UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON
D.C. 20549









FORM 10-Q





x
            
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934FOR
      THE QUARTERLY PERIOD ENDED JUNE 30, 2009OR ̈
            
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934




FOR
THE TRANSITION PERIOD FROM
           TO
          .




COMMISSION
FILE NUMBER: 0-50295









ADVANCED
CELL TECHNOLOGY, INC.


(EXACT
NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)




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




381
PLANTATION STREET, WORCESTER, MASSACHUSETTS 01605


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




REGISTRANT’S
TELEPHONE NUMBER, INCLUDING AREA CODE: (510) 748-4900




Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90
days.      Yes   x
  No    ̈




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).  Yes  ̈ No  ̈





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):




Large
      accelerated filer  ̈
            Accelerated
      filer   ̈
            Non-accelerated
      filer  ̈
            Smaller reporting company 
      x(Do
      not check if a smaller
              reporting
      company)




Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes   ̈   No 
x




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




Class:
                  
                  Outstanding
      at August 14, 2009:Common
      Stock, $0.001 par value per share
                  
                  499,905,641 shares







ADVANCED
CELL TECHNOLOGY, INC. AND SUBSIDIARY





INDEX




PART I.
      FINANCIAL INFORMATIONITEM
      1. FINANCIAL STATEMENTS
              
              
              1ITEM
      2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
      OF OPERATIONS
              
              
              35ITEM
      3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
    RISK
              
              
              56ITEM
      4. CONTROLS AND PROCEDURES
              
              
              57PART II.
      OTHER INFORMATIONITEM
      1. LEGAL PROCEEDINGS
              
              
              57ITEM
      2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
    PROCEEDS
              
              
              58ITEM
      3. DEFAULTS UPON SENIOR SECURITIES
              
              
              58ITEM
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
              
              
              59ITEM
      5. OTHER INFORMATION
              
              
              59ITEM
      6. EXHIBITS
              
              
              61SIGNATURE
              
              
              62







Part
I – FINANCIAL INFORMATION


Item 1. Financial
Statements





ADVANCED
CELL TECHNOLOGY, INC. AND SUBSIDIARY


CONSOLIDATED
BALANCE SHEETS


AS
OF JUNE 30, 2009 AND DECEMBER 31, 2008





June
      30,
                                            
                                            
                                            December
      31,2009
                                            
                                            
                                            2008(unaudited)ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
                                            
                                            $
                                            689,911
                                            
                                            
                                            $
                                            816,904Accounts
      receivable
                                            
                                            
                                            -
                                            
                                            
                                            
                                            261,504Prepaid
      expenses
                                            
                                            
                                            46,466
                                            
                                            
                                            
                                            32,476Deferred
      royalty fees, current portion
                                            
                                            
                                            182,198
                                            
                                            
                                            
                                            182,198Total
      current assets
                                            
                                            
                                            918,575
                                            
                                            
                                            
                                            1,293,082Property
      and equipment, net
                                            
                                            
                                            251,406
                                            
                                            
                                            
                                            400,008Investment
      in joint venture
                                            
                                            
                                            -
                                            
                                            
                                            
                                            225,200Deferred
      royalty fees, less current portion
                                            
                                            
                                            568,389
                                            
                                            
                                            
                                            659,488Deposits
                                            
                                            
                                            2,170
                                            
                                            
                                            
                                            -Deferred
      issuance costs, net of amortization of $289,790 and
    $8,666,387
                                            
                                            
                                            4,691,209
                                            
                                            
                                            
                                            -TOTAL
      ASSETS
                                            
                                            $
                                            6,431,749
                                            
                                            
                                            $
                                            2,577,778LIABILITIES AND STOCKHOLDERS'
      DEFICITCURRENT
      LIABILITIES:Accounts
      payable
                                            
                                            $
                                            6,718,901
                                            
                                            
                                            $
                                            8,287,786Accrued
      expenses
                                            
                                            
                                            1,647,137
                                            
                                            
                                            
                                            2,741,591Accrued
      default interest
                                            
                                            
                                            4,826,991
                                            
                                            
                                            
                                            3,717,384Deferred
      revenue, current portion
                                            
                                            
                                            992,664
                                            
                                            
                                            
                                            834,578Advances
      payable, other
                                            
                                            
                                            130,000
                                            
                                            
                                            
                                            130,0002005
      Convertible debenture and embedded derivatives, net of discounts of $0 and
      $0
                                            
                                            
                                            135,819
                                            
                                            
                                            
                                            85,9972006
      Convertible debenture and embedded derivatives (fair value $2,733,345 and
      $1,993,354)
                                            
                                            
                                            2,733,345
                                            
                                            
                                            
                                            1,993,3542007
      Convertible debenture and embedded derivatives (fair value $17,859,334 and
      $7,706,344)
                                            
                                            
                                            17,859,334
                                            
                                            
                                            
                                            7,706,344February
      2008 Convertible debenture and embedded derivatives (fair value $1,775,904
      and $1,757,470)
                                            
                                            
                                            1,775,904
                                            
                                            
                                            
                                            1,757,470April
      2008 Convertible debenture and embedded derivatives (fair value $8,165,561
      and $4,066,505)
                                            
                                            
                                            8,165,561
                                            
                                            
                                            
                                            4,066,505Warrant
      and option derivative liabilities
                                            
                                            
                                            26,334,356
                                            
                                            
                                            
                                            2,655,849Embedded
      derivative liability
                                            
                                            
                                            540,098
                                            
                                            
                                            
                                            -Deferred
      joint venture obligations, current portion
                                            
                                            
                                            130,644
                                            
                                            
                                            
                                            167,335Short
      term capital leases
                                            
                                            
                                            12,955
                                            
                                            
                                            
                                            12,955Notes
      payable, other
                                            
                                            
                                            468,425
                                            
                                            
                                            
                                            468,425Total
      current liabilities
                                            
                                            
                                            72,472,134
                                            
                                            
                                            
                                            34,625,573Deferred
      joint venture obligations, less current portion
                                            
                                            
                                            16,979
                                            
                                            
                                            
                                            63,473Deferred
      revenue, less current portion
                                            
                                            
                                            6,172,659
                                            
                                            
                                            
                                            3,817,716Total
      liabilities
                                            
                                            
                                            78,661,772
                                            
                                            
                                            
                                            38,506,762Series
      A-1 redeemable convertible preferred stock, $0.001 par value; 50,000,000
      shares authorized,181
      and 0 shares issued and outstanding; aggregate liquidation value:
      $1,841,109 and $0, respectively
                                            
                                            
                                            1,579,994
                                            
                                            
                                            
                                            -Commitments
      and contingencies
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -STOCKHOLDERS'
      DEFICIT:Common
      stock, $0.001par value; 500,000,000 shares authorized,499,905,641
      and 429,448,381 issued and outstanding
                                            
                                            
                                            499,906
                                            
                                            
                                            
                                            429,448Additional
      paid-in capital
                                            
                                            
                                            63,944,361
                                            
                                            
                                            
                                            53,459,172Accumulated
      deficit
                                            
                                            
                                            (138,254,284
                                            )
                                            
                                            
                                            (89,817,604
                                            )Total
      stockholders' deficit
                                            
                                            
                                            (73,810,017
                                            )
                                            
                                            
                                            (35,928,984
                                            )TOTAL
      LIABILITIES AND STOCKHOLDERS' DEFICIT
                                            
                                            $
                                            6,431,749
                                            
                                            
                                            $
                                            2,577,778





The
accompanying notes are an integral part of these consolidated financial
statements.


1




ADVANCED
CELL TECHNOLOGY, INC. AND SUBSIDIARY


CONSOLIDATED
STATEMENTS OF OPERATIONS


FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2009 AND 2008


(UNAUDITED)





Three
      Months Ended June 30,
                    
                    
                    Six
      Months Ended June 30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Revenue(License fees
      and royalties)
                    
                    $
                    242,995
                    
                    
                    $
                    174,388
                    
                    
                    $
                    536,971
                    
                    
                    $
                    298,731Cost
      of Revenue
                    
                    
                    77,347
                    
                    
                    
                    120,186
                    
                    
                    
                    216,099
                    
                    
                    
                    310,914Gross
      profit
                    
                    
                    165,648
                    
                    
                    
                    54,202
                    
                    
                    
                    320,872
                    
                    
                    
                    (12,183
                    )Operating
      expenses:Research
      and development
                    
                    
                    1,138,258
                    
                    
                    
                    2,786,870
                    
                    
                    
                    1,574,865
                    
                    
                    
                    6,754,422Grant
      reimbursements
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (136,840
                    )
                    
                    
                    (105,169
                    )General
      and administrative expenses
                    
                    
                    760,556
                    
                    
                    
                    1,840,116
                    
                    
                    
                    1,507,634
                    
                    
                    
                    3,565,938Loss
      on settlement of litigation
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    4,793,949
                    
                    
                    
                    -Total
      operating expenses
                    
                    
                    1,898,814
                    
                    
                    
                    4,626,986
                    
                    
                    
                    7,739,608
                    
                    
                    
                    10,215,191Loss
      from operations
                    
                    
                    (1,733,166
                    )
                    
                    
                    (4,572,784
                    )
                    
                    
                    (7,418,736
                    )
                    
                    
                    (10,227,374
                    )Non-operating
      income (expense):Interest
      income
                    
                    
                    137
                    
                    
                    
                    1,317
                    
                    
                    
                    1,758
                    
                    
                    
                    8,166Interest
      expense and late fees
                    
                    
                    (953,089
                    )
                    
                    
                    (8,540,674
                    )
                    
                    
                    (1,535,910
                    )
                    
                    
                    (12,747,290
                    )Charges
      related to issuance of 2008 convertible debentures
                    
                    
                    -
                    
                    
                    
                    (531,769
                    )
                    
                    
                    -
                    
                    
                    
                    (1,217,342
                    )Income
      related to repricing of 2006 and 2007 convertible debentures and
      warrants
                    
                    
                    -
                    
                    
                    
                    847,588
                    
                    
                    
                    -
                    
                    
                    
                    847,588Adjustments
      to fair value of derivatives
                    
                    
                    (26,701,374
                    )
                    
                    
                    7,206,905
                    
                    
                    
                    (37,542,986
                    )
                    
                    
                    8,227,176Losses
      attributable to equity method investment
                    
                    
                    (49,312
                    )
                    
                    
                    -
                    
                    
                    
                    (144,438
                    )
                    
                    
                    -Loss
      on modification of debentures
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (1,796,368
                    )
                    
                    
                    -Total
      non-operating income (expense)
                    
                    
                    (27,703,638
                    )
                    
                    
                    (1,016,633
                    )
                    
                    
                    (41,017,944
                    )
                    
                    
                    (4,881,702
                    )Loss
      before income tax
                    
                    
                    (29,436,804
                    )
                    
                    
                    (5,589,417
                    )
                    
                    
                    (48,436,680
                    )
                    
                    
                    (15,109,076
                    )Income
      tax
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Net
      loss
                    
                    $
                    (29,436,804
                    )
                    
                    $
                    (5,589,417
                    )
                    
                    $
                    (48,436,680
                    )
                    
                    $
                    (15,109,076
                    )Weighted
      average shares outstanding :Basic
                    
                    
                    499,905,641
                    
                    
                    
                    153,438,333
                    
                    
                    
                    476,926,873
                    
                    
                    
                    124,654,606Diluted
                    
                    
                    499,905,641
                    
                    
                    
                    153,438,333
                    
                    
                    
                    476,926,873
                    
                    
                    
                    124,654,606Loss
      per share:Basic
                    
                    $
                    (0.06
                    )
                    
                    $
                    (0.04
                    )
                    
                    $
                    (0.10
                    )
                    
                    $
                    (0.12
                    )Diluted
                    
                    $
                    (0.06
                    )
                    
                    $
                    (0.04
                    )
                    
                    $
                    (0.10
                    )
                    
                    $
                    (0.12
                    )





The
accompanying notes are an integral part of these consolidated financial
statements.


2





ADVANCED
CELL TECHNOLOGY, INC. AND SUBSIDIARY


CONSOLIDATED
STATEMENT OF STOCKHOLDERS' DEFICIT


FOR
THE SIX MONTHS ENDED JUNE 30 2009


(UNAUDITED)




Additional
                  
                  
                  
                  
                  
                  TotalCommon
      Stock
                  
                  
                  Paid-in
                  
                  
                  Accumulated
                  
                  
                  Stockholders'Shares
                  
                  
                  Amount
                  
                  
                  Capital
                  
                  
                  Deficit
                  
                  
                  DeficitBalance
      December 31, 2008
                  
                  
                  429,448,381
                  
                  
                  $
                  429,448
                  
                  
                  $
                  53,459,172
                  
                  
                  $
                  (89,817,604
                  )
                  
                  $
                  (35,928,984
                  )Convertible
      debentures conversions
                  
                  
                  6,176,413
                  
                  
                  
                  6,177
                  
                  
                  
                  325,625
                  
                  
                  
                  -
                  
                  
                  
                  331,802Option
      compensation charges
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  193,697
                  
                  
                  
                  
                  
                  
                  
                  193,697Issuance
      of stock in settlement of accounts payable
                  
                  
                  39,380,847
                  
                  
                  
                  39,381
                  
                  
                  
                  5,259,767
                  
                  
                  
                  
                  
                  
                  
                  5,299,148Issuance
      of stock in payment of debt issue costs for Series A-1 redeemable
      convertible preferred stock
                  
                  
                  24,900,000
                  
                  
                  
                  24,900
                  
                  
                  
                  4,706,100
                  
                  
                  
                  
                  
                  
                  
                  4,731,000Net
      loss for the six months ended June 30, 2009
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (48,436,680
                  )
                  
                  
                  (48,436,680
                  )Balance
      June 30, 2009
                  
                  
                  499,905,641
                  
                  
                  $
                  499,906
                  
                  
                  $
                  63,944,361
                  
                  
                  $
                  (138,254,284
                  )
                  
                  $
                  (73,810,017
                  )





The
accompanying notes are an integral part of these consolidated financial
statements


3




ADVANCED
CELL TECHNOLOGY, INC. AND SUBSIDIARY


CONSOLIDATED
STATEMENTS OF CASH FLOWS


FOR
THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008


(UNAUDITED)





Six
      Months Ended June 30,2009
                      
                      
                      2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                      
                      $
                      (48,436,680
                      )
                      
                      $
                      (15,109,076
                      )Adjustments
      to reconcile net loss to net cashused
      in operating activities:Depreciation
      and amortization
                      
                      
                      232,752
                      
                      
                      
                      211,893Write-off
      of uncollectible accounts receivable
                      
                      
                      -
                      
                      
                      
                      25,000Amortization
      of deferred charges
                      
                      
                      91,099
                      
                      
                      
                      433,413Amortization
      of deferred revenue
                      
                      
                      (536,971
                      )
                      
                      
                      (311,160
                      )Redeemable
      preferred stock dividend accrual
                      
                      
                      31,348
                      
                      
                      
                      -Stock
      based compensation
                      
                      
                      193,697
                      
                      
                      
                      645,602Amortization
      of deferred issuance costs
                      
                      
                      289,790
                      
                      
                      
