# ** **

# **UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

# **WASHINGTON D.C. 20549**

# ** **

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# **FORM 10-QSB**

# ** **

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**ý****      ****QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

# **FOR THE PERIOD ENDED MARCH 31, 2005**

# ** **

# **OR**

# ** **

**o****      ****TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**FOR THE TRANSITION PERIOD FROM           TO           .**

 

**COMMISSION FILE NUMBER: 0-50295**

 

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# **A.C.T.HOLDINGS, INC.**

(EXACT NAME OF SMALL BUSINESSISSUER AS SPECIFIED IN ITS CHARTER)

 
| **NEVADA**                                                      | ** ** | **87-0656515**                       |
|-----------------------------------------------------------------|------------|--------------------------------------|
| (STATE OR OTHER JURISDICTION OF  INCORPORATION OR ORGANIZATION) |       | (I.R.S. EMPLOYER IDENTIFICATION NO.) |

 

**381 PLANTATIONSTREET, WORCESTER, MA 01605**

(ADDRESS, INCLUDING ZIP CODE,OF PRINCIPAL EXECUTIVE OFFICES)

 

REGISTRANT’S TELEPHONE NUMBER,INCLUDING AREA CODE: **(508) 756-1212**

 

SECURITIES REGISTERED PURSUANTTO SECTION 12(b) OF THE ACT: **NONE**

 

SECURITIES REGISTERED PURSUANTTO SECTION 12(g) OF THE ACT: **NONE**

 

Indicate by check mark whether the small business issuer (1) hasfiled all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the small business issuer was requiredto file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 

Yes ý       Noo

 

Indicate the number of shares outstanding of each of theissuer’s classes of common stock, as of the latest practicable date.

 
| **Class:**                               | ** ** | **Outstanding at May 20,  2005:** |
|------------------------------------------|------------|----------------------------------------|
| Common Stock, $0.001 par value per share |       | 23,213,212 shares                      |

 

TransitionalSmall Business Disclosure format (check one)

 

Yes o       Noý

 

 

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# **A.C.T. HOLDINGS, INC.**

# ** **

# **INDEX**

 
| RECENT  DEVELOPMENTS OF SMALL BUSINESS ISSUER                           |   |
|-------------------------------------------------------------------------|--------|
| PART I. FINANCIAL  INFORMATION                                          |   |
| ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS                              |   |
| ITEM  2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION |   |
| ITEM 3. CONTROLS AND  PROCEDURES                                        |   |
| PART II. OTHER  INFORMATION                                             |   |
| ITEM 1. LEGAL PROCEEDINGS                                               |   |
| ITEM  2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS    |   |
| ITEM 3.  DEFAULTS UPON SENIOR SECURITIES                                |   |
| ITEM  4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS            |   |
| ITEM 5. OTHER INFORMATION                                               |   |
| ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K                               |   |
| SIGNATURE                                                               |   |

 

2

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**RECENTDEVELOPMENTS OF SMALL BUSINESS ISSUER**

 

# **On January 31,2005, A.C.T. Holdings, Inc., a Nevada corporation (the “Company”)completed a merger transaction with Advanced Cell Technology, Inc., aDelaware corporation (“ACT”), pursuant to which a wholly-owned subsidiary ofthe Company merged with and into ACT (the “Merger”), with ACT remaining as thesurviving corporation and a wholly-owned subsidiary of the Company.  Upon the completion of the Merger, theCompany ceased all of its pre-Merger operations and adopted the business ofACT.  In this report, A.C.T. Holdings, Inc.and its subsidiaries are collectively referred to as the “Company,” “we,” or “us.”  Advanced Cell Technology, Inc. is referredto separately as “ACT.”**

# ** **

Investorsare cautioned that, prior to the Merger, the Company had minimal business,operations, revenues and assets, and has been involved in an industry entirelyunrelated to the business of ACT. Therefore, the acquisition of ACT by the Company represented a completechange in the nature of the Company’s business and operations, and changed thenature of any prior investment in the Company. Prior to the Merger, ACT, as a privately held Company, had not beensubject to the reporting requirements of the Securities Exchange Act of 1934,(the “Exchange Act”) and, therefore, there was little public information aboutACT available.  In light of this fact, wehave elected to set forth additional disclosure regarding the business of theCompany under Part II, Item 5 of this Quarterly Report on Form 10-QSB.  Although such disclosure is not required inthis Quarterly Report on Form 10-QSB, we have provided this additionaldisclosure as we believe that it is helpful to investors.

 

**CAUTIONARY NOTE REGARDINGFORWARD-LOOKING STATEMENTS**

 

Certainstatements contained in this Quarterly Report on Form 10-QSB and theexhibits hereto containing the words “may,” “assumes,” “forecasts,” “positions,”“predicts,” “strategy,” “will,” “expects,” “estimates,” “anticipates,” “believes,”“projects,” “intends,” “plans,” “budgets,” “potential,” “continue” andvariations thereof, and other statements contained in this Quarterly Report on Form 10-QSBand the exhibits hereto regarding matters that are not historical facts areforward-looking statements. Because these statements involve risks anduncertainties, as well as certain assumptions, actual results may differmaterially from those expressed or implied by such forward-looking statements.  Factors that could cause actual results todiffer materially include, but are not limited to, risks inherent in:  our early stage of development, including alack of operating history, lack of profitable operations and the need for significantadditional capital resources in order to sustain our business; the developmentand commercialization of largely novel and unproven technologies and products;our ability to protect, maintain, and defend our intellectual property rights;our ability to retain key members of our management and scientific teams; anduncertainty regarding our overall ability to compete effectively in a highlycomplex, rapidly developing, capital intensive and competitive industry.  See *“*RISKFACTORS THAT MAY AFFECT OUR BUSINESS*”*set forth in Part I, Item 2 of this Quarterly Report on Form 10-QSBfor a more complete discussion of these factors.  Readers are cautioned not to place unduereliance on these forward-looking statements, which speak only as of the datethat they are made.  We undertake noobligation to publicly update or revise any forward-looking statements, whetheras a result of new information, future events or otherwise.

 

Forward-looking statements include our plans and objectives for future operations, including plans and objectives relating to our products and our future economic performance.  Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions, future business decisions, and the time and money required to successfully complete development and commercialization of our technologies, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of those assumptions could prove inaccurate and, therefore, we cannot assure you that the results contemplated in any of the forward-looking statements contained herein will be realized. Based on the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of any such statement should not be regarded as a representation by us or any other person that our objectives or plans will be achieved.

 

3

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# **PART I. FINANCIAL INFORMATION**

# ** **

## **ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS**

## ** **

# **A.C.T. HOLDINGS, INC.**

# ** **

# **CONSOLIDATED BALANCE SHEETS**

# **(UNAUDITED)**

# ** **

| ** **                                                                                                                           | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                           | ** ** | **(Unaudited)**          | ** ** | ** **                  | ** ** |
| ASSETS                                                                                                                               |       |                     |       |                        |       |
|                                                                                                                                 |       |                     |       |                        |       |
| Current assets:                                                                                                                      |       |                     |       |                        |       |
| Cash and cash equivalents                                                                                                            |       | $                        | 5,368,281  |                        | $          | — |   |
| Cash held in escrow for stock subscriptions                                                                                          |       | —                   |       | 3,676,000                   |       |
| Accounts receivable, net of allowance for doubtful  accounts of $161,399 and $128,684                                                |       | 260,810                  |       | 104,150                     |       |
| Prepaid expenses                                                                                                                     |       | 74,619                   |       | 31,300                      |       |
| Deferred royalty fees, current portion                                                                                               |       | 153,513                  |       | 119,763                     |       |
|                                                                                                                                 |       |                     |       |                        |       |
| Total current assets                                                                                                                 |       | 5,857,223                |       | 3,931,213                   |       |
|                                                                                                                                 |       |                     |       |                        |       |
| Property and equipment, net                                                                                                          |       | 242,798                  |       | 98,455                      |       |
|                                                                                                                                 |       |                     |       |                        |       |
| Due from stockholder                                                                                                                 |       | 586,969                  |       | 394,015                     |       |
| Deferred royalty fees, less current portion                                                                                          |       | 688,633                  |       | 718,573                     |       |
| Deposits                                                                                                                             |       | 17,954                   |       | 17,954                      |       |
| Deferred offering costs                                                                                                              |       | —                   |       | 12,000                      |       |
|                                                                                                                                 |       |                     |       |                        |       |
| Total assets                                                                                                                         |       | $                        | 7,393,577  |                        | $          | 5,172,210 |   |
|                                                                                                                                 |       |                     |       |                        |       |
| LIABILITIES AND STOCKHOLDERS’ DEFICIT                                                                                           |       |                     |       |                        |       |
|                                                                                                                                 |       |                     |       |                        |       |
| Current liabilities:                                                                                                                 |       |                     |       |                        |       |
| Accounts payable                                                                                                                     |       | $                        | 3,071,263  |                        | $          | 3,246,482 |   |
| Accrued expenses                                                                                                                     |       | 576,616                  |       | 507,570                     |       |
| Cash overdraft                                                                                                                       |       | —                   |       | 1,409                       |       |
| Deferred revenue, current portion                                                                                                    |       | 332,508                  |       | 332,508                     |       |
| Interest payable                                                                                                                     |       | 61,424                   |       | 111,821                     |       |
| Interest payable - stockholder                                                                                                       |       | 326,877                  |       | 296,877                     |       |
| Advances payable - other                                                                                                             |       | 130,000                  |       | 130,000                     |       |
| Note payable - stockholder                                                                                                           |       | 1,000,000                |       | 1,000,000                   |       |
| Notes payable - other                                                                                                                |       | 228,014                  |       | 967,014                     |       |
|                                                                                                                                 |       |                     |       |                        |       |
| Total current liabilities                                                                                                            |       | 5,726,702                |       | 6,593,681                   |       |
|                                                                                                                                 |       |                     |       |                        |       |
| Deferred revenue, net of current portion                                                                                             |       | 1,911,922                |       | 1,995,049                   |       |
| Preferred units subscribed                                                                                                           |       | —                   |       | 4,175,999                   |       |
|                                                                                                                                 |       |                     |       |                        |       |
| Total liabilities                                                                                                                    |       | 7,638,624                |       | 12,764,729                  |       |
|                                                                                                                                 |       |                     |       |                        |       |
| Stockholders’ deficit:                                                                                                          |       |                     |       |                        |       |
| Preferred stock, $0.001 par value; 5,000,000 shares  authorized, none issued and outstanding                                         |       | —                   |       | —                      |       |
| Common stock, $0.001 par value; 50,000,000 shares  authorized, 23,213,212 and 8,325,883 shares issued and outstanding,  respectively |       | 23,213                   |       | 8,326                       |       |
| Additional paid-in capital                                                                                                           |       | 14,677,458               |       | 6,158,954                   |       |
| Deferred compensation                                                                                                                |       | (21,586                  | )          | —                      |       |
| Accumulated deficit                                                                                                                  |       | (14,924,132              | )          | (13,759,799                 | )          |
|                                                                                                                                 |       |                     |       |                        |       |
| Total stockholders’ deficit                                                                                                     |       | (245,047                 | )          | (7,592,519                  | )          |
|                                                                                                                                 |       |                     |       |                        |       |
| Total liabilities and stockholders’ deficit                                                                                     |       | $                        | 7,393,577  |                        | $          | 5,172,210 |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

4

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# **A.C.T. HOLDINGS, INC.**

# **CONSOLIDATED STATEMENTS OF OPERATIONS(UNAUDITED)**

# ** **

| ** **                                              | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                              | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| Revenue:                                                |       |                             |       |   |   |
| License fees and royalties                              |       | $                                | 108,127    |   | $ | 183,236 |   |
|                                                    |       |                             |       |   |   |
| Cost of revenue                                         |       | 45,691                           |       | 69,166 |   |
|                                                    |       |                             |       |   |   |
| Gross profit                                            |       | 62,436                           |       | 114,070 |   |
|                                                    |       |                             |       |   |   |
| Operating expenses:                                     |       |                             |       |   |   |
| Research and development                                |       | 276,595                          |       | 293,570 |   |
| Grant reimbursements                                    |       | (235,810                         | )          | (140,171 | ) |
| General and administrative                              |       | 1,204,480                        |       | 492,525 |   |
|                                                    |       |                             |       |   |   |
| Total operating expenses                                |       | 1,245,265                        |       | 645,924 |   |
|                                                    |       |                             |       |   |   |
| Loss from operations                                    |       | (1,182,829                       | )          | (531,854 | ) |
|                                                    |       |                             |       |   |   |
| Other income (expense):                                 |       |                             |       |   |   |
| Interest income                                         |       | 12,107                           |       | — |   |
| Gain on settlement of debt                              |       | 86,513                           |       | — |   |
| Interest expense and late fees                          |       | (50,124                          | )          | (19,062 | ) |
| Interest expense - stockholder                          |       | (30,000                          | )          | (30,000 | ) |
|                                                    |       |                             |       |   |   |
| Total other income (expense)                            |       | 18,496                           |       | (49,062 | ) |
|                                                    |       |                             |       |   |   |
| Net loss                                                |       | $                                | (1,164,333 | ) | $ | (580,916 | ) |
|                                                    |       |                             |       |   |   |
| Net loss per share, basic and diluted                   |       | $                                | (0.06      | ) | $ | (0.07 | ) |
|                                                    |       |                             |       |   |   |
| Weighted average shares outstanding, basic and  diluted |       | 18,250,769                       |       | 8,325,883 |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

5

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# **A.C.T. HOLDINGS, INC.**

# ** **

# **CONSOLIDATED STATEMENTS OF CASH FLOWS**

# **CHANGE IN CASH AND CASH EQUIVALENTS**

# ** (UNAUDITED)**

# ** **

| ** **                                                                                                                                                                                         | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                                                                                         | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                                                                                                                              |       |                             |       |   |   |
| Net loss                                                                                                                                                                                           |       | $                                | (1,164,333 | ) | $ | (580,916 | ) |
| Adjustments to reconcile net loss to net cash (used  in) provided by operating activities:                                                                                                         |       |                             |       |   |   |
| Depreciation and amortization                                                                                                                                                                      |       | 21,794                           |       | 35,364 |   |
| Bad debt                                                                                                                                                                                           |       | 32,715                           |       | — |   |
| Amortization of deferred charges                                                                                                                                                                   |       | 29,940                           |       | 29,061 |   |
| Amortization of deferred revenue                                                                                                                                                                   |       | (83,127                          | )          | (78,236 | ) |
| Stock based compensation                                                                                                                                                                           |       | 50,768                           |       | — |   |
| Gain on settlement of accounts payable                                                                                                                                                             |       | (86,513                          | )          | — |   |
| Shares issued for services                                                                                                                                                                         |       | 15,000                           |       | — |   |
| Changes in operating assets and liabilities:                                                                                                                                                       |       |                             |       |   |   |
| (Increase) decrease in:                                                                                                                                                                            |       |                             |       |   |   |
| Accounts receivable                                                                                                                                                                                |       | (189,375                         | )          | 341,245 |   |
| Prepaid expenses                                                                                                                                                                                   |       | (43,319                          | )          | 16,046 |   |
| Other current assets                                                                                                                                                                               |       |                             |       | 5,000 |   |
| Deferred charges                                                                                                                                                                                   |       | (33,750                          | )          | (60,319 | ) |
| Increase (decrease) in:                                                                                                                                                                            |       |                             |       |   |   |
| Accounts payable and accrued expenses                                                                                                                                                              |       | (72,935                          | )          | 344,970 |   |
| Interest payable                                                                                                                                                                                   |       | 56,986                           |       | 46,416 |   |
| Deferred revenue                                                                                                                                                                                   |       | —                           |       | 75,000 |   |
| Related party advances                                                                                                                                                                             |       | (192,954                         | )          | (47,287 | ) |
|                                                                                                                                                                                               |       |                             |       |   |   |
| Net cash (used in) provided by operating activities                                                                                                                                                |       | (1,659,103                       | )          | 126,344 |   |
|                                                                                                                                                                                               |       |                             |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                                                                                                                              |       |                             |       |   |   |
| Cash acquired in acquisition                                                                                                                                                                       |       | 10,000                           |       | — |   |
| Purchases of property and equipment                                                                                                                                                                |       | (166,137                         | )          | (228 | ) |
|                                                                                                                                                                                               |       |                             |       |   |   |
| Net cash used in investing activities                                                                                                                                                              |       | (156,137                         | )          | (228 | ) |
|                                                                                                                                                                                               |       |                             |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                                                                                                                              |       |                             |       |   |   |
| Proceeds from preferred unit subscriptions, net of  cost                                                                                                                                           |       | 3,658,930                        |       | — |   |
| Payments on notes and leases                                                                                                                                                                       |       | (150,000                         | )          | (23,752 | ) |
| Cash overdraft                                                                                                                                                                                     |       | (1,409                           | )          | — |   |
|                                                                                                                                                                                               |       |                             |       |   |   |
| Net cash provided by (used in) financing activities                                                                                                                                                |       | 3,507,521                        |       | (23,752 | ) |
|                                                                                                                                                                                               |       |                             |       |   |   |
| Net increase in cash                                                                                                                                                                               |       | 1,692,281                        |       | 102,364 |   |
|                                                                                                                                                                                               |       |                             |       |   |   |
| Cash and cash equivalents, beginning of period                                                                                                                                                     |       | $                                | 3,676,000  |   | 3,782 |   |
|                                                                                                                                                                                               |       |                             |       |   |   |
| Cash and cash equivalents, end of period                                                                                                                                                           |       | $                                | 5,368,281  |   | $ | 106,146 |   |
|                                                                                                                                                                                               |       |                             |       |   |   |
| Cash paid for:                                                                                                                                                                                     |       |                             |       |   |   |
| Interest                                                                                                                                                                                           |       | $                                | —     |   | $ | 1,247 |   |
| Income taxes                                                                                                                                                                                       |       | —                           |       | — |   |
|                                                                                                                                                                                               |       |                             |       |   |   |
| Supplemental schedule of non-cash financing  activities:                                                                                                                                      |       |                             |       |   |   |
|                                                                                                                                                                                               |       |                             |       |   |   |
| During the three months ended March 31, 2005:                                                                                                                                                 |       |                             |       |   |   |
|                                                                                                                                                                                               |       |                             |       |   |   |
| 105,177 Preferred Units, valued at $89,400, were  issued in partial settlement of accounts payable.                                                                                                |       |                             |       |   |   |
|                                                                                                                                                                                               |       |                             |       |   |   |
| 616,124 shares of common stock, and 306,062 common  stock purchase warrants, were issued upon conversion of $500,000 of notes  payable and $23,708 of accrued interest.                            |       |                             |       |   |   |
|                                                                                                                                                                                               |       |                             |       |   |   |
| 469,247 shares of common stock, and 234,629 common  stock purchase warrants, valued at an aggregate of $398,860, were issued in  consideration of services related to the Preferred Unit Offering. |       |                             |       |   |   |
|                                                                                                                                                                                               |       |                             |       |   |   |
| A note for $150,000 was issued as a part of a  settlement of a note payable of $339,000 and related accrued interest of  $53,675.                                                                  |       |                             |       |   |   |
|                                                                                                                                                                                               |       |                             |       |   |   |
| 9,411,778 shares of preferred stock converted to  9,411,778 shares of common stock in the Merger.                                                                                                  |       |                             |       |   |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

6

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# **A.C.T. HOLDINGS, INC.**

# **CONSOLIDATED STATEMENT OF STOCKHOLDERS’DEFICIT**

# **FOR THE THREE MONTH PERIOD ENDED MARCH 31,2005**

# **(UNAUDITED)**

# ** **

| ** **                                        | ** ** | **Preferred Stock** | ** ** | **Common Stock** | ** ** | **Additional  Paid-In** | ** ** | ** ** | ** ** | ** **  | ** ** | **Total  Stockholders’** | ** ** |
|---------------------------------------------------|------------|---------------------|------------|------------------|------------|-------------------------|------------|------------|------------|-------------|------------|-------------------------------|------------|
| **Deferred**                                      | ** ** | **Accumulated**     | ** ** |
| ** **                                        | ** ** | **Shares**          | ** ** | **Amount**       | ** ** | **Shares**              | ** ** | **Amount** | ** ** | **Capital** | ** ** | **Compensation**              | ** ** | **Deficit** | ** ** | **Deficit** | ** ** |
|                                              |       |                |       |             |       |                    |       |       |       |        |       |                          |       |   |   |   |   |
| Balance, December 31, 2004                   |       | —              |       | —           |       | 8,325,883               |       | 8,326      |       | 6,158,954   |       | —                        |       | (13,759,799 | ) | (7,592,519 | ) |
|                                              |       |                |       |             |       |                    |       |       |       |        |       |                          |       |   |   |   |   |
| Sale of preferred units for cash                  |       | 9,306,601           |       | 9,306            |       | —                  |       | —     |       | 7,901,294   |       | —                        |       | — |   | 7,910,600 |   |
|                                              |       |                |       |             |       |                    |       |       |       |        |       |                          |       |   |   |   |   |
| Issuance of preferred units for services provided |       | 105,177             |       | 105              |       | —                  |       | —     |       | 89,295      |       | —                        |       | — |   | 89,400 |   |
|                                              |       |                |       |             |       |                    |       |       |       |        |       |                          |       |   |   |   |   |
| Issuance of shares for debt conversion            |       | —              |       | —           |       | 616,124                 |       | 616        |       | 523,092     |       | —                        |       | — |   | 523,708 |   |
|                                              |       |                |       |             |       |                    |       |       |       |        |       |                          |       |   |   |   |   |
| Issuance of shares for services                   |       | —              |       | —           |       | 17,647                  |       | 18         |       | 14,982      |       | —                        |       | — |   | 15,000 |   |
|                                              |       |                |       |             |       |                    |       |       |       |        |       |                          |       |   |   |   |   |
| Issuance of units for offering services           |       | —              |       | —           |       | 469,247                 |       | 469        |       | 398,391     |       | —                        |       | — |   | 398,860 |   |
|                                              |       |                |       |             |       |                    |       |       |       |        |       |                          |       |   |   |   |   |
| Conversion of preferred                           |       | (9,411,778          | )          | (9,411           | )          | 9,411,778               |       | 9,411      |       | —      |       | —                        |       | — |   | — |   |
|                                              |       |                |       |             |       |                    |       |       |       |        |       |                          |       |   |   |   |   |
| Cost of offering                                  |       | —              |       | —           |       | —                  |       | —     |       | (486,530    | )          | —                        |       | — |   | (486,530 | ) |
|                                              |       |                |       |             |       |                    |       |       |       |        |       |                          |       |   |   |   |   |
| Shares retained by public shareholders            |       | —              |       | —           |       | 4,374,007               |       | 4,374      |       | 5,626       |       | —                        |       | — |   | 10,000 |   |
|                                              |       |                |       |             |       |                    |       |       |       |        |       |                          |       |   |   |   |   |
| Fair value of consultant options                  |       | —              |       | —           |       | —                  |       | —     |       | 72,354      |       | (21,586                       | )          | — |   | 50,768 |   |
|                                              |       |                |       |             |       |                    |       |       |       |        |       |                          |       |   |   |   |   |
| Shares cancelled                                  |       | —              |       | —           |       | (1,474                  | )          | (1         | )          | —      |       | —                        |       | — |   | (1 | ) |
|                                              |       |                |       |             |       |                    |       |       |       |        |       |                          |       |   |   |   |   |
| Net loss                                          |       | —              |       | —           |       | —                  |       | —     |       | —      |       | —                        |       | (1,164,333 | ) | (1,164,333 | ) |
|                                              |       |                |       |             |       |                    |       |       |       |        |       |                          |       |   |   |   |   |
| Balance, March 31, 2005                      |       | —              |       | —           |       | 23,213,212              |       | $          | 23,213     |        | $          | 14,677,458                    |       | $ | (21,586 | ) | $ | (14,924,132 | ) | $ | (245,047 | ) |
|                                                   |            |                     |            |                  |            |                         |            |            |            |             |            |                               |            |  |  |  |  |  |  |  |  |  |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

7

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# **A.C.T. HOLDINGS, INC.**

# ** **

# **NOTES TO CONSOLIDATED FINANCIALSTATEMENTSMARCH 31, 2005(UNAUDITED)**

# ** **

###### **1.**         ORGANIZATIONALMATTERS

###### ** **

# **Organization**

# ** **

# **On January 31, 2005, A.C.T. Holdings, Inc. (the “Company”)completed the Merger with Advanced Cell Technology, Inc., a Delawarecorporation (“ACT”), pursuant to which a wholly-owned subsidiary of the Companymerged with and into ACT, with ACT remaining as the surviving corporation and awholly-owned subsidiary of the Company. Upon the completion of the Merger, the Company ceased all of itspre-Merger operations and adopted the business of ACT.**

# ** **

Priorto the Merger, the Company had minimal business, operations, revenues andassets, and has been involved in an industry entirely unrelated to the businessof ACT. Therefore, the acquisition of ACT by the Company represented a completechange in the nature of the Company’s business and operations, and changed thenature of any prior investment in the Company.

