August, 28 2006

There isn't much else to write about this weekend. ACTC was clearly the story of the week in an otherwise dull, listless, last week of summer. However, ACTC is providing all the fireworks we need for a little excitement.

Friday, the company held a conference call to discuss recent developments. I had the opportunity to listen to the replay late in the day, but didn't realize I would have to budget an hour for the call.

The call was extremely enlightening. I found it interesting as much for what was said as what wasn't said. CEO Bill Caldwell and Stem Cell pioneer Michael West discussed at great length the importance of their breakthrough. In short, the company can take a one to eight cell Blastomere (an early stage human egg) and extract and cultivate fetal stem cells. From there, the Blastomere can become a viable egg from which a human life can be born. Why is this important?- Because it meets President Bush's rather Draconian demand that new fetal stem cells lines be created without harm to potential human life. It allows the NIH to fund more research. 

Here's what wasn't said. During the conference call, management did not address the company's ability to infuse a Blastomere with some else's DNA. This gives ACTC to create a custom fetal stem cell just for you. This discussion gets into the moral issues associated with potential cloning. At this stage I believe the company wants to focus on the less controversial aspects of what they have achieved. 

The high print on Thursday was $2.30 (up from $.40 early in the week), at which point the rally turned the other way, and the stock tanked. The sell off was sparked by ACTC disclosure of a financing.

The original group that had invested about $17 million in a debt deal with the company was holding approximately 14.2 million warrants with conversion prices of $2.53 and $1.27. The shares underlying these warrants were already registered. In a move designed to use their new found fame to load up their treasury with cash, the company reset the price of all the warrants to $.95, and forced their conversion.

Net result: The company issued another 14.2 million shares, and will receive in return $13.5 million in cash, which buys them another year of operations. I think this was a great move. They needed to raise more money. They achieved it in one day, and it all happened as a result of the market's recognition of their achievements. They took advantage of a hot market to reload their treasury. Imagine the arrangement they would have cut had the stock been trading at the depressed $.40 level with little or no volume? This was much better for existing shareholders.

Here's what happened to ACTC this crazy week. The stock runs from $.40 to a high print of $2.30 in 1 1/2 trading days. Then it tanks. Why does it sell off so abruptly? - because the company announces they just sold 14.2 million free trading shares at $.95.

Here's the typical sequence on an event like this. The first money to pounce on the stock comes from investors who read the new information, understood the significance, and wanted to own a piece of the company. The next money in, perhaps later that day or early the next, is the hot money- traders who are buying the stock because it is trading huge volume and going up.

Then, behind the scenes you have the warrant holders who make their deal with the company. Believe me, this is a risk averse bunch. They don't put their capital at risk long term. They structure "no lose" arrangements. I absolute guarantee this bunch has sold every single share they could, and sold them as quickly as they could. It would not surprise me to learn that all 14.2 million shares have already been dumped. Also, as the hot money learns about the massive issuance of shares below the current market, yesterday's buyer becomes today's seller. Hence, the rapid blow off in the stock.

I believe the stock could now well be a great opportunity for both investors and traders. Here's why: If I had to make an educated guess, I would say the market has already absorbed the excess supply from the newly issued 14.2 million shares at $.95, and will now head back up as supply dries up.

In the meantime, there is probably more high profile publicity in store for this company. Look for a number of major news organizations have an interest in a small Stem Cell company that has met Bush's challenge on the moral issues. A Wall Street Journal reporter was on the conference call asking questions.

If you are a trader and want to jump in, your SSL is $.75 once again. If you just want to own a piece of this technology for the long term, own some now and don't worry about where it goes in the short term- either up or down.

More on the technology sometime next week.