                      2,896,649Amortization
      of discounts
                      
                      
                      10,230
                      
                      
                      
                      9,525,843Loss
      on modification of debentures
                      
                      
                      1,796,368
                      
                      
                      
                      -Adjustments
      to fair value of derivatives
                      
                      
                      37,542,986
                      
                      
                      
                      (8,227,176
                      )Charges
      related to issuance of 2008 convertible debentures
                      
                      
                      -
                      
                      
                      
                      1,217,342Repricing
      of 2006 and 2007 convertible debentures and warrants
                      
                      
                      -
                      
                      
                      
                      (847,588
                      )Shares
      of common stock issued for services
                      
                      
                      -
                      
                      
                      
                      8,616Warrants
      issued for consulting services
                      
                      
                      -
                      
                      
                      
                      155,281Charges
      related to settlement of anti-dilution provision
                      
                      
                      -
                      
                      
                      
                      15,581Issuance
      of note for services received
                      
                      
                      -
                      
                      
                      
                      750,000Shares
      of common stock issued for financing costs
                      
                      
                      -
                      
                      
                      
                      316,059Non-cash
      rent expense
                      
                      
                      -
                      
                      
                      
                      254,231Forfeiture
      of rent deposits
                      
                      
                      -
                      
                      
                      
                      88,504Loss
      on settlement of litigation
                      
                      
                      4,793,949
                      
                      
                      
                      -Loss
      attributable to investment in joint venture
                      
                      
                      144,438
                      
                      
                      
                      -Amortization
      of deferred joint venture obligations
                      
                      
                      (83,185
                      )
                      
                      
                      -(Increase)
      / decrease in assets:Accounts
      receivable
                      
                      
                      261,504
                      
                      
                      
                      (4,767
                      )Prepaid
      expenses
                      
                      
                      (13,990
                      )
                      
                      
                      (39,192
                      )Increase
      / (decrease) in current liabilities:Accounts
      payable and accrued expenses
                      
                      
                      (2,408,138
                      )
                      
                      
                      3,785,714Accrued
      default interest
                      
                      
                      1,109,607
                      
                      
                      
                      4,813Deferred
      revenue
                      
                      
                      3,050,000
                      
                      
                      
                      450,000Net
      cash used in operating activities
                      
                      
                      (1,931,196
                      )
                      
                      
                      (3,754,418
                      )CASH
      FLOWS FROM INVESTING ACTIVITIESPurchases
      of property and equipment
                      
                      
                      (3,388
                      )
                      
                      
                      (168,549
                      )Payment
      of deposits
                      
                      
                      (2,170
                      )
                      
                      
                      -Net
      cash used in investing activities
                      
                      
                      (5,558
                      )
                      
                      
                      (168,549
                      )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from issuance of convertible notes
                      
                      
                      -
                      
                      
                      
                      2,812,432Payments
      on notes and leases
                      
                      
                      -
                      
                      
                      
                      (18,650
                      )Payment
      for issuance costs on note payable
                      
                      
                      -
                      
                      
                      
                      (3,660
                      )Proceeds
      from issuance of Series A-1 redeemable convertible preferred
      stock
                      
                      
                      1,809,761
                      
                      
                      
                      -Net
      cash provided by financing activities
                      
                      
                      1,809,761
                      
                      
                      
                      2,790,122NET
      DECREASE IN CASH AND CASH EQUIVALENTS
                      
                      
                      (126,993
                      )
                      
                      
                      (1,132,845
                      )CASH
      AND CASH EQUIVALENTS, BEGINNING BALANCE
                      
                      
                      816,904
                      
                      
                      
                      1,166,116CASH
      AND CASH EQUIVALENTS, ENDING BALANCE
                      
                      $
                      689,911
                      
                      
                      $
                      33,271CASH
      PAID FOR:Interest
                      
                      $
                      -
                      
                      
                      $
                      2,504Income
      taxes
                      
                      $
                      514
                      
                      
                      $
                      -SUPPLEMENTAL
      DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:Issuance
      of 45,030,046 shares of common stock in redemption of convertible
      debentures
                      
                      $
                      -
                      
                      
                      $
                      4,634,221Issuance
      of 6,176,413 and 38,100,654 shares of common stock in conversion of
      convertible debentures
                      
                      $
                      331,802
                      
                      
                      $
                      5,915,442Issuance
      of 24,900,000 shares of common stock in payment of convertible preferred
      stock issuance costs
                      
                      $
                      4,731,000
                      
                      
                      $
                      -Issuance
      of 39,380,847 shares of common stock in settlement of
      litigation
                      
                      $
                      5,299,148
                      
                      
                      $
                      -Issuance
      of 70,503 shares of common stock to settle an anti-dilution provision
      feature ofconvertible
      debenture
                      
                      $
                      -
                      
                      
                      $
                      15,581Issuance
      of 1,200,000 shares of common stock upon cash-less exercise of employee
      stock options
                      
                      $
                      -
                      
                      
                      $
                      60,000





The
accompanying notes are an integral part of these consolidated financial
statements.


4




ADVANCED
CELL TECHNOLOGY, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 June
30, 2009
  1.
        ORGANIZATIONAL
MATTERS
 
 Organization
and Nature of Business
  Advanced
Cell Technology, Inc. (the “Company”) is a biotechnology company, incorporated
in the state of Delaware, focused on developing and commercializing human
embryonic and adult stem cell technology in the emerging fields of regenerative
medicine. Principal activities to date have included obtaining financing,
securing operating facilities, and conducting research and development. The
Company has no therapeutic products currently available for sale and does not
expect to have any therapeutic products commercially available for sale for a
period of years, if at all. These factors indicate that the Company’s ability to
continue its research and development activities is dependent upon the ability
of management to obtain additional financing as required.
  Going
Concern
  As
reflected in the accompanying financial statements, the Company has losses from
operations, negative cash flows from operations, a substantial stockholders’
deficit and current liabilities exceed current assets. The Company may thus not
be able to continue as a going concern and fund cash requirements for operations
through the next 12 months with current cash reserves. As discussed below, the
Company was able to raise additional cash during the first six months of
2009.  Notwithstanding success in raising capital, there continues to be
substantial doubt about the Company’s ability to continue as a going
concern.
  In view
of the matters described in the preceding paragraph, recoverability of a major
portion of the recorded asset amounts shown in the accompanying consolidated
balance sheets is dependent upon continued operations of the Company, which, in
turn, is dependent upon the Company’s ability to continue to raise capital and
ultimately generate positive cash flows from operations. The financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or amounts and classifications of
liabilities that might be necessary should the Company be unable to continue its
existence.
  Management
has taken or plans to take the following steps that it believes will be
sufficient to provide the Company with the ability to continue in
existence:
  ·
                  Between
      September 29, 2008 and January 20, 2009, the Company settled certain past
      due accounts payable by the issuance of shares of its common stock. In
      aggregate, the Company settled $1,108,673 in accounts payable through the
      issuance of 260,116,283 shares of its common
  stock.
 
 ·
                On
      December 18, 2008, the Company entered into a license agreement with an
      Ireland-based investor, Transition Holdings Inc. (“Transition”), for
      certain of its non-core technology. Under the agreement, Transition agreed
      to acquire a license to the technology for $3.5 million in cash. Through
      December 31, 2008, the Company had received $2 million in cash under this
      agreement. During the six months ended June 30, 2009, the Company received
      $1.5 million in cash under this agreement. The Company expects to apply
      the proceeds towards its retinal epithelium (“RPE”) cells program. See
      Note 3.
  5
  ·
                On
      March 30, 2009, the Company entered into a license agreement with CHA Bio
      & Diostech Co., Ltd. (“CHA”) under
      which the Company will license its retinal pigment epithelium (“RPE”)
      technology, for the treatment of diseases of the eye, to CHA for
      development and commercialization exclusively in Korea. The Company is
      eligible to receive up to a total of $1.9 million in fees based upon the
      parties achieving certain milestones, including the Company making an IND
      submission to the US FDA to commence clinical trials in humans using the
      technology. The Company received an up-front fee under the license in the
      amount of $1,100,000 during the second quarter of 2009. Under the
      agreement, CHA will incur all of the costs associated with the RPA
      clinical trials in Korea. The agreement is part of continuing cooperation
      and collaboration between the two companies. See Note
  3.
 
 ·
                On
      March 11, 2009, the Company entered into a $5 million credit facility
      (“Facility”) with a life sciences fund. Under the agreement, the proceeds
      from the Facility must be used exclusively for the Company to file an
      investigational new drug (“IND”) for its retinal pigment epithelium
      (“RPE”) program, and will allow the Company to complete both Phase I and
      Phase II studies in humans. An IND is required to commence clinical
      trials. Under the terms of the agreement, the Company may draw down funds,
      as needed for clinical development of the RPE program, from the investor
      through the issuance of Series A-1 redeemable convertible preferred stock.
      The preferred stock pays dividends, in kind of preferred stock, at an
      annual rate of 10%, matures in four years from the initial issuance date,
      and is convertible into common stock at $0.75 per share. As of August 10,
      2009, the Company has drawn down approximately $2,169,000 on this
      facility. See Note 11.
 
 ·
                On
      May 13, 2009, the Company entered into another license agreement with CHA
      under which the Company will license its proprietary “single blastomere
      technology,” which has the potential to generate stable cell lines,
      including RPE for the treatment of diseases of the eye, for development
      and commercialization exclusively in Korea. The Company received an
      upfront license fee of $300,000. See Note
3.
 
 ·
                On
      July 29, 2009, the Company entered into a consent, amendment and exchange
      agreement with holders of the Company’s outstanding convertible debentures
      and warrants, which were issued in private placements to the 2005, 2006,
      2007 and 2008 debentures. The Company agreed to issue to each debenture
      holder in exchange for the holder’s debenture an amended and restated
      debenture in a principle amount equal to the principal amount of the
      holder’s debenture times 1.35 minus any interest paid thereon. The
      conversion price under the amended and restated debentures was reduced to
      $0.10, subject to certain customary anti-dilution adjustments. The
      maturity date under the amended and restated debentures was extended until
      December 30, 2010. The amended and restated debentures bear interest at
      12% per annum. Further, the Company agreed to issue to each holder in
      exchange for the holder’s warrant an amended and restated warrant, which
      exercise price was reduced to $0.10, subject to certain customary
      anti-dilution adjustments. The termination date under the amended and
      restated warrants was extended until June 30, 2014. Simultaneously with
      the signing of this agreement, the Company and the debenture holders
      entered into a standstill and forbearance agreement, whereby the debenture
      holders agreed to forbear from exercising their rights and remedies under
      the original debentures and transaction
  documents.
 
 ·
                Management
      anticipates raising additional future capital from its current convertible
      debenture holders, or other financing sources, that will be used to fund
      any capital shortfalls. The terms of any financing will likely be
      negotiated based upon current market terms for similar financings. No
      commitments have been received for additional investment and no assurances
      can be given that this financing will ultimately be
    completed.
  ·
                Management
      has focused its scientific operations on product development in order to
      accelerate the time to market products which will ultimately generate
      revenues. While the amount or timing of such revenues cannot be
      determined, management believes that focused development will ultimately
      provide a quicker path to revenues, and an increased likelihood of raising
      additional financing.
  6
 
 ·
              Management
      will continue to pursue licensing opportunities of the Company’s extensive
      intellectual property portfolio.
  2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  Basis of
Presentation —The accompanying consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States of America (“GAAP”).
  Principles of
Consolidation —The accounts of the Company and its wholly-owned
subsidiary Mytogen, Inc. (“Mytogen”) are included in the accompanying
consolidated financial statements. All intercompany balances and transactions
were eliminated in consolidation.
 
 Segment
Reporting —SFAS No. 131, “Disclosure about Segments of an Enterprise and
Related Information” requires use of the “management approach” model for segment
reporting. The management approach model is based on the way a company’s
management organizes segments within the company for making operating decisions
and assessing performance. The Company determined it has one operating segment.
Disaggregation of the Company’s operating results is impracticable, because the
Company’s research and development activities and its assets overlap, and
management reviews its business as a single operating segment. Thus, discrete
financial information is not available by more than one operating
segment.
  Use of
Estimates —These consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
and, accordingly, require management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Specifically, the Company’s management has estimated
variables used to calculate the Black-Scholes option pricing model used to value
derivative instruments as discussed below under “Fair Value Measurements”. In
addition, management has estimated the expected economic life and value of the
Company’s licensed technology, the Company’s net operating loss for tax
purposes, share-based payments for compensation to employees, directors,
consultants and investment banks, and the useful lives of the Company’s fixed
assets and its accounts receivable allowance. Actual results could differ from
those estimates.
  Reclassifications
—Certain prior year financial statement balances have been reclassified to
conform to the current year presentation. These reclassifications had no effect
on the recorded net loss.
  Cash and Cash
Equivalents —Cash equivalents are comprised of certain highly liquid
investments with maturities of three months or less when purchased. The Company
maintains its cash in bank deposit accounts, which at times, may exceed
federally insured limits. The Company has not experienced any losses related to
this concentration of risk. As of June 30, 2009 and December 31, 2008, the
Company had deposits in excess of federally-insured limits totaling $284,269 and
$655,074, respectively. The Company has not experienced any losses in such
accounts.
 
 Accounts
Receivable —The Company periodically assesses its accounts receivable for
collectability on a specific identification basis. Past due status on accounts
receivable is based on contractual terms. If collectability of an account
becomes unlikely, the Company records an allowance for that doubtful account.
Once the Company has exhausted efforts to collect, management writes off the
account receivable against the allowance it has already created. The Company
does not require collateral for its trade accounts receivable.
  Property and
Equipment — The Company records its property and equipment at historical
cost. The Company expenses maintenance and repairs as incurred. Upon disposition
of property and equipment, the gross cost and accumulated depreciation are
written off and the difference between the proceeds and the net book value is
recorded as a gain or loss on sale of assets. In the case of certain assets
acquired under capital leases, the assets are recorded net of imputed interest,
based upon the net present value of future payments. Assets under capital lease
are pledged as collateral for the related lease.
  7
  The
Company provides for depreciation over the assets’ estimated useful lives as
follows:
 
 Machinery
      & equipment
                
                4
      yearsComputer
      equipment
                
                3
      yearsOffice
      furniture
                
                4
      yearsLeasehold
      improvements
                
                Lesser
      of lease life or economic lifeCapital
      leases
                
                Lesser
      of lease life or economic
life
 
 Equity Method
Investment — The Company follows Accounting Principles Board Opinion No.
18 The Equity Method of
Accounting for Investments in Common Stock   (“APB No. 18”) in
accounting for its investment in the joint venture. In the event the Company’s
share of the joint venture’s net losses reduces the Company’s investment to
zero, the Company will discontinue applying the equity method and will not
provide for additional losses unless the Company has guaranteed obligations of
the joint venture or is otherwise committed to provide further financial support
for the joint venture. If the joint venture subsequently reports net income, the
Company will resume applying the equity method only after its share of that net
income equals the share of net losses not recognized during the period the
equity method was suspended.
  Deferred Issuance
Costs —Payments, either in cash or share-based payments, made in
connection with the sale of debentures are recorded as deferred debt issuance
costs and amortized using the effective interest method over the lives of the
related debentures. The weighted average amortization period for deferred debt
issuance costs is 48 months.
  Intangible and
Long-Lived Assets — The Company follows Statement of Financial Accounting
Standards (“FAS”) No. 144, “Accounting for Impairment of Disposal of
Long-Lived Assets,” which established a “primary asset” approach to determine
the cash flow estimation period for a group of assets and liabilities that
represents the unit of accounting for a long-lived asset to be held and used.
Long-lived assets to be held and used are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The carrying amount of a long-lived asset is not
recoverable if it exceeds the sum of the undiscounted cash flows expected to
result from the use and eventual disposition of the asset. Long-lived assets to
be disposed of are reported at the lower of carrying amount or fair value less
cost to sell. During the six months ended June 30, 2009 and 2008, no impairment
loss was recognized.
  Fair Value
Measurements — For certain financial instruments, including accounts
receivable, accounts payable, accrued expenses, interest payable, advances
payable and notes payable, the carrying amounts approximate fair value due to
their relatively short maturities.
 