 

Thetransaction has been accounted for as a recapitalization of ACT, the accountingacquirer. The historical financial statements presented for periods prior tothe merger are those of ACT. The consolidated accounts of the Company have beenincluded from January 31, 2005.  Allcomparisons of financial results for periods prior to the Merger are to thefinancial results of ACT.  Anydifferences that would result from the inclusion of the pre-Merger financialresults of the Company would not be material.

 

**Natureof Business**

** **

TheCompany is a biotechnology company focused on developing and commercializinghuman stem cell technology in the emerging fields of regenerative medicine andstem cell therapy. Principal activities to date have included obtainingfinancing, securing operating facilities and conducting research anddevelopment.  The Company has notherapeutic products currently available for sale and does not expect to haveany therapeutic products commercially available for sale for a period of years,if at all.  These factors indicate thatthe Company’s ability to continue its research and development activities isdependent upon the ability of management to obtain additional financing asrequired.

 

**Basisof Presentation**

** **

Theaccompanying unaudited financial statements as of March 31, 2005 and forthe three month periods ended March 31, 2005 and 2004 have been preparedpursuant to the rules and regulations of the Securities and ExchangeCommission (“SEC”), including Form 10-QSB and Regulation S-B. Theinformation furnished herein reflects all adjustments (consisting of normalrecurring accruals and adjustments), which are, in the opinion of management,necessary to fairly present the operating results for the respective periods.Certain information and footnote disclosures normally present in annualfinancial statements prepared in accordance with accounting principlesgenerally accepted in the United States of America have been omitted pursuantto such rules and regulations. The Company believes that the disclosuresprovided are adequate to make the information presented not misleading. Thesefinancial statements should be read in conjunction with the audited financialstatements and explanatory notes for the year ended December 31, 2004 asdisclosed in the Company’s annual report on Form 10-KSB for that year asfiled with the SEC, as it may be amended and in conjunction with ACT’s auditedfinancial statements and explanatory notes for the year ended December 31,2004 as disclosed in the Company’s current report on Form 8-K/A as filedwith the SEC on April 18, 2005.

 

8

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###### **2.**         SIGNIFICANTACCOUNTING POLICIES

###### ** **

***Use of Estimates—***These financial statements havebeen prepared in accordance with accounting principles generally accepted inthe United States and, accordingly, require management to make estimates andassumptions that affect the reported amounts of assets and liabilities at thedate of the financial statements and the reported amounts of revenues andexpenses during the reporting period. Specifically, our management has estimated the expected economic lifeand value of our licensed technology, our net operating loss for tax purposesand our stock, option and warrant expenses related to compensation to employeesand directors, consultants and investment banks.  Actual results could differ from thoseestimates.

 

***Revenue Recognition—***Our revenues are generatedfrom license and research agreements with collaborators. Licensing revenue isrecognized ratably over the shorter of the life of the license or the estimatedeconomic life of the patents related to the license. Deferred revenuerepresents the portion of the license and other payments received that has notbeen earned. Costs associated with the license revenue are deferred andrecognized over same term as the revenue. Reimbursements of research expensepursuant to grants are recorded as a reduction of research and developmentexpense in the period during which collection of the reimbursement isreasonably assured, because the reimbursements are subject to approval.

 

***Research and Development Costs—***Research anddevelopment costs consist of expenditures for the research and development ofpatents and technology, which are not capitalizable. Our research anddevelopment costs consist mainly of payroll and payroll related expenses,research supplies and research grants.

 

Reimbursementsof research expense pursuant to grants are recorded as a reduction of researchand development expense in the period received.

 

***Stock Based Compensation—***SFAS No. 123, “*Accounting for Stock-Based Compensation*,” establishes andencourages the use of the fair value based method of accounting for stock-basedcompensation arrangements under which compensation cost is determined using thefair value of stock-based compensation determined as of the date of the grantor the date at which the performance of the services is completed and isrecognized over the periods in which the related services are rendered.  The statement also permits companies to electto continue using the current intrinsic value accounting method specified inAccounting Principles Board (“*APB*”) Opinion No. 25,“*Accounting for Stock Issued to Employees*,”to account for stock-based compensation to employees.  We have elected to use the intrinsic valuebased method for grants to our employees and directors and have disclosed thepro forma effect of using the fair value based method to account for our stock-basedcompensation to employees.

 

TheCompany uses the fair value method for equity instruments granted to non-employeesand uses the Black Scholes model for measuring the fair value.  The stock based fair value compensation isdetermined as of the date of the grant or the date at which the performance ofthe services is completed (measurement date) and is recognized over the periodsin which the related services are rendered.

 

**ProForma Information**

** **

***Employee and Director Common Share Purchase Options—***Proforma information regarding the effects on operations of employee and directorcommon share purchase options as required by SFAS No. 123 and SFAS No. 148has been determined as if the Company had accounted for those options under thefair value method. Pro forma information is computed using the Black Scholesmethod at the date of grant of the options based on the following assumptionsranges for the three month period ended March 31, 2005: (1) risk freeinterest rate of 2.75% - 3.25; (2) dividend yield of 0%; (3) expectedvolatility factor of 0%; and (4) an expected life of the options of 2-3years.  The foregoing option valuationmodel requires input of highly subjective assumptions.  Because common share purchase options grantedto employees and directors have characteristics significantly different fromthose of traded options, and because changes in the subjective inputassumptions can materially affect the fair value of estimate, the existingmodel does not in the opinion of our management necessarily provide a reliablesingle measure of fair value of common share purchase options we have grantedto our employees and directors.

 

9

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Proforma information relating to employee and director common share purchaseoptions is as follows:

 
| ** **                                     | ** ** | **For the  Three Months  Ended  March 31, 2005** |       | **For The  Three Months  Ended  March 31, 2004** | ** ** |
|------------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|
| Net loss as reported                           |       | $                                                     | (1,164,333 | )                                                     | $          | (580,916 | ) |
| Current period expense calculated under APB 25 | ** ** | **—**                                            |       | **—**                                            | ** ** |
| Stock compensation calculated under SFAS 123   |       | (126,481                                              | )          | **—**                                            | ** ** |
| Pro forma net loss                             |       | $                                                     | (1,290,814 | )                                                     | $          | (580,916 | ) |
| Basic and diluted historical loss per share    |       | $                                                     | (0.06      | )                                                     | $          | (0.07 | ) |
| Pro forma basic and diluted loss per share     |       | $                                                     | (0.07      | )                                                     | $          | (0.07 | ) |

 

***Net Loss Per Share—***We use SFAS No. 128, “*Earnings Per Share*” for calculating the basic and dilutedloss per share.  We compute basic lossper share by dividing net loss and net loss attributable to common shareholdersby the weighted average number of common shares outstanding.  Diluted loss per share is computed similar tobasic loss per share except that the denominator is increased to include thenumber of additional common shares that would have been outstanding if thepotential shares had been issued and if the additional shares were dilutive.Common equivalent shares are excluded from the computation of net loss pershare if their effect is anti-dilutive.

 

Forthe three months ended March 31, 2005, 23,090,952 potential shares wereexcluded from the shares used to calculate diluted earnings per share as theirinclusion would reduce net loss per share. There were no potentially dilutiveshares at March 31, 2004.

 

###### **3.**         PROPERTYAND EQUIPMENT

###### ** **

Ourproperty and equipment as of March 31, 2005 is as follows:

 
| Machinery and equipment        |   | $       | 803,890 |   |
|--------------------------------|--------|---------|---------|--------|
| Computers and office equipment |   | 129,838 |    |
| Leasehold improvements         |   | 21,451  |    |
| Furniture and fixtures         |   | 24,216  |    |
| Total property and equipment   |   | 979,395 |    |
| Accumulated depreciation       |   | 736,597 |    |
| Property and equipment, net    |   | $       | 242,798 |   |

 

Depreciation expense amounted to $21,794 and $35,364during the three months ended March 31, 2005 and 2004, respectively.

 

###### **4.**         CONVERTIBLENOTES PAYABLE

###### ** **

During2004, we issued promissory notes aggregating $500,000 face value for cashproceeds of $450,000 and the assumption of $50,000 of debt owed by our parentto one of the investors. As a result of the assumption of

 

10

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the$50,000 of debt, we have recorded a financing cost in that amount. The notesbear interest at 10% per year. $350,000 of notes matured on December 31,2004 and $150,000 matures on September 30, 2005. The notes are convertibleat the option of the holder into shares of our capital stock sold in asubsequent financing, at an amount equal to the lowest per share selling priceof shares of that stock issued in such financing (see Note 7).

 

Asadditional consideration for the purchase of the notes, we granted to the noteholders warrants entitling them to purchase 700,000 common shares at anexercise price of $0.05. Warrants for 300,000 shares were exercisableimmediately upon issuance and expire two years from the date of issue.  Warrants for 400,000 shares are exercisableon or after February 1, 2006 and expire February 1, 2008. The fairvalue of the warrants was estimated at $0, using the Black Scholes optionpricing model. The assumptions used in the Black Scholes model are as follows: (1) dividendyield of 0%; (2) expected volatility of 0%, (3) risk-free interestrate of 2.75%, and (4) expected life of 2 years. Pursuant to EITF 98-6 andEITF 00-27, there has been no allocation of the proceeds of the notes to thewarrants and no beneficial conversion feature, because the conversion rate isunknown at the date of issue and is presumed to be at market value.

 

Duringthe first quarter of 2005, the $500,000 of notes, plus accrued interest of$23,708, were converted into investment units consisting of 616,124 shares ofcommon stock, plus 308,063 common stock purchase warrants, exercisable at $1.27per share.

 

###### **5.**         OTHERNOTES PAYABLE

###### ** **

On July 1,2003, we issued a promissory note with a face amount of $339,000 to a law firmas a payment of fees due them. The note bears interest at a rate of 10% peryear. The note was due on October 1, 2003. During the first quarter of2005, the note, plus accrued interest of $53,675, was settled through (i) theissuance of 105,177 shares of preferred stock and 52,589 warrants pursuant tothe preferred stock offering described in Note 7, valued at $89,400, (ii) acash payment of $100,000, and (iii) a new note with a face value of$150,000. The new note bears interest at 10%, is due in 3 monthly payments of50,000 each and matures on May 1, 2005. There was a balance due on thenote of $100,000 at March 31, 2005.

 

On July 8,2003, we issued a promissory note with a face amount of $272,108 to a law firm asa payment of fees due them. The note bears interest at a rate of 5% per year.The note is payable in monthly installments of $25,000, including interest. Thenote matured on October 1, 2003. We made payments through January, 2004.At March 31, 2005 there is a remaining principal balance of $128,014, aswell as accrued interest of $7,632 and accrued late fees of $50,000, includedin accrued interest. Late fees accrue at the rate of $2,500 per month.

 

###### **6.**         NOTEPAYABLE – STOCKHOLDER

###### ** **

On July 12,2002, we issued a promissory note with a face amount of $1,000,000 to ourmajority stockholder as a repayment of advances received from the stockholder.The note bears interest at a rate of 12% per year. The note matures on December 31,2005.

 

###### **7.**         STOCKHOLDERS’EQUITY TRANSACTIONS

###### ** **

We areauthorized to issue two classes of capital stock, to be designated,respectively, Preferred Stock and Common Stock. The total number of shares of capital stock which we are authorized toissue is 55,000,000.  The total number ofshares of Preferred Stock we are authorized to issue is 5,000,000, par value$0.001 per share.  The total number ofshares of Common Stock we are authorized to issue is 50,000,000, par value$0.001 per share.  We had no PreferredStock outstanding as of March 31, 2005. We had 23,213,212 shares of Common Stock outstanding as of March 31,2005.

 

On January 31,2005, the Company closed the Merger described in Note 1.  As a result of the Merger, all of theoutstanding shares of the capital stock of ACT were converted, on a pro rata basis,into the right to receive

 

11

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anaggregate of approximately 18,000,000 shares of the Company’s CommonStock.  In addition, all outstandingoptions and warrants to acquire shares of the capital stock of ACT wereconverted into the right to receive shares of the Company’s Common Stock, andthe Company has adopted the ACT stock option plans and all options grantedthereunder.

 

On orabout January 27, 2005, the Company issued 616,124 shares of its commonstock and granted associated warrants to purchase 308,062 shares of commonstock at a per share price of $1.27 to five holders of $500,000 aggregateprincipal amount of short-term promissory notes, plus interest of $23,708 inexchange for and in retirement of the notes. The fair value of the warrants wasestimated at $0, using the Black Scholes option pricing model. The assumptionsused in the Black Scholes model are as follows: (1) dividend yield of 0%;(2) expected volatility of 0%, (3) risk-free interest rate of 3.25%,and (4) expected life of 2 years.

 

On orabout January 15, 2005, the Company issued 17,647 shares of common stock,valued at $15,000, in consideration of accounting services provided to theCompany.

 

Duringthe period beginning January 3, 2005 through January 31, 2005, ACTcompleted a preferred unit offering in which ACT sold 4,705,890 investmentunits to a group of accredited investors (within the meaning of Rule 501of Regulation D) for total consideration of $8,000,000. ACT received gross cashproceeds of $7,910,600 and the balance of $89,400 was for payment of non-Mergerrelated legal fees.  The completion ofthe offering resulted in the issuance of 9,411,788 shares of ACT’sSeries A Preferred Stock and associated warrants to purchase 4,705,890shares of common stock at a per share price of $1.27.  In consideration of services rendered inconnection with the preferred unit offering, ACT paid consultants to thepreferred unit offering 469,247 investment units, which resulted in theissuance by the Company of 469,247 shares of Common Stock and associatedwarrants to purchase 234,629 shares of common stock at a per share price of$1.27. All preferred shares issued pursuant to the preferred offering wereconverted into common stock prior to the Merger.

 

On December 30,2004, ACT granted warrants to purchase 1,833,260 shares of common stock at aper share price of $0.85 and warrants to purchase 1,291,615 shares of commonstock at a per share price of $2.00. These warrants are exercisable on or afterDecember 30, 2005 and lapse if unexercised on December 30, 2014. Thewarrants were granted as consideration for services provided in connection withthe Merger. The warrants have been valued at $0, using the Black Scholespricing model with the following assumptions: (1) dividend yield of 0%;(2) expected volatility of 0%, (3) risk-free interest rate of 2.75%,and (4) expected life of 3 years.

 

On December 13,2004, ACT granted warrants to purchase 1,954,000 shares of common stock at a pershare price of $0.25. Of these warrants, 1,488,000 are exercisable on February 1,2006 and lapse if unexercised on December 13, 2014 and 546,000 areexercisable immediately upon issuance and lapse if unexercised on December 13,2006. The warrants were granted as consideration for services provided. Thewarrants have been valued at $0, using the Black Scholes pricing model with thefollowing assumptions: (1) dividend yield of 0%; (2) expectedvolatility of 0%, (3) risk-free interest rate of 2.75%, and (4) expectedlife of 3 years.

 

On November 30,2004, ACT granted warrants to purchase 100,000 shares of common stock at a pershare price of $0.25. The warrants are exercisable on or after April 1,2005 and lapse if unexercised on April 1,2010. The warrants were grantedin connection with the termination of an employment contract. The warrants havebeen valued at $0, using the Black Scholes pricing model with the followingassumptions: (1) dividend yield of 0%; (2) expected volatility of 0%,(3) risk-free interest rate of 2.75%, and (4) expected life of 3years.

 

On November 26,2004, ACT granted warrants to purchase 250,000 shares of common stock at a pershare price of $0.05. The warrants are exercisable immediately upon issuanceand lapse if unexercised on November 26, 2006. The warrants were grantedas consideration for the early release of funds from escrow, related to thepreferred unit offering. The warrants have been valued at $983, using the BlackScholes pricing model with the following assumptions: (1) dividend yieldof 0%; (2) expected volatility of 0%, (3) risk-free interest rate of2.75%, and (4) expected life of 2 years.

 

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###### **8.**         OPTIONSOUTSTANDING

###### ** **

**StockPlans**

** **

On August 12,2004, ACT’s Board of Directors approved the establishment of the 2004 StockOption Plan (the “*2004 Stock Plan*”), subject toapproval by ACT’s stockholders on or before August 12, 2005. Stockholderapproval was received on December 13, 2004. The total number of commonshares available for grant and issuance under the plan may not exceed 2,800,000shares, subject to adjustment in the event of certain recapitalizations,reorganizations and similar transactions. Common stock purchase options may be exercisable by the payment of cash orby other means as authorized by the Board of Directors or a committeeestablished by the Board of Directors. At December 31, 2004, ACT had granted 2,604,000 common sharepurchase options under the plan.

 

On December 13,2004, ACT’s Board of Directors and stockholders approved the establishment ofthe 2004 Stock Option Plan II (the “*2004 Stock Plan II*”).The total number of common shares available for grant and issuance under theplan may not exceed 1,301,161 shares, subject to adjustment in the event ofcertain recapitalizations, reorganizations and similar transactions.  Common stock purchase options may beexercisable by the payment of cash or by other means as authorized by the Boardof Directors or a committee established by the Board of Directors.  At December 31, 2004, ACT had granted1,301,161 common share purchase options under the plan.

 

On January 31,2005, the Company’s Board of Directors approved the establishment of the 2005Stock Incentive Plan (the “2005 Plan”), subject to approval of our shareholders.  The total number of common shares availablefor grant and issuance under the plan may not exceed 9 million shares, plus anannual increase on the fist day of each of the Company’s fiscal years beginningin 2006 equal to 5% of the number of shares of our common stock outstanding onthe last day of the immediately preceding fiscal year, subject to adjustment inthe event of certain recapitalizations, reorganizations and similartransactions.  Common stock purchaseoptions may be exercisable by the payment of cash or by other means asauthorized by the Board of Directors or a committee established by the Board ofDirectors.  At March 31, 2005, wehad granted 7,808,335 common stock purchase options under the plan.

 

Pursuantto the 2005 Plan, on January 31, 2005, we granted 7,273,335 common stockpurchase options to our employees. The options granted to employees have anexercise price of $0.85 per share and vest over periods not exceeding 4 years.The fair value of the options was estimated at $385,472 for pro forma purposesusing the Black Scholes option pricing model. The assumptions used in the BlackScholes model are as follows: (1) dividend yield of 0%; (2) expectedvolatility of 0%, (3) risk-free interest rate of 3.25%, and (4) expectedlife of 2 years.

 

Pursuantto the 2005 Plan, on January 31, 2005, we granted 535,000 common stockpurchase options to consultants. The options have an exercise price of $0.85per share and vest over periods not exceeding 4 years. The fair value of theoptions at the date of grant was estimated at $28,354 using the Black Scholesoption pricing model. The assumptions used in the Black Scholes model are asfollows: (1) dividend yield of 0%; (2) expected volatility of 0%,(3) risk-free interest rate of 3.25%, and (4) expected life of 2years. The fair value of the options will be expensed over the vesting period.During the three months ended March 31, 2005, $50,768 was expensed and$21,586 is deferred, based on the fair value as they vest. At March 31,2005, an addition $44,000 of expense was recognized based on the fair valueusing the Black Scholes option pricing model with the following assumptions: (1) dividendyield of 0%; (2) expected volatility of 292%, (3) risk-free interestrate of 3.25%, and (4) expected life of 2 years

 

**CommonShare Options and Warrants Issued**

 

Thefollowing table summarizes information on all common share purchase options andwarrants of the Company outstanding as of March 31, 2005.

 
| ** **                                                         | ** ** | **March 31, 2005** | ** ** |
|--------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                         | ** ** | **Number**              | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| **Outstanding  at beginning of the period**                        | ** ** | **10,034,036**          | ** ** | **$** | **0.51** | ** ** |
| ** **                                                         | ** ** | ** **              | ** ** | ** ** | ** ** |
| **Option  granted to employees and consultants during the period** | ** ** | **7,808,335**           | ** ** | **0.85** | ** ** |
| ** **                                                         | ** ** | ** **              | ** ** | ** ** | ** ** |
| **Warrants  issued during the period**                             | ** ** | **5,248,581**           | ** ** | **1.27** | ** ** |
| ** **                                                         | ** ** | ** **              | ** ** | ** ** | ** ** |
| **Exercise  during the period**                                    | ** ** | **—**              | ** ** | **—** | ** ** |
| ** **                                                         | ** ** | ** **              | ** ** | ** ** | ** ** |
| **Outstanding  at end of the period**                              | ** ** | **23,090,952**          | ** ** | **0.80** | ** ** |
|                                                                    |            |                         |            |  |  |  |

 

###### **9.**         COMMITMENTSAND CONTINGENCIES

###### ** **

We area party to a research collaboration agreement and license agreement with theUniversity of Massachusetts, as amended from time to time (the “UMassLicense”). Under the UMass License, we were granted certain exclusive rights tolicense and sublicense certain products and services invented as part of thecollaborative effort. The term of the UMass License extends to the later of theexpiration of the related patents or April 16, 2006.  We are required to pay royalties ranging from2.5% to 4.5% of net sales of licensed products and services, as defined.  Minimum royalties of $45,000 per year must bepaid to UMass.  For 2005 and 2004, wehave paid only the minimum royalty required. Additionally, we are required topay

 

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sublicensefees of 18% for sublicense income, as defined. We are required to spend aminimum annual amount of $200,000 on research and development.

 

During2004, we entered into license agreements with two parties, the terms of whichprovide for the initial payment of the license fee through an aggregate of sixpromissory notes totaling $1,400,000. The notes mature as follows: $333,333 on December 1,2005; $666,667 on December 1, 2006; and $400,000 on June 1, 2007.There is no stated interest rate for $1,000,000 of notes, the remaining$400,000 bear interest at 10% per year, but only if the notes are not paid atmaturity. Because of the uncertainty of the ultimate collection of theprincipal amount of the notes, they have not been recorded in the financialstatements and will not be recorded until their collectibility is reasonableassured.

 

Wehave entered into a lease for our office space commencing December 20,2004 and expiring April 30, 2010. Annual minimum lease payments are asfollows:

 
| 2005 |   | $218,346 |   |
|------|--------|----------|--------|
| 2006 |   | 225,296  |   |
| 2007 |   | 232,246  |   |
| 2008 |   | 239,196  |   |
| 2009 |   | 246,146  |   |
| 2010 |   | 83,400   |   |

 

Rentexpense recorded in the financial statements for the three month periods ended March 31,2005 and 2004 was $97,318 and $78,298, respectively.

 

Wehave entered into employment contracts with certain executives and researchpersonnel. The contracts provide for salaries, bonuses and stock option grants,along with other employee benefits. The employment contracts generally have noset term and can be terminated by either party. There is a provision forpayments of three months to one year of annual salary as severance if weterminate a contract without cause, along with the acceleration of certainunvested stock option grants. Certain of the agreements provide for salaryincreases upon the closing of an equity funding of $10 million.

 

###### **10.**      LEGALPROCEEDINGS

 

**Geron-RelatedProceedings**

 

Campbellet al. v. Stice et al., Patent Interference Nos. 104,746 and 105,192.These two interference proceedings were initiated January 30, 2002 at therequest of Geron Corporation in an effort to obtain rights to U.S. Patent Nos.5,945,577 and 6,235,970, which are licensed by the University of Massachusettsexclusively to the Company. In both proceedings, the Board of Patent Appealsand Interferences issued a decision adverse to the Company. Both of thesedecisions are being challenged in proceedings described below. This proceedingand the two proceedings discussed immediately below are referred to as the“Geron-Related Proceedings.” Adverse determinations in this proceeding wouldhave a materially adverse effect on our business.

 

Universityof Massachusetts and Advanced Cell Technology, Inc. v. Roslin Institute(Edinburgh), Geron Corporation and Exeter Life Sciences, Inc.,U.S. District Court for the District of Columbia. The Company filed an actionon February 18, 2005 in the U.S. District Court for the District of Columbia. TheCompany brought this action under 35 U.S.C. 146 to reverse the decision of theBoard of Patent Appeals and Interferences regarding a patent to a method ofcloning non-human animals. The patent, U.S. Patent No. 5,945,577, is licensedby the University of Massachusetts exclusively to the Company. Defendants havereceived an extension until May 2, 2005 to answer or otherwise respond. Noother activities have taken place in this action. Adverse determinations inthis proceeding would have a materially adverse effect on our business.

 

Universityof Massachusetts and Advanced Cell Technology, Inc. v. Roslin Institute(Edinburgh), Geron Corporation and Exeter Life Sciences, Inc.,U.S. District Court for the District of Columbia. The Company filed an action onApril 7, 2005 in the U.S. District Court for the District of Columbia. TheCompany brought this action under 35 U.S.C. 146 to reverse the decision of theBoard of Patent Appeals and Interferences regarding a patent to a method ofcreating embryonic stem cells. The patent, U.S. Patent No. 6,235,970, islicensed by the University of Massachusetts exclusively to the Company. Adversedeterminations in this proceeding would have a materially adverse effect on ourbusiness.

 

**OtherLegal Proceedings**

 

GaryD. Aronson and John Gorton v. A.C.T. Group, Inc., Advanced Cell Technology,Inc., Michael D. West, and Gunnar L. Engstrom. Commonwealthof Massachusetts Superior Court, Worcester. C.A. No. 040523B. This proceedingis a claim for breach of contract and failure to pay brought by two of theindividuals who hold Promissory Notes issued by ACT Group Inc., a Delaware corporation(“ACT Group”). ACT is a named defendant in this proceeding. In April 2004, thecourt entered an order denying a request for a temporary restraining order andpreliminary injunction with respect to our subsidiary ACT. In its order, theCourt stated that, based upon the record before the Court at that stage of theproceeding, ACT was “not legally responsible” for these ACT Group obligations.In August 2004, the plaintiffs obtained a judgment against ACT Group for$690,040. The Company and certain officers and directors have been named ascontemnors in a related contempt complaint seeking to enforce the judgmentagainst ACT Group. If ACT Group is unable to resolve this dispute on terms thatare satisfactory to it and the Company, our business may be materiallyadversely affected. Although our operations and those of ACT Group are distinctand separate, with separate governance structures, and the two companiesobserve

 

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strictcorporate formalities distinct to the respective entities, the plaintiffs inthis action seek to pierce the corporate veil and hold us responsible for ACTGroup’s liabilities. To date, those claims have not been successful. However,we cannot assure you that there will not be further attempts to pierce thecorporate veil, or that they will be unsuccessful in doing so. If there aresuch future attempts, they could result in significant legal expenses indefending such claims. Moreover, if the plaintiffs creditors are successful inpiercing the corporate veil and holding us responsible for these ACTobligations, there will be a material adverse effect on our business andoperations. The Massachusetts Superior Court before which this proceeding ispending has entered an Order requiring all 6,811,146 shares of our stock heldby ACT Group be placed in escrow pending sale to satisfy this judgment.Although the Order specifies that the sale must be conducted in a commerciallyreasonable manner, we cannot assure you that the plaintiffs in this action willeffect the sale in a manner that will not have a materially adverse impact uponthe trading value of our stock.

 

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## **ITEM 2. MANAGEMENT’S DISCUSSION ANDANALYSIS OR PLAN OF OPERATION**

## ** **

## **OVERVIEW**

## ** **

ThisQuarterly Report on Form 10-QSB contains forward-looking statements thatinvolve risks and uncertainties.****Weuse words such as “may,” “assumes,” “forecasts,” “positions,” “predicts,”“strategy,” “will,” “expects,” “estimates,” “anticipates,” “believes,”“projects,” “intends,” “plans,” “budgets,” “potential,” “continue” andvariations thereof, and other statements contained in quarterly report, and theexhibits hereto, regarding matters that are not historical facts and areforward-looking statements. Because these statements involve risks anduncertainties, as well as certain assumptions, actual results may differmaterially from those expressed or implied by such forward-lookingstatements.  Factors that could causeactual results to differ materially include, but are not limited to risksinherent in:  our early stage of development,including a lack of operating history, lack of profitable operations and theneed for additional capital; the development and commercialization of largelynovel and unproven technologies and products; our ability to protect, maintain,and defend our intellectual property rights: uncertainties regarding ourability to obtain the capital resources needed to continue research anddevelopment operations and to conduct research, preclinical development andclinical trials necessary for regulatory approvals; uncertainty regarding theoutcome of clinical trials and our overall ability to compete effectively in ahighly complex, rapidly developing, capital intensive and competitiveindustry.  See *“*RISK FACTORS THAT MAY AFFECT OUR BUSINESS*”* set forth in Part I, Item 2 of thisQuarterly Report on Form 10-QSB for a more complete discussion of thesefactors.  Readers are cautioned not toplace undue reliance on these forward-looking statements, which speak only asof the date that they are made.  Weundertake no obligation to publicly update or revise any forward-lookingstatements, whether as a result of new information, future events or otherwise.

 

## **Thefollowing discussion should be read in conjunction with the consolidatedfinancial statements and notes thereto included in Part I, Item 1 of this quarterlyreport on Form 10-QSB.**

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## **We area biotechnology company focused on developing and commercializing human stemcell technology in the emerging fields of regenerative medicine and stem celltherapy as discussed in more detail in Part II, Item 5 “Other Information”of this Quarterly Report on Form 10-QSB.**

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## **SIGNIFICANTACCOUNTING POLICIES**

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## **Ourconsolidated financial statements have been prepared in accordance withaccounting principles generally accepted in the United States of America. Thepreparation of these financial statements requires management to make estimatesand assumptions that affect the reported amounts of assets, liabilities,revenues and expenses. Note 1 of the Notes to Consolidated Financial Statementsdescribes the significant accounting policies used in the preparation of theconsolidated financial statements. Certain of these significant accountingpolicies are considered to be critical accounting policies, as defined below.We do not believe that there have been significant changes to our accountingpolicies during the three months ended March 31, 2005, as compared tothose policies disclosed in the December 31, 2004 financial statementsfiled in our Current Report on Form 8-K/A with the SEC on April 18,2005.**

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## **Acritical accounting policy is defined as one that is both material to thepresentation of our financial statements and requires management to makedifficult, subjective or complex judgments that could have a material effect onour financial condition and results of operations. Specifically, criticalaccounting estimates have the following attributes: 1) we are required to makeassumptions about matters that are highly uncertain at the time of theestimate; and 2) different estimates we could reasonably have used, or changesin the estimate that are reasonably likely to occur, would have a materialeffect on our financial condition or results of operations.**

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## **Estimatesand assumptions about future events and their effects cannot be determined withcertainty. We base our estimates on historical experience and on various otherassumptions believed to be applicable and reasonable under the circumstances.These estimates may change as new events occur, as additional information isobtained and as our operating environment changes. These changes havehistorically been minor and have been**

 

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included in theconsolidated financial statements as soon as they became known. Based on acritical assessment of our accounting policies and the underlying judgments anduncertainties affecting the application of those policies, management believesthat our consolidated financial statements are fairly stated in accordance withaccounting principles generally accepted in the United States, and present ameaningful presentation of our financial condition and results of operations.We believe the following critical accounting policies reflect our moresignificant estimates and assumptions used in the preparation of ourconsolidated financial statements:

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***Use of Estimates -***These financial statements havebeen prepared in accordance with accounting principles generally accepted inthe United States and, accordingly, require management to make estimates andassumptions that affect the reported amounts of assets and liabilities at thedate of the financial statements and the reported amounts of revenues andexpenses during the reporting period.  Specifically, our management hasestimated the expected economic life and value of our licensed technology, ournet operating loss for tax purposes and our stock, option and warrant expensesrelated to compensation to employees and directors, consultants and investmentbanks.  Actual results could differ from those estimates.

 

***Fair Value of FinancialInstruments -***Forcertain of our financial instruments, including accounts receivable, accountspayable, accrued expenses, interest payable, bank overdraft, advances payableand notes payable, the carrying amounts approximate fair value due to theirrelatively short maturities.

 

***Cash and Equivalents -***Cash equivalents are comprisedof certain highly liquid investments with maturity of three months or less whenpurchased.  We maintain our cash in bank deposit accounts, which at times,may exceed federally insured limits.  We have not experienced any lossesin such account.

 

***Equipment -***We record our equipment athistorical cost.  We expense maintenance and repairs as incurred.Depreciation is provided for by the straight-line method over three to sixyears.

 

***Revenue Recognition -***Our revenues are generated fromlicense and research agreements with collaborators. Licensing revenue isrecognized ratably over the life of the license. Deferred revenue representsthe portion of the license and other payments received that has not beenearned. Costs associated with the license revenue are deferred and recognizedover the same term as the revenue. Reimbursements of research expense pursuantto grants are recorded as a reduction of research and development expense oncethe reimbursements are approved and the Company is assured of collectibility.

 

***Intangible and Long-LivedAssets -***Wefollow SFAS No. 144, “*Accounting forImpairment of Disposal of Long-Lived Assets*”, which established a“primary asset” approach to determine the cash flow estimation period for agroup of assets and liabilities that represents the unit of accounting for along lived asset to be held and used.  Long-lived assets to be held andused are reviewed for impairment whenever events or changes in circumstancesindicate that the carrying amount of an asset may not be recoverable.  Thecarrying amount of a long-lived asset is not recoverable if it exceeds the sumof the undiscounted cash flows expected to result from the use and eventualdisposition of the asset.  Long-lived assets to be disposed of are reportedat the lower of carrying amount or fair value less cost to sell.  Duringthe periods ended March 31, 2005 and December 31, 2004, no impairmentlosses were recognized.

 

***Research and DevelopmentCosts -***Researchand development costs consist of expenditures for the research and developmentof patents and technology, which are not capitalizable. Our research anddevelopment costs consist mainly of payroll and payroll related expenses,research supplies and costs incurred in connection with specific research grants.

 

***Stock Based Compensation -***SFASNo. 123, “*Accounting for Stock-BasedCompensation*,” establishes and encourages the use of the fair valuebased method of accounting for stock-based compensation arrangements underwhich compensation cost is determined using the fair value of stock-basedcompensation determined as of the date of the grant or the date at which theperformance of the services is completed and is recognized over the periods inwhich the related services are rendered.  The statement also permitscompanies to elect to continue using the current intrinsic value accountingmethod specified in *APB*OpinionNo. 25, “*Accounting for Stock Issued toEmployees*,” to account for stock-based compensation toemployees.  We have elected to use the intrinsic value based method forgrants to our employees and directors and have disclosed the pro forma effectof using the fair value based method to account for our stock-basedcompensation to employees.

 

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ACTuses the fair value method for equity instruments granted to non-employees anduses the Black Scholes model for measuring the fair value.  The stockbased fair value compensation is determined as of the date of the grant or thedate at which the performance of the services is completed (measurement date)and is recognized over the periods in which the related services are rendered.

 

## **RESULTSOF OPERATIONS**

## ** **

***Revenues***

 

Revenuesfor the three months ended March 31, 2005 and March 31, 2004 wereapproximately $108,000 and $183,000, respectively. These amounts relateprimarily to license fees and royalties collected that are being amortized overthe period of the license granted. The reduction in revenue was due to decreasedrevenue levels from licensee operations. We recognized no revenues from collaborations during either of theperiods presented.

 

##### ***Research andDevelopment Expenses and Grant Reimbursements***

##### *** ***

Research and development expenses for thethree months ended March 31, 2005 and March 31, 2004 remained relativelyflat at approximately $277,000 and $294,000, respectively.  These amounts consist mainly ofpayroll and payroll related expenses, research supplies and costs incurred inconnection with specific research grants.

 

Grantreimbursements for the three months ended March 31, 2005 and March 31,2004 were approximately $236,000 and $140,000, respectively. These amountsrepresent approved reimbursements pursuant to a scientific grant from the USNational Institute of Standards and Technology that expires in 2006. At March 31,2005, ACT had approximately $1,100,000 of funds available under the grant thatcan be used to reimburse future approved research expenditures.  We will lose the availability of any unusedfunds upon the expiration of the grant.

 

##### ***General andAdministrative Expenses***

##### *** ***

Generaland administrative expenses for the three months ended March 31, 2005 and March 31,2004 were approximately $1,204,000 and $493,000, respectively.  The principal increase in expense in thecurrent period versus the same period last year is a result of additionalsalary costs related to the addition of key personnel, increased professionalfees related to ACT’s merger into a public company, increased professional feesrelated to audits for the years ended December 31, 2004 and 2003, andcosts of preparing documents and records for various public filings with theSecurities and Exchange Commission.

 

***Other Income (Expense)***

 

Otherincome (expense) for the three months ended March 31, 2005 and March 31,2004 were approximately $18,000 and ($49,000), respectively.  The increase in other income was due to thefact that the quarter ended March 31, 2005 included interest income ofapproximately $12,000 as a result of cash balances from ACT’s recentlycompleted financing and a gain on settlement of debt of approximately $87,000related to resolution of certain outstanding legal bills.  These amounts were partially offset byincreases in interest expense and late fees the three months ended March 31,2005 as compared to the three months ended March 31, 2004, primarily as aresult of past due amounts owed to professionals and other suppliers to ACT.

 

##### ***Net Loss***

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Netloss for the three months ended March 31, 2005 and March 31, 2004 wasapproximately $1,164,000 and $581,000, respectively.  The increased loss in the quarter ended March 31,2005 is the result of increased general and administrative expenses, offset inpart by increased interest income and the gain on settlement of debt.

 

## ***Recent Accounting Pronouncements***

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## **In December 2004,the Financial Accounting Standards Board (“FASB”) issued SFAS No. 153,“Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29,Accounting for Nonmonetary Transactions.” The amendments made by Statement 153are based on the principle that exchanges of nonmonetary**

 

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assets should be measuredbased on the fair value of the assets exchanged.  Further, the amendments eliminate the narrowexception for nonmonetary exchanges of similar productive assets and replace itwith a broader exception for exchanges of nonmonetary assets that do not havecommercial substance.  Previously,Opinion 29 required that the accounting for an exchange of a productive assetfor a similar productive asset or an equivalent interest in the same or similarproductive asset should be based on the recorded amount of the assetrelinquished.  Opinion 29 provided anexception to its basic measurement principle (fair value) for exchanges of similarproductive assets.  The FASB believesthat exception required that some nonmonetary exchanges, although commerciallysubstantive, be recorded on a carryover basis. By focusing the exception on exchanges that lack commercial substance,the FASB believes this statement produces financial reporting that morefaithfully represents the economics of the transactions.  SFAS 153 is effective for nonmonetary assetexchanges occurring in fiscal periods beginning after June 15, 2005.  Earlier application is permitted fornonmonetary asset exchanges occurring in fiscal periods beginning after thedate of issuance.  The provisions of SFAS153 shall be applied prospectively.  TheCompany has evaluated the impact of the adoption of SFAS 153, and does notbelieve the impact will be significant to the Company’s overall results ofoperations or financial position.

## ** **

In December 2004,the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment”. SFAS 123(R) will provide investors and other users of financial statements withmore complete and neutral financial information by requiring that thecompensation cost relating to share-based payment transactions be recognized infinancial statements.  That cost will be measured based on the fair valueof the equity or liability instruments issued.  SFAS 123(R) covers a widerange of share-based compensation arrangements including share options,restricted share plans, performance-based awards, share appreciation rights,and employee share purchase plans.  SFAS 123(R) replaces FASB StatementNo. 123, “Accounting for Stock-Based Compensation”, and supersedes APBOpinion No. 25, “Accounting for Stock Issued to Employees”. SFAS 123, asoriginally issued in 1995, established as preferable a fair-value-based methodof accounting for share-based payment transactions with employees. However, that statement permitted entities the option of continuing to applythe guidance in Opinion 25, as long as the footnotes to financial statementsdisclosed what net income would have been had the preferable fair-value-basedmethod been used.  Public entities (other than those filing as smallbusiness issuers) will be required to apply SFAS 123(R) as of the first interimor annual reporting period that begins after June 15, 2005. SFAS 123(R) isapplicable for ACT effective the first interim period that starts after December 15,2005. The Company has evaluated the impact of the adoption of SFAS 123(R), andbelieves that the impact may be significant to the Company’s overall results ofoperations and financial position (a pro forma effect, as estimated bymanagement, is disclosed earlier in this note).

 

In December 2004,the FASB issued SFAS No. 152, “Accounting for Real Estate Time-SharingTransactions, an amendment of FASB Statements No. 66 and 67 (SFAS 152)”.The amendments made by Statement 152 amend FASB Statement No. 066,“Accounting for Sales of Real Estate”, to reference the financial accountingand reporting guidance for real estate time-sharing transactions that isprovided in AICPA Statement of Position (SOP) 04-2, “Accounting for Real EstateTime-Sharing Transactions”. This Statement also amends FASB StatementNo. 67, “Accounting for Costs and Initial Rental Operations of Real EstateProjects”, to state that the guidance for (1) incidental operations and(2) costs incurred to sell real estate projects does not apply to realestate time-sharing transactions. The accounting for those operations and costsis subject to the guidance in SOP 04-2. This statement is effective forfinancial statements for fiscal years beginning after June 15, 2005, withearlier application encouraged. The Company has evaluated the impact of theadoption of SFAS 152, and does not believe the impact will be significant tothe Company’s overall results of operations or financial position since theCompany does not enter into such transactions.

 

In December 2004,the FASB issued two FASB Staff Positions—FSP FAS 109-1, Application of FASBStatement 109 “Accounting for Income Taxes” to the Tax Deduction on QualifiedProduction Activities Provided by the American Jobs Creation Act of 2004, andFSP FAS 109-2 Accounting and Disclosure Guidance for the Foreign EarningsRepatriation Provision within the American Jobs Creation Act of 2004. Neitherof these affected the Company as it does not participate in the related activities.

 

In November 2004,the FASB issued SFAS No. 151, “Inventory Costs, an amendment of ARBNo. 43, Chapter 4”. The amendments made by Statement 151 clarify thatabnormal amounts of idle facility expense, freight, handling costs, and wastedmaterials (spoilage) should be recognized as current period charges and requirethe allocation of fixed production overheads to inventory based on the normalcapacity of the production facilities. The guidance is effective for inventorycosts incurred during fiscal years beginning after June 15, 2005. Earlierapplication is permitted for inventory costs incurred during fiscal yearsbeginning after November 23, 2004. The Company has evaluated the impact ofthe adoption of SFAS 151, and does not believe the impact will be significantto the Company’s overall results of operations or financial position since theCompany currently does not have any manufacturing operations or inventory.

 

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In March 2004,the FASB approved the consensus reached on the Emerging Issues Task Force(EITF) Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment andIts Application to Certain Investments.” The objective of this Issue is toprovide guidance for identifying impaired investments. EITF 03-1 alsoprovides new disclosure requirements for investments that are deemed to betemporarily impaired. The accounting provisions of EITF 03-1 are effective forall reporting periods beginning after June 15, 2004, while the disclosurerequirements for certain investments are effective for annual periods endingafter December 15, 2003, and for other investments such disclosurerequirements are effective for annual periods ending after June 15, 2004.

 

In December 2003,the SEC issued Staff Accounting Bulletin (“SAB”) No. 104 (“SABNo. 104”), “Revenue Recognition.” SAB No. 104 supersedes SABNo. 101, “Revenue Recognition in Financial Statements.” SAB No. 104,which was effective upon issuance, rescinded certain guidance contained in SABNo. 101 related to multiple element revenue arrangements, and replacedsuch guidance with that contained in EITF 00-21, “Accounting for RevenueArrangements with Multiple Deliverables.” Additionally, SAB No. 104rescinded the SEC’s Revenue Recognition in Financial Statements FrequentlyAsked Questions and Answers issued with SAB No. 101. The revenuerecognition principles of SAB No. 101 remain largely unchanged by theissuance of SAB No. 104, and therefore the adoption of SAB No. 104did not have a material effect on the Company’s results of operations orfinancial condition.

 

In January 2003,the FASB issued FASB Interpretation No. (“FIN”) 46, “Consolidation ofVariable Interest Entities” (“FIN 46”). In December 2003, FIN 46 wasreplaced by FASB interpretation No. 46(R) “Consolidation of VariableInterest Entities.” FIN 46(R) clarifies the application of Accounting ResearchBulletin No. 51, “Consolidated Financial Statements,” to certain entitiesin which equity investors do not have the characteristics of a controlling financialinterest or do not have sufficient equity at risk for the entity to finance itsactivities without additional subordinated financial support from otherparties. FIN 46(R) requires an enterprise to consolidate a variable interestentity if that enterprise will absorb a majority of the entity’s expectedlosses, is entitled to receive a majority of the entity’s expected residualreturns, or both. FIN 46(R) is effective for entities being evaluated under FIN46(R) for consolidation no later than the end of the first reporting periodthat ends after March 15, 2004. The Company does not currently have anyvariable interest entities that will be impacted by adoption of FIN 46(R).

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

We are financing ouroperations primarily with the proceeds of the sale of $8,000,000 of investmentunits, consisting of Series A Preferred Stock and associated warrants, byour subsidiary, ACT, in January 2005, prior to the closing of theMerger.  To a substantially lesserdegree, financing of our operations is provided through grant funding, paymentsreceived under license agreements, and interest earned on cash and cashequivalents.

 

With the exception of2002, when we sold certain assets of a subsidiary resulting in a gain for theyear, we have incurred substantial net losses each year since inception as aresult of research and development and general and administrative expenses insupport of our operations. We anticipate incurring substantial net losses inthe future.

 

Cash, cash equivalents, andcash held in escrow at March 31, 2005 and December 31, 2004 wereapproximately $5,386,000 and $3,676,000, respectively.  None of our cash was held in escrow at March 31,2005.  The increase in the current periodis the result of closing the financing described above, net of amounts spentfor payment of notes and accounts payable, increased legal and accounting fees,and increases in other general and administrative expenses.

 

At March 31,2005 and December 31, 2004, we had a note payable in the principal amountof $1,000,000 to ACT Group, and related accrued interest of approximately$327,000 and $297,000, respectively.  Asan offset to these amounts owed to ACT Group, we had a receivable at March 31,2005 and December 31, 2004 of approximately $587,000 and $394,000,respectively, primarily related to expenses incurred by ACT on behalf of ACTGroup for salaries, legal fees and other costs incurred.

 

Our future cashrequirements will depend on many factors, including the pace and scope of ourresearch and development programs, the costs involved in filing, prosecuting,maintaining and enforcing patents and other costs associated withcommercializing our potential products. However, we expect to require substantial additional funding.  We intend to seek additional fundingprimarily through public or private financing transactions, and, to a lesserdegree, new licensing or scientific collaborations, grants from governmental orother institutions, and other related transactions.  If we are unable to raise additional funds,we will be forced to either scale back our business

 

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efforts or curtail ourbusiness activities entirely. We anticipate that our available cash andexpected income will be sufficient to finance most of our current activitiesfor at least twelve months from the date of the financial statements, althoughcertain of these activities and related personnel may need to be reduced.  We cannot assure you that public or privatefinancing or grants will be available on acceptable terms, if at all.  Several factors will affect our ability toraise additional funding, including, but not limited to, the volatility of ourcommon stock.  See “RISK FACTORS THATMAY AFFECT OUR BUSINESS*”* setforth in Part I, Item 2 of this Quarterly Report on Form 10-QSB for amore complete discussion of these factors.

 

# **RISK FACTORS THAT MAY AFFECT OURBUSINESS**

# ** **

*Our business is subject to various risks, included but not limited to those described below.  You should carefully consider these factors, together with all the other information disclosed in this Quarterly Report on Form 10-QSB.  Any of these risks could materially adversely affect our business, operating results and financial condition.*

 

**Risks Relating to Our Early Stage of Development**

 

***We have a limited operating history on which potential investors may evaluate our operations and prospects for profitable operations.*****We have a limited operating history on which a potential investor may base an evaluation of us and our prospects.  If we are unable to begin and sustain profitable operations, investors may lose their entire investment in us. We are in the development stage, and our prospects must be considered speculative in light of the risks, expenses and difficulties frequently encountered by companies in their early stages of development, particularly in light of the uncertainties relating to the new, competitive and rapidly evolving markets in which we anticipate we will operate. To attempt to address these risks, we must, among other things, further develop our technologies, products and services, successfully implement our research, development, marketing and commercialization strategies, respond to competitive developments and attract, retain and motivate qualified personnel. A substantial risk is involved in investing in us because, as a development stage company,

 

**•**      we have fewer resources than an established company;

**•**      our management may be more likely to make mistakes at such an early stage; and

**•**      we may be more vulnerable operationally and financially to any mistakes that may be made, as well as to external factors beyond our control.