 Emerging
Issues Task Force (“EITF”) No. 00-19 “Accounting for Derivative Financial
Instruments Indexed to and Potentially Settled in, a Company’s Own Stock” (“EITF
00-19”), provides a criteria for determining whether freestanding contracts that
are settled in a company’s own stock, including common stock options and
warrants, should be designated as either an equity instrument, an asset or as a
liability under SFAS No. 133 “Accounting for Derivative Instruments
and Hedging Activities.” Under the provisions of EITF 00-19, a contract
designated as an asset or a liability must be carried at fair value on a
company’s balance sheet, with any changes in fair value recorded in a company’s
results of operations.  Using the criteria in EITF 00-19, the Company
has determined that its outstanding options, warrants, and embedded derivative
liabilities require liability accounting and records the fair values as
warrant and option derivatives.
 
 On
January 1, 2008, the Company adopted FAS No. 157, “Fair Value Measurements”
(“FAS 157”). FAS 157 defines fair value, and establishes a three-level valuation
hierarchy for disclosures of fair value measurement that enhances disclosure
requirements for fair value measures. The carrying amounts reported in the
consolidated balance sheets for receivables and current liabilities each qualify
as financial instruments and are a reasonable estimate of their fair values
because of the short period of time between the origination of such instruments
and their expected realization and their current market rate of interest. The
three levels of valuation hierarchy are defined as follows:
  8
  ·
              Level
      1 inputs to the valuation methodology are quoted prices for identical
      assets or liabilities in active
markets.
 
 ·
              Level
      2 inputs to the valuation methodology include quoted prices for similar
      assets and liabilities in active markets, and inputs that are observable
      for the asset or liability, either directly or indirectly, for
      substantially the full term of the financial
  instrument.
 
 ·
              Level
      3 inputs to the valuation methodology are unobservable and significant to
      the fair value measurement.
  FAS 133,
“Accounting for Derivative Instruments and Hedging Activities” requires
bifurcation of embedded derivative instruments and measurement of fair value for
accounting purposes. In addition, FAS 155, “Accounting for Certain Hybrid
Financial Instruments” requires measurement of fair values of hybrid financial
instruments for accounting purposes. The Company applied the accounting
prescribed in FAS 133 to account for its 2005 Convertible Debenture as described
in Note 9. For practicality in the valuation of the debentures and for ease of
presentation, the Company applied the accounting prescribed in FAS 155 to
account for the 2006, 2007, February 2008, and April 2008 Convertible Debentures
as described below in Notes 5, 6, 7, and 8.
 
 In
determining the appropriate fair value of the debentures, the Company used Level
2 inputs for its valuation methodology. For the periods from January 1, 2008
through June 30, 2008, the Company applied the Black-Scholes models, Binomial
Option Pricing models, Standard Put Option Binomial models and the net present
value of certain penalty amounts to value the debentures and their embedded
derivatives. At December 31, 2008, to achieve greater cost efficiencies, the
Company changed its application of the Income Approach as defined under
paragraph 18 of FAS 157, by applying the Black-Scholes option pricing model in
valuing all debentures and their embedded derivatives. This change did not
materially impact the results of the Company’s valuations of its debentures and
embedded derivatives. The impact of the change in the application of the Income
Approach was approximately 1.4% of the fair value of the Company’s debentures
and their embedded derivatives. FAS 157, paragraph 20 states that the disclosure
provisions of Statement of Financial Accounting Standards No. 154 Accounting Changes and Error
Corrections (“FAS 154”) for a change in accounting estimate are not
required for revisions resulting from a change in a valuation technique or its
application.
 
 Derivative
liabilities are adjusted to reflect fair value at each period end, with any
increase or decrease in the fair value being recorded in results of operations
as adjustments to fair value of derivatives. The effects of interactions between
embedded derivatives are calculated and accounted for in arriving at the overall
fair value of the financial instruments. In addition, the fair values of
freestanding derivative instruments such as warrant and option derivatives are
valued using the Black-Scholes model.
 
 At June
30, 2009, the Company identified the following assets and liabilities that are
required to be presented on the balance sheet at fair value:
  9
  Fair
      Value Measurements atFair
      Value
                  
                  
                  June
      30, 2009As
      of
                  
                  
                  Using Fair Value HierarchyDerivative Liabilities
                  
                  June 30, 2009
                  
                  
                  Level 1
                  
                  
                  Level 2
                  
                  
                  Level 3Conversion
      option - 2005 debenture
                  
                  
                  53,897
                  
                  
                  
                  -
                  
                  
                  
                  53,897
                  
                  
                  
                  -2006
      Convertible debenture and embedded derivatives
                  
                  
                  2,733,345
                  
                  
                  
                  -
                  
                  
                  
                  2,733,345
                  
                  
                  
                  -2007
      Convertible debenture and embedded derivatives
                  
                  
                  17,859,334
                  
                  
                  
                  -
                  
                  
                  
                  17,859,334
                  
                  
                  
                  -February
      2008 Convertible debentures and embedded derivatives
                  
                  
                  1,775,904
                  
                  
                  
                  -
                  
                  
                  
                  1,775,904
                  
                  
                  
                  -April
      2008 Convertible debenture and embedded derivatives
                  
                  
                  8,165,561
                  
                  
                  
                  -
                  
                  
                  
                  8,165,561
                  
                  
                  
                  -Embedded
      derivative liability
                  
                  
                  540,098
                  
                  
                  
                  -
                  
                  
                  
                  540,098
                  
                  
                  
                  -Warrant
      and option derivatives
                  
                  
                  26,334,356
                  
                  
                  
                  -
                  
                  
                  
                  26,334,356
                  
                  
                  
                  -57,462,495
                  
                  
                  
                  -
                  
                  
                  
                  57,462,495
                  
                  
                  
                  -
  For the
three months ended June 30, 2009 and 2008, the Company recognized a gain (loss)
of ($26,701,374) and $7,206,905, respectively, for the changes in the valuation
of the aforementioned liabilities. For the six months ended June 30, 2009 and
2008, the Company recognized a gain (loss) of ($37,542,986) and $8,227,176,
respectively, for the changes in the valuation of the aforementioned
liabilities.
 
 The
Company did not identify any other non-recurring assets and liabilities that are
required to be presented in the consolidated balance sheets at fair value in
accordance with FAS 157.
 
 In
February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities” (“FAS 159”). FAS 159 permits entities to
choose to measure many financial assets and financial liabilities at fair value.
Unrealized gains and losses on items for which the fair value option has been
elected are reported in earnings. FAS 159 is effective as of the beginning of an
entity’s first fiscal year that begins after November 15, 2007. The Company
adopted FAS 159 on January 1, 2008. The Company chose not to elect the option to
measure the fair value of eligible financial assets and
liabilities.
 
 Revenue
Recognition — The Company’s revenues are generated from license and
research agreements with collaborators. Licensing revenue is recognized on a
straight-line basis over the shorter of the life of the license or the estimated
economic life of the patents related to the license. License fee revenue begins
to be recognized in the first full month following the effective date of the
license agreement. Deferred revenue represents the portion of the license and
other payments received that has not been earned. Costs associated with the
license revenue are deferred and recognized over the same term as the revenue.
Reimbursements of research expense pursuant to grants are recorded in the period
during which collection of the reimbursement becomes assured, because the
reimbursements are subject to approval.
  Research and
Development Costs —Research and development costs consist of expenditures
for the research and development of patents and technology, which cannot be
capitalized. The Company’s research and development costs consist mainly of
payroll and payroll related expenses, research supplies and research grants.
Reimbursements of research expense pursuant to grants are recorded in the period
during which collection of the reimbursement becomes assured, because the
reimbursements are subject to approval. Research and development costs are
expensed as incurred.
  Share-Based
Compensation —Effective January 1, 2006, the Company adopted the
fair value recognition provisions of FAS 123(R), using the
modified-prospective transition method. Under this method, stock-based
compensation expense is recognized in the consolidated financial statements for
stock options granted, modified or settled after the adoption date. In
accordance with FAS 123(R), the unamortized portion of options granted
prior to the adoption date is recognized into earnings after adoption. Results
for prior periods have not been restated, as provided for under the
modified-prospective method.
  10
  Under
FAS 123(R), stock-based compensation expense recognized is based on the
value of the portion of share-based payment awards that are ultimately expected
to vest during the period. Based on this, our stock-based compensation is
reduced for estimated forfeitures at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those
estimates.
  The fair
value of each stock option is estimated on the date of grant using the
Black-Scholes option pricing model. No options were granted during the six
months ended June 30, 2009. Assumptions relative to volatility and anticipated
forfeitures are determined at the time of grant with the following weighted
average assumptions used in the three and six months ended June 30,
2008:
 
 Expected
      life in years
                    
                    
                    4.0Volatility
                    
                    
                    148
                    %Risk
      free interest rate
                    
                    
                    2.50
                    %Expected
      dividends
                    
                    NoneExpected
      forfeitures
                    
                    
                    13
                    %
  The
assumptions used in the Black-Scholes models referred to above are based upon
the following data: (1) The expected life of the option is estimated by
considering the contractual term of the option, the vesting period of the
option, the employees’ expected exercise behavior and the post-vesting employee
turnover rate. (2) The expected stock price volatility of the underlying
shares over the expected term of the option is based upon historical share price
data. (3) The risk free interest rate is based on published U.S. Treasury
Department interest rates for the expected terms of the underlying options.
(4) Expected dividends are based on historical dividend data and expected
future dividend activity. (5) The expected forfeiture rate is based on
historical forfeiture activity and assumptions regarding future forfeitures
based on the composition of current grantees.
  In
accordance with FAS 123(R), the benefits of tax deductions in excess of the
compensation cost recognized for options exercised during the period are
classified as financing cash inflows rather than operating cash
inflows.
  Income
Taxes — Deferred income taxes are provided using the liability method
whereby deferred tax assets are recognized for deductible temporary differences
and operating loss and tax credit carryforwards, and deferred tax liabilities
are recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax
bases. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of the changes in tax laws and rates of
the date of enactment.
  When tax
returns are filed, it is highly certain that some positions taken would be
sustained upon examination by the taxing authorities, while others are subject
to uncertainty about the merits of the position taken or the amount of the
position that would be ultimately sustained. The benefit of a tax position is
recognized in the financial statements in the period during which, based on all
available evidence, management believes it is more likely than not that the
position will be sustained upon examination, including the resolution of appeals
or litigation processes, if any. Tax positions taken are not offset or
aggregated with other positions. Tax positions that meet the
more-likely-than-not recognition threshold are measured as the largest amount of
tax benefit that is more than 50 percent likely of being realized upon
settlement with the applicable taxing authority. The portion of the benefits
associated with tax positions taken that exceeds the amount measured as
described above is reflected as a liability for unrecognized tax benefits in the
accompanying balance sheet along with any associated interest and penalties that
would be payable to the taxing authorities upon examination.
  11
 
 Applicable
interest and penalties associated with unrecognized tax benefits are classified
as additional income taxes in the statement of income.
  Net Loss Per
Share —   Earnings per share is calculated in accordance with the
SFAS No. 128, “Earnings Per Share” (“SFAS 128”). Basic earnings per share is
based upon the weighted average number of common shares outstanding. Diluted
earnings per share is based on the assumption that all dilutive convertible
shares and stock options were converted or exercised. Dilution is computed by
applying the treasury stock method. Under this method, options and warrants are
assumed to be exercised at the beginning of the period (or at the time of
issuance, if later), and as if funds obtained thereby were used to purchase
common stock at the average market price during the period.
 
 At June
30, 2009 and 2008, approximately 247,800,000 and 214,976,000 potentially
dilutive shares, respectively, were excluded from the shares used to calculate
diluted earnings per share as their inclusion would be
anti-dilutive.
  Concentrations
and Other Risks —Currently, the Company’s revenues and accounts
receivable are concentrated on a small number of customers. The following table
shows the Company’s concentrations of its revenue for those customers comprising
greater than 10% of total license revenue for the three and six months ended
June 30, 2009 and 2008.
  3
      Months Ended
                    
                    
                    6
      Months EndedJune
      30,
                    
                    
                    June
      30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Genzyme
      Transgenics Corporation
                    
                    
                    13
                    %
                    
                    
                    19
                    %
                    
                    
                    12
                    %
                    
                    
                    22
                    %Exeter
      Life Sciences, Inc.
                    
                    
                    13
                    %
                    
                    
                    18
                    %
                    
                    
                    11
                    %
                    
                    
                    20
                    %Lifeline
      Cell Technology
                    
                    
                    *
                    
                    
                    
                    *
                    
                    
                    
                    *
                    
                    
                    
                    11
                    %Start
      Licensing, Inc.
                    
                    
                    10
                    %
                    
                    
                    14
                    %
                    
                    
                    *
                    
                    
                    
                    17
                    %Terumo
      Corporation
                    
                    
                    10
                    %
                    
                    
                    **
                    
                    
                    
                    19
                    %
                    
                    
                    17
                    %International
      Stem Cell Corporation
                    
                    
                    10
                    %
                    
                    
                    **
                    
                    
                    
                    12
                    %
                    
                    
                    *Transition
      Holdings, Inc.
                    
                    
                    21
                    %
                    
                    
                    **
                    
                    
                    
                    18
                    %
                    
                    
                    **CHA
      Biotech Co., Ltd.
                    
                    
                    10
                    %
                    
                    
                    **
                    
                    
                    
                    *
                    
                    
                    
                    **
  *License
revenue earned during the period was less than 10% of total license
revenue.
 **No
license revenue earned from this customer during the period.
 