 

These difficulties are compounded by our heavy dependence on emerging and sometimes unproven technologies.  In addition, the fact that some of our significant potential revenue sources involve ethically sensitive and controversial issues which could become the subject of legislation or regulations that could materially restrict our operations and, therefore, harm our financial condition, operating results and prospects for bringing our investors a return on their investment.

 

***We have a history of operating losses, and we cannot assure you that we will achieve future revenues or operating profits.*****We have generated insignificant revenue to date from our operations.  Historically, we have had net operating losses each year since our inception.  We have limited current potential sources of revenue from license fees and product development revenues, and we cannot assure you that we will be able to develop such revenue sources or that our operations will become profitable, even if we are able to commercialize our technologies or any products or services developed from those technologies.  If we continue to suffer losses as we have in the past, investors may not receive any return on their investment and may lose their entire investment.

 

Wehave no commercially marketable products and no immediate ability to generaterevenue from commercial products, nor any assurance of being able to develop ourtechnologies for commercial applications. As a result, we may never be able to operate profitably. We are justbeginning to identify products available for pre-clinical trials and may notreceive significant revenues from commercial sales of our products for the nextseveral years, if at all, although we do generate revenues from licensingactivities.  We have marketed only alimited amount of services based on our technologies and have little experiencein doing so. Our technologies and any potential products or services that wemay develop will require significant additional effort and investment prior tomaterial commercialization and, in the case of any biomedical products,pre-clinical and clinical testing and regulatory approvals.  We cannot assure you that we will be able todevelop any such technologies or any products or services, or that suchtechnologies, products or services will prove to be safe and efficacious inclinical trials, meet applicable regulatory standards, be capable of being producedin commercial quantities at acceptable costs or be successfully

 

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marketed.  For that reason, we may not be able togenerate revenues from commercial production or operate profitably.

 

We have sold the agricultural portion of our business in order to finance operations.  The agricultural applications of our technology generally have a more rapid realization of revenues due to more limited regulatory requirements and testing.  Our ability to generate revenue from any agricultural applications of our technology is limited to existing license royalties.

 

***We will require substantial additional funds to continue operating which may not be available on acceptable terms, if at all.*****We believe our cash from all sources (cash, cash equivalents and anticipated revenue stream from licensing fees and sponsored research contracts) is sufficient for the Company to continue as a going concern through March 31, 2006.  However, without substantial additional financing during this period, we will need to significantly limit our capital and operational spending and therefore be limited in our ability to advance our scientific efforts or further our efforts to operate profitably.

 

We are evaluatingalternatives and sources for additional funding, which may include public orprivate investors, strategic partners, and grant programs available throughspecific states or foundations. Lack of necessary funds may require us todelay, scale back or eliminate some or all of our research and productdevelopment programs and/or our capital expenditures or to license ourpotential products or technologies to third parties.

 

In addition, our cash requirements may vary materially from those now planned because of results of research and development, potential relationships with strategic partners, changes in the focus and direction of our research and development programs, competition, litigation required to protect our technology, technological advances, the cost of pre-clinical and clinical testing, the regulatory process of the United States Food and Drug Administration, or FDA, and foreign regulators, whether any of our products become approved or the market acceptance of any such products and other factors.  Our current cash reserves are not sufficient to fund our operations through the commercialization of our first products or services.

 

***We have limited clinical testing, regulatory, manufacturing, marketing, distribution and sales capabilities which may limit our ability to generate revenues.*****Because of the relatively early stage of our research and development programs, we have not yet invested significantly in clinical testing, regulatory, manufacturing, or in marketing, distribution or product sales resources. We cannot assure you that we will be able to develop any such resources successfully or as quickly as may be necessary. The inability to do so may harm our ability to generate revenues or operate profitably.

 

**Risks Relating to Our Technology**

 

***We rely on nuclear transfer and embryonic stem cell technologies that we may not be able to successfully develop, which will prevent us from generating revenues, operating profitably or providing investors any return on their investment.*****We have concentrated our research on our nuclear transfer and embryonic stem cell technologies, and our ability to operate profitably will depend on being able to successfully develop these technologies for human applications. These are emerging technologies with, as yet, limited human applications. We cannot guarantee that we will be able to successfully develop our nuclear transfer and embryonic stem cell technologies or that such development will result in products or services with any significant commercial utility. We anticipate that the commercial sale of such products or services, and royalty / licensing fees related to our technology, would be our primary sources of revenues. If we are unable to develop our technologies, investors will likely lose their entire investment in us.

 

***The outcome of pre-clinical, clinical and product testing of our products is uncertain, and if we are unable to satisfactorily complete such testing, or if such testing yields unsatisfactory results, we will be unable to commercially produce our proposed products. ***Before obtaining regulatory approvals for the commercial sale of any potential human products, our products will be subjected to extensive pre-clinical and clinical testing to demonstrate their safety and efficacy in humans.  We cannot assure you that the clinical trials of our products, or those of our licensees or collaborators, will demonstrate the safety and efficacy of such products at all, or to the extent necessary to obtain appropriate regulatory approvals, or that the testing of such products will be completed in a timely manner, if at all, or without significant increases in costs, program delays or both, all of which could harm our ability to generate revenues.  In addition, our prospective products may not prove to be more effective for treating disease or injury than current therapies. Accordingly, we may have to delay or abandon efforts to research, develop or obtain regulatory approval to market our prospective products. Many companies involved in biotechnology research

 

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and development have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials. The failure to adequately demonstrate the safety and efficacy of a therapeutic product under development could delay or prevent regulatory approval of the product and could harm our ability to generate revenues, operate profitably or produce any return on an investment in us.

 

While the marketing of cloned or transgenic animals does not currently require regulatory approval, such approval may be required in the future.  We cannot assure you that we would obtain such approvals or that our licensees’ products would be accepted in the marketplace.  This lack of approval could reduce or preclude any royalty revenues we might receive from our licensees in that field.

 

***We may not be able to commercially develop our technologies and proposed product lines, which, in turn, would significantly harm our ability to earn revenues and result in a loss of investment.*****Our ability to commercially develop our technologies will be dictated in large part by forces outside our control which cannot be predicted, including, but not limited to, general economic conditions, the success of our research and pre-clinical and field testing, the availability of collaborative partners to finance our work in pursuing applications of nuclear transfer technology and technological or other developments in the biomedical field which, due to efficiencies, technological breakthroughs or greater acceptance in the biomedical industry, may render one or more areas of commercialization more attractive, obsolete or competitively unattractive. It is possible that one or more areas of commercialization will not be pursued at all if a collaborative partner or entity willing to fund research and development cannot be located.  Our decisions regarding the ultimate products and/or services we pursue could have a significant adverse affect on our ability to earn revenue if we misinterpret trends, underestimate development costs and/or pursue that wrong products or services. Any of these factors either alone or in concert could materially harm our ability to earn revenues and could result in a loss of any investment in us.

 

***If we are unable to keep up with rapid technological changes in our field or compete effectively, we will be unable to operate profitably.*****We are engaged in activities in the biotechnology field, which is characterized by extensive research efforts and rapid technological progress. If we fail to anticipate or respond adequately to technological developments, our ability to operate profitably could suffer. We cannot assure you that research and discoveries by other biotechnology, agricultural, pharmaceutical or other companies will not render our technologies or potential products or services uneconomical or result in products superior to those we develop or that any technologies, products or services we develop will be preferred to any existing or newly-developed technologies, products or services.

 

***We may not be able to protect our proprietary technology, which could harm our ability to operate profitably.*****The biotechnology and pharmaceutical industries place considerable importance on obtaining patent and trade secret protection for new technologies, products and processes. Our success will depend, to a substantial degree, on our ability to obtain and enforce patent protection for our products, preserve any trade secrets and operate without infringing the proprietary rights of others. We cannot assure you that:

 

**•**      we will succeed in obtaining any patents, obtain them in a timely manner, or that the breadth or degree of protection that any such patents will protect our interests;

**•**      the use of our technology will not infringe on the proprietary rights of others;

**•**      patent applications relating to our potential products or technologies will result in the issuance of any patents or that, if issued, such patents will afford adequate protection to us or not be challenged, invalidated or infringed; or

**•**      patents will not issue to other parties, which may be infringed by our potential products or technologies.

 

We are aware of certain patents that have been granted to others and certain patent applications that have been filed by others with respect to nuclear transfer technologies.  The fields in which we operate have been characterized by significant efforts by competitors to establish dominant or blocking patent rights to gain a competitive advantage, and by considerable differences of opinion as to the value and legal legitimacy of competitors’ purported patent rights and the technologies they actually utilize in their businesses.

 

***Our business is highly dependent upon maintaining licenses with respect to key technology.*****Several of the key patents we utilize are licensed to us by third parties.  These licenses are subject to termination under certain circumstances (including, for example, our failure to make minimum royalty payments or to timely achieve development and commercialization benchmarks).  The loss of any of such licenses, or the conversion of such licenses to non-exclusive licenses, could harm our operations and/or enhance the prospects of our competitors.

 

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Certain of such licenses also contain restrictions (e.g., limitations on our ability to grant sublicenses)  that could materially interfere with our ability to generate revenue through the licensing or sale to third parties of important and valuable technologies that we have, for strategic reasons, elected not to pursue directly.  The possibility exists that in the future we will require further licenses to complete and/or commercialize our proposed products.  We cannot assure you that we will be able to acquire any such licenses on a commercially viable basis.

 

***Certain of our technology is not protectable by patent.*****Certain parts of our know-how and technology are not patentable. To protect our proprietary position in such know-how and technology, we intend to require all employees, consultants, advisors and collaborators to enter into confidentiality and invention ownership agreements with us.  We cannot assure you, however, that these agreements will provide meaningful protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use or disclosure. Further, in the absence of patent protection, competitors who independently develop substantially equivalent technology may harm our business.

 

***We may not be able to adequately protect against piracy of intellectual property in foreign jurisdictions.*** Considerable research in the areas of stem cells, cell therapeutics and regenerative medicine is being performed in countries outside of the United States, and a number of our competitors are located in those countries.  The laws protecting intellectual property in some of those countries may not provide protection for our trade secrets and intellectual property adequate to prevent our competitors from misappropriating our trade secrets or intellectual property.  If our trade secrets or intellectual property are misappropriated in those countries, we may be without adequate remedies to address the issue.

 

**Risks Relating to Government Regulation**

 

***Companies such as ours engaged in research using nuclear transfer and embryonic stem cells are currently subject to strict government regulations, and our operations could be harmed by any legislative or administrative efforts impacting the use of nuclear transfer technology or human embryonic material.**** *Our business is focused on human cell therapy, which includes the production of human differentiated cells from stem cells and involves the use of nuclear transfer technology, human oocytes, and embryonic material.  Nuclear transfer technology, commonly known as therapeutic cloning, and research utilizing embryonic stem cells are controversial subjects, and are currently subject to intense scrutiny, both in the United States, the United Nations and throughout the world, particularly in the area of nuclear transfer of human cells and the use of human embryonic material.

 

We cannot assure you that our operations will not be harmed by any legislative or administrative efforts by politicians or groups opposed to the development of nuclear transfer technology generally or the use of nuclear transfer for therapeutic cloning of human cells specifically. Further, we cannot assure you that legislative or administrative restrictions directly or indirectly delaying, limiting or preventing the use of nuclear transfer technology or human embryonic material or the sale, manufacture or use of products or services derived from nuclear transfer technology or human embryonic material will not be adopted in the future.

 

***Restrictionson the use of human embryonic stem cells, and the ethical, legal and socialimplications of that research, could prevent us from developing or gainingacceptance for commercially viable products in these areas.* **Some ofour most important programs involve the use of stem cells that are derived fromhuman embryos. The use of human embryonic stem cells gives rise to ethical,legal and social issues regarding the appropriate use of these cells. In theevent that our research related to human embryonic stem cells becomes thesubject of adverse commentary or publicity, the market price for our commonstock could be significantly harmed. Some political and religious groupshave voiced opposition to our technology and practices. We use stem cellsderived from human embryos that have been created for in vitro fertilizationprocedures but are no longer desired or suitable for that use and are donatedwith appropriate informed consent for research use. Many research institutions,including some of our scientific collaborators, have adopted policies regardingthe ethical use of human embryonic tissue. These policies may have the effectof limiting the scope of research conducted using human embryonic stem cells,thereby impairing our ability to conduct research in this field.

** **

***Potential and actual legislation and regulation related to our technology could limit our activities and ability to develop products for commercial sales, depriving us of our anticipated source of future revenues.*****In July, 2001, the House of Representatives of the United States Congress passed a bill, HR 2505, the “Human Cloning Prohibition Act of 2001”.  This bill was placed on the calendar of the U.S. Senate in August 2002, where it did not pass.  However, similar bills could be introduced in the future aiming to prohibit the use or commercialization of somatic cell nuclear transfer technology or of any products resulting from it, including those related to human therapeutic

 

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cloning and regenerative medicine.  If passed, such a bill could have a significant influence on our ability to pursue our research, development and commercialization plans in the United States.

 

The Commonwealth ofMassachusetts House of Representatives and Senate have passed a bill, S.2039,“An Act Relative to Enhancing Regenerative Medicine in the Commonwealth,” whichhas been sent to the Governor of the Commonwealth for action.  The bill, among other things, permitsresearch and clinical applications involving the derivation and use of humanembryonic stem cells, including somatic cell nuclear transfer, human adult stemcells from any source, umbilical cord stem cells, parthenotes, and placentalcells; requires that all research involving the derivation human embryonic stemcells through the use human genetic material, including somatic cell nucleartransfer, and parthenogenesis or other asexual means be conducted only upon thewritten approval of a duly authorized Institutional Review Board (IRB); andprohibits the knowing purchase, sale or transfer of human embryos or gametesfor valuable consideration for research purposes.  The bill also directs the biomedical researchadvisory council created pursuant to the bill to investigate the feasibility ofpermitting companies’ such as ours whose stock is publicly traded to use analternative method of approval in lieu of the requirement of having to acquireIRB approval before conducting embryonic stem cell research.  If the bill becomes law, the biomedicalresearch advisory council will be required to report its findings andrecommendations (if any) by October 31, 2005.  If passed, this bill could have a significant influence on the Company’sability to pursue its research, development and commercialization plans inMassachusetts.

 

Any future or additionalgovernment-imposed restrictions in these or other jurisdictions with respect touse of embryos or human embryonic stem cells in research and development couldhave a material adverse effect on us, by, among other things:

 

**•**  harmingour ability to establish critical partnerships and collaborations;

**•**  delayingor preventing progress in our research and development;

**•**  limitingor preventing the development, sale or use of our products; and

**•**  causinga decrease in the price of our stock.

 

***Because we or our collaborators must obtain regulatoryapproval to market our products in the United States and other countries, wecannot predict whether or when we will be permitted to commercialize ourproducts.***Federal, state and local governments in theUnited States and governments in other countries have significant regulationsin place that govern many of our activities. We are or may become subject tovarious federal, state and local laws, regulations and recommendations relatingto safe working conditions, laboratory and manufacturing practices, theexperimental use of animals and the use and disposal of hazardous orpotentially hazardous substances used in connection with our research anddevelopment work. The preclinical testing and clinical trials of theproducts that we or our collaborators develop are subject to extensivegovernment regulation that may prevent us from creating commercially viableproducts from our discoveries. In addition, the sale by us or our collaboratorsof any commercially viable product will be subject to government regulationfrom several standpoints, including manufacturing, advertising and promoting,selling and marketing, labeling, and distributing.

 

If, and to the extent that, we are unable to comply with these regulations, our ability to earn revenues will be materially and negatively impacted.  The regulatory process, particularly in the biotechnology field, is uncertain, can take many years and requires the expenditure of substantial resources. Biological drugs and non-biological drugs are rigorously regulated. In particular, proposed human pharmaceutical therapeutic product candidates are subject to rigorous preclinical and clinical testing and other requirements by the FDA in the United States and similar health authorities in other countries in order to demonstrate safety and efficacy. We may never obtain regulatory approval to market our proposed products. For additional information about governmental regulations that will affect our planned and intended business operations, see “BUSINESS-*Government Regulation*” of Part II, Item 5 of this Quarterly Report on Form 10-QSB.

 

***Our products may not receive FDA approval, which would prevent us from commercially marketing our products and producing revenues.*****The FDA and comparable government agencies in foreign countries impose substantial regulations on the manufacture and marketing of pharmaceutical products through lengthy and detailed laboratory, pre-clinical and clinical testing procedures, sampling activities and other costly and time-consuming procedures. Satisfaction of these regulations typically takes several years or more and varies substantially based upon the type, complexity and novelty of the proposed product. We cannot yet accurately predict when we might first submit any Investigational New Drug, or IND, application to the FDA, or whether any such IND application would be granted on a timely basis, if at all, nor can we assure you that we will successfully complete any clinical trials in connection with any such IND application. Further, we cannot yet accurately predict when we might first submit any product

 

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license application for FDA approval or whether any such product license application would be granted on a timely basis, if at all.  As a result, we cannot assure you that FDA approvals for any products developed by us will be granted on a timely basis, if at all. Any such delay in obtaining, or failure to obtain, such approvals could have a material adverse effect on the marketing of our products and our ability to generate product revenue. For additional information about governmental regulations that will affect our planned and intended business operations, see “BUSINESS-*Government Regulation*” of Part II, Item 5 of this Quarterly Report on Form 10-QSB.

 

***For-profit entities may be prohibited from benefiting from grant funding***.  There has been much publicity about grant resources for stem cell research, including Proposition 71 in California. To date, California has not provided any funding related to research activities pursuant to this Proposition, and there is ongoing litigation in California that may delay, or prevent the sale of State bonds that would fund the activities contemplated by California voters.  In addition, rules and regulations related to any funding that may ultimately be provided, the type of entity that will be eligible for funding, the science to be funded, and funding details have not been finalized.  As a result of these uncertainties regarding Proposition 71, we cannot assure youthat funding, if any, will be available to the Company, or any for-profit entity.

 

***The government maintains certainrights in technology that we develop using government grant money and we maylose the revenues from such technology if we do not commercialize and utilizethe technology pursuant to established government guidelines***. Certain of our and our licensors’ researchhas been or is being funded in part by government grants. In connection withcertain grants, the U.S. Government retains rights in the technologydeveloped with the grant. These rights could restrict our ability to fullycapitalize upon the value of this research.

 

**Risks Relating to Competition**

 

***Our competition includes both public and private organizations and collaborations among academic institutions and large pharmaceutical companies, most of which have significantly greater experience and financial resources than we do.*****The biotechnology and pharmaceutical industries are characterized by intense competition. We compete against numerous companies, many of which have substantially greater financial and other resources than we have. Several such enterprises have initiated cell therapy research programs and/or efforts to treat the same diseases targeted by us. Companies such as Geron Corporation, Genzyme Corporation, StemCells, Inc., Aastrom Biosciences, Inc. and Viacell, Inc., as well as others, have substantially greater resources and experience in our fields than we do, and are well situated to compete with us effectively.  Of course, any of the world’s largest pharmaceutical companies represents a significant actual or potential competitor with vastly greater resources than ours.

 

These companies hold licenses to genetic selection technologies and other technologies that are competitive with those of our technologies.  These and other competitive enterprises have devoted, and will continue to devote, substantial resources to the development of technologies and products in competition with us.

 

Private and public academic and research institutions also compete with us in the research and development of human therapeutic or agricultural products.  In the past several years, the pharmaceutical industry has selectively entered into collaborations with both public and private organizations to explore the possibilities that stem cell therapies may present for substantive breakthroughs in the fight against disease.

 

Inaddition, many of our competitors have significantly greater experience andfinancial resources than we have in the development, pre-clinical testing andhuman clinical trials of biotechnology and pharmaceutical products, inobtaining FDA and other regulatory approvals of such products and inmanufacturing and marketing such products. Accordingly our competitors maysucceed in obtaining FDA approval for products more rapidly or effectively thanwe can. Our competitors may also be the first to discover and obtain a validpatent to a particular stem cell which may effectively block all others fromdoing so.  It will be important for us orour collaborators to be the first to discover any stem cell that we are seekingto discover. Failure to be the first could prevent us from commercializing allof our research and development affected by that discovery. Additionally, if wecommence commercial sales of any products, we will also be competing withrespect to manufacturing efficiency and sales and marketing capabilities, areasin which we have no experience.

 

***The United States is encountering tremendous competition from many foreign countries that are providing an environment more attractive for stem cell research.***The governments of numerous foreign countries are investing in, providing facilities, personnel and legal environments intended to attract biotechnology companies and encourage stem cell research and development of stem cell-related technologies.

 

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These efforts by foreign countries may make it more difficult to effectively compete in our industry and may generate competitors with substantially greater resources than ours.

 

**Risks Relating to Our Reliance on Third Parties**

 

***We depend on our collaborators to help us develop and testour proposed products, and our ability to develop and commercialize productsmay be impaired or delayed if collaborations are unsuccessful***.  Our strategy for thedevelopment, clinical testing and commercialization of our proposed productsrequires that we enter into collaborations with corporate partners, licensors,licensees and others. We are dependent upon the subsequent success of theseother parties in performing their respective responsibilities and the continuedcooperation of our partners. Our collaborators may not cooperate with us orperform their obligations under our agreements with them. We cannot control theamount and timing of our collaborators’ resources that will be devoted to ourresearch and development activities related to our collaborative agreementswith them. Our collaborators may choose to pursue existing or alternativetechnologies in preference to those being developed in collaboration with us.

 

Underagreements with collaborators, we may rely significantly on such collaboratorsto, among other things:

 

**•**  design and conduct advancedclinical trials in the event that we reach clinical trials;

**•**  fund research and developmentactivities with us;

**•**  pay us fees upon the achievementof milestones; and

**•**  market with us any commercialproducts that result from our collaborations.

 

The development and commercialization of potential products will be delayed if collaborators fail to conduct these activities in a timely manner or at all. In addition, our collaborators could terminate their agreements with us and we may not receive any development or milestone payments. If we do not achieve milestones set forth in the agreements, or if our collaborators breach or terminate their collaborative agreements with us, our business may be materially harmed.

 

***Our reliance on the activities of our non-employeeconsultants, research institutions, and scientific contractors, whoseactivities are not wholly within our control, may lead to delays in developmentof our proposed products***. We relyextensively upon and have relationships with scientific consultants at academicand other institutions, some of whom conduct research at our request, and otherconsultants with expertise in clinical development strategy or other matters.These consultants are not our employees and may have commitments to, orconsulting or advisory contracts with, other entities that may limit theiravailability to us. We have limited control over the activities of theseconsultants and, except as otherwise required by our collaboration andconsulting agreements to the extent they exist, can expect only limited amountsof their time to be dedicated to our activities.

 

Inaddition, we have formed research collaborations with academic and otherresearch institutions throughout the world. These research facilities may havecommitments to other commercial and non-commercial entities. We have limitedcontrol over the operations of these laboratories and can expect only limitedamounts of time to be dedicated to our research goals.

 

Wealso rely on other companies for certain process development or other technicalscientific work. We have contracts with these companies that specify the workto be done and results to be achieved, but we do not have direct control overtheir personnel or operations.  If any ofthese third parties are unable or refuse to contribute to projects on which weneed their help, our ability to generate advances in our technologies anddevelop our products could be significantly harmed.

 

**Risks Relating to A.C.T. Group, Inc.**

 

***One of our largest shareholders is in financial distress which may harm our ability to conduct operations.*****One of**our largest shareholders, ACT Group, is facing insolvency.  Two of our three Board members also serve in similar positions at ACT Group.  Our Chairman, President and Chief Scientific Officer is the President of ACT Group.  Although our operations and those of ACT Group are distinct and separate, with separate governance structures, and the two companies observe strict corporate formalities distinct to the respective entities, there have been several attempts by the debt holders of ACT Group, via a legal complaint, to pierce the corporate veil and hold ACT responsible for ACT Group’s liabilities.  To date, those claims have not been successful.  However, we cannot assure you that there will not be further attempts by creditors of ACT Group to pierce the corporate veil, or that they will be unsuccessful in doing so.  If there are such future attempts, they could result in significant legal expenses in

 

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defending such claims.  Moreover, if ACT Group creditors are successful in piercing the corporate veil and holding us responsible for ACT Group debts, there will be a material adverse effect on our business and operations.

 

***ACT Group isinvolved in certain litigation proceedings, which, if not resolved on termssatisfactory to us, could adversely affect our business. ***ACT Group is involvedin litigation relating to a claim for breach of contract and failure to paybrought by two of the individuals who hold Promissory Notes issued by ACTGroup, as discussed in more detail in Part II, Item 1 “LEGAL PROCEEDINGS.”  The plaintiffshave obtained a judgment in the amount of approximately $690,000.  Our subsidiary, ACT, is a nameddefendant in this proceeding.  If ACTGroup is unable to resolve this dispute on terms that are satisfactory to itand ACT, our business may be materially adversely affected.  The Massachusetts Superior Court has enteredan order requiring all shares of our stock held by ACT Group be placed inescrow pending sale to satisfy this judgment. Although the order specifies that the sale must be conducted in a commerciallyreasonable manner, we cannot assure you that the plaintiffs in this action willeffect the sale in a manner that will not have a materially adverse impact uponthe trading value of our stock.  Othercreditors of ACT Group have also filed suit against ACT Group.  We cannot assure you that these creditorswill not also take action against that company that could have a materialadverse impact upon the trading value of our stock due to the significant blockof our stock held by ACT Group.

 

**General Risks Relating to Our Business**

 

***We may be subject to litigation that will be costly todefend or pursue and uncertain in its outcome. ***Our business may bring us into conflict with ourlicensees, licensors, or others with whom we have contractual or other businessrelationships, or with our competitors or others whose interests differ fromours. If we are unable to resolve those conflicts on terms that aresatisfactory to all parties, we may become involved in litigation brought by oragainst us. That litigation is likely to be expensive and may require asignificant amount of management’s time and attention, at the expense of otheraspects of our business.The outcome of litigation is always uncertain, and in some cases could includejudgments against us that require us to pay damages, enjoin us from certainactivities, or otherwise affect our legal or contractual rights, which couldhave a significant adverse effect on our business.  Additional discussion regarding litigation inwhich the Company and/or ACT is involved is contained in Part II, Item 1 “LEGALPROCEEDINGS.”

 

***Patent litigation presents an ongoing threat to our business with respect to both outcomes and costs.*****We have previously been involved in patent interference litigation with Infigen, Inc., and are currently involved in two patent disputes with Geron Corporation, and it is possible that further litigation over patent matters with one or more competitors could arise. We could incur substantial litigation or interference costs in defending ourselves against suits brought against us or in suits in which we may assert our patents against others. If the outcome of any such litigation, including our current disputes with Geron Corporation, is unfavorable, our business would likely be materially adversely affected. To determine the priority of inventions, we may also have to participate in interference proceedings declared by the United States Patent and Trademark Office, which could result in substantial cost to us.  Without additional capital, we may not have the resources to adequately defend or pursue this litigation.

 

***We may not be able to obtain third-party patient reimbursement or favorable product pricing, which would reduce our ability to operate profitably.***Our ability to successfully commercialize certain of our proposed products in the human therapeutic field may depend to a significant degree on patient reimbursement of the costs of such products and related treatments at acceptable levels from government authorities, private health insurers and other organizations, such as health maintenance organizations. We cannot assure you that reimbursement in the United States or foreign countries will be available for any products we may develop or, if available, will not be decreased in the future, or that reimbursement amounts will not reduce the demand for, or the price of, our products with a consequent harm to our business. We cannot predict what additional regulation or legislation relating to the health care industry or third-party coverage and reimbursement may be enacted in the future or what effect such regulation or legislation may have on our business. If additional regulations are overly onerous or expensive, or if health care related legislation makes our business more expensive or burdensome than originally anticipated, we may be forced to significantly downsize our business plans or completely abandon our business model.

 

***Our products are likely to be expensive to manufacture, andthey may not be profitable if we are unable to control the costs to manufacturethem***. Our products are likely to be significantly more expensive tomanufacture than most other drugs currently on the market today.  Our present manufacturing processes producemodest quantities of product intended for use in our ongoing researchactivities, and we have not developed processes, procedures and capability toproduce commercial volumes of product We hope to substantially reducemanufacturing costs through

 

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process improvements, development of newscience, increases in manufacturing scale and outsourcing to experiencedmanufacturers. If we are not able to make these, or other improvements, anddepending on the pricing of the product, our profit margins may besignificantly less than that of most drugs on the market today. In addition, wemay not be able to charge a high enough price for any cell therapy product wedevelop, even if they are safe and effective, to make a profit. If we areunable to realize significant profits from our potential product candidates, ourbusiness would be materially harmed.

 

***To be successful, our proposed products must be accepted bythe health care community, which can be very slow to adopt or unreceptive tonew technologies and products***.  Our proposed products and those developed byour collaborative partners, if approved for marketing, may not achieve marketacceptance since hospitals, physicians, patients or the medical community ingeneral may decide not to accept and utilize these products. The products thatwe are attempting to develop represent substantial departures from establishedtreatment methods and will compete with a number of more conventional drugs andtherapies manufactured and marketed by major pharmaceutical companies. Thedegree of market acceptance of any of our developed products will depend on anumber of factors, including:

 

**•**  our establishment and demonstration to the medical communityof the clinical efficacy and safety of our proposed products;

**•**  our ability to create productsthat are superior to alternatives currently on the market;

**•**  our ability to establish in the medical community thepotential advantage of our treatments over alternative treatment methods; and

**•**  reimbursement policies ofgovernment and third-party payors.

 

Ifthe health care community does not accept our products for any of the foregoingreasons, or for any other reason, our business would be materially harmed.

 

***Our current source of revenues depends on the stability and performance of our sublicensees.***Our ability to collect royalties on product sales from our sublicensees will depend on the financial and operational success of the companies operating under a sublicense.  We have numerous licensees to third parties including Lifeline Cell Technology, Exeter Life Sciences and GTC Biotherapeutics, as well as others that hold licenses to our technology.  Revenues from those licensees will depend upon the financial and operational success of those third parties.  We cannot assure you that these licensees will be successful in obtaining requisite financing or in developing and successfully marketing their products.  These licensees may experience unanticipated obstacles including regulatory hurdles, and scientific or technical challenges, which could have the effect of reducing their ability to generate revenues and pay us royalties.

 

***We depend on key personnel for our continued operations and future success, and a loss of certain key personnel could significantly hinder our ability to move forward with our business plan.*****Because of the specialized nature of our business, we are highly dependent on our ability to identify, hire, train and retain highly qualified scientific and technical personnel for the research and development activities we conduct or sponsor. The loss of one or more certain key executive officers, or scientific officers, would be significantly detrimental to us.  In addition, recruiting and retaining qualified scientific personnel to perform research and development work is critical to our success. Our anticipated growth and expansion into areas and activities requiring additional expertise, such as clinical testing, regulatory compliance, manufacturing and marketing, will require the addition of new management personnel and the development of additional expertise by existing management personnel. There is intense competition for qualified personnel in the areas of our present and planned activities, and there can be no assurance that we will be able to continue to attract and retain the qualified personnel necessary for the development of our business. The failure to attract and retain such personnel or to develop such expertise would adversely affect our business.

 

***Our credibility as a business operating in the field of human embryonicstem cells is largely dependent upon the support of our Ethics Advisory Board.*****Because the use of human embryonic stem cellsgives rise to ethical, legal and social issues, the Company consults with itsEthics Advisory Board on a regular basis. The Company’s Ethics Advisory Board is made up of highly qualifiedindividuals with expertise in the field of human embryonic stem cells.  We cannot assure you that these members willcontinue to serve on our Ethics Advisory Board, and the loss of any such membermay affect the credibility and effectiveness of the Board.  As a result, our business may be materiallyharmed in the event of any such loss.

 

***Our insurance policies may be inadequate and potentially expose us to unrecoverable risks.***  We have limited director and officer insurance and commercial insurance policies. Any significant insurance claims would have a

 

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material adverse effect on our business, financial condition and results of operations.  Insurance availability, coverage terms and pricing continue to vary with market conditions. We endeavor to obtain appropriate insurance coverage for insurable risks that we identify, however, we may fail to correctly anticipate or quantify insurable risks, we may not be able to obtain appropriate insurance coverage, and insurers may not respond as we intend to cover insurable events that may occur. We have observed rapidly changing conditions in the insurance markets relating to nearly all areas of traditional corporate insurance. Such conditions have resulted in higher premium costs, higher policy deductibles, and lower coverage limits. For some risks, we may not have or maintain insurance coverage because of cost or availability.

 

***We have no product liability insurance, which may leave us vulnerable to future claims we will be unable to satisfy.*****The testing, manufacturing, marketing and sale of human therapeutic products entail an inherent risk of product liability claims, and we cannot assure you that substantial product liability claims will not be asserted against us. We have no product liability insurance. In the event we are forced to expend significant funds on defending product liability actions, and in the event those funds come from operating capital, we will be required to reduce our business activities, which could lead to significant losses.

 

We cannot assure you that adequate insurance coverage will be available in the future on acceptable terms, if at all, or that, if available, we will be able to maintain any such insurance at sufficient levels of coverage or that any such insurance will provide adequate protection against potential liabilities. Whether or not a product liability insurance policy is obtained or maintained in the future, any product liability claim could harm our business or financial condition.

 

***We need to improve our financial control procedures. ***Since the Merger, we have determined that there are serious deficienciesin the operating effectiveness of our internal controls over financialreporting that we believe would collectively constitute significantdeficiencies and material weaknesses under standards established by theAmerican Institute of Certified Public Accountants, resulting in more than aremote likelihood that a material misstatement of the annual or interim financialstatements of the Company will not be prevented or detected.

 

In our opinion, we have notestablished and did not maintain effective internal control over financialreporting as of March 31, 2005.  Wealso believe that because of the effect of the material weakness we haveidentified, we have not maintained effective internal control over financialreporting as of March 31, 2005, based on criteria established in InternalControl — Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission. The Company has taken initialremedial steps, and will continue its on-going evaluation of internal controlsand expects to improve its internal controls over financial reporting asnecessary to assure their effectiveness, but there can be no assurance that itwill succeed or that other deficiencies will not be identified.

 

***The Company presently has members of management and other key employeeslocated in various locations throughout the country which adds complexities tothe operation of the business. ***Presently, the Company has members ofmanagement and other key employees located in both California andMassachusetts, which adds complexities to the operation of our business.  The Company intends to maintain its researchfacilities in Massachusetts and establish corporate offices and an additionalresearch facility in California.  TheCompany will likely incur significant costs associated with maintainingmultiple locations.

 

***We face risksrelated to compliance with corporate governance laws and financial reportingstandards***.  TheSarbanes-Oxley Act of 2002, as well as related new rules and regulationsimplemented by the Securities and Exchange Commission and the Public CompanyAccounting Oversight Board, required changes in the corporate governancepractices and financial reporting standards for public companies. These newlaws, rules and regulations, including compliance with Section 404 ofthe Sarbanes-Oxley Act of 2002 relating to internal control over financialreporting (“Section 404”), have materially increased our legal andfinancial compliance costs and made some activities more time-consuming andmore burdensome. Section 404 of the Sarbanes-Oxley Act of 2002 requiresthat our management assess our internal control over financial reportingannually and include a report on its assessment in our annual report. Ourindependent registered public accounting firm is required to audit both thedesign and operating effectiveness of our internal controls and management’sassessment of the design and the operating effectiveness of its internalcontrols. As described below in Part I, Item 4 of this Quarterly Report onForm 10-QSB, there exist material weaknesses and deficiencies at this timein the Company’s internal controls. These weaknesses and deficiencies could have a material adverse effecton our business and operations.

 

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**Risks Relating to Our Common Stock**

 

***Stock prices for biotechnology companies have historicallytended to be very volatile***.  Stock prices and trading volumes for manybiotechnology companies fluctuate widely for a number of reasons, including butnot limited to the following factors, some of which may be unrelated to theirbusinesses or results of operations:

 

**•**       clinical trial results;

**•**       the amount of our cash resources and ourability to obtain additional funding;

**•**       announcements of research activities, businessdevelopments, technological innovations or new products by us or ourcompetitors;

**•**       entering into or terminating strategicrelationships;

**•**       changes in government regulation;

**•**       disputes concerning patents or proprietaryrights;

**•**       changes in our revenues or expense levels;

**•**       public concern regarding the safety, efficacyor other aspects of the products or methodologies we are developing;

**•**       reports by securities analysts;

**•**       activitiesof various interest groups or organizations;

**•**       media coverage; and

**•**       status of the investment markets.

 

This market volatility, as well as generaldomestic or international economic, market and political conditions, couldmaterially and adversely affect the market price of our common stock and thereturn on your investment.

 

***The sale or issuance of a substantial number of shares mayadversely affect the market price for our common stock. ***Sale of asubstantial number of shares of our common stock in the public market, or theperception that such sales could occur, could significantly and negativelyaffect the market price for our common stock. We expect that we will likely issue a substantial number of shares ofour capital stock in financing transactions in order to fund our operations andthe growth of our business.  In addition,we have issued common stock to certain parties, such as vendors and serviceproviders, as payment for products and services. Under these arrangements, wemay agree to register the shares for resale soon after their issuance. We mayalso continue to pay for certain goods and services with equity, which woulddilute your interest in the Company. Also, sales of the shares issued in thismanner could negatively affect the market price of our stock.

 

***We do not intend to pay cash dividends on our common stockin the foreseeable future***.  Any payment of cash dividends will dependupon our financial condition, results of operations, capital requirements andother factors and will be at the discretion of the Board of Directors. We donot anticipate paying cash dividends on our common stock in the foreseeablefuture. Furthermore, we may incur additional indebtedness that may severelyrestrict or prohibit the payment of dividends.

 

***Our securities are quoted on the OTC Bulletin Board, which may limitthe liquidity and price of our securities more than if our securities werequoted or listed on the Nasdaq Stock Market or a national exchang***e. Our securities are currently quoted on theOTC Bulletin Board, an NASD-sponsored and operated inter-dealer automatedquotation system for equity securities not included in the Nasdaq Stock Market.Quotation of our securities on the OTC Bulletin Board may limit the liquidityand price of our securities more than if our securities were quoted or listedon The Nasdaq Stock Market or a national exchange. Some investors may perceiveour securities to be less attractive because they are traded in theover-the-counter market.  In addition, asan OTC Bulletin Board listed company, we do not attract the extensive analystcoverage that accompanies companies listed on Nasdaq or any other regional ornational exchange. Further, institutional and other investors may haveinvestment guidelines that restrict or prohibit investing in securities tradedin the over-the-counter market. The factors may have an adverse impact on thetrading and price of our securities.

 

***Our common stock is subject to “penny stock” regulations andrestrictions on initial and secondary broker-dealer sales***. The Securities and Exchange Commission hasadopted regulations which generally define “penny stock” to be any listed,trading equity security that has a market price less than $5.00 per share or anexercise price of less than $5.00 per share, subject to certainexemptions.  Penny stocks are subject tocertain additional oversight and regulatory requirements.  Brokers and dealers affecting transactions inour Common Stock in many circumstances must obtain the written consent of acustomer prior to purchasing our Common Stock, must obtain information from thecustomer and must provide disclosures to the customer.  These requirements may restrict the abilityof broker-

 

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dealers to sell our CommonStock and may affect your ability to sell your shares of our Common Stock inthe secondary market.

 

## **ITEM 3. CONTROLS AND PROCEDURES**

## ** **

(a) *Evaluation ofdisclosure controls and procedures.* The Company’smanagement, with the participation of our principal executive officer, hasevaluated the effectiveness of our disclosure controls and procedures (asdefined in Rules 13a-15(e) and 15d-15(e) under the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”)), as of the end of theperiod covered by this Quarterly Report on Form 10-QSB. Based on suchevaluation, due to the material weaknesses in our internal controls overfinancial reporting further described below, our principal executive officerhas concluded that such disclosure controls and procedures were not effectivein providing reasonable assurance that information required to be disclosed byus in the reports we file or submitted by us under the Exchange Act isrecorded, processed, summarized and reported, within the time periods specifiedin the SEC’s rules and forms.  TheCompany is therefore in the process of designing new disclosure controls andprocedures to ensure that information required to be disclosed by us in reportsthat we file or submit under the Exchange Act is recorded, processed,summarized and reported with the time periods specified in applicable SEC rules andforms are effective.

 

(b) *Changes in internal controls*. The Company’s management is responsible for establishing and maintainingadequate internal control over financial reporting.  Our internal control system is intended toprovide reasonable assurance to the Company’s management and board of directorsregarding the preparation and fair presentation of published financialstatements.  The Company’s managementassessed the effectiveness of the Company’s internal control over financialreporting as of March 31, 2005. In making its assessment of internalcontrol over financial reporting, management used the criteria set forth by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal Control — Integrated Framework.

 

Management’s assessment identified materialdeficiencies in the Company’s internal control over financial reporting.  These deficiencies include lack ofsegregation of duties, limited capability to interpret and apply United Statesgenerally accepted accounting principles, lack of adequate documentation of oursystem of internal controls, lack of formal accounting policy and proceduresand related documentation, deficiencies in our information technology systemsand lack of a formal budgeting process. We also have not yet instituted newinternal control processes related to our identified material weaknesses,significant deficiencies and deficiencies, as has been characteristic ofcompanies that have completed their review of internal controls and have had toreport on the effect or such review. Accordingly, our internal control overfinancial reporting may be subject to additional material weaknesses anddeficiencies that we have not identified. Management has determined that these significant deficiencies, in theaggregate, constituted a material weakness in the design and operation of theCompany’s internal controls in effect prior to March 31, 2005. Althoughthe Company hired a chief financial officer on April 1, 2005, the newcontrols this addition allowed were not in operation during the quarter ended March 31,2005.  As a result of the materialweaknesses described in the preceding paragraph, we believe that, as of March 31,2005, the Company’s internal control over financial reporting was not effectivebased on the COSO criteria.

 

# **PART II.OTHER INFORMATION**

# ** **

## **ITEM 1. LEGAL PROCEEDINGS**

## ** **

Although this Part II,Item 1 of Form 10-QSB requires that a legal proceeding need only bereported in the Form 10-QSB filed for the quarter in which it first becamea reportable event and in subsequent quarters in which there have been materialdevelopments, in light of the Merger and the complete change of business by thesmall business issuer following the Merger, we have elected to providedisclosure relating to all material pending legal proceedings to which theCompany or ACT is a party.

 

**Geron-Related Proceedings**

 

Campbellet al. v. Stice et al., Patent Interference Nos. 104,746 and 105,192.  These two interference proceedings wereinitiated January 30, 2002 at the request of Geron Corporation in an effort toobtain rights to U.S. Patent Nos. 5,945,577 and 6,235,970, which are licensedby the University of Massachusetts exclusively to the Company.  In both proceedings, the Board of PatentAppeals and Interferences issued a decision adverse to the Company.  Both of these decisions are being challengedin proceedings described below.  Thisproceeding and the two proceedings discussed immediately below are referred toas the “Geron-Related Proceedings.” Adverse determinations in this proceeding would have a materiallyadverse effect on our business.

 

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Universityof Massachusetts and Advanced Cell Technology, Inc. v. Roslin Institute(Edinburgh), Geron Corporation and Exeter Life Sciences, Inc., U.S. District Court for the District ofColumbia.  The Company filed an action onFebruary 18, 2005 in the U.S. District Court for the District ofColumbia.  The Company brought thisaction under 35 U.S.C. 146 to reverse the decision of the Board of PatentAppeals and Interferences regarding a patent to a method of cloning non-humananimals.  The patent, U.S. Patent No. 5,945,577,is licensed by the University of Massachusetts exclusively to the Company.  Defendants have received an extension until May 2,2005 to answer or otherwise respond.  Noother activities have taken place in this action.  Adverse determinations in this proceedingwould have a materially adverse effect on our business.

 

Universityof Massachusetts and Advanced Cell Technology, Inc. v. Roslin Institute(Edinburgh), Geron Corporation and Exeter Life Sciences, Inc., U.S. District Court for the District ofColumbia.  The Company filed an action onApril 7, 2005 in the U.S. District Court for the District ofColumbia.  The Company brought thisaction under 35 U.S.C. 146 to reverse the decision of the Board of PatentAppeals and Interferences regarding a patent to a method of creating embryonicstem cells.  The patent, U.S. Patent No. 6,235,970,is licensed by the University of Massachusetts exclusively to the Company.  Adverse determinations in this proceedingwould have a materially adverse effect on our business.

 

***Other Legal Proceedings***

 

GaryD. Aronson and John Gorton v. A.C.T. Group, Inc., Advanced Cell Technology, Inc.,Michael D. West, and Gunnar L. Engstrom. Commonwealth ofMassachusetts Superior Court. Worcester. C.A. No. 040523B.  Thisproceeding is a claim for breach of contract and failure to pay brought by twoof the individuals who hold Promissory Notes issued by ACT Group. ACT isa named defendant in this proceeding.  In April 2004, the court entered an orderdenying a request for a temporary restraining order and preliminary injunctionwith respect to our subsidiary ACT.  Inits order, the Court stated that, based upon the record before the Court atthat stage of the proceeding, ACT, was “not legally responsible” for these ACTGroup obligations.  In August 2004,the plaintiffs obtained a judgment against ACT Group for $690,040. The Companyand certain of its officers and directors have been named as contemnors in arelated contempt complaint seeking to enforce the judgment against ACT Group.  IfACT Group is unable to resolve this dispute on terms that are satisfactory toit and the Company, our business may be materially adversely affected.  Although our operations and those of ACTGroup are distinct and separate, with separate governance structures, and thetwo companies observe strict corporate formalities distinct to the respectiveentities, the plaintiffs in this action seek to pierce the corporate veil andhold us responsible for ACT Group’s liabilities.  To date, those claims have not beensuccessful.  However, we cannot assureyou that there will not be further attempts to pierce the corporate veil, orthat they will be unsuccessful in doing so. If there are such future attempts, they could result in significant legalexpenses in defending such claims. Moreover, if the plaintiffs creditors are successful in piercing thecorporate veil and holding us responsible for these ACT obligations, there willbe a material adverse effect on our business and operations.  The Massachusetts Superior Court before whichthis proceeding is pending has entered an Order requiring all 6,811,146 sharesof our stock held by ACT Group be placed in escrow pending sale to satisfy thisjudgment.  Although the Order specifiesthat the sale must be conducted in a commercially reasonable manner, we cannotassure you that the plaintiffs in this action will effect the sale in a mannerthat will not have a materially adverse impact upon the trading value of ourstock.

 

Universityof Massachusetts v. James M. Robl and Phillippe Collas,Massachusetts Superior Court (Suffolk County). The University of Massachusetts, referred to as UMass, filed a complainton February 22, 2004 in the Superior Court (Suffolk County) for theCommonwealth of Massachusetts.  We arenot a party to this litigation; however, a decision adverse to UMass in thislitigation could have a materially adverse effect on the Company’sbusiness.  The complaint alleges themisappropriation by the defendants of valuable inventions in the fields ofanimal cloning and cell reprogramming, made by the defendants at UMass and withUMass support, that are exclusively licensed to ACT by UMass.  The complaint includes counts for declaratoryjudgment, breach of contract seeking specific performance, injunctive reliefand damages, intentional interference with contract and prospective contractualrelations, conversion, breach of duty, and breach of the covenant of good faithand fair dealing.  ACT has been cooperatingwith UMass in connection with the prosecution and possible settlement of thislitigation.