 Other
risks include the uncertainty of the regulatory environment and the effect of
future regulations on the Company’s business activities. As the Company is a
biotechnology research and development company, there is also the attendant risk
that someone could commence legal proceedings over the Company’s discoveries.
Acts of God could also adversely affect the Company’s business.
  Recent
Accounting Pronouncements
  In May
2009, the FASB issued Statement of Financial Accounting Standards No. 165,
Subsequent Events (“FAS 165”), which provides guidance to establish general
standards of accounting for and disclosures of events that occur after the
balance sheet date but before financial statements are issued or are available
to be issued. FAS 165 also requires entities to disclose the date through which
subsequent events were evaluated as well as the rationale for why that date was
selected. FAS 165 is effective for interim and annual periods ending after June
15, 2009, and accordingly, the Company adopted this Standard during the second
quarter of 2009. FAS 165 requires that public entities evaluate subsequent
events through the date that the financial statements are issued. Subsequent
events have been evaluated as of the date of this filing and no further
disclosures were required and its adoption did not impact its consolidated
results of operations and financial condition.
  In June 2009, the FASB issued SFAS No.
166 “Accounting for Transfers of Financial Assets” (“SFAS 166”).Statement 166 is a revision to FASB
Statement No. 140,Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities,and will
require more information about transfers of financial assets, including
securitization transactions, and where entities have continuing exposure to the
risks related to transferred financial assets. It eliminates the concept of a
“qualifying special-purpose entity,” changes the requirements for derecognizing
financial assets, and requires additional disclosures. SFAS166 enhances information reported to
users of financial statements by providing greater transparency about transfers
of financial assets and an entity’s continuing involvement in transferred
financial assets. SFAS 166
will be effective at the start of a reporting entity’s first fiscal year
beginning after November 15, 2009. Early application is not permitted. The
Company is currently evaluating the impact of adoption of SFAS 166 on the
accounting for its convertible debt instruments and related warrant
liabilities.
  12
 
 In June
2009, the FASB issued SFAS No. 167 “Amendments to FASB Interpretation No. 46(R)”
(“SFAS 167”). Statement 167 is a revision to FASB Interpretation No. 46 (Revised
December 2003), Consolidation
of Variable Interest Entities, and changes how a reporting entity
determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. The
determination of whether a reporting entity is required to consolidate another
entity is based on, among other things, the other entity’s purpose and design
and the reporting entity’s ability to direct the activities of the other entity
that most significantly impact the other entity’s economic
performance. SFAS 167 will require a reporting entity to provide additional
disclosures about its involvement with variable interest entities and any
significant changes in risk exposure due to that involvement. A reporting entity
will be required to disclose how its involvement with a variable interest entity
affects the reporting entity’s financial statements. SFAS 167 will be effective
at the start of a reporting entity’s first fiscal year beginning after November
15, 2009. Early application is not permitted. The Company is currently
evaluating the impact, if any, of adoption of SFAS 167 on its financial
statements.
 
 In June
2009, the FASB issued Statement of Financial Accounting Standards No. 168, The
FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted
Accounting Principles a Replacement of FASB Statement No. 162 (“FAS 168”). This
Standard establishes the FASB Accounting Standards CodificationTM (the
“Codification”) as the source of authoritative accounting principles recognized
by the FASB to be applied by nongovernmental entities in the preparation of
financial statements in conformity with U.S. GAAP. The Codification does not
change current U.S. GAAP, but is intended to simplify user access to all
authoritative U.S. GAAP by providing all the authoritative literature related to
a particular topic in one place. The Codification is effective for interim and
annual periods ending after September 15, 2009, and as of the effective date,
all existing accounting standard documents will be superseded. The Codification
is effective in the third quarter of 2009, and accordingly, the Quarterly Report
on Form 10-Q for the quarter ending September 30, 2009 and all subsequent public
filings will reference the Codification as the sole source of authoritative
literature.
 
 3.
LICENSE REVENUE
 
 In
connection with the joint venture agreement discussed in Note 4, on December 1,
2008, the Company entered into a license agreement with CHA for the exclusive,
worldwide license to the Hemangioblast Program. Under the agreement, CHA agreed
to acquire the Company’s core technology for an up-front payment of $500,000 in
cash. The Company received $250,000 in December 2008 and the remaining $250,000
in January 2009. The Company has recorded $7,353 and $14,706 in license fee
revenue for the three and six months ended June 30, 2009, respectively, in its
accompanying consolidated statements of operations, and the remainder of the
license fee has been accrued in deferred revenue at June 30, 2009. The Company
is recognizing revenue from this agreement over its 17-year patent useful
life.
 
 On
December 18, 2008, the Company entered into a license agreement with Transition
for certain of its non-core technology. Under the agreement, Transition agreed
to acquire a license to the technology for $3.5 million in cash. The Company
received $2,000,000 during December 2008 and the remaining $1,500,000 during the
six months ended June 30, 2009. The Company expects to apply the proceeds
towards its retinal epithelium (“RPE”) cells program. The Company has recorded
$51,470 and $95,587 in license fee revenue for the three and six months ended
June 30, 2009 in its accompanying consolidated statements of operations, and the
remainder of the license fee has been accrued in deferred revenue at June 30,
2009. The Company is recognizing revenue from this agreement over its 17-year
patent useful life.
 
 On March
30, 2009, the Company entered into a second license agreement with CHA under
which the Company will license its RPE technology, for the treatment of diseases
of the eye, to CHA for development and commercialization exclusively in Korea.
The Company is eligible to receive up to a total of $1.9 million in fees based
upon the parties achieving certain milestones, including the Company making an
IND submission to the US FDA to commence clinical trials in humans using the
technology. The Company received an up-front fee under the license in the amount
of $1,100,000 during the second quarter of 2009. Under the agreement, CHA will
incur all of the costs associated with the RPA clinical trials in Korea. The
Company has recorded $16,176 and $16,176 in license fee revenue for the three
and six months ended June 30, 2009, respectively, in its accompanying
consolidated statements of operations, and the remainder of the license fee has
been accrued in deferred revenue at June 30, 2009. The Company is recognizing
revenue from this agreement over its 17-year patent useful
life.
  13
  On May
13, 2009, the Company entered into a third license agreement with CHA under
which the Company will license its proprietary “single blastomere technology,”
which has the potential to generate stable cell lines, including RPE for the
treatment of diseases of the eye, for development and commercialization
exclusively in Korea. The Company received an upfront license fee of $300,000 on
May 8, 2009. The Company has recorded $1,471 in license fee revenue for the
three months ended June 30, 2009 in its accompanying consolidated statements of
operations, and the remainder of the license fee has been accrued in deferred
revenue at June 30, 2009. The Company is recognizing revenue from this agreement
over its 17-year patent useful life.
 
 4.
INVESTMENT IN JOINT VENTURE
 
 On
December 1, 2008, the Company and CHA Bio & Diostech Co., Ltd . (“CHA”), a leading
Korean-based biotechnology company focused on the development of stem cell
technologies, formed an international joint venture. The new company, Stem Cell
& Regenerative Medicine International, Inc. (“SCRMI”), will develop human
blood cells and other clinical therapies based on the Company’s hemangioblast
program, one of the Company’s core technologies. Under the terms of the
agreement, the Company purchased upfront a 33% interest in the joint venture,
and will receive another 7% interest upon fulfilling certain obligations under
the agreement over a period of 3 years. The Company’s contribution includes (a)
the uninterrupted use of a portion of its leased facility at the Company’s
expense, (b) the uninterrupted use of certain equipment in the leased facility,
and (c) the release of certain of the Company’s research and science personnel
to be employed by the joint venture. In return, for a 67% interest, CHA has
agreed to contribute $150,000 cash and to fund all operational costs in order to
conduct the hemangioblast program.
 
 The
Company has agreed to collaborate with the joint venture in securing grants to
further research and development of its technology. Additionally, SCRMI has
agreed to pay the Company a fee of $500,000 for an exclusive, worldwide license
to the Hemangioblast Program. The Company has recorded $7,353 and $14,706 in
license fee revenue for the three and six months ended June 30, 2009,
respectively, in its accompanying consolidated statements of operations,
and the balance of unamortized license fee of $484,069 has been accrued in
deferred revenue in the accompanying consolidated balance sheet at June 30,
2009.
  Accounting
Principles Board Opinion 18 The Equity Method of Accounting for
Investments in Common Stock (“APB 18”), paragraph 19a requires that the
difference between the cost of an investment and the amount of underlying equity
in net assets of an investee should be accounted for as if the investee were a
consolidated subsidiary. The Company has calculated the difference between the
cost of the investment and the amount of underlying equity in net assets of the
joint venture to be $196,130, based on the Company’s initial cost basis in the
investment of $246,130, less its 33.3% of the initial equity in net assets of
the joint venture of $50,000.  The Company will amortize the $196,130
over the term of the shorter of the equipment usage or lease term (through April
2010, or 17 months from December 1, 2008). The amortization will be applied
against the value of the Company’s investment. Amortization expense for the
three and six months ending June 30, 2009 was $34,612 and $80,762,
respectively.
  The
following table is a summary of key financial data for the joint venture as of
and for the six months ended June 30, 2009:
  Current
      assets
                    
                    $
                    34,434Noncurrent
      assets
                    
                    $
                    516,877Current
      liabilities
                    
                    $
                    271,984Noncurrent
      liabilities
                    
                    $
                    501,683Net
      revenue
                    
                    $
                    13,389Net
      loss
                    
                    $
                    (615,318
                    )
  14
 
 The
following table is a summary of the activity from December 31, 2008 to June 30,
2009 in the Company’s investment in the joint venture:
  Balance,
      December 31, 2008
                    
                    $
                    225,200Losses
      attributable to investment
                    
                    
                    (144,438
                    )Amortization
      of premium
                    
                    
                    (80,762
                    )Balance,
      June 30, 2009
                    
                    $
                    -
  5.
CONVERTIBLE NOTE PAYABLE—APRIL 2008
 
 On April
4, 2008, the Company entered into a Securities Purchase Agreement with
accredited investors for the issuance of an aggregate of $4,038,880 principal
amount of senior secured convertible debentures with an original issue discount
of $820,648 representing approximately 20.32%. The amortizing senior secured
convertible debentures issued at the closing of the 2008 financing will be due
and payable one (1) year from the closing, and will not bear interest. The cash
purchase price excluding refinancing of bridge debt and in-kind payments was
$2,212,432. Refinanced bridge debt consisted of the aggregate $130,000 in
unsecured convertible notes previously issued and sold to PDPI LLC and The
Shapiro Family Trust on March 21, 2008. The net outstanding amount of principal
plus interest of the Notes was converted into the debt within the April 2008
debenture on a dollar-for-dollar basis.  Dr. Shapiro, one of the Company’s
directors, may be deemed the beneficial owner of the securities owned by The
Shapiro Family Trust. The convertible debentures are convertible at the option
of the holders beginning on the six-month anniversary of the effective date into
26,206,333 and 5,396,500 shares of common stock at a fixed conversion price of
$0.15 per share and $0.02 per share, respectively, subject to anti-dilution and
other customary adjustments. The Company has classified the note as short term
in the accompanying consolidated balance sheet as of December 31, 2008. The
debenture contains no restrictions as to the use of the proceeds, and is
intended to fund the Company’s working capital obligations. As of August 10,
2009, the entire debenture balance remains outstanding.
 
 Under the
terms of the agreements, principal amounts owed under the debentures become due
and payable commencing six months following closing of the transaction. At that
time, and each month thereafter, the Company is required to either repay 1/30 of
the outstanding balance owed in common stock at the lesser of the then
conversion price or 80% of the weighted average price for common shares for the
10 trading days prior to the amortization payment date. The debenture agreement
does not limit the number of shares that the Company could be required to
issue.
 
 The note
contains a provision that modifies the conversion rate to $0.15 per common share
and the warrant exercise price to $0.165 per common share, issued to the April
2008 note payable subscribers who are also participants in the 2005, 2006, and
2007 debentures. The Company concluded that the change in conversion price and
warrant exercise price did not constitute a significant change in the nature of
the debt and that the transaction should not be treated as an extinguishment of
that debt.
 
 In
connection with this financing, the Company accrued cash fees to a placement
agent of $20,000 and issued warrants to purchase 26,925,867 shares of Common
Stock at an exercise price of $0.165 per share. The term of the warrants is five
years and is subject to anti-dilution and other customary adjustments. The
initial fair value of the warrants was estimated at $2,587,521 using the
Black-Scholes pricing model. The Company issued warrants to purchase an
aggregate of 4,263,962 shares of common stock of the Company at an exercise
price of $0.165 to T.R. Winston & Company, LLC as consideration for
placement agent services provided in connection with the Debenture. The term of
the warrants is five years and is subject to anti-dilution and other customary
adjustments. The initial fair value of the warrants was estimated at $412,732
using the Black-Scholes pricing model. The total of 31,189,829 warrants were
again valued at $7,398,737 at June 30, 2009 at fair value using the
Black-Scholes model, representing an increase in the fair value of the liability
of $4,205,629 and $6,576,694 during the three and six months ended June 30,
2009, respectively, which was recorded through the results of operations as an
adjustment to fair value of derivatives. The assumptions used in the
Black-Scholes option pricing model at April 4, 2008 for all warrants issued in
connection with this Debenture are as follows: (1) dividend yield of 0%; (2)
expected volatility of 145%, (3) risk-free interest rate of 2.63%, and (4)
expected life of 5.0 years. The assumptions used in the Black-Scholes option
pricing model at June 30, 2009 for all warrants issued in connection with this
Debenture are as follows: (1) dividend yield of 0%; (2) expected volatility of
190%, (3) risk-free interest rate of 1.64%, and (4) expected life of 3.76 years.
Cash fees accrued in the amount of $20,000, the initial fair value of the
original issue discount in the amount of $820,649, and the initial fair value of
the warrant discount in the amount of $3,000,253 were capitalized as debt
issuance costs (cash paid) and debt discounts (original issue discount and
warrant discount), respectively, and were amortized in full during the year
ended December 31, 2008 due to the August 6, 2008 default as discussed
below.
  15
  Under the
terms of the agreement, beginning October 1, 2008, the Company is to amortize
the note resulting in complete repayment by the maturity date. The Company may
make the amortization payment in either cash or equity. If the payment is made
in common stock, the stock will be issued at a price per share equal to the
lesser of (i) the then conversion price, and (ii) 80% of the weighted average
price for common shares for the 10 trading days prior to the amortization
payment date. As of June 30, 2009, no note amortization had occurred and the
note was in default, effective August 6, 2008, as discussed below.
 
 The
agreement entered into provides that the Company will pay certain cash amounts
as liquidated damages in the event that the Company does not maintain an
effective registration statement, or if the Company fails to timely execute
stock trading activity. Additionally, penalties will be incurred by the Company
in the event of potential default conditions.
 
 As long
as any portion of this debenture remains outstanding, unless the holders of at
least 67% in principal amount of the then outstanding debentures otherwise give
prior written consent, the Company is not permitted to (a) guarantee or borrow
any indebtedness, (b) enter into any liens, (c) amend its charter documents in
any manner that materially and adversely affects any rights of the holders, (d)
acquire more than a de minimis number of shares of its common stock equivalents
other than as to conversion shares of warrant shares as permitted or required
and repurchases of common stock or common stock equivalents of departing
officers and directors of the Company, provided that such purchases do not
exceed certain specified amounts, (e) repay any indebtedness, other than the
debentures already issued on a pro-rata basis, other than regularly scheduled
principle payments as such terms are in effect under this debenture, (f) pay
cash dividends or distributions on any equity securities of the Company, (g)
enter into any material transaction with any affiliate of the Company, unless
such transaction is made on an arm’s-length basis, or (h) enter into any
agreement with respect to any of the above.
 