 

William A. Brandt, Jr. as Assignee for the Benefitof the Creditors of Avian Farms, Inc. v. Advanced Cell Technology, Inc.and A.C.T. Group, Inc.  U.S.District Court for the District of Massachusetts, C.A. No. 01-40227-NMG. Plaintiff brought suit on December 3, 2001 in U.S. District Courtin Worcester, Massachusetts

 

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alleging that ACT Group and ACT defaulted on twopromissory notes totaling $2,787,000. Plaintiff sought that amount plus interest and legal fees.  ACT Group and ACT filed an answer in whichthey disputed the amount due.  ACT Groupand ACT also brought counterclaims in which they sought compensation for travelexpenses and legal fees owed to ACT.  ACTpaid its note in full in July of 2002. Following the parties’ notification to the court that they had reachedtentative settlement, the case was dismissed on August 16, 2004 withoutprejudice to the right of any party to move to re-open the case within 60 daysif settlement could not be formalized. The parties never reached settlement and none of the parties moved tore-open the case.  On or about January 11,2005, Brandt assigned Avian Farms’ rights to Highview Associates.  Although our operations and those of ACTGroup are distinct and separate, with separate governance structures, and thetwo companies observe strict corporate formalities distinct to the respectiveentities, there have been several attempts by the debt holders of ACT Group,via a legal complaint, to pierce the corporate veil and hold us responsible forACT Group’s liabilities.  To date, thoseclaims have not been successful. However, we cannot assure you that there will not be further attempts bycreditors of ACT Group to pierce the corporate veil, or that they will beunsuccessful in doing so.  If there aresuch future attempts, they could result in significant legal expenses indefending such claims.  Moreover, if ACTGroup creditors are successful in piercing the corporate veil and holding usresponsible for ACT Group debts, there will be a material adverse effect on ourbusiness and operations.

 

## **ITEM 2. UNREGISTERED SALES OF EQUITYSECURITIES AND USE OF PROCEEDS**

## ** **

Although this Part II,Item 2 of Form 10-QSB requires that the small business issuer need onlyreport unregistered sales of equity securities during the period covered by thereport, in light of the Merger and the complete change of business by the smallbusiness issuer following the Merger, we have elected to disclose allunregistered sales of equity securities during the previous three years.  For the portion of the three year periodprior to the consummation of the Merger on January 31, 2005, thedisclosure set forth below relates to unregistered sales of equity securitiesby ACT.  For the period January 31,2005 through March 31, 2005, the disclosure set forth below relates tounregistered sales of equity securities by the Company.  The issuances of the equity securitiesdescribed below were made in reliance upon the exemption from registrationunder Section 4(2) of the Securities Act of 1933, as amended (the “SecuritiesAct”), relating to sales by an issuer not involving a public offering, and/orpursuant to the requirements of one or more of the safe harbors provided inRegulation D under the Securities Act or, in the case of equity compensation toemployees, directors and eligible consultants, Rule 701 therewith.

 

On January 31, 2005,the Company’s Board of Directors approved the establishment of the 2005 StockIncentive Plan (the “2005 Plan”), subject to approval of our shareholders.  The Board approved stock option grants toemployees and consultants totaling 7,808,335 under the 2005 Plan.  These grants included 7,273,335 awarded toemployees and 535,000 awarded to consultants.

 

On January 31, 2005,the Company closed the Merger.  TheCompany filed a Form 8-K on February 4, 2005 reporting that it hadcompleted the Merger transaction and the following issuances of unregisteredsecurities in connection therewith.  As aresult of the Merger, all of the outstanding shares of the capital stock of ACTwere converted, on a pro rata basis, into the right to receive an aggregate ofapproximately 18,000,000 shares of the Company’s Common Stock.  In addition, all outstanding options andwarrants to acquire shares of the capital stock of ACT were converted into theright to receive shares of the Company’s Common Stock, and the Company hasassumed the ACT 2004 Stock Option Plan and the ACT 2004 Stock Option Plan IIand all options granted thereunder.

 

On or about January 27,2005, ACT issued 616,124 shares of its common stock and granted associatedwarrants to purchase 308,062 shares of common stock at a per share price of$1.27 to five holders of $500,000 aggregate principal amount of short-termpromissory notes, plus interest of $23,708 in exchange for and in retirement ofthe notes.  The issuance of the notes isdescribed below.

 

On orabout January 15, 2005, ACT issued 17,647 shares of common stock to RobertScherne in consideration of accounting services provided to ACT.

 

Duringthe period January 3, 2005 through January 31, 2005, ACT completed apreferred unit offering in which ACT sold 4,705,890 investment units to a groupof accredited investors (within the meaning of Rule 501 of Regulation D)for total consideration of $8,000,000. The completion of the offering resulted in the issuance of 9,411,788shares of its Series A Preferred Stock and associated warrants to purchase4,705,890 shares of common

 

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stock at a per shareprice of $1.27.  In consideration ofservices rendered in connection with the preferred unit offering, ACT paidconsultants to the preferred unit offering 469,247 investment units, whichresulted in the issuance by ACT of 469,247 shares of Series A PreferredStock and associated warrants to purchase 234,629 shares of common stock at aper share price of $1.27.

 

On December 30,2004, the Company issued 1,291,615 warrants to consultants and employees withan exercise price of $2.00 per share, and 1,833,260 cashless warrants with anexercise price of $0.85, as reported in the Company’s Form 8-K filed February 4,2005.  All of these warrants areexercisable for a period of 10 years, enjoy “piggy-back” registration rightsand may not be exercised for a period of twelve months from the date ofissuance.

 

On December 13,2004, ACT’s Board of Directors and stockholders approved the establishment ofthe 2004 Stock Plan II. The total number of common shares available for grantand issuance under the plan may not exceed 1,301,161 shares, subject toadjustment in the event of certain recapitalizations, reorganizations andsimilar transactions.  Common stockpurchase options may be exercisable by the payment of cash or by other means asauthorized by the committee or the Board of Directors or a committeeestablished by the Board of Directors. As of December 31, 2004, ACT had granted 1,301,161 common stockpurchase options under the plan to certain employees and consultants of ACT.

 

On December 13,2004, ACT granted warrants to certain employees and consultants to purchase1,954,000 shares of common stock at a price of $0.25 per share in considerationfor consulting services provided to ACT.

 

On November 30,2004, ACT granted warrants to purchase 100,000 shares of common stock at a pershare price of $0.25 to a former executive of the Company in connection withthe termination of his employment contract. The warrants are exercisable on or after April 1, 2005 and lapse ifunexercised on April 1, 2010.

 

On November 26,2004, ACT granted to Andwell, LLC warrants to purchase 250,000 shares of commonstock at a per share price of $0.05 in connection with the early release of$500,000 of escrowed funds from the ACT preferred unit offering escrow account.The warrants are exercisable immediately upon issuance and lapse if unexercisedon November 26, 2006.

 

Duringthe period August 2004 through October 2004, ACT issued promissorynotes aggregating $500,000 face value to certain accredited investors (withinthe meaning of Rule 501 of Regulation D) for cash proceeds of $450,000 andthe assumption of $50,000 of debt owed by ACT Group to one of itscreditors.  The notes were convertible atthe option of the holder into shares of ACT’s capital stock sold in asubsequent financing, at an amount equal to the lowest per share selling priceof shares of that stock issued in such financing.  As described above, these notes wereconverted into ACT common stock and warrants on January 27, 2005.  As additional consideration for the purchaseof the notes, ACT granted to the note holders warrants entitling them topurchase 700,000 common shares at an exercise price of $0.05. Warrants for300,000 shares were exercisable immediately upon issuance and expire two yearsfrom the date of issue.  Warrants for400,000 shares are exercisable on or after February 1, 2006 and expire February 1,2008.

 

On August 12,2004, ACT’s Board of Directors approved the establishment of the 2004 StockPlan, subject to approval by our stockholders on or before August 12,2005. Stockholder approval was received on December 13, 2004. The totalnumber of common shares available for grant and issuance under the plan may notexceed 2,800,000 shares, subject to adjustment in the event of certainrecapitalizations, reorganizations and similar transactions.  Common stock purchase options may beexercisable by the payment of cash or by other means as authorized by thecommittee or the Board of Directors or a committee established by the Board ofDirectors.  At December 31, 2004, wehad granted 2,604,000 common share purchase options under the plan.

 

On September 27,2003, ACT issued 2,596,967 shares of its common stock to its majoritystockholder pursuant to the cashless exercise of 3,051,738 options.

 

On April 1,2003, ACT issued 73,263 shares of its common stock to the University ofMassachusetts in consideration for a license to certain intellectual property.

 

On orabout February 1, 2002, ACT issued 284,000 shares of its common stock tothe University of Massachusetts in consideration for a license to certainintellectual property.

 

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## **ITEM 3. DEFAULTS UPON SENIOR SECURITIES**

## ** **

None.

 

## **ITEM 4. SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

## ** **

None.

 

## **ITEM 5. OTHER INFORMATION**

## ** **

Pleaserefer to the information set forth under the heading “RECENT DEVELOPMENTS OF SMALLBUSINESS ISSUER” on page 1 of this Quarterly Report on Form 10-QSBfor an explanation as to the purposes behind the following disclosure.  None of the information contained herein wasrequired to be reported on a Current Report of Form 8-K for the periodcovered by this Quarterly Report on Form 10-QSB.

 

**BUSINESS**

 

***Overview.*** We are a biotechnology company focused on developing and commercializing human stem cell technology in the emerging field of regenerative medicine.

 

We have developed and maintain a portfolio of patents and patent applications that form the proprietary base for our research and development efforts in the area of embryonic stem cell research.  We believe that our intellectual property represents one of the strongest portfolios in the field.  We employ a team including some of the world’s leading scientists in the field of stem cell research and development.  We believe our technology base, in combination with our know-how, provides a competitive advantage and will facilitate the successful development and commercialization of products for use in treatment of a wide array of chronic degenerative diseases and in regenerative repair of acute disease, such as trauma, infarction and burns.

 

All of the Company’s research efforts to date are at the level of basic research or in the pre-clinical stage of development. The Company is focused on leveraging its key assets, including its intellectual property, its scientific team, its facilities and its capital, to accelerate the advancement of its stem cell technologies.  In addition, we are pursuing strategic collaborations with members of academia, industry and foundations to further accelerate the pace of our research efforts.  The Company is currently headquartered in Worcester, Massachusetts.  The Company intends to establish a research facility in California, where voters passed Proposition 71 in November 2004.

 

***The Field of Regenerative Medicine.***  The emerging field of treatment called “regenerative medicine” or “cell therapy,”  refers to treatments that are founded on the concept of producing new cells to replace malfunctioning or damaged cells as a vehicle to treat disease and injury.  Our focus is the development of effective methods to generate replacement cells from stem cells.  Many significant and currently untreatable human diseases arise from the loss or malfunction of specific cell types in the body.  This is especially true of diseases associated with aging such as Alzheimer’s disease, Parkinson’s disease, type II diabetes, heart failure, osteoarthritis, and aging of the immune system, known as immunosencence.  This is also true for medical conditions resulting from damage to cells due to acute disease, such as trauma, infarction and burns.  We believe that replacing damaged or malfunctioning cells with fully functional ones may be a useful therapeutic strategy in treating many of these diseases and conditions.

 

A stemcell is a cell that has the ability to branch out and change, or differentiate,into two or more different cell types. Stem cells are self-renewing primitivecells that have the ability to develop into functional, differentiated cells.In general, there are two broad categories of stem cells: adult stem cells andembryonic stem cells.  Adult stem cellsare derived from various tissues in the human body. Because they can branch outinto many different cell types, they are referred to as “multipotent.”  Multipotent means these cells develop intomultiple, but not all, types of cells in the body.  Embryonic stem cells, referred to as EScells, which are derived from pre-implantation embryos, are unique because theyare “pluripotent,” which means that they can develop into all cells and tissuesin the body, and they self-renew indefinitely in their undifferentiatedstate.  The ability of ES cells to divideindefinitely in the undifferentiated state without losing pluripotency is aunique characteristic that distinguishes them from all other stem cellsdiscovered to date in humans.  Because of the potential of ES cells, one ofour primary efforts is the development and commercialization of ES cell basedtechnologies.

 

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Sincethe discovery of the human ES cell, medical researchers worldwide havegenerally recognized the significance of this new technology and have begun tofocus research on the translation of this discovery into important newtherapies.  Specifically, researchershave focused on several key challenges including:

 

**•**      isolating and purifying cell lines;

**•**      growing stable cell lines in culture for longperiods without mutations;

**•**      manufacturing cell lines in numbers sufficientfor therapy;

**•**      differentiating ES cells into all of the celltypes desired for therapies; and

**•**      solving the potential rejection of ES cellsused in therapies due to immuno-incompatibility with the patient.

 

Webelieve that solving the potential rejection of ES cells in patients is thegreatest scientific obstacle to developing successful therapeutics.  Our research and technologies are focused onsolving this obstacle by creating stem cell therapeutics with compatibletissues. Compatible tissues are referred to as being histocompatible.

 

We believe the potential markets for regenerative medicine and stem cell therapy are large.  The table below summarizes the potential United States patient populations which we believe may be amenable to cell or organ transplantation and represent target markets for products generated through our regenerative medicine technology.

 

**Potential U.S. Patient Populations for Cell-Based Therapies**

 

| **Medical Condition**     | ** ** | **Number of Patients*** |
|---------------------------|------------|-------------------------|
|                      |       |                    |
| Cardiovascular  disease   |       |                    | 70 million |
| Autoimmune  disease       |       |                    | 50 million |
| Diabetes                  |       |                    | 18 million |
| Osteoporosis              |       |                    | 10 million |
| Cancer                    |       |                    | 10 million |
| Alzheimer’s  disease |       |                    | 4.5 million |
| Parkinson’s  disease |       |                    | 1 million |
| Burns (severe)            |       |                    | 1.1 million |
| Spinal-cord  injuries     |       |                    | 0.25 million |
| Birth defects             |       |                    | 0.15  million/year |

 

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* These estimates are based on the most current patient estimates published by the following organizations as of April 2005: the American Heart Association, the American Autoimmune Related Diseases Association, SEER (Surveillance, Epidemiology and End Result), American Burn Association, March of Dimes, the Alzheimer’s Association, the Alzheimer’s Disease Education & Referral Center (National Institute on Aging), the National Institutes of Health’s National Institute on Neurological Disorders and Stroke, the Foundation for Spinal Cord Injury Prevention, Care & Cure, the Centers for Disease Control and Prevention, the American Association of Diabetes Educators, the Northwest Parkinson’s Foundation and the Parkinson’s Action Network.

 

***Our Technology.**** *The ability to produce embryonic stem cells that are immunologicallycompatible with the patient is the hallmark and the strength of our technologyplatform.  We believe our technologyplatform will enable the transformation of a patient’s cells into an embryonicstate where those cells can be differentiated into specific therapeuticallyrelevant cell types that are genetically identical to the patient. We believeour technology may also enable the production of stem cell lines, from sourcesexternal to the patient, that have a sufficiently high level of histocompatibilityto be useful in making cell therapies readily accessible to a large segment ofthe patient population, without the need for exact genetic matching of tissues.As a result, our technology avoids reliance on more limited approaches thatinvolve use of cell lines that are not histocompatible with the recipient, ortherapies based upon use of adult stem cells.

 

In August 2001, ThePresident of the United States set guidelines for federal funding of researchon embryonic stem cells from human embryos created by in-vitro fertilization (IVF)*.*  IVF-ES cells have the drawback that they arenot genetically matched to the recipient patient.  These ES cells are allogeneic.  The wordallogeneic literally means “other DNA type.” Therapies using allogeneic cell lines can result in immune systemincompatibilities where the host immune system attacks and rejects thetransplanted cells or the transplanted cells attack the host.  These incompatibilities may be partially suppressedwith powerful immunosuppressive drugs, but the side effects can be severe andresult in life-threatening complications. As a result, these incompatibilities will generate significantinefficiencies in the application of cell therapies.

 

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Our approach also differsfrom that of technologies limited to use of adult stem cells.  Theprincipal drawbacks to therapies based exclusively on use of adult stem cells arethat these cells are neither pluripotent, nor “youthful.”  Adult stem cells are multipotent, which meansthat, unlike our pluripotent stem cells, they cannot be differentiated into allcell types of the human body.  Theirusefulness is inherently limited in this regard.  With respect to their lack of “youthful”characteristics, adult stem cells are intrinsically mortal.  Cellular aging is caused by shorteningtelomeres, which are the ends of chromosomes. ES cells are immortal, telomerase positive cells.  Through nuclear transfer, we have beensuccessful in regenerating cell lifespan through the reactivation oftelomerase, an enzyme concerned with the formation, maintenance and renovationof telomeres.

 

The strategicfocus of our technology is to produce cell lines that are both histocompatible withthe patient and pluripotent.  We havenumerous proprietary technologies that we believe will generate histocompatible,pluripotent stem cells for patient-specific application.  These cells maximize the potential foreffective use as transplants to replace diseased or destroyed cells in humanpatients.  If successfully developed, ourcellular reprogramming technologies will make it possible to produce cells thathave the proliferative capacity of young cells, have specific therapeuticapplication, and are immunologically compatible with the patient.

 

All of ourtechnologies are at thelevel of basic research or in the pre-clinical stage of development.

 

***Our Research Programs. ***Our research programs aredivided into three core categories: cellular reprogramming, our reducedcomplexity program, and stem cell differentiation.  Each of these core areas of focus arediscussed below.

 

**CellularReprogramming.**  Thisresearch program involves development of therapies based on the use ofgenetically identical pluripotent stem cells generated by our cellular reprogramming technologies.  These technologies can be used to generate patient-specificpluripotent cells and tissues for transplantation.  We believe our technology platform willenable the transformation of a patient’s cell into pluripotent ES cells thatare histocompatible with the patient and have the potential to bedifferentiated into any of the over 200 different human cell types that may betherapeutically relevant in treating diseased or destroyed tissues in humanpatients.  We expect that our cellularreprogramming technologies will offer a new avenue for the introduction oftargeted genetic modifications in cells and for the regeneration of celllifespan, thereby making youthful cells available for aging patients.  The combination of these advances, theability to produce young cells of certain kinds that are histocompatible withthe patient, is a core potential application of our technology. We believethese cellular reprogramming technologies will be effective therapies wherethere is time to prepare customized therapy through reprogramming of thepatient’s own cells.

 

Some of thetechnologies that support our Cellular Reprogramming are somatic cell nucleartransfer and chromatin transfer and fusion technologies.

 

Somatic cell nuclear transfer, referred to asSCNT, refers to the process wherein a body cell is transferred to an egg cellfrom which the nuclear DNA has been removed. This results in the body cell being “reprogrammed” by the egg cell.  This reprogramming transforms the cell fromthe type of cell it was, for instance a skin cell, into an embryonic cell withthe power to become any cell type in the body. A related technology is called chromatin transfer.  Through thistechnology, the DNA and attached proteins, or chromatin, of the somatic cell isreprogrammed prior to transfer into an egg cell.  Chromatin transfer has the potential toimprove the efficiencies and therefore reduce the cost of nuclear transfer.  We believe that one critical advantage of ourproprietary SCNT and chromatin transfer technologies is that the cells are “rejuvenated”by returning the cell to a youthful state. This is important because theseyouthful cells will have the proliferative capacity of young cells.  These healthy replacement cells, which wouldbe genetically identical to the patient’s own cells, would then be used forcell transplantation.

 

Our fusion technologiesinvolve the fusion of the cytoplasm of one cell into another.  In the same manner that the cytoplasm of anegg cell is capable of transforming any cell back to an embryonic state, thefusion of the cytoplasm of other cell types, including differentiated celltypes (such as blood cells) is capable of reprogramming another cell type (suchas a skin cell).  These technologies havethe potential of transforming a cell from a patient into anothermedically-useful cell type also identical to the patient.  They also have the potential to fuse thecytoplasm of undifferentiated cells, such as embryonic stem cells, with somaticcells to transport the somatic cell DNA back to pluripotency.  We believe that the fusion technology we aredeveloping can be developed into as broad and powerful a technique as SCNT,producing histocompatible, youthful stem cells that are multi and potentiallyeven pluripotent.  If successfullydeveloped, this technology may also provide a pathway that does not utilizehuman egg cells which would reduce the cost of the procedure, increase thenumber of patients that could benefit from its implementation and bypass many of the ethical issues associatedwith technologies based upon or using eggs and embryos, because it does notrequire the creation or destruction of embryos.

 

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**Reduced Complexity Program.* ***We believe our proprietarytechnology may be applied to generate readily available cell therapy productsfor patients with acute medical needs that do not allow time forpatient-specific reprogramming of cells. We believe several of our proprietary technologies may be used togenerate a wide arrayof readily available stem cell therapies for rapid deployment across a broadpatient population without the need for time-consuming patient-specificreprogramming of cells.  Current organand tissue transplantation technology requires that there be a high degree ofcompatibility between the donated organ or tissue and the recipient.  Genes for histocompatibility antigens, or HLAgenes, play a critical role in achieving donor/recipient compatibility andresulting transplant success.  We aredeveloping our reduced complexity technology with the goal of assembling a bankof stem cell lines that are homozygous in the HLA genes.

 

We believe the result ofthis technology will be that a bank of at most a few hundred cell lines willprovide a close enough match that, together with immunosuppressive drugs, stemcell therapies for certain common applications will be achievable in mostpatients.  One example of a potential applicationis introduction of stem cell therapy on a time-sensitive basis in the case ofheart attack to repair damaged heart tissue. Timely, cost-effective introduction of cell therapies will be criticalto commercial application.  Withoutreduced complexity technology, producing a readily-available, “off the shelf”supply may require many hundreds of thousands of cell lines.

 

We also believe thatreduced complexity applications resulting from our research will offer animportant research tool in the field of regenerative medicine by offering readilyavailable cell lines for researchers produced at a level of quality andquantity appropriate for clinical applications. We believe our ability to genetically modify cells, while assuringquality control of the cell lines, will give us a decided advantage over ourcompetition in providing readily available, closely matched cell lines at lowercost.

 

Wehave several different technologies we believe may be used to create a bank ofstem cells with reduced complexity in the HLA genes.  One of several such technologies is called “parthenogenesis”.  Parthenogenesis is similar to somatic cell nuclear transfer; howeverthere is no somatic cell being transferred. We use our proprietary technology to take one egg cell and stimulate itto begin cell division as though it has been fertilized.  This results in a parthenote or a blastocystwith a duplicate set of the egg’s chromosomes from which we can harvest EScells.  This duplication gives aparthenote a full complement of genes.  Webelieve parthenogenesis and certain of our other technologies could be used togenerate a master cell bank of clean homozygous stem cell lines that couldprovide matches for a majority of the U.S. patient population.

 

**StemCell Differentiation.* ***Regenerativemedicine requires that stem cells, from whatever source derived, bedifferentiated (or re-differentiated) into specific body cell types and thenphysically transplanted into a patient. Differentiation into tissues such as cardiac muscle, blood, and othertissues occurs spontaneously in ES cells being cultured in a dish.  Successful application of stem celltechnology will require control over the specific kinds of cells into whichstem cells differentiate.  Control ofdifferentiation and the culture and growth of stem and differentiated cells areimportant current areas of research for us. Also, some chemicals, such as retinoic acid, can be used to triggerdifferentiation into specific cell types such as nerve cells.  We intend to pursue differentiationapproaches both in-house and through collaborations with other researchers whohave particular interests in, and skills related to, cellulardifferentiation.  These efforts includeusing both animal and human stem cell lines. Our research in this area includes projects focusing on developing manydifferent cell types that may be used in the future to treat a wide range ofdiseases.  Currently researchers at theCompany are working on projects to generate stable cell lines including retinalpigment epithelium (“RPE”) cells, skin cells, and hemangioblast cells.  In the future, researchers at the Company mayalso focus on various projects to generate other cell types, includingneuronal, lung, heart, liver and pancreatic beta cells.

 

Researchers atthe Company were the first to report the successful generation of severalstable lines of retinal pigment epithelium (“RPE”) cells from human ES cells.  Our scientific team has refined our abilityto purify and establish banks of these cell lines.  We are currently conducting pre-clinical researchin the restoration of visual loss in small animal models to determine if thesecells may be used to treat disorders such as macular degeneration and retinitispigmentosa.

 

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Ourresearchers are also focusing on development of technology and know-how toconsistently isolate, purify and develop skin cells with patterns of geneexpression that are analogous to early embryonic skin.  Early embryonic skin is capable ofregenerating after wounding without scar formation.  We believe that these types of cells mayprovide a means of improving wound repair in surgery, burns, and chronic skinulcers.

 

Additionally,our research is also focused on an important cell type called thehemangioblast.  Hemangioblasts are a newly-characterized stem cell capable ofdifferentiating into both hematopoietic (blood cell forming) and angiogenic(blood vessel endothelium forming) cells. We believe it will be possible to utilize hemangioblast cells inengraftment to repair age-related endothelial dysfunction associated withnumerous significant age-related diseases, including cardiovascular disease,stroke, and even perhaps cancer. We have demonstrated in amouse model that nuclear transfer-derived hemangioblast cells were able toregenerate myocardium in an infarcted mouse heart.  In addition, we have recently completed aproject using nuclear transfer technology to produce hemangioblasts in a bovinemodel. The nuclear transfer-derived hemangioblasts were transplanted into the originaladult animals and persisted and multiplied in the blood and lymph supply ofthose cows, demonstrating a significant competitive advantage over adult stemcells.  We believe that demonstratinglong-term success of these techniques in animal models may translate intofuture applications in humans.  Resultsfrom the Company’s on-going pre-clinical research programs will ultimatelydetermine what clinical applications the Company chooses to initially pursue inhuman clinical trials.

 

***Potential Commercial Applications of our Technologies. ***We believe that, ifsuccessfully developed, stem cell-based therapy has the potential toprovide treatment for a broad range of acute and chronic degenerative diseases.  We believe the potential applications ofcell-based therapeutics include

 

**•**      hematopoieticcells for blood diseases and cancer,

**•**      myocardialand endothelial vascular tissue for cardiovascular disease,

**•**      skincells for dermatological conditions,

**•**      retinalpigment epithelium cells as treatment for macular degeneration and retinalpigmentosis,

**•**      neuralcells for spinal cord injury, Parkinson’s disease and other neuro-degenerativediseases,

**•**      pancreaticislet ß cells for diabetes,

**•**      livercells for hepatitis and cirrhosis,

**•**      cartilagecells for arthritis, and

**•**      lungcells for a variety of pulmonary diseases.

 

***Our Intellectual Property.***** Our research and development is supported by a broad intellectual property portfolio.  We currently own or have exclusive licenses to over 30 patents and have over 280 patent applications pending worldwide in the field of regenerative medicine and stem cell therapy.  We also have non-exclusive rights to a portfolio of patents and patent applications that support our core intellectual property.  We believe our intellectual property collectively represents one of the strongest portfolios in the field.

 

Our success will likely depend upon our ability to preserve our proprietary technologies and operate without infringing the proprietary rights of other parties. However, we may rely on certain proprietary technologies and know-how that are not patentable. We protect our proprietary information, in part, by the use of confidentiality agreements with our employees, consultants and certain of our contractors.

 

We maintain a disciplined patent policy and, when appropriate, seek patent protection for inventions in our core technologies and in ancillary technologies that support our core technologies or which we otherwise believe will provide us with a competitive advantage.  We pursue this strategy by filing patent applications for discoveries we make, either alone or in collaboration with scientific collaborators and strategic partners.  Typically, although not always, we file patent applications both in the United States and in select international markets.  In addition, we plan to obtain licenses or options to acquire licenses to patent filings from other individuals and organizations that we anticipate could be useful in advancing our research, development and commercialization initiatives and our strategic business interests.

 

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The following table identifies the issued patents weown or license that we believe currently support our technology platform.

 

**Owned by Advanced Cell Technology, Inc.**

 
| **Number  Patent**                                                                        | ** ** | **Country** | ** ** | **Filing  Date** | ** ** | **Issue  Date** | ** ** | **Title**                                                                                                                                                                                                  |
|-------------------------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-----------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 6,808,704                                                                                 |       | US          |       | 09/06/00         |       | 10/26/04        |       | Method for  Generating Immune-Compatible Cells and Tissues Using Nuclear Transfer  Techniques                                                                                                              |
| 518191                                                                                    |       | New Zealand |       | 10/13/00         |       | 05/10/04        |       | Method of  Differentiation of Morula or Inner Cell Mass Cells and Method of Making  Lineage-Defective Embryonic Stem Cells                                                                                 |
| 516236                                                                                    |       | New Zealand |       | 12/18/01         |       | 04/07/05        |       | Cytoplasmic  Transfer to De-Differentiate Recipient Cells                                                                                                                                                  |
|                                                                                      |       |        |       |             |       |            |       |                                                                                                                                                                                                       |
| **University of Massachusetts Exclusive License to  Advanced Cell Technology, Inc.** |
|                                                                                      |       |        |       |             |       |            |       |                                                                                                                                                                                                       |
| **Number  Patent**                                                                        | ** ** | **Country** | ** ** | **Filing  Date** | ** ** | **Issue  Date** | ** ** | **Title**                                                                                                                                                                                                  |
| 6,235,970                                                                                 |       | US          |       | 09/22/97         |       | 05/22/01        |       | CICM Cells and  Non-Human Mammalian Embryos Prepared by Nuclear Transfer of a Proliferating  Differentiated Cell or its Nucleus                                                                            |
| 6,235,969                                                                                 |       | US          |       | 07/03/97         |       | 05/22/01        |       | Cloning Pigs  Using Donor Nuclei from Non-Quiescent Differentiated Cells                                                                                                                                   |
| 6,215,041                                                                                 |       | US          |       | 01/08/98         |       | 04/10/01        |       | Cloning Using  Donor Nuclei from a Non-Quiescent Somatic Cells                                                                                                                                             |
| 6,156,569                                                                                 |       | US          |       | 08/04/97         |       | 12/05/00        |       | Prolonged Culturing  of Avian Primordial Germ Cells (PGCs) Using Specific Growth Factors, Use  Thereof to Produce Chimeric Avians                                                                          |
| 5,994,619                                                                                 |       | US          |       | 12/16/96         |       | 11/30/99        |       | Production of  Chimeric Bovine or Porcine Animals Using Cultured Inner Cell Mass Cells                                                                                                                     |
| 5,945,577                                                                                 |       | US          |       | 01/10/97         |       | 08/31/99        |       | Cloning Using  Donor Nuclei from Proliferating Somatic Cells                                                                                                                                               |
| 5,905,042                                                                                 |       | US          |       | 04/01/96         |       | 05/18/99        |       | Cultured Inner  Cell Mass Cell Lines Derived from Bovine or Porcine Embryos                                                                                                                                |
| 521426                                                                                    |       | New Zealand |       | 03/26/01         |       | 11/11/04        |       | Prion-Free  Transgenic Ungulates                                                                                                                                                                           |
| 521026                                                                                    |       | New Zealand |       | 02/26/01         |       | 01/13/05        |       | Production of  Mammals which Produce Progeny of a Single Sex                                                                                                                                               |
| 518365                                                                                    |       | New Zealand |       | 10/27/00         |       | 08/12/04        |       | Gynogenetic or  Androgenetic Production of Pluripotent Cells and Cell Lines, and Use Thereof  to Produce Differentiated Cells and Tissues                                                                  |
| 517609                                                                                    |       | New Zealand |       | 09/14/00         |       | 06/08/04        |       | Embryonic or  Stem-Like Cell Lines Produced by Cross Species Nuclear Transplantation and  Method for Enhancing Embryonic Development by Genetic Alteration of Donor  Cells or by Tissue Culture Conditions |
| 519346                                                                                    |       | New Zealand |       | 05/10/00         |       | 06/08/04        |       | Embryonic or  Stem-Like Cell Lines Produced by Cross Species Nuclear Transplantation                                                                                                                       |
| 759322                                                                                    |       | Australia   |       | 03/02/99         |       | 07/24/03        |       | Embryonic or  Stem-Like Cell Lines Produced by Cross Species Nuclear Transplantation                                                                                                                       |
| 506808                                                                                    |       | New Zealand |       | 03/02/99         |       | 03/29/04        |       | Embryonic or  Stem-Like Cell Lines Produced by Cross Species Nuclear Transplantation                                                                                                                       |
| 502713                                                                                    |       | New Zealand |       | 08/04/98         |       | 01/05/04        |       | Production of  Avian Embryonic Germ (EG) and Embryonic Stem (ES) Cell Lines by Prolonged  Culturing of PGCs Use Thereof of Cloning and Chimerization                                                       |
| 502712                                                                                    |       | New Zealand |       | 08/04/98         |       | 05/12/03        |       | Avian Primordial  Germ Cell (PGC) Cell Line and a Method for Long Term Culturing Thereof                                                                                                                   |
| 742840                                                                                    |       | Australia   |       | 07/01/98         |       | 08/01/02        |       | Cloning Pigs  Using Donor Nuclei from Differentiated Cells                                                                                                                                                 |
| 502124                                                                                    |       | New Zealand |       | 07/01/98         |       | 05/12/03        |       | Cloning Pigs  Using Donor Nuclei from Differentiated Cells                                                                                                                                                 |
| 742363                                                                                    |       | Australia   |       | 01/05/98         |       | 01/03/02        |       | Cloning Using  Donor Nuclei from Differentiated Fetal and Adult Cells                                                                                                                                      |
| 334016                                                                                    |       | New Zealand |       | 07/28/97         |       | 12/07/00        |       | Embryonic or  Stem-Like Cell Lines Produced by Cross Species Nuclear Transplantation                                                                                                                       |
| 717529                                                                                    |       | Australia   |       | 03/24/97         |       | 07/13/00        |       | Cultured Inner  Cell Mass Cell Lines Derived from Ungulate Embryos                                                                                                                                         |
| 126416                                                                                    |       | Israel      |       | 03/24/97         |       | 09/21/04        |       | Cultured Inner  Cell Mass Cell Lines Derived from Ungulate Embryos                                                                                                                                         |
| 332159                                                                                    |       | New Zealand |       | 03/24/97         |       | 06/08/00        |       | Cultured Inner  Cell Mass Cell Lines Derived from Ungulate Embryos                                                                                                                                         |

 

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**Genzyme Transgenics Corp.Exclusive License to Advanced Cell Technology, Inc.**

 
| **Number  Patent**                                                        | ** ** | **Country** | ** ** | **Filing  Date** | ** ** | **Issue  Date** | ** ** | **Title**                                                                                               |
|---------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-----------------|------------|---------------------------------------------------------------------------------------------------------|
| 6,580,017                                                                 |       | US          |       | 04/23/99         |       | 06/17/03        |       | Methods of  Reconstructed Goat Embryo Transfer                                                          |
| 6,528,699                                                                 |       | US          |       | 03/22/01         |       | 03/04/03        |       | Transgenically  Produced Non-Secreted Proteins                                                          |
| 517930                                                                    |       | New Zealand |       | 09/27/00         |       | 05/10/04        |       | Methods of  Producing Cloned and Transgenic Mammals                                                     |
| 88117                                                                     |       | Singapore   |       | 10/16/00         |       | 03/31/04        |       | Methods of  Producing a Target Molecule in a Transgenic Animal and Purification of the  Target Molecule |
| 518263                                                                    |       | New Zealand |       | 10/16/00         |       | 07/05/04        |       | Methods of  Producing a Target Molecule in a Transgenic Animal and Purification of the  Target Molecule |
|                                                                      |       |        |       |             |       |            |       |                                                                                                    |
| **Infigen Non-Exclusive License to Advanced Cell  Technology, Inc.** |
| ** **                                                                |
| **Number  Patent**                                                        | ** ** | **Country** | ** ** | **Filing  Date** | ** ** | **Issue  Date** | ** ** | **Title**                                                                                               |
| 6,700,037                                                                 |       | US          |       | 12/28/00         |       | 03/02/04        |       | Method of  Cloning Porcine Animals                                                                      |
| 6,680,199                                                                 |       | US          |       | 05/22/00         |       | 01/20/04        |       | In Vitro  Activation of Mammalian Oocytes and Use in Cloning Procedures                                 |
| 6,603,059                                                                 |       | US          |       | 10/16/00         |       | 08/05/03        |       | Ungulates  Produced By Sequential Nuclear Transfer                                                      |
| 6,395,958                                                                 |       | US          |       | 07/15/99         |       | 05/28/02        |       | Method of  Producing a Polypeptide In an Ungulate                                                       |
| 6,258,998                                                                 |       | US          |       | 11/24/98         |       | 07/10/01        |       | Method of  Cloning Porcine Animals                                                                      |
| 6,194,202                                                                 |       | US          |       | 03/04/96         |       | 02/27/01        |       | Parthenogenic  Oocyte Activation                                                                        |
| 6,077,710                                                                 |       | US          |       | 10/21/98         |       | 06/20/00        |       | Parthenogenic  Oocyte Activation                                                                        |
| 6,011,197                                                                 |       | US          |       | 01/28/99         |       | 01/04/00        |       | Method of  Cloning Bovines Using Reprogrammed Non-Embryonic Bovine Cells                                |
| 5,843,754                                                                 |       | US          |       | 06/06/95         |       | 12/01/98        |       | Parthenogenic  Bovine Oocyte Activation                                                                 |
| 5,496,720                                                                 |       | US          |       | 02/10/93         |       | 03/05/96        |       | Parthenogenic  Oocyte Activation                                                                        |
| 5,453,366                                                                 |       | US          |       | 03/15/93         |       | 09/26/95        |       | Method of  Cloning Bovine Embryos                                                                       |
| 5,374,544                                                                 |       | US          |       | 01/15/92         |       | 12/20/94        |       | Mutated Skeletal  Actin Promoter                                                                        |
| 4,994,384                                                                 |       | US          |       | 10/27/87         |       | 02/19/91        |       | Multiplying  Bovine Embryos                                                                             |

 

***Research and LicenseAgreements.***

 

**Licenses of Intellectual Property to the Company**

 

The following summarizestechnology licenses to the Company.

 

UMassLicense. Exclusive License Agreements dated February 1, 2002 and April 16,1996 between the University of Massachusetts and Advanced Cell Technology, Inc.,as amended by amendments dated September 1, 1997, May 31, 2000 and September 19,2002.  Pursuant to these agreements, theUniversity of Massachusetts, referred to as UMass, exclusively licensed to ACT certainbiological materials, patent rights and related technology forcommercialization in specified fields. The license agreements require ACT touse diligent efforts to develop licensed products and licensed services andrequires ACT to pay certain royalties, minimum annual royalties, milestonepayments and sublicense income to UMass.

 

GTCLicense. Exclusive Development and License Agreement between GTCBiotherapeutics (f/k/a as Genzyme Transgenics Corporation) and Advanced CellTechnology, Inc. dated June 8, 1999. ACT entered into a Development and Commercialization Agreement withGenzyme Transgenics Corporation (now known as GTC Biotherapeutics) on September 25,1997, which was superseded by an Exclusive Development and License Agreementdated June 8, 1999, pursuant to which each party exclusively licensed tothe other certain patent rights and technology for use in defined fields andpursuant to which ACT agreed to provide certain related services.  This agreement also requires each party todisclose to the other on a periodic basis a written report of developmentsrelevant to the other party’s field .

 

WakeForest License. Materials and Research Data License Agreement datedJanuary 26, 2001 between Wake Forest University and Advanced CellTechnology, Inc., and July 1, 2002 Assignment to Wake ForestUniversity Health Sciences.  In January 2001,ACT entered into a Materials and Research Data License Agreement with WakeForest University, referred to as WFU, pursuant to which WFU granted to ACT aworldwide, exclusive, royalty-free perpetual and irrevocable right and licenseto use certain data and stem cells and stem cell cultures created by ACT frombiological materials provided by WFU to ACT for specified purposes only.

 

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InfigenLicense. Non-Exclusive Sublicense Agreement between Advanced Cell Technology, Inc.and Infigen, Inc. dated August 1, 2003.  In August 2003, ACT entered into aNon-Exclusive Sublicense Agreement with Infigen, Inc. pursuant to whicheach party non-exclusively licensed to the other certain patent rights andtechnology for use in defined fields. The license was entered into in connection litigation that was thenpending in Massachusetts Superior Court and in connection with a Final SettlementAgreement dated August 6, 1999 between the parties pursuant to which,among other things, Infigen licensed to ACT certain patents and patentapplications.  In connection with thelicense, ACT and Infigen entered into a Settlement Agreement and GeneralRelease regarding the then pending litigation. The license requires each party to pay to the other certain sublicenseincome and royalty payments on the net sales of products or services sold byeach party using the other party’s patent rights.

 

**Exclusive Licenses of Intellectual Property from the Company**

 

The following summarizeslicenses from the Company to third parties.

 

LifelineLicense. Exclusive License Agreements dated May 14, 2004 between AdvancedCell Technology, Inc. and Lifeline Cell Technology (f/k/a PacGen Cellco,LLC) and Agreement to Amend ACT/CELLCO License Agreements dated September 7,2004.  In May 2004, ACT entered intothree exclusive license agreements with Lifeline Cell Technology (f/k/a PacGenCellco, LLC), referred to as Lifeline, pursuant to which ACT exclusivelylicensed to Lifeline certain know-how and patent rights for, among otherthings, the research, development, manufacture and sale of human cells for celltherapy in the treatment of human diabetes and liver diseases.  In consideration of the license granted toLifeline, Lifeline agreed to pay to ACT certain specified license fees,royalties on the net sales of products or services covered by the license,minimum annual royalties and sublicense income. The licenses also grants Lifeline a 90 day right of negotiation withrespect to any technology that would constitute licensed technology if thefield included diseases related either to the heart or to neuro degenerativediseases prior to ACT entering into any license relating to such fields with athird party.

 

InSeptember 2004, ACT and Lifeline entered into an agreement to amend theselicense agreements pursuant to which ACT and Lifeline agreed to amend thelicenses to include the field described as all retinal and other cell typesrelated to the diagnosis and treatment of retinal disease or the slowing orstopping the progression of retinal degenerative diseases.  The agreement to amend also contemplatesadditional license fees and additional annual minimum royalties.  ACT and Lifeline are currently negotiatingthe formal amendments that will be executed as a result of the agreement toamend.

 

GTCLicense. Exclusive Development and License Agreement between GTCBiotherapeutics (f/k/a as Genzyme Transgenics Corporation) and Advanced CellTechnology, Inc. dated June 8, 1999. See description of this agreement above.

 

ExeterLife Sciences License. Exclusive License Agreement dated October 22,2003 between Advanced Cell Technology, Inc. and Exeter Life Sciences, Inc.  In October 2003, ACT entered into anExclusive License Agreement with Exeter Life Sciences, Inc., referred toas Exeter, pursuant to which ACT exclusively licensed to Exeter certaintechnology and patent rights for use in the fields of agriculture, endangeredspecies, companion animals and equine animals. The license also grants Exeter a right of first negotiation to anyimprovement patents that are obtained by ACT that relate to the licensedintellectual property or which are useful, necessary or required to develop ormanufacture certain animals, cells or tissues within the defined fields ofuse.  In consideration of the rights andlicenses granted to Exeter, Exeter agreed to pay ACT specified license fees,royalties on the net sales of all products and services covered by the license,sublicense income and annual maintenance fees. Under the license, Exeter’s obligation to pay the annual maintenance feeis suspended unless and until certain intellectual property that is the subjectof litigation,, namely the matter styled Universityof Massachusetts v. James M. Robl and Phillipe Collas, MassachusettsSuperior Court, Suffolk County, Docket No. 04-0445-BLS, is recovered andlicensed to ACT and included in the license to Exeter.  The license also provides that ACT willrefund certain amounts to Exeter if certain conditions concerning thereferenced litigation are not met and that ACT will extend to Exeter rightsacquired by ACT or the University in connection with the referenced litigationor any patent interference or opposition proceedings involving ACT.

 

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**Nonexclusive Licenses of Intellectual Property from ACT**

 

Wehave entered into numerous nonexclusive license agreements pursuant to which wehave granted non-exclusive rights to various parties to use certain patentrights in defined fields.  These licensesgenerally provide for commercialization of our intellectual property andtypically contain minimum royalties, milestones and continuing royalties basedupon percentages of revenue.

 

***California Proposition 71.***  In November 2004, CaliforniaState Proposition 71, referred to as Prop. 71, the California Stem CellResearch and Cures Initiative, was adopted by state-wide referendum.  Prop. 71 is a state-sponsored program designedto encourage stem cell research in the State of California, and to finance suchresearch with State funds totaling approximately $295 million annually for10 years beginning in 2005. This initiative creates the CaliforniaInstitute for Regenerative Medicine, which will provide grants, primarily butnot exclusively, to academic institutions to advance both ES cell research andadult stem cell research.  ES cellresearch is one of our primary areas of focus. It is unclear whether we are eligible to directly receive Prop. 71generated funds.  However, we intend toapply for any funding that becomes available. We also expect to benefit fromcollaborations with academic and other institutions eligible for Prop. 71funding for research in the use of ES cells for various diseases andconditions.  ES cell research does notgenerally qualify for federal funding due to restrictions on embryonic stemcell research.  Prop. 71 is specificallytargeting research in the embryonic stem cell field.  The Company considers government support tobe important confirmation of the quality of its technology, but does not relyon government programs as a significant source of financial support.

 

***Competition****.* The biotechnology industries are characterized by rapidly evolvingtechnology and intense competition. Our competitors include major multinationalpharmaceutical companies, specialty biotechnology companies and chemical andmedical products companies operating in the fields of regenerative medicine,cell therapy, tissue engineering and tissue regeneration. Many of thesecompanies are well-established and possess technical, research and development,financial and sales and marketing resources significantly greater thanours.  In addition, certain smallerbiotech companies have formed strategic collaborations, partnerships and othertypes of joint ventures with larger, well established industry competitors thatafford these companies potential research and development and commercializationadvantages. Academic institutions, governmental agencies and other public andprivate research organizations are also conducting and financing researchactivities which may produce products directly competitive to those we aredeveloping.  Moreover, many of thesecompetitors may be able to obtain patent protection, obtain FDA and otherregulatory approvals and begin commercial sales of their products before we do.

 

In the general area of cell-based therapies,we compete with a variety of companies, most of whom are specialtybiotechnology companies. Some of these, such as Geron Corporation, GenzymeCorporation, StemCells, Inc., Aastrom Biosciences, Inc. and Viacell, Inc.,are well-established and have substantial technical and financial resourcescompared to us. However, as cell-based products are only just emerging asmedical therapies, many of our direct competitors are smaller biotechnology andspecialty medical products companies. These smaller companies may become significant competitors through rapidevolution of new technologies.  Any ofthese companies could substantially strengthen their competitive positionthrough strategic alliances or collaborative arrangements with largepharmaceutical or biotechnology companies.

 

The diseases and medical conditions we are targetinghave no effective long-term therapies. Nevertheless, we expect that ourtechnologies and products will compete with a variety of therapeutic productsand procedures offered by major pharmaceutical companies.  Many pharmaceutical and biotechnologycompanies are investigating new drugs and therapeutic approaches for the samepurposes, which may achieve new efficacy profiles, extend the therapeuticwindow for such products, alter the prognosis of these diseases, or preventtheir onset. We believe that our products, when and if successfully developed,will compete with these products principally on the basis of improved andextended efficacy and safety and their overall economic benefit to the healthcare system.

 

Competition for any stem cell products that we maydevelop may be in the form of existing and new drugs, other forms of celltransplantation, ablative and simulative procedures, and gene therapy. Webelieve that some of our competitors are also trying to develop stem andprogenitor cell-based technologies. We expect that all of these products willcompete with our potential stem cell products based on efficacy, safety, costand intellectual property positions.  Wemay also face competition from companies that have filed patent applicationsrelating to the use of genetically modified cells to treat disease, disorder orinjury. In the event our therapies should require the use of such geneticallymodified cells, we may be required to seek licenses from these competitors inorder to commercialize certain of our proposed products, and such licenses maynot be granted.

 

If we develop products that receive regulatoryapproval, they would then have to compete for market acceptance and marketshare. For certain of our potential products, an important success factor willbe the timing of

 

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market introduction ofcompetitive products. This timing will be a function of the relative speed withwhich we and our competitors can develop products, complete the clinicaltesting and approval processes, and supply commercial quantities of a productto market. These competitive products may also impact the timing of clinicaltesting and approval processes by limiting the number of clinical investigatorsand patients available to test our potential products.

 

***Government Regulation. ***Regulation bygovernmental authorities in the United States and other countries is asignificant factor in our research and development and will be a significantfactor in the manufacture and marketing of our proposed products. The natureand extent to which such regulation applies to us will vary depending on thenature of any products we may develop. We anticipate that many, if not all, ofour products will require regulatory approval by governmental agencies prior tocommercialization. In particular, human therapeutic products are subject torigorous preclinical and clinical testing and other approval procedures of theU.S. Food and Drug Administration, referred to as the FDA, and similarregulatory authorities in European and other countries. Various governmentalstatutes and regulations also govern or influence testing, manufacturing,safety, labeling, storage and recordkeeping related to such products and theirmarketing. The process of obtaining these approvals and the subsequentcompliance with appropriate statutes and regulations require the expenditure ofsubstantial time and money, and there can be no guarantee that approvals willbe granted.