 The
Company has complied with the provisions of FAS 155 “Accounting for Certain
Hybrid Financial Instruments”, and recorded the fair value of the convertible
debentures and related embedded conversion option. The initial fair value of the
debentures and embedded conversion option was valued using a combination of
Binomial and Black-Scholes models, resulting in a fair value of $4,570,649 at
April 4, 2008. As of June 30, 2009, the convertible debenture is convertible at
the option of the holders into a total of 31,602,833 shares, subject to
anti-dilution and other customary adjustments. The excess of $531,769 of this
value over the face value of the note was recorded through the results of
operations as charges related to issuance of April 2008 convertible note
payable. The fair value of the debentures and embedded conversion option was
$8,165,561 at June 30, 2009, which includes the face value of the note of
$4,038,880, plus the $4,126,681 fair value of the embedded conversion option.
The embedded conversion option was valued using the Black-Scholes option pricing
model. The assumptions used in the Black-Scholes option pricing model at June
30, 2009 are as follows: (1) dividend yield of 0%; (2) expected volatility of
190%, (3) risk-free interest rate of 0.17%, and (4) expected life of 0.08 years.
The increase in fair value of the embedded conversion option of $3,623,936 and
$3,622,043 during the three and six months ended June 30, 2009, respectively,
which was recorded through the results of operations as an adjustment to fair
value of derivatives.  Additionally, $477,013 was recorded in loss on
modification of convertible debenture during the six months ended June 30, 2009
as a result of a settlement with a debenture holder in February 2009. See Note
14.
 
 At June
30, 2009, the note and related embedded derivatives outstanding were again
valued at fair value using a binomial option pricing model, resulting in the
changes shown in the following table in the fair values of the respective
liabilities versus the values at December 31, 2008.  The changes were
recorded through the results of operations as an adjustment to fair value of
derivatives.
  16
  June
      30,
                    
                    
                    December
      31,
                    
                    
                    Increase2009
                    
                    
                    2008
                    
                    
                    (Decrease)Principal
      Due
                    
                    $
                    4,038,880
                    
                    
                    $
                    4,038,880
                    
                    
                    $
                    -Fair
      Value
                    
                    $
                    8,165,561
                    
                    
                    $
                    4,066,505
                    
                    
                    $
                    4,099,056
  Interest
expense on the April 2008 debenture for the three months ended June 30, 2009 and
2008 was $181,252 and $817,125, respectively. Interest expense on the April 2008
debenture for the six months ended June 30, 2009 and 2008 was $360,512 and
$817,125, respectively.
 
 On August
6, 2008, the Company issued a moratorium on amortization of all outstanding
debentures. Under the terms of the debenture agreements, the moratorium
constitutes an event of default and thus the debentures all incur default
interest penalties. As a result of the default, the Company has recognized
additional penalty interest, and has recognized the remaining balance of its
debt discounts associated with this note in interest expense, and classified the
entire balance as short term. See Note 10 for the total default interest expense
recognized during the three and six months ended June 30, 2009. Effective July
29, 2009, the default was cured through a forbearance and amendment to the 2005,
2006, 2007 and 2008 debentures. See Note 18 “Subsequent Events” for details of
forbearance and amendment of this debenture.
 
 6.
CONVERTIBLE NOTES PAYABLE—FEBRUARY 2008
  The
Company issued and sold a $600,000 unsecured convertible note dated as of
February 15, 2008 (“Note A”) to JMJ Financial, for a net purchase price of
$500,000 (reflecting a 16.66% original issue discount) in a private placement.
Note A bears interest at the rate of 12% per annum, and is due by February 15,
2010. At any time after the 180th day following the effective date of Note A,
the holder may at its election convert all or part of Note A plus accrued
interest into shares of the Company's common stock at the conversion rate of the
lesser of: (a) $0.38 per share, or (b) 80% of the average of the three lowest
trade prices in the 20 trading days prior to the conversion. Pursuant to the Use
of Proceeds Agreement entered into in connection with the issuance of Note A,
the Company is required to use the proceeds from Note A solely for research and
development dedicated to adult stem cell research.
  Effective
February 15, 2008, in exchange for $1,000,000 in the form of a Secured &
Collateralized Promissory Note (the “JMJ Note”) issued by JMJ Financial to the
Company, the Company issued and sold an unsecured convertible note (“Note B”) to
JMJ Financial in the aggregate principal amount of $1,200,000 or so much as may
be paid towards the balance of the JMJ Note. Note B bears interest at the rate
of 10% per annum, and is due by February 15, 2010. At any time following the
effective date of Note B, the holder may at its election convert all or part of
Note B plus accrued interest into shares of the Company’s common stock at the
conversion rate of the lesser of: (a) $0.38 per share, or (b) 80% of the average
of the three lowest trade prices in the 20 trading days prior to the conversion.
In connection with the issuance of Note B, the Company entered into a Collateral
and Security Agreement dated as of February 15, 2008 with JMJ Financial pursuant
to which the Company granted JMJ Financial a security interest in certain of its
assets securing the JMJ Note. As of June 30, 2009, the Company had drawn down
and received the following amounts under Note B:
  · On March 17, 2008 —
$60,000 for a net purchase price of $50,000 (reflecting a 16.66% original issue
discount).
 · On June 17, 2008 —
$60,000 for a net purchase price of $50,000 (reflecting a 16.66% original issue
discount).
  17
  As long
as any portion of this debenture remains outstanding, unless the holders of at
least 67% in principal amount of the then outstanding debentures otherwise give
prior written consent, the Company is not permitted to (a) guarantee or borrow
any indebtedness, (b) enter into any liens, (c) amend its charter documents in
any manner that materially and adversely affects any rights of the holders, (d)
acquire more than a de minimis number of shares of its common stock equivalents
other than as to conversion shares of warrant shares as permitted or required
and repurchases of common stock or common stock equivalents of departing
officers and directors of the Company, provided that such purchases do not
exceed certain specified amounts, (e) repay any indebtedness, other than the
debentures already issued on a pro-rata basis, other than regularly scheduled
principle payments as such terms are in effect under this debenture, (f) pay
cash dividends or distributions on any equity securities of the Company, (g)
enter into any material transaction with any affiliate of the Company, unless
such transaction is made on an arm’s-length basis, or (h) enter into any
agreement with respect to any of the above.
 
 The
debenture agreement does not limit the number of shares that the Company could
be required to issue. The convertible debenture is convertible at the option of
the holders into a total of 6,000,000 shares of common stock at a conversion
price of $0.12 per share at June 30, 2009, subject to anti-dilution and other
customary adjustments. The conversion options included in Note A and Note B
represent embedded derivative instruments. Accordingly, the Company has complied
with the provisions of FAS 155 “Accounting for Certain Hybrid Financial
Instruments”. The fair values of Note A and Note B and the related embedded
derivatives, valued using a Monte Carlo simulation model, were recorded as of
February 15, 2008. The excess of these values over the face values of Note A and
Note B was recorded through the results of operations as charges related to the
issuance of the February 2008 convertible notes payable. The fair value of the
debentures and embedded conversion options was $1,775,904 at June 30, 2009,
which includes the face value of the debentures of $720,000, plus the $1,055,904
fair value of the embedded conversion options. The embedded conversion options
were valued using the Black-Scholes option pricing model. The assumptions used
in the Black-Scholes option pricing model at June 30, 2009 are as follows: (1)
dividend yield of 0%; (2) expected volatility of 190%, (3) risk-free interest
rate of 0.56%, and (4) expected life of 0.63 years. The increase in fair value
of the embedded conversion option of $245,421 and $18,434 during the three and
six months ended June 30, 2009, respectively, which was recorded through the
results of operations as an adjustment to fair value of
derivatives.
 
 The
following table summarizes the changes in the fair values of the respective
liabilities versus the values at June 30, 2009 and December 31,
2008.
  June
      30,
                      
                      
                      December
      31,
                      
                      
                      Increase2009
                      
                      
                      2008
                      
                      
                      (Decrease)Note
      A:Principal
      Due
                      
                      $
                      600,000
                      
                      
                      $
                      600,000
                      
                      
                      $
                      -Fair
      Value
                      
                      
                      1,479,921
                      
                      
                      
                      1,464,558
                      
                      
                      
                      15,363Note
      B:Principal
      Due
                      
                      $
                      120,000
                      
                      
                      $
                      120,000
                      
                      
                      $
                      -Fair
      Value
                      
                      
                      295,983
                      
                      
                      
                      292,912
                      
                      
                      
                      3,071Total
      Increase (Decrease)
                      
                      
                      
                      
                      
                      
                      $
                      18,434
  Interest
expense on the February 2008 debenture for the three months ended June 30, 2009
and 2008 was $32,311 and $5,006, respectively. Interest expense on the February
2008 debenture for the six months ended June 30, 2009 and 2008 was $64,267 and
$21,881, respectively.
 
 On August
6, 2008, the Company issued a moratorium on amortization of all outstanding
debentures. Under the terms of the debenture agreements, the moratorium
constitutes an event of default and thus the debentures all incur default
interest penalties. As a result of the default, the Company has recognized
additional penalty interest, and has recognized the remaining balance of its
debt discounts associated with this note in interest expense, and classified the
entire balance as short term. See Note 10 for the total default interest expense
recognized during the three and six months ended June 30, 2009. Effective July
29, 2009, the default was cured through a forbearance and amendment to the 2005,
2006, 2007 and 2008 debentures. See Note 18 “Subsequent Events” for details of
forbearance and amendment of this debenture.
  18
  7.
CONVERTIBLE DEBENTURES—2007
  On August
31, 2007, to fund its continuing operations, the Company entered into a
Securities Purchase Agreement with accredited investors for the issuance of an
aggregate of $12,550,000 principal amount of convertible debentures with an
original issue discount of $2,550,000 representing approximately 20.3%. In
connection with the closing of the sale of the debentures, the Company received
gross proceeds of $10,000,000. The convertible debentures are convertible at the
option of the holders into 36,911,765 shares of common stock at a fixed
conversion price of $0.34 per share, subject to anti-dilution and other
customary adjustments. In connection with the Securities Purchase Agreement, the
Company also issued warrants to purchase an aggregate of 54,905,483 shares of
its common stock. The term of the warrants is five years and the exercise price
is $0.38 per share, subject to anti-dilution and other customary adjustments.
The conversion price and warrant exercise price have each been modified for
those subscribers who also participated in the April 2008 convertible note. See
Note 5. The investors have contractually agreed to restrict their ability to
convert the convertible debentures, exercise the warrants and exercise the
additional investment right and receive shares of the Company’s common stock
such that the number of shares of the Company’s common stock held by them and
their affiliates after such conversion or exercise does not exceed 4.99% of the
Company’s then issued and outstanding shares of its common stock.
 
 The April
2008 note (see Note 5) contains a provision that modifies the conversion rate to
$0.15 per common share and the warrant exercise price to $0.165 per common
share, issued to the April 2008 debenture subscribers who are also participants
in the 2007 debentures. The Company concluded that the change in conversion
price and warrant exercise price did not constitute a significant change in the
nature of the debt and that the transaction should not be treated as an
extinguishment of that debt. As a result of the change in the exercise price of
the warrants, 2,399,264 warrants remained at $0.38 exercise price and the
remaining 34,512,501 warrants were adjusted to the $0.165 exercise price as a
result of participation in the April 2008 debenture. The convertible debentures
are convertible at the option of the holders into 1,999,387; 38,471,546; and
14,434,550 shares of common stock at a fixed conversion price of $0.34 per
share, $0.15 per share, and $0.02 per share, respectively, subject to
anti-dilution and other customary adjustments.
  The
agreements entered into provide that the Company will pay certain cash amounts
as liquidated damages in the event that the Company does not maintain an
effective registration statement, or if the Company fails to timely execute
stock trading activity.
  Under the
terms of the agreements, principal amounts owed under the debentures become due
and payable commencing six months following closing of the transaction. At that
time, and each month thereafter, the Company is required to either repay 1/30 of
the outstanding balance owed in common stock at the lesser of $0.34 per share or
80% of the prior ten day’s average closing stock price, immediately preceding
the redemption. The agreements also provide that the Company may force
conversion of outstanding amounts owed under the debentures into common stock,
if the Company has met certain conditions and milestones, and additionally, has
a stock price for 20 consecutive trading days that exceeds 200% of the
conversion price. The debenture agreement does not limit the number of shares
that the Company could be required to issue.
 
 As long
as any portion of this debenture remains outstanding, unless the holders of at
least 67% in principal amount of the then outstanding debentures otherwise give
prior written consent, the Company is not permitted to (a) guarantee or borrow
any indebtedness, (b) enter into any liens, (c) amend its charter documents in
any manner that materially and adversely affects any rights of the holders, (d)
acquire more than a de minimis number of shares of its common stock equivalents
other than as to conversion shares of warrant shares as permitted or required
and repurchases of common stock or common stock equivalents of departing
officers and directors of the Company, provided that such purchases do not
exceed certain specified amounts, (e) pay cash dividends or distributions on any
equity securities of the Company, (f) enter into any material transaction with
any affiliate of the Company, unless such transaction is made on an arm’s-length
basis, or (g) enter into any agreement with respect to any of the
above.
  19
  The
agreement included an embedded conversion option, and the Company has complied
with the provisions of FAS 155 “Accounting for Certain Hybrid Financial
Instruments”, and recorded the fair value of the convertible debentures, and the
related embedded derivatives, as of August 31, 2007. The fair value of the
debentures and embedded conversion option was $17,859,334 at June 30, 2009,
which includes the face value of the debentures of $6,739,215, plus the
$11,120,119 fair value of the embedded conversion option. The embedded
conversion option was valued using the Black-Scholes option pricing model. The
assumptions used in the Black-Scholes option pricing model at June 30, 2009 are
as follows: (1) dividend yield of 0%; (2) expected volatility of 190%, (3)
risk-free interest rate of 0.56%, and (4) expected life of 1.17 years. The
increase in fair value of derivative liabilities of $6,583,530 and $1,518,774
during the three months ended June 30, 2009 and 2008, respectively, which was
recorded through the results of operations as an adjustment to fair value of
derivatives. The increase in fair value of derivative liabilities of $9,078,716
and $1,301,276 during the six months ended June 30, 2009 and 2008, respectively,
which was recorded through the results of operations as an adjustment to fair
value of derivatives. Additionally, $1,319,355 was recorded in loss on
modification of convertible debenture during the six months ended June 30, 2009
as a result of a settlement with a debenture holder in February 2009. See Note
14.
 
 In
connection with this financing, the Company paid cash fees to a placement agent
of $1,001,800 and issued a warrant to purchase 6,328,890 shares of common stock
at an exercise price of $0.38 per share (modified to $0.165 for holders who are
also subscribers of the April 2008 note payable – see Note 5). The initial fair
value of the warrant was estimated at $2,025,000 using the Black-Scholes pricing
model. The broker-dealer warrants were again valued at June 30, 2009 at fair
value using the Black-Scholes model, resulting in an increase (decrease) in the
fair value of the liability for the three months ended June 30, 2009 and 2008 of
$836,921 and ($519,860), respectively, which was recorded through the results of
operations as an adjustment to fair value of derivatives. The increase
(decrease) in the fair value of the liability for the six months ended June 30,
2009 and 2008 was $1,307,074 and ($536,500), respectively. The assumptions used
in the Black-Scholes model at June 30, 2009 are as follows: (1) dividend yield
of 0%; (2) expected volatility of 190%, (3) risk-free interest rate of 1.64%,
and (4) expected life of 3.17 years. Cash fees paid, and the initial fair value
of the warrant, were capitalized on the date of the note, and were amortized in
full during the year ended December 31, 2008 due to the August 6, 2008 default
as discussed below.
  The
following table summarizes the 2007 Convertible Debentures and discounts
outstanding at June 30, 2009 and December 31, 2008:
  June
      30,
                      
                      
                      December
      31,
                      
                      
                      Increase2009
                      
                      
                      2008
                      
                      
                      (Decrease)Principal
      Due
                      
                      $
                      6,739,215
                      
                      
                      $
                      6,984,297
                      
                      
                      $
                      (245,082
                      )Fair
      Value
                      
                      $
                      17,859,334
                      
                      
                      $
                      7,706,344
                      
                      
                      $
                      10,152,990
  Interest
expense on the 2007 debenture for the three months ended June 30, 2009 and 2008
was $302,434 and $4,170,216, respectively. Interest expense on the 2007
debenture for the six months ended June 30, 2009 and 2008 was $535,365 and
$5,817,827, respectively.
 
 On August
6, 2008, the Company issued a moratorium on amortization of all outstanding
debentures. Under the terms of the debenture agreements, the moratorium
constitutes an event of default and thus the debentures all incur default
interest penalties. As a result of the default, the Company has recognized
additional penalty interest, and has recognized the remaining balance of its
debt discounts associated with this note in interest expense, and classified the
entire balance as short term. See Note 10 for the total default interest expense
recognized during the three and six months ended June 30, 2009. Effective July
29, 2009, the default was cured through a forbearance and amendment to the 2005,
2006, 2007 and 2008 debentures. See Note 18 “Subsequent Events” for details of
forbearance and amendment of this debenture.
  20
 
 8.
CONVERTIBLE DEBENTURES—2006
  On
September 6, 2006, to fund its continuing operations, the Company entered into a
Securities Purchase Agreement with accredited investors for the issuance of an
aggregate of $10,981,250 principal amount of convertible debentures with an
original issue discount of $2,231,250 representing approximately 20.3%. In
connection with the closing of the sale of the debentures, the Company received
gross proceeds of $8,750,000. The Company may make the amortization payment in
either cash or equity. If the payment is made in common stock, the stock will be
issued at a price per share equal to the lesser of (i) the then conversion
price, and (ii) 70% of the weighted average price for common shares for the 10
trading days prior to the amortization payment date. The debenture agreement
does not limit the number of shares that the Company could be required to issue.
In connection with the issuance of the debenture, the Company also issued
warrants to purchase 19,064,670 shares of common stock at an initial price of
$0.3168 per share (modified to $0.165 for holders who are also subscribers of
the April 2008 note payable – see Note 5) and exercisable for five years. The
warrants were valued using the Black-Scholes option pricing model. The
assumptions used in the Black-Scholes option pricing model at June 30, 2009 are
as follows: (1) dividend yield of 0%; (2) expected volatility of 190%, (3)
risk-free interest rate of 1.11%, and (4) expected life of 2.19 years. The
increase (decrease) in fair value of the warrants of $2,369,038 and ($1,397,605)
during the three months ended June 30, 2009 and 2008, respectively, which was
recorded through the results of operations as an adjustment to fair value of
derivatives. The increase (decrease) in fair value of the warrants of $3,673,292
and ($1,437,731) during the six months ended June 30, 2009 and 2008,
respectively, which was recorded through the results of operations as an
adjustment to fair value of derivatives.
 
 The
agreement included an embedded conversion option, and the Company has complied
with the provisions of FAS 155 “Accounting for Certain Hybrid Financial
Instruments”, and recorded the fair value of the convertible debentures, and
related embedded derivatives, as of September 6, 2006. The fair value of the
debentures and embedded conversion option was $2,733,345 at June 30, 2009, which
includes the face value of the debentures of $1,854,875, plus the $878,470 fair
value of the embedded conversion option. The embedded conversion option was
valued using the Black-Scholes option pricing model. The assumptions used in the
Black-Scholes option pricing model at June 30, 2009 are as follows: (1) dividend
yield of 0%; (2) expected volatility of 190%, (3) risk-free interest rate of
0.19%, and (4) expected life of 0.19 years. The increase (decrease) in fair
value of derivative liabilities of $569,326 and ($280,948) during the three
months ended June 30, 2009 and 2008, respectively, which was recorded through
the results of operations as an adjustment to fair value of derivatives. The
increase (decrease) in fair value of derivative liabilities of $826,711 and
($695,790) during the six months ended June 30, 2009 and 2008, respectively,
which was recorded through the results of operations as an adjustment to fair
value of derivatives.
 
 As long
as any portion of this debenture remains outstanding, unless the holders of at
least 67% in principal amount of the then outstanding debentures otherwise give
prior written consent, the Company is not permitted to (a) guarantee or borrow
any indebtedness, (b) enter into any liens, (c) amend its charter documents in
any manner that materially and adversely affects any rights of the holders, (d)
acquire more than a de minimis number of shares of its common stock equivalents
other than as to conversion shares of warrant shares as permitted or required
and repurchases of common stock or common stock equivalents of departing
officers and directors of the Company, provided that such purchases do not
exceed certain specified amounts, (e) pay cash dividends or distributions on any
equity securities of the Company, or (f) enter into any agreement with respect
to any of the above.
 
 The April
2008 note (see Note 5) contains a provision that modifies the conversion rate to
$0.15 per common share and the warrant exercise price to $0.165 per common
share, issued to the April 2008 note payable subscribers who are also
participants in the 2006 debentures. The Company concluded that the change in
conversion price and warrant exercise price did not constitute a significant
change in the nature of the debt and that the transaction should not be treated
as an extinguishment of that debt. As a result of the change in the exercise
price of the warrants, 6,572,626 warrants remained at the $0.3168 exercise price
and the remaining 12,492,044 warrants were adjusted to the $0.165 exercise price
upon participation in the April 2008 debenture. The convertible debentures are
convertible at the option of the holders into 3,866,563 and 4,942,035 shares of
common stock at a fixed conversion price of $0.288 per share and $0.15 per
share, respectively, subject to anti-dilution and other customary
adjustments.
  21
  The
following table summarizes the 2006 Convertible Debentures and discounts
outstanding at June 30, 2009 and December 31, 2008:
  June
      30,
                    
                    
                    December
      31,
                    
                    
                    Increase2009
                    
                    
                    2008
                    
                    
                    (Decrease)Principal
      Due
                    
                    $
                    1,854,875
                    
                    
                    $
                    1,941,595
                    
                    
                    $
                    (86,720
                    )Fair
      Value
                    
                    $
                    2,733,345
                    
                    
                    $
                    1,993,354
                    
                    
                    $
                    739,991
  In
connection with this financing, the Company paid cash fees to a broker-dealer of
$525,000 and issued a warrant to purchase 4,575,521 shares of common stock at an
exercise price of $0.3168 per share (modified for holders who are also
subscribers of the April 2008 note payable – see Note 5). The broker-dealer
warrants were again valued at June 30, 2009 at fair value using the
Black-Scholes model. The increase (decrease) in the fair value of the liability
of approximately $553,071 and ($1,397,605) for the three months ended June 30,
2009 and 2008, respectively, was recorded through the results of operations as
an adjustment to fair value of derivatives. The increase (decrease) in the fair
value of the liability of approximately $846,542 and ($1,478,336) for the six
months ended June 30, 2009 and 2008, respectively, was recorded through the
results of operations as an adjustment to fair value of derivatives. The
assumptions used in the Black-Scholes model at June 30, 2009 are as follows: (1)
dividend yield of 0%; (2) expected volatility of 190%, (3) risk-free interest
rate of 1.11%, and (4) expected life of approximately 2.25 years. Cash fees
paid, and the initial fair value of the warrant, were capitalized on the date of
the note, and were amortized in full during the year ended December 31, 2008 due
to the August 6, 2008 default as discussed below.
  Interest
expense on the 2006 debenture for the three months ended June 30, 2009 and 2008
was $83,241 and $2,880,835, respectively. Interest expense on the 2006 debenture
for the six months ended June 30, 2009 and 2008 was $142,150 and $4,893,878,
respectively.
 
 On August
6, 2008, the Company issued a moratorium on amortization of all outstanding
debentures. Under the terms of the debenture agreements, the moratorium
constitutes an event of default and thus the debentures all incur default
interest penalties. As a result of the default, the Company has recognized
additional penalty interest, and has recognized the remaining balance of its
debt discounts associated with this note in interest expense, and classified the
entire balance as short term. See Note 10 for the total default interest expense
recognized during the three and six months ended June 30, 2009. Effective July
29, 2009, the default was cured through a forbearance and amendment to the 2005,
2006, 2007 and 2008 debentures. See Note 18 “Subsequent Events” for details of
forbearance and amendment of this debenture.
  9.
CONVERTIBLE DEBENTURES—2005
  On
September 15, 2005, to fund its continuing operations, the Company entered into
a Securities Purchase Agreement with accredited investors for the issuance of an
aggregate of $22,276,250 principal amount of convertible debentures with an
original issue discount of $4,526,250 representing approximately 20.3%. In
connection with the closing of the sale of the debentures, the Company received
gross proceeds of $17,750,000. The Company may make the amortization payment in
either cash or equity, beginning six months from the closing date of this
debenture. If the payment is made in common stock, the stock will be issued at a
price per share equal to the lesser of (i) the then conversion price, and (ii)
85% of the weighted average price for common shares for the 10 trading days
prior to the amortization payment date. The debenture agreement does not limit
the number of shares that the Company could be required to issue.
  The
agreement included a an embedded conversion option that required separate
valuation in accordance with the requirements of FAS 133, EITF –00-27 and
related accounting literature. The fair value at June 30, 2009 of the derivative
for the conversion feature was valued as an American call option using the
Black-Scholes option pricing model with the following inputs: (1) closing stock
price from $0.25 (2) exercise price equal to the $0.15 and $0.34 conversion
prices (3) volatility of 190% (4) risk-free interest rate of 0.56%, and (5)
expected life of 0.50 years.
  22
  During
the three months ended June 30, 2009 and 2008, respectively, an increase
(decrease) in the fair value of the embedded derivative amounts of approximately
$33,954 and ($79,309), respectively, was recorded through results of operations
as adjustment to fair value of derivatives. During the six months ended June 30,
2009 and 2008, respectively, an increase (decrease) in the fair value of the
embedded derivative amounts of approximately $49,822 and ($168,857),
respectively, was recorded through results of operations as adjustment to fair
value of derivatives.
  In
connection with this financing, we paid cash fees to a broker-dealer of
$1,065,000 and issued a warrant to purchase 1,623,718 shares of Common Stock at
an exercise price of $0.165 per share. The fair value of the warrant as of June
30, 2009 was estimated at $354,801 using the Black-Scholes pricing model. The
assumptions used in the Black-Scholes model are as follows: (1) dividend
yield of 0%; (2) expected volatility of 190%, (3) risk-free interest
rate of 1.11%, and (4) expected life of 2.21 years. Cash fees paid, and the
fair value of the warrant, have been capitalized as debt issuance costs and are
being amortized over 36 months, and as redemptions occur the Company writes
off the proportional amount of the original deferred issuance cost to interest
expense.
  In
January 2007, the Company’s Board of Directors agreed to reduce the
exercise price of the warrants issued in connection with the 2005 debentures to
$0.95 per share and to reduce the conversion price of the debentures to $0.90
per share. The conversion price and warrant exercise price have each been
further modified in April 2008 for those subscribers who also participated in
the April 2008 convertible note. See Note 5.
 
 Anti-dilution
Impact
  As a
result of the 2007 and April 2008 Financings, described more fully in Notes 5
and 7, the exercise prices of certain of the warrants issued in connection with
the 2005 Financing were automatically diluted down to $0.34 and $0.165. The
result of this was to impact both the number and price of the original warrants
and replacement warrants issued to both the investors and the
brokers.
  The
number of original warrants issued to investors totaled 2,335,005. The warrants
were again valued at June 30, 2009 at fair value using the Black-Scholes model.
The increase (decrease) in the fair value of the liability of approximately
$257,479 and ($141,407) for the three months ended June 30, 2009 and 2008,
respectively, was recorded through the results of operations as an adjustment to
fair value of derivatives. The increase (decrease) in the fair value of the
liability of approximately $368,033 and ($156,014) for the six months ended June
30, 2009 and 2008, respectively, was recorded through the results of operations
as an adjustment to fair value of derivatives. The assumptions used in the
Black-Scholes model to value the warrants at June 30, 2009 were as follows:
(1) dividend yield of 0%; (2) expected volatility of 190%,
(3) risk-free interest rate of 0.56%, and (4) expected life of
1.0 years.
  The new
number of replacement warrants issued to investors and brokers totaled
12,689,966. The warrants were again valued at June 30, 2009 at fair value using
the Black-Scholes model. The increase (decrease) in the fair value of the
liability of approximately $1,583,911 and ($912,776) for the three months ended
June 30, 2009 and 2008, respectively, was recorded through the results of
operations as an adjustment to fair value of derivatives. The increase
(decrease) in the fair value of the liability of approximately $2,427,804 and
($956,978) for the six months ended June 30, 2009 and 2008, respectively, was
recorded through the results of operations as an adjustment to fair value of
derivatives. The assumptions used in the Black-Scholes model at June 30,
2009 are as follows: (1) dividend yield of 0%; (2) expected volatility
of 190%, (3) risk-free interest rate of 1.11%, and (4) expected life
of 2.21 years.
  23
  The April
2008 note (see Note 5) contains a provision that modifies the conversion rate to
$0.15 per common share and the warrant exercise price to $0.165 per common
share, issued to the April 2008 note payable subscribers who are also
participants in the 2006 debentures. The Company concluded that the change in
conversion price and warrant exercise price did not constitute a significant
change in the nature of the debt and that the transaction should not be treated
as an extinguishment of that debt. As a result of the change in the exercise
price of the warrants, 1,793,364 original warrants remained at the $0.34
exercise price and the remaining 541,641 original warrants were adjusted to the
$0.165 exercise price upon participation in the April 2008 debenture. Further,
3,239,810 replacement warrants remained at the $0.34 exercise price and the
remaining 9,450,156 replacement warrants were adjusted to the $0.165 exercise
price upon participation in the April 2008 debenture. The convertible debentures
are convertible at the option of the holders into 159,951 and 237,056 shares of
common stock at a fixed conversion price of $0.34 per share and $0.15 per share,
respectively, subject to anti-dilution and other customary
adjustments..
  The
following table summarizes the 2005 Convertible Debentures and embedded
derivatives outstanding at June 30, 2009 and December 31, 2008:
  June
      30,
                    
                    
                    December
      31,
                    
                    
                    Increase2009
                    
                    
                    2008
                    
                    
                    (Decrease)Principal
      Due
                    
                    $
                    81,922
                    
                    
                    $
                    81,922
                    
                    
                    $
                    -Fair
      Value
                    
                    $
                    135,819
                    
                    
                    $
                    85,997
                    
                    
                    $
                    49,822
  Interest
expense on the 2005 debenture for the three months ended June 30, 2009 and 2008
was $3,676 and $337,770, respectively. Interest expense on the 2005 debenture
for the six months ended June 30, 2009 and 2008 was $7,312 and $868,114,
respectively.
 