 

***FDA Approval. ***The FDA requirementsfor our potential products to be marketed in the United States include thefollowing five steps:

 

Preclinicallaboratory and animal tests must be conducted. Preclinical tests include laboratory evaluation of the cells and theformulation intended for use in humans for quality and consistency. In vivostudies are performed in normal animals and specific disease models to assessthe potential safety and efficacy of the cell therapy product.

 

Aninvestigational new drug application, or IND, must be submitted to the FDA, andthe IND must become effective before human clinical trials in the United Statesmay commence.  The IND is submitted tothe FDA with the preclinical data, a proposed development plan and a proposedprotocol for a study in humans. The IND becomes effective 30 days followingreceipt by the FDA, provided there are no questions, requests for delay orobjections from the FDA. If the FDA has questions or concerns, it notifies thesponsor, and the IND will then be on clinical hold until a satisfactoryresponse is made by the sponsor.

 

Adequateand well-controlled human clinical trials must be conducted to establish thesafety and efficacy of the product. Clinical trials involve the evaluation of a potential product under thesupervision of a qualified physician, in accordance with a protocol thatdetails the objectives of the study, the parameters to be used to monitorsafety and the efficacy criteria to be evaluated. Each protocol is submitted tothe FDA as part of the IND. The protocol for each clinical study must be approvedby an independent institutional review board, or IRB, of the institution atwhich the study is conducted, and the informed consent of all participants mustbe obtained. The IRB reviews the existing information on the product, considersethical factors, the safety of human subjects, the potential benefits of thetherapy and the possible liability of the institution. The IRB is responsiblefor ongoing safety assessment of the subjects during the clinicalinvestigation.  Clinical development istraditionally conducted in three sequential phases.

 

**•**      Phase1 studies for a cell therapy product are designed to evaluate safety in a smallnumber of subjects in a selected patient population by assessing adverseeffects, and may include multiple dose levels. This study may also gatherpreliminary evidence of a beneficial effect on the disease.

 

**•**      Phase2 may involve studies in a limited patient population to determine biologicaland clinical effects of the product and to identify possible adverse effectsand safety risks of the product in the selected patient population.

 

**•**      Phase 3trials would be undertaken to conclusively demonstrate clinical benefit oreffect and to test further for safety within a broader patient population,generally at multiple study sites.  The FDAcontinually reviews the clinical trial plans and results and may suggestchanges or may require discontinuance of the trials at any time if significantsafety issues arise.

 

Marketingauthorization applications must be submitted to the FDA.  The results of the preclinical studies andclinical studies are submitted to the FDA in the form of marketing approvalauthorization applications.

 

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TheFDA must approve the applications prior to any commercial sale or practice ofthe technology or product. Biologic product manufacturing establishmentslocated in certain states also may be subject to separate regulatory andlicensing requirements.  The testing andapproval process will require substantial time, effort and expense. The timefor approval is affected by a number of factors, including relative risks andbenefits demonstrated in clinical trials, the availability of alternativetreatments and the severity of the disease. Additional animal studies or clinicaltrials that may be requested during the FDA review period.

 

Ourresearch and development is based largely on the use of human stem andprogenitor cells. The FDA has initiated a risk-based approach to regulatinghuman cell, tissue and cellular and tissue-based products and has publishedcurrent Good Tissue Practice, or cGTP, regulations. As part of this approach,the FDA has published final rules for registration of establishments thatengage in the recovery, screening, testing, processing, storage or distributionof human cells, tissues, and cellular and tissue-based products, and for thelisting of such products. In addition, the FDA has published rules formaking suitability and eligibility determinations for donors of cells andtissue and for current good tissue practice for manufacturers using them, whichhave recently taken effect. We cannot now determine the full effects of thisregulatory initiative, including precisely how it may affect the clarity ofregulatory obligations and the extent of regulatory burdens associated with ourstem cell research and the manufacture and marketing of stem cell products.

 

***European and Other Regulatory Approval.***  Approval of a product by regulatoryauthorities comparable to the FDA in Europe and other countries will likely benecessary prior to commencement of marketing a product in any of thesecountries. The regulatory authorities in each country may impose their ownrequirements and may refuse to grant approval, or may require additional databefore granting approval, even though the relevant product has been approved bythe FDA or another authority. The regulatory authorities in the European Union,or EU, and other developed countries have lengthy approval processes forpharmaceutical products. The process for gaining approval in particularcountries varies, but is generally similar to the FDA approval process. InEurope, the European Committee for Proprietary Medicinal Products provides amechanism for EU-member states to exchange information on all aspects of productlicensing. The EU has established a European agency for the evaluation ofmedical products, with both a centralized community procedure and adecentralized procedure, the latter being based on the principle of licensingwithin one member country followed by mutual recognition by the other membercountries.

 

***Other Regulations.***In addition to safety regulations enforced by the FDA, we are also subject toregulations under the Occupational Safety and Health Act, the EnvironmentalProtection Act, the Toxic Substances Control Act and other present andpotential future and Federal, state, local, and foreign regulations.

 

Outside the United States, we will be subject toregulations that govern the import of drug products from the United States orother manufacturing sites and foreign regulatory requirements governing humanclinical trials and marketing approval for our products. The requirementsgoverning the conduct of clinical trials, product licensing, pricing andreimbursements vary widely from country to country.

 

The United States Congress, several states and foreign countries, have considered legislation banning or restricting human application of ES cell-based and nuclear transfer based technologies.  No assurance can be given regarding future restrictions or prohibitions that might affect our technology and business.  In addition, we cannot assure you that future judicial rulings with respect to nuclear transfer technology or human ES cells will not have the effect of delaying, limiting or preventing the use of nuclear transfer technology or ES cell-based technology or delaying, limiting or preventing the sale, manufacture or use of products or services derived from nuclear transfer technology or ES cell-derived material.  Any such legislative or judicial development would harm our ability to generate revenues and operate profitably.

 

For additional information about governmental regulations that will affect our planned and intended business operations, see “RISK FACTORS THAT MAY AFFECT OUR BUSINESS” set forth in Part I, Item 2.

 

***Employees.***  As of March 31, 2005, we had 23full-time employees, of whom eight hold Ph.D. or M.D. degrees. Fifteen employeesare directly involved in research and development activities and eight areengaged in business development and administration. Along with oursubsidiaries, we also use the services of numerous outside consultants inbusiness and scientific matters.  Webelieve that we have good relations with our employees and consultants.

 

***Properties. ***Our headquarters are located at 381 PlantationStreet, Worcester, MA 01605. Our facilities consist of an approximately 14,000square foot executive office and laboratory facilities which provide us the

 

46

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capability of producingnecessary quantities of materials sufficient to support our research.  We have the facility under an 8 yearsub-lease which expires on April 30, 2010. We do not own any real estate.

 

As part of the new management of the Company, theCompany will be establishing procedures by which security holders may recommendnominees to our Board of Directors.

 

## **ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K**

## ** **

Please see the Exhibit Indexwhich follows the signature pages to this Quarterly Report on Form 10-QSBand which is incorporated by reference herein. Although this Part II, Item 6 of Form 10-QSB requires thatMaterial Agreements need only be reported in the 10-QSB filed for the quarterin which they first become a reportable event, in light of the Merger and thecomplete change of business by the small business issuer following the Merger,we have elected to provide disclosure relating to all Material Agreements towhich the Company or ACT is a party.

 

47

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# **SIGNATURE**

# ** **

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned hereunto dulyauthorized.

 
| ** **                | **A.C.T. HOLDINGS, INC.** |
|---------------------------|---------------------------|
| ** **                | ** **                | ** ** |
| ** **                | ** **                | ** ** |
|                      | By:                       | /s/ William M.  Caldwell, IV |   |
|                      |                      | William M. Caldwell,  IV |
|                      |                      | Chief Executive  Officer |
|                      |                      |   |
| Dated: May 23,  2005 |                      |   |

 

48

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**Exhibit Index**

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1              |       | Agreement and Plan of  Merger between the Company, A.C.T. Acquisition Corp., and ACT, dated as of January 3,  2005. Previously filed as Exhibit 10.1 to our Current Report on  Form 8-K dated December 30, 2004 and filed with the Securities and  Exchange Commission (the “Commission”) on January 4, 2005 (SEC File  No. 0-50295).                                                                                                                                                                                    |
| 3.1              |       | Articles of Incorporation  of the Company. Previously filed as Exhibit 3.1 to our Registration  Statement on Form SB-2 filed with the Commission on May 14,  2001(SEC File No. 333-6096).                                                                                                                                                                                                                                                                                                                                                    |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|             |       | 3.1.1                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | Certificate of  Amendment to Articles of Incorporation dated April 1, 2004. |
|             |       | 3.1.2                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | Certificate of  Amendment to Articles of Incorporation. Previously filed as Exhibit 3.1  to our Current Report on Form 8-K dated December 30, 2004 and filed  with the Commission on filed on January 4, 2005 (sec File  No. 0-50295). |
| 3.2              |       | Bylaws of the Company.  Previously filed as Exhibit 3.2 to our Registration Statement on  Form SB-2 filed with the Commission on May 14, 2001 (SEC File  No. 333-6096).                                                                                                                                                                                                                                                                                                                                                                      |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|             |       | 3.2.1                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | Amendment to Bylaws of  the Company. Previously filed as Exhibit 3.1 to our Current Report on Form 8-K  dated December 15, 2004 and filed with the Commission on December 29,  2004 (SEC File No. 0-50295). |
| 4.1              |       | Specimen Stock  Certificate.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.2              |       | Form of $0.05 Warrant to Purchase Common Stock of ACT. ACT issued  warrants in this form for the purchase of an aggregate of 900,000 shares,  including a warrant to purchase 250,000 shares of ACT common stock to  Andwell, LLC, an entity affiliated with William Caldwell, IV, the Chief  Executive Officer and a director of the Company                                                                                                                                                                                                               |
| 4.3              |       | Form of $0.25  Warrant to Purchase Common Stock of ACT. ACT issued warrants in this form for  the purchase of an aggregate of 1,954,000 shares, including (i) a  warrant to purchase 236,000 shares of ACT common stock to Andwell, LLC, an  entity affiliated with William Caldwell, IV, the Chief Executive Officer and  a director of the Company, (ii) a warrant to purchase 75,000 shares of  ACT common stock to Rocket Ventures, an entity affiliated with Jonathan  Atzen, a Senior Vice President and the General Counsel of the Company |
| 4.4              |       | $0.25 Warrant to  Purchase Common Stock of the Company issued to Gunnar Engstrom.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.5              |       | Form of $0.85  Warrant to Purchase Common Stock of ACT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 4.6              |       | Form of $1.27  Warrant to Purchase Common Stock of ACT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 4.7              |       | Form of $2.00  Warrant to Purchase Common Stock of ACT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 4.8              |       | Form of  Subscription Agreement to Purchase Series A Convertible Preferred Units  of ACT.                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 4.9              |       | Form of Share  Purchase Agreement to purchase common stock of Two Moons Kachinas Corp. (“TMOO”),  the predecessor to the Company.                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.10             |       | Form of Lock-Up  Agreement entered into by certain sellers of TMOO common stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 4.11             |       | Form of Lock-Up  Agreement entered into by certain buyers of TMOO common stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.12             |       | Investor’s Rights  Agreement between ACT and Avian Farms, Inc. dated December 31,  1998.                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 9.1              |       | Form of Voting Agreement  for shares of common stock of ACT held by certain parties effective as of January 31,  2005.                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.1             |       | Exclusive Development  and License Agreement between GTC Biotherapeutics (f/k/a as Genzyme  Transgenics Corporation) and ACT dated June 8, 1999.                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.2             |       | Exclusive  License Agreement dated April 16, 1996 between the University of  Massachusetts and ACT.                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|             |       | 10.2.1                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | Amendment to  Exclusive License Agreement dated September 1, 1997 |
|             |       | 10.2.2                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | Second Amendment  to Exclusive License Agreement dated May 31, 2000 |
|             |       | 10.2.3                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | Third Amendment  to Exclusive License Agreement dated September 19, 2002 |
| 10.3             |       | Materials and  Research Data License Agreement dated January 26, 2001 between Wake  Forest University and ACT.                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|             |       | 10.3.1                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | July 1,  2002 Assignment to Wake Forest University Health Sciences. |
|                  |            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |  |  |

 

 

49

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| 10.4   |   | Exclusive  License Agreement dated February 1, 2002 between the University of  Massachusetts and ACT.                                                                                          |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.5   |   | Non-Exclusive  Sublicense Agreement between ACT and Infigen, Inc. dated August 1,  2003.                                                                                                  |
| 10.6   |   | Non-Exclusive  License Agreements, dated January 1, 2001 between ACT and PPL  Therapeutics (Scotland) Limited.                                                                                 |
| 10.7   |   | Nonexclusive  License Agreement dated May 1, 2001 between ACT and Immerge  BioTherapeutics, Inc.                                                                                          |
| 10.8   |   | Nonexclusive  License and Sponsored Research Agreement dated June 29, 2001 between ACT  and Charles River Laboratories, Inc.                                                              |
| 10.9   |   | Non-Exclusive  Sublicense Agreement between Cyagra, Inc., ACT, ACT Group and Goyaike,  S.A. dated November 20, 2001.                                                                      |
| 10.10  |   | Exclusive Sublicense  Agreement between ACT, ACT Group and Cyagra, Inc. dated June 28,  2002.                                                                                             |
| 10.11  |   | Non-Exclusive  License Agreement dated November 8, 2002 between ACT and Merial Limited.                                                                                                        |
| 10.12  |   | Non-Exclusive  Sublicense Agreement between ACT and Infigen, Inc. dated August 1,  2003.                                                                                                  |
| 10.13  |   | Exclusive  License Agreement dated October 22, 2003 between ACT and Exeter Life  Sciences, Inc.                                                                                           |
|   |   | 10.13.1                                                                                                                                                                                             | Letter of Intent  between ELS and ACT dated March 16, 2003. |
|   |   | 10.13.2                                                                                                                                                                                             | Sponsored  Research Agreement. |
| 10.14  |   | Non-Exclusive  License Agreement dated January 4, 2002 between ACT and Genetic  Savings & Clone.                                                                                      |
| 10.15  |   | Non-Exclusive  License Agreement dated February 3, 2004 between ACT and Pureline  Genetics.                                                                                                    |
| 10.16  |   | Non-Exclusive  License Agreement dated February 3, 2004 between ACT and First Degree  Genetics.                                                                                                |
| 10.17  |   | Non-Exclusive  License Agreement dated February 3, 2004 between ACT and One Degree  Genetics.                                                                                                  |
| 10.18  |   | Option to  License Intellectual Property dated December 31, 2003 between ACT and  PacGen Cellco, LLC.                                                                                          |
|   |   | 10.18.1                                                                                                                                                                                             | First Amendment  to Option to License Intellectual Property dated February 13, 2004. |
| 10.19  |   | Exclusive  License Agreement (Infigen IP) dated May 14, 2004 between ACT and PacGen  Cellco, LLC.                                                                                              |
| 10.20  |   | Exclusive  License Agreement (UMass IP) dated May 14, 2004 between ACT and PacGen  Cellco, LLC.                                                                                                |
| 10.21  |   | Exclusive  License Agreement (ACT IP) dated May 14, 2004 between ACT and PacGen  Cellco, LLC.                                                                                                  |
| 10.22  |   | Agreement to  Amend ACT/CELLCO License Agreements dated September 7, 2004 ACT and  PacGen Cellco, LLC.                                                                                         |
| 10.23  |   | Indemnification  Agreement of David Merrell to certain buyers of TMOO common stock dated December 31,  2004.                                                                                   |
| 10.24  |   | Convertible  Promissory Note to ACT Group, Inc. dated July 12, 2002 in the  amount of $1,000,000.                                                                                         |
| 10.25  |   | Promissory Note  issued by ACT to Pierce Atwood LLP dated January 2005 in the amount of  $150,000.                                                                                             |
| 10.26  |   | Promissory Note  issued by ACT to Pierce Atwood dated July 1, 2003 in the amount of  $339,000.                                                                                                 |
| 10.27  |   | Promissory Note  issued by ACT to Rothwell, Figg, Ernst & Manbeck, P.C. dated July 8,  2003 in the amount of $272,108.                                                                |
| 10.28  |   | Forbearance and Stock  Purchase Agreement Among Avian Farms, Inc., ACT Group, Inc., ACT  and Cima Biotechnology, Inc., dated July 16, 1999, as amended December 23,  1999. |
| 10.29  |   | Securityholders’  Agreement among ACT, ACT Group, Cyagra, Inc. and Goyaike S.A. dated November 20,  2001                                                                             |
| 10.30  |   | Securities Purchase  Agreement between ACT, ACT Group and Goyaike S.A. dated July 1, 2002.                                                                                                     |
|   |   | 10.30.1                                                                                                                                                                                             | Securityholders’  Agreement among ACT, ACT Group, Cyagra, Inc. and Goyaike S.A. dated July 1,  2002. |
|   |   | 10.30.2                                                                                                                                                                                             | Collaboration Agreement  and Technology License. |
|   |   | 10.30.3                                                                                                                                                                                             | Separation Agreement  among ACT, ACT Group, Cyagra, Inc. and Goyaike S.A. |
|        |        |                                                                                                                                                                                                     |  |  |

 

 

50

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| 10.31  |   | Membership  Interest Exchange and Asset Sale Agreement dated May 31, 2000, by and  among ACT and Hematech, LLC, et al.                                                                                                                                                                                                                                                                                                                                                                                          |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   | 10.31.1                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | Buyout Option  Agreement dated May 31, 2000 between Hematech, LLC and ACT. |
| 10.32  |   | Space Sublease  Agreement dated November      , 2004, between  BioReliance and ACT, for 381 Plantation Street, Worcester, MA 01605                                                                                                                                                                                                                                                                                                                                                     |
| 10.33  |   | Advanced Cell  Technology, Inc. 2004 Stock Option Plan. ** Pursuant to this option  plan, ACT issued options to purchase an aggregate 2,604,000 shares, including  (i) options to purchase 1,500,000 shares of ACT common stock to Michael  West, the Chairman of the Board of Directors and the Chief Scientific Officer  of the Company, and (ii) options to purchase 750,000 shares of ACT  common stock to Robert Lanza, the Vice President of Medical and Scientific  Development of the Company |
| 10.34  |   | Advanced Cell  Technology, Inc. 2004 Stock Option Plan II. **Pursuant to this option  plan, ACT issued options to purchase an aggregate 1,301,161 shares, including  (i) options to purchase 651,161 shares of ACT common stock to William  Caldwell, IV, the Chief Executive Officer and a director of the Company**,**and (ii) options to purchase  240,000 shares of ACT common stock to Robert Peabody, a director of the  Company.                                                               |
| 10.35  |   | A.C.T.  Holdings, Inc. 2005 Stock Option Plan. ** Previously filed as Appendix A  to our preliminary proxy statement on Form PRE-14A filed with the  Commission on May 10, 2005 (SEC File No. 0-50295).                                                                                                                                                                                                                                                                                          |
| 10.36  |   | Form of Incentive  Stock Option Agreement.** .                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.37  |   | Form of  Nonqualified Stock Option Agreement**                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.38  |   | Employment  Agreement between ACT and William M. Caldwell, IV dated December 31,  2004. **                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.39  |   | Employment  Agreement between ACT and Michael D. West dated December 31, 2004. **                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.40  |   | Employment  Agreement between ACT and Robert Lanza dated February 1, 2005. **                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.41  |   | Employment  Agreement between ACT, the Company and James Stewart dated March 13,  2005. **                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.42  |   | Employment  Agreement between ACT and Robert Peabody dated February 9, 2005. **                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.43  |   | Employment  Agreement between ACT and Jonathan Atzen dated April 1, 2005. **                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.44  |   | Employment  Agreement between ACT and Irina Klimanskaya dated October 1, 2003                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.45  |   | Employment  Agreement between ACT and Sadhana Agarwal dated April 1, 2004                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.46  |   | Employment  Agreement between ACT and James Murai dated February 17, 2005                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.47  |   | Employment  Agreement between ACT and David Larocca dated February 9, 2005                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.48  |   | Consulting  Agreement between ACT and William M. Caldwell, IV dated October 1, 2004  **                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.49  |   | Consulting  Agreement between ACT and Jonathan Atzen dated January 14, 2005**                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.50  |   | Consulting  Agreement between ACT and Stephen Price dated December 31, 2004                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   | 10.50.1                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | Consulting  Agreement between ACT and Stephen Price dated April 28, 2005 |
| 10.51  |   | Consulting  Agreement between ACT and Chad Griffin dated April 1, 2005                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.52  |   | Consulting Agreement  between ACT and James Stewart dated January 14, 2005                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.53  |   | Settlement  Agreement between ACT and Gunnar Engstrom dated January 28, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.54  |   | Confidentiality  and Nondisclosure Agreement dated February 3, 1999 between ACT and  Robert Lanza, M.D.                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.55  |   | Consulting  Agreement dated September 29, 1997 between ACT and Dr. James Robl.                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.56  |   | Consulting  Agreement dated January 23, 1998 between ACT and Dr. James Robl.                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.57  |   | Final Settlement  Agreement dated August 6, 1999 between Infigen, Inc., ACT and  Steven Stice.                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.58  |   | Letter Agreement  dated April 20, 2000 between ACT and Dr. Steven L. Stice.                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.59  |   | Master  Laboratory Services Agreement dated as of January 4, 2001 between White  Eagle Laboratories, Inc. and ACT                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.60  |   | Master Study  Agreement dated as of December 4, 2000 between Biomedical Research  Models, Inc. and ACT                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.61  |   | Agreement  Relating to the Transfer of Biological Materials dated as of February 3,  2000 between Wake Forest University and ACT                                                                                                                                                                                                                                                                                                                                                                                |
| 10.62  |   | Materials  Transfer Agreement dated February 16, 2000 between ACT, B.C. Cancer  Agency and Dr. Peter Lansdorp                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.63  |   | Materials  Transfer Agreement dated January 19, 2000 between ACT, IPK and Anna  Wobus                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.64  |   | Materials  Transfer Agreement dated February 23, 2000 between ACT, Philip Damiani  and Carlos T. Moraes                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.65  |   | Material  Transfer Agreement dated January 6, 1997 between ACT, University of  Massachusetts, University of Colorado and Curtis R. Freed                                                                                                                                                                                                                                                                                                                                                                        |
| 10.66  |   | Material  Transfer Agreement dated March 20, 2000 between ACT, Charlotte Farin and  Peter Farin.                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.67  |   | Sponsored  Research Agreement dated as of May 15, 2000 between Carl H.  Lindner, Jr. Family Center for Research of Endangered Wildlife (CREW)  and ACT                                                                                                                                                                                                                                                                                                                                                     |
|        |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |  |

 

 

51

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| 10.68  |   | Sponsored  Research Agreement dated as of August 9, 2000 between Cornell University  and ACT                                                                                                              |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.69  |   | Sponsored  Research Agreement dated as of December 1, 1999 between ACT and the  University of Massachusetts Amherst                                                                                       |
|   |   |                                                                                                                                                                                                           |   | 10.69.1 | Amendment  No. 1 to Agreement dated December 1, 1999. |
| 10.70  |   | Sponsored  Research Agreement dated August 1, 1999 between ACT and UMass (D. Good)                                                                                                                        |
| 10.71  |   | Term Sheet for  Non-Exclusive License Agreement dated as of December 23, 2000 between  Immerge BioTherapeutics, Inc. and ACT, as amended by First Amendment to  Term Sheet dated March 14, 2001 |
| 10.72  |   | Withdrawal,  Termination, Assignment and Assumption Agreement dated March 14, 2001 by  and among ACT, BioTransplant, Inc., Immerge BioTherapeutics, Inc.  and Infigen, Inc.                |
| 10.73  |   | Consulting  Agreement between ACT and Karen Chapman dated January 15, 2005                                                                                                                                     |
| 21.1   |   | List of  Subsidiaries                                                                                                                                                                                          |
| 31.1   |   | Section 302  Certification of Chief Executive Officer                                                                                                                                                     |
| 31.2   |   | Section 302  Certification of Chief Financial Officer                                                                                                                                                     |
| 32.1   |   | Certification of  Chief Executive Officer pursuant to 18 U.S.C. Section 1350                                                                                                                              |
| 32.2   |   | Certification of  Chief Financial Officer pursuant to 18 U.S.C. Section 1350                                                                                                                              |
|        |        |                                                                                                                                                                                                                |  |  |  |

 

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** Indicates a managementcontract or compensation plan.

 

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