 On August
6, 2008, the Company issued a moratorium on amortization of all outstanding
debentures. Under the terms of the debenture agreements, the moratorium
constitutes an event of default and thus the debentures all incur default
interest penalties. As a result of the default, the Company has recognized
additional penalty interest, and has recognized the remaining balance of its
debt discounts associated with this note in interest expense, and classified the
entire balance as short term. See Note 10 for the total default interest expense
recognized during the three and six months ended June 30, 2009. Effective July
29, 2009, the default was cured through a forbearance and amendment to the 2005,
2006, 2007 and 2008 debentures. See Note 18 “Subsequent Events” for details of
forbearance and amendment of this debenture.
 
 10.           ACCRUED
DEFAULT INTEREST
 
 On August
6, 2008, the Company issued a moratorium on amortization of all outstanding
debentures at June 30, 2008. Effective July 29, 2009, the default was cured
through a forbearance and amendment to the 2005, 2006, 2007 and 2008 debentures.
See Note 18 “Subsequent Events” for details of forbearance and amendment of this
debenture. Under the terms of the debenture agreements, the moratorium
constituted an event of default and thus the debentures all incurred default
interest penalties. The debenture agreements required in the event of default
that the full principle amount of the debentures, together with other amounts
owing in respect thereof, to the date of acceleration shall become, at the
Holder’s election, immediately due and payable in cash. The aggregate amount
payable upon event of default shall be equal to the mandatory default amount.
The mandatory default amount equals the sum of (i) the greater of: (A) 120% of
the principle amount of the debentures to be repaid plus 100% of the accrued and
unpaid interest, or (B) the principle amount of the debentures to be repaid,
divided by the conversion price on (x) the date the mandatory default amount
came due or (y) the date the mandatory default amount is paid in full, whichever
is less, multiplied by the closing price on (x) the date the mandatory default
amount is demanded or otherwise due or (y) the date the mandatory default amount
is paid in full, whichever is greater, and (ii) all other amounts, costs,
expenses and liquidated damages due in respect to the debentures. Commencing 5
days after the occurrence of any event of default that results in the eventual
acceleration of the debentures, the interest rate on the debentures shall accrue
at the rate of 18% per annum. Further, as a result of the default, during 2008
the Company recognized the remaining balance of its debt discounts associated
with this note in interest expense, and classified the entire balance in short
term at June 30, 2009 and December 31, 2008, respectively. The following table
summarizes the accrued default interest expense recognized in the accompanying
consolidated balance sheets at June 30, 2009 and December 31, 2008,
respectively:
  24
  June
      30,
                        
                        
                        December
      31,2009
                        
                        
                        20082005
      debenture
                        
                        $
                        29,434
                        
                        
                        $
                        22,1212006
      debenture
                        
                        
                        666,434
                        
                        
                        
                        524,2842007
      debenture
                        
                        
                        2,421,317
                        
                        
                        
                        1,885,951February
      2008 debenture
                        
                        
                        258,687
                        
                        
                        
                        194,420April
      2008 debenture
                        
                        
                        1,451,120
                        
                        
                        
                        1,090,608$
                        4,826,991
                        
                        
                        $
                        3,717,384
  11.           SERIES
A-1 REDEEMABLE CONVERTIBLE PREFERRED STOCK
 
 Effective
March 3, 2009, the Company entered into a $5 million credit facility
(“Facility”) with a life sciences fund. Under the terms of the agreement, the
Company may draw down funds, as needed, from the investor through the issuance
of Series A-1 redeemable convertible preferred stock, par value $.001, at a
basis of 1 share of Series A-1 redeemable convertible preferred stock for every
$10,000 invested.
 
 Conversion
Rights
 
 Any
shares of Series A-1 redeemable convertible preferred stock may, at the option
of the holder, be converted at any time into shares of common stock. The
conversion price for the preferred stock is equal to $0.75 per share of common
stock. The Company must keep available out of its authorized but unissued shares
of common stock, such number of shares sufficient to effect a conversion of all
then outstanding shares of the Series A-1 redeemable convertible preferred
stock. If at ay time the number of authorized but unissued shares of common
stock is not sufficient to effect a conversion of all then outstanding shares of
the Series A-1 redeemable convertible preferred stock, the Company must take
necessary action to increase its authorized but unissued shares of common stock
to such number of shares as is sufficient for conversion.
 
 Dividends
 
 The
preferred stock pays dividends, in kind of preferred stock, at an annual rate of
10%, matures in four years from the initial drawdown date, and is convertible
into common stock at $0.75 per share.
 
 Redemption
Rights
 
 Upon the
earlier of (i) the fourth anniversary of the issuance date, and (ii) the
occurrence of a major transaction, each holder shall have the right, at such
holder’s option, to require the Company to redeem all or a portion of such
holder’s share of Series A-1 preferred stock, at a price per share equal to the
Series A-1 liquidation value. The Company has the option to pay the redemption
price in cash or in shares of its common stock. A major transaction includes (i)
the consolidation, merger, or other business combination of the Company with or
into another entity, (ii) the sale or transfer of more than 50% of the Company’s
assets other than inventory in the ordinary course of business in one or more
related series of transactions, or (iii) closing of a purchase, tender or
exchange offer made  to the holders of more than 50% of the
outstanding shares of common stock in which more than 50% of the outstanding
shares of common stock were tendered and accepted. The Company shall have the
right, at its own option, to redeem all or a portion of the shares of Series A-1
redeemable preferred stock, at any time at a price per share of Series A-1
redeemable preferred stock equal to 100% of the Series A-1 liquidation value. In
the event the closing price of the our common stock during the 5 trading days
following the put notice falls below 75% of the average of the closing bid price
in the 5 trading days prior to the put closing date, the investor may, at its
option, and without penalty, decline to purchase the applicable put shares on
the put closing date.
  25
  Termination
and Liquidation Rights
  The
Company may terminate this agreement and its right to initiate future draw-downs
by providing 30 days advanced written notice to the investor. Upon any
liquidation, dissolution or winding up of the Company, whether voluntary or
involuntary, after payment or provision for payment of debts and other
liabilities of the Corporation, before any distribution or payment shall be made
to the holders of any other equity securities of the Company by reason of their
ownership thereof, the holders of the Series A-1 redeemable convertible
preferred stock shall first be entitled to be paid out of the assets of the
Company available for distribution to its stockholders an amount with respect to
each share of Series A-1 redeemable convertible preferred stock equal to
$10,000, plus any accrued by unpaid dividends. If, upon dissolution or winding
up of the Company, the assets of the Company shall be insufficient to make
payment in full to all holders, then such assets shall be distributed among the
holders at the time outstanding, ratably in proportion to the full amounts to
which they would otherwise be respectively entitled. During the six months ended
June 30, 2009, the Company drew down $1,809,761 on this credit
facility.
 
 Because
this instrument is redeemable, the Company determined that the Series A-1
redeemable preferred stock should be classified within the mezzanine section
between liabilities and equity in its consolidated balance sheets. The embedded
conversion option has been recorded as a derivative liability in the Company’s
consolidated balance sheets, and changes in the fair value each reporting period
will be reported in adjustments to fair value of derivatives in the consolidated
statements of operations.
 
 The
outstanding balance at June 30, 2009 of $1,809,761 is convertible into 2,413,015
shares of the Company’s common stock. The Company values the conversion option
initially when each draw takes place. The following table summarizes the
assumptions used in the Black-Scholes model to value the conversion option
associated with each draw, along with the fair value of the embedded conversion
option.
 
 Black-Scholes
      Assumptionsat Draw DateDraw
                                          
                                          Draw
                                          
                                          Dividend
                                          
                                          
                                          Expected
                                          
                                          
                                          Risk-Free
                                          
                                          
                                          Expected
                                          
                                          
                                          FairAmount
                                          
                                          Date
                                          
                                          Yield
                                          
                                          
                                          Volatility
                                          
                                          
                                          Rate
                                          
                                          
                                          Life (Yrs)
                                          
                                          
                                          Value$
                                          1,100,000
                                          
                                          4/6/2009
                                          
                                          
                                          0
                                          %
                                          
                                          
                                          190
                                          %
                                          
                                          
                                          1.90
                                          %
                                          
                                          
                                          4.00
                                          
                                          
                                          $
                                          139,98587,000
                                          
                                          4/28/2009
                                          
                                          
                                          0
                                          %
                                          
                                          
                                          190
                                          %
                                          
                                          
                                          1.83
                                          %
                                          
                                          
                                          3.94
                                          
                                          
                                          
                                          9,951105,000
                                          
                                          5/1/2009
                                          
                                          
                                          0
                                          %
                                          
                                          
                                          190
                                          %
                                          
                                          
                                          2.03
                                          %
                                          
                                          
                                          3.93
                                          
                                          
                                          
                                          12,00781,036
                                          
                                          5/19/2009
                                          
                                          
                                          0
                                          %
                                          
                                          
                                          190
                                          %
                                          
                                          
                                          2.12
                                          %
                                          
                                          
                                          3.88
                                          
                                          
                                          
                                          12,204162,624
                                          
                                          6/9/2009
                                          
                                          
                                          0
                                          %
                                          
                                          
                                          190
                                          %
                                          
                                          
                                          2.86
                                          %
                                          
                                          
                                          3.83
                                          
                                          
                                          
                                          28,428131,644
                                          
                                          6/15/2009
                                          
                                          
                                          0
                                          %
                                          
                                          
                                          190
                                          %
                                          
                                          
                                          2.75
                                          %
                                          
                                          
                                          3.81
                                          
                                          
                                          
                                          26,23767,457
                                          
                                          6/26/2009
                                          
                                          
                                          0
                                          %
                                          
                                          
                                          190
                                          %
                                          
                                          
                                          2.53
                                          %
                                          
                                          
                                          3.78
                                          
                                          
                                          
                                          20,14575,000
                                          
                                          6/29/2009
                                          
                                          
                                          0
                                          %
                                          
                                          
                                          190
                                          %
                                          
                                          
                                          2.53
                                          %
                                          
                                          
                                          3.77
                                          
                                          
                                          
                                          22,386$
                                          1,809,761
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          $
                                          271,343
  The
embedded conversion option was again valued at $540,098 at June 30, 2009 at fair
value using the Black-Scholes model. The increase in the fair value of the
embedded conversion option liability of $268,754 for the three and six months
ended June 30, 2009 was recorded through the results of operations as an
adjustment to fair value of derivatives. The assumptions used in the
Black-Scholes model to value the embedded conversion option at June 30, 2009
were as follows: (1) dividend yield of 0%; (2) expected volatility of
190%, (3) risk-free interest rate of 2.54%, and (4) expected life of
3.77 years.
 
 The
following table summarizes the Series A-1 redeemable convertible preferred stock
and embedded derivative outstanding at June 30, 2009 and at initial draw
dates:
  26
  June
      30,
                        
                        
                        Inception
                        
                        
                        Increase2009
                        
                        
                        Dates*
                        
                        
                        (Decrease)Principal
      Due
                        
                        $
                        1,809,761
                        
                        
                        $
                        1,809,761
                        
                        
                        $
                        -Accrued
      Dividend
                        
                        
                        31,348
                        
                        
                        
                        -
                        
                        
                        
                        31,348Debt
      Discount
                        
                        
                        (261,115
                        )
                        
                        
                        (271,343
                        )
                        
                        
                        10,2281,579,994
                        
                        
                        
                        1,538,418
                        
                        
                        
                        41,576Less
      current portion
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Non-current
      portion
                        
                        $
                        1,579,994
                        
                        
                        $
                        1,538,418
                        
                        
                        $
                        41,576Aggregate
      liquidation value**
                        
                        $
                        1,841,109
                        
                        
                        $
                        1,809,761
                        
                        
                        $
                        31,348
  *Represents
the sum of values from various draw dates on the Series A-1 redeemable
convertible preferred stock facility.
 **Represents the sum of
principal due and accrued dividends.
 
 The
dividends are accrued at a rate of 10% per annum, and the Company records the
accrual as interest expense in its consolidated statements of operations in the
period incurred. The Company recorded accrued dividends on the Series A-1
redeemable convertible preferred stock of $31,348 for the three and six months
ended June 30, 2009.
 
 For
providing investor relations services in connection with the Series A-1
redeemable convertible preferred stock credit facility, the Company issued a
consultant 24,900,000 shares of its common stock on February 9, 2009. The
Company valued the issuance of these shares at $4,731,000 based on a closing
price of $0.19 on February 9, 2009 and recorded the value of the shares as
deferred financing costs associated with the financing on the date they were
issued. Beginning on the date of the first draw-down on April 6, 2009 (the loan
maturity date is 4 years after the initial draw-down), each quarter the Company
will amortize the deferred issuance costs ratably over the term of the Series
A-1 redeemable convertible preferred stock facility.
 
 The
Company also incurred a non-refundable commitment fee to the holder of this
convertible preferred stock facility in the amount of $250,000. The fee is
payable by the Company in either (a) cash, or (b) common stock. If paid in
common stock, the Company will issue a number of shares valued at 97% of the
volume-weighted average price of its common stock for the five trading days
immediately preceding the effective date of the facility, or March 3, 2009.
Based on this,  as of June 30, 2009, the Company would be required to issue
approximately 2,152,000 shares of the Company’s common stock. Beginning on the
date of the first draw-down on April 6, 2009 (the loan maturity date is 4 years
after the initial draw-down), each quarter the Company will amortize the
deferred issuance costs ratably over the term of the Series A-1 redeemable
convertible preferred stock facility.
 
 Interest
expense on the Series A-1 redeemable convertible preferred stock and deferred
financing costs for the three and six months ended June 30, 2009 was
$300,019.
 
 12.           WARRANT
SUMMARY
 
 Warrant
Activity
  A summary
of warrant activity for the six months ended June 30, 2009 is presented
below:
  27
  WeightedWeighted
                          
                          
                          Average
                          
                          
                          AggregateAverage
                          
                          
                          Remaining
                          
                          
                          IntrinsicNumber of
                          
                          
                          Exercise
                          
                          
                          Contractual
                          
                          
                          ValueWarrants
                          
                          
                          Price
                          
                          
                          Life (in years)
                          
                          
                          (000)Outstanding,
      December 31, 2008
                          
                          
                          129,397,951
                          
                          
                          $
                          0.26
                          
                          
                          
                          3.23
                          
                          
                          $
                          -Granted
                          
                          
                          -
                          
                          
                          
                          -Exercised
                          
                          
                          -
                          
                          
                          
                          -Forfeited
                          
                          
                          (211,000
                          )
                          
                          $
                          1.44Outstanding,
      June 30, 2009
                          
                          
                          129,186,951
                          
                          
                          $
                          0.27
                          
                          
                          
                          2.74
                          
                          
                          
                          -Vested
      and expected to vest at
      June 30, 2009
                          
                          
                          129,186,951
                          
                          
                          $
                          0.27
                          
                          
                          
                          2.74
                          
                          
                          
                          -Exercisable,
      June 30, 2009
                          
                          
                          129,186,951
                          
                          
                          $
                          0.27
                          
                          
                          
                          2.74
                          
                          
                          
                          -
  The
aggregate intrinsic value in the table above is before applicable income taxes
and is calculated based on the difference between the exercise price of the
warrants and the quoted price of the Company’s common stock as of the reporting
date.
  The
following table summarizes information about warrants outstanding and
exercisable at June 30, 2009:
  Warrants Outstanding
                      
                      
                      Warrants ExercisableWeighted
                      
                      
                      Weighted
                      
                      
                      
                      
                      
                      WeightedAverage
                      
                      
                      Average
                      
                      
                      
                      
                      
                      AverageExercise
                      
                      Number
                      
                      
                      Remaining
                      
                      
                      Exercise
                      
                      
                      Number
                      
                      
                      ExercisePrice
                      
                      of Shares
                      
                      
                      Life (Years)
                      
                      
                      Price
                      
                      
                      of Shares
                      
                      
                      Price$
                      0.17
                      
                      
                      95,630,311
                      
                      
                      
                      3.00
                      
                      
                      $
                      0.17
                      
                      
                      
                      95,630,311
                      
                      
                      $
                      0.170.32
                      
                      
                      11,148,147
                      
                      
                      
                      2.19
                      
                      
                      
                      0.32
                      
                      
                      
                      11,148,147
                      
                      
                      
                      0.320.34
                      
                      
                      8,753,762
                      
                      
                      
                      1.23
                      
                      
                      
                      0.34
                      
                      
                      
                      8,753,762
                      
                      
                      
                      0.340.38
      - 0.40
                      
                      
                      5,902,908
                      
                      
                      
                      3.84
                      
                      
                      
                      0.39
                      
                      
                      
                      5,902,908
                      
                      
                      
                      0.390.85
      - 0.96
                      
                      
                      5,734,831
                      
                      
                      
                      1.46
                      
                      
                      
                      0.95
                      
                      
                      
                      5,734,831
                      
                      
                      
                      0.952.20
                      
                      
                      72,917
                      
                      
                      
                      2.13
                      
                      
                      
                      2.20
                      
                      
                      
                      72,917
                      
                      
                      
                      2.202.48
      - 2.54
                      
                      
                      1,944,075
                      
                      
                      
                      0.46
                      
                      
                      
                      2.54
                      
                      
                      
                      1,944,075
                      
                      
                      
                      2.54129,186,951
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      129,186,951
  13.
ADJUSTMENT TO FAIR VALUE OF DERIVATIVES
  
 The
following tables summarize the components of the adjustment to fair value of
derivatives which were recorded as charges to results of operations for the
three and six months ended June 30, 2009 and 2008.
 
 The
following table summarizes by category of derivative liability the increase
(decrease) in fair value from market changes during the three months ended June
30, 2009 and 2008, the impact of additional investments and repricing and
exercise of certain warrants.
  28
  Three Months Ended
                          June 30, 2009
                        
                        
                        Three Months Ended
                          June 30, 2008Embedded
      Pipe derivatives - 9.05
                        
                        $
                        33,954
                        
                        
                        $
                        79,309Pipe
      Hybrid instrument – 9.06
                        
                        
                        569,326
                        
                        
                        
                        280,948Pipe
      Hybrid- FAS 155 – 8.07
                        
                        
                        6,583,530
                        
                        
                        
                        (1,518,774
                        )Pipe
      Hybrid- February 2008
                        
                        
                        245,421
                        
                        
                        
                        195,270Pipe
      Hybrid- April 2008
                        
                        
                        3,623,936
                        
                        
                        
                        141,105Series
      A-1 Preferred Stock conversion option
                        
                        
                        268,754
                        
                        
                        
                        -Original
      warrants PIPE 2005 , excluding replacement warrants
                        
                        
                        257,479
                        
                        
                        
                        141,407Replacement
      Warrants
                        
                        
                        1,583,911
                        
                        
                        
                        912,776Warrants
      – PIPE 2006-investors
                        
                        
                        2,369,038
                        
                        
                        
                        1,397,606Warrants
      – PIPE 2007-investors
                        
                        
                        4,975,723
                        
                        
                        
                        3,338,410Warrants
      – PIPE 2008-investors
                        
                        
                        4,205,629
                        
                        
                        
                        816,232Other
      Warrant Derivatives- 2005 and 2006
                        
                        
                        1,552,169
                        
                        
                        
                        1,173,275Other
      Warrants Derivatives - 2007
                        
                        
                        432,504
                        
                        
                        
                        249,341$
                        26,701,374
                        
                        
                        $
                        7,206,905
  The
following table summarizes by category of derivative liability the increase
(decrease) in fair value from market changes during the six months ended June
30, 2009 and 2008, the impact of additional investments and repricing and
exercise of certain warrants.
  Six Months Ended
                          June 30, 2009
                        
                        
                        Six Months Ended
                          June 30, 2008Embedded
      Pipe derivatives - 9.05
                        
                        $
                        49,822
                        
                        
                        $
                        168,857Pipe
      Hybrid instrument – 9.06
                        
                        
                        826,711
                        
                        
                        
                        695,790Pipe
      Hybrid- FAS 155 – 8.07
                        
                        
                        9,078,716
                        
                        
                        
                        (1,301,276
                        )Pipe
      Hybrid- February 2008
                        
                        
                        18,434
                        
                        
                        
                        258,632Pipe
      Hybrid- April 2008
                        
                        
                        3,622,043
                        
                        
                        
                        141,105Series
      A-1 Preferred Stock conversion option
                        
                        
                        268,754
                        
                        
                        
                        -Original
      warrants PIPE 2005 , excluding replacement warrants
                        
                        
                        368,033
                        
                        
                        
                        156,014Replacement
      Warrants
                        
                        
                        2,427,804
                        
                        
                        
                        956,978Warrants
      – PIPE 2006-investors
                        
                        
                        3,673,292
                        
                        
                        
                        1,478,337Warrants
      – PIPE 2007-investors
                        
                        
                        7,632,265
                        
                        
                        
                        3,286,787Warrants
      – PIPE 2008-investors
                        
                        
                        6,576,694
                        
                        
                        
                        816,232Other
      Warrant Derivatives- 2005 and 2006
                        
                        
                        2,333,904
                        
                        
                        
                        1,296,746Other
      Warrants Derivatives - 2007
                        
                        
                        666,514
                        
                        
                        
                        272,974$
                        37,542,986
                        
                        
                        $
                        8,227,176
  14.
STOCKHOLDERS’ EQUITY TRANSACTIONS
 
 The
Company is authorized to issue two classes of capital stock, to be designated,
respectively, Preferred Stock and Common Stock. The total number of shares of
Preferred Stock the Company is authorized to issue is 50,000,000, par value
$0.001 per share. The total number of shares of Common Stock the Company is
authorized to issue is 500,000,000, par value $0.001 per share. The Company had
181 shares of Series A-1 Redeemable Convertible Preferred Stock outstanding as
of June 30, 2009 and 499,905,641 shares of Common Stock outstanding as of June
30, 2009.
  29
  Between
September 29, 2008 and January 20, 2009, the Company was ordered by the Circuit
Court of the Twelfth Judicial District Court for Sarasosa County, Florida to
settle certain past due accounts payable, for previous professional services and
other operating expenses incurred, by the issuance of shares of its common
stock. In aggregate, through June 30, 2009, the Company settled $1,108,673 in
accounts payable through the issuance of 260,116,283 shares of its common stock.
During the six months ended June 30, 2009, the Company settled $505,199 in
accounts payable through the issuance of 39,380,847 shares of its common stock.
The Company recorded a loss on settlement of $4,793,949 in its accompanying
statements of operations for the three and six months ended June 30, 2009. The
losses were calculated as the difference between the amount of accounts payable
relieved and the value of the shares (based on the closing share price on the
settlement date) that were issued to relieve the accounts payable.
 
 On March
5, 2009, the Company settled a lawsuit originally brought by an investor in
January 2009, who is an investor in the 2007 and 2008 debentures, and associated
with the default on August 6, 2008 on all debentures. As a result of the
lawsuit, the Company was required by court order to reduce the conversion price
on convertible debentures held by this investor to $0.02 per share, effective
immediately, so long as the Company has a sufficient number of authorized shares
to honor the request for conversion. During the six months ended June 30, 2009,
the Company issued 4,847,050 shares of its common stock to this investor in
conversion of approximately $97,000 of its 2006 debenture at $0.02 per share,
and 1,252,950 shares of its common stock to this investor in conversion of
approximately $25,000 of its 2007 debenture at $0.02 per share. The Company has
considered the impact of Emerging Issue Task Force statements, or EITFs 96 - 19—
Debtor’s Accounting for a
Modification or Exchange of Debt Instruments,  06-6— Debtor’s Accounting for a
Modification (or Exchange) of Convertible Debt Instruments on the
accounting treatment of the change in conversion price of the 2007 and 2008
Convertible Debentures. EITF 96 - 19 states that a transaction resulting in a
significant change in the nature of a debt instrument should be accounted for as
an extinguishment of debt. The Company calculated the fair value of the
conversion option for the 2007 and April 2008 debentures immediately prior to
and after the change in the conversion price, and evaluated the impact of the
change in conversion price. The Company has concluded that the change in
conversion price for this investor constitutes a substantial modification in the
terms of the 2007 and 2008 debenture agreements. Based on the Company’s
evaluation, the below table summarizes the impact relative to the Debentures’
face value on March 5, 2009.
 
 DebentureImpact on Debentures
                          
                          Change
                          
                          
                          Face Value
                          
                          
                          % Change2007
      Debenture
                          
                          $
                          1,319,354
                          
                          
                          $
                          6,739,214
                          
                          
                          
                          20
                          %April
      2008 Debenture
                          
                          $
                          477,014
                          
                          
                          $
                          4,038,880
                          
                          
                          
                          12
                          %
  The
change in fair value of the conversion option on the 2007 debenture was
$1,319,355, or a 20% change relative to the face value of the debenture. The
change in fair value of the conversion option on the April 2008 debenture was
$477,014, or a 12% change relative to the face value of the debenture. The
Company recorded a loss on modification of debentures in the amount of
$1,796,368 during the six months ended June 30, 2009 as a result of this
modification.
 
 15.
STOCK-BASED COMPENSATION
 
 Stock
Plans
 
 On August
12, 2004, ACT’s Board of Directors approved the establishment of the 2004 Stock
Option Plan (the “2004 Stock Plan”). Stockholder approval was received on
December 13, 2004. The total number of common shares available for grant and
issuance under the plan may not exceed 2,800,000 shares, 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 or by other means as authorized by the Board of Directors or a committee
established by the Board of Directors. At June 30, 2009, the Company had 820,000
common share purchase options outstanding under the plan. At June 30, 2009,
there were 370,000 options available for grant under this plan.
  30
  On
December 13, 2004, ACT’s Board of Directors and stockholders approved the
establishment of the 2004 Stock Option Plan II (the “2004 Stock Plan II”). The
total number of common shares available for grant and issuance under the plan
may not exceed 1,301,161 shares, 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 or by other means as
authorized by the Board of Directors or a committee established by the Board of
Directors. At June 30, 2009, ACT had granted 1,301,161 common share purchase
options under the plan. At June 30, 2009, no options were available for grant
under this plan.
  On
January 31, 2005, the Company’s Board of Directors approved the establishment of
the 2005 Stock Incentive Plan (the “2005 Plan”) for its employees, subject to
approval of our shareholders. The total number of common shares available for
grant and issuance under the plan may not exceed 9 million shares, plus an
annual increase on the first day of each of the Company’s fiscal years beginning
in 2006 equal to 5% of the number of shares of our common stock outstanding on
the last day of the immediately preceding fiscal year, subject to adjustment in
the event of certain recapitalizations, reorganizations and similar
transactions. On January 24, 2008, the Company’s shareholders approved an
increase of 25,000,000 shares to the 2005 Plan. Common stock purchase options
may be exercisable by the payment of cash or by other means as authorized by the
Board of Directors or a committee established by the Board of Directors. At June
30, 2009, 12,364,419 common stock purchase options were outstanding and the
Company issued 1,497,263 shares of common stock under the plan. At June 30,
2009, there were 33,456,831 options available for grant under this
plan.
 
 Stock
Option Activity
  A summary
of option activity for the three months ended June 30, 2009 is presented
below:
  WeightedWeighted
                                              
                                              
                                              Average
                                              
                                              
                                              AggregateAverage
                                              
                                              
                                              Remaining
                                              
                                              
                                              IntrinsicNumber of
                                              
                                              
                                              Exercise
                                              
                                              
                                              Contractual
                                              
                                              
                                              ValueOptions
                                              
                                              
                                              Price
                                              
                                              
                                              Life (in years)
                                              
                                              
                                              (000)Outstanding,
      January 1, 2009
                                              
                                              
                                              14,485,580
                                              
                                              
                                              $
                                              0.55
                                              
                                              
                                              
                                              7.25
                                              
                                              
                                              $
                                              -Granted
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Exercised
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Forfeited
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Outstanding,
      June 30, 2009
                                              
                                              
                                              14,485,580
                                              
                                              
                                              $
                                              0.55
                                              
                                              
                                              
                                              6.75
                                              
                                              
                                              $
                                              404Vested
      and expected to vestat
      June 30, 2009
                                              
                                              
                                              14,011,163
                                              
                                              
                                              
                                              0.56
                                              
                                              
                                              
                                              6.69
                                              
                                              
                                              
                                              386Exercisable,
      June 30, 2009
                                              
                                              
                                              10,836,220
                                              
                                              
                                              
                                              0.66
                                              
                                              
                                              
                                              6.15
                                              
                                              
                                              
                                              232
  The
aggregate intrinsic value in the table above is before applicable income taxes
and is calculated based on the difference between the exercise price of the
options and the quoted price of the Company’s common stock as of the reporting
date.
  A summary
of the status of unvested employee stock options as of June 30, 2009 and changes
during the period then ended, is presented below:
  31
  WeightedAverageGrant
      DateFair
      ValueShares
                                
                                
                                Per ShareUnvested
      at January 1, 2009
                                
                                
                                4,769,159
                                
                                
                                $
                                0.23Granted
                                
                                
                                -
                                
                                
                                
                                -Vested
                                
                                
                                (1,119,799
                                )
                                
                                
                                0.27Forfeited
                                
                                
                                -
                                
                                
                                
                                -Unvested
      at June 30, 2009
                                
                                
                                3,649,360
                                
                                
                                $
                                0.22
  As of
June 30, 2009, total unrecognized stock-based compensation expense related to
nonvested stock options was approximately $670,000, which is expected to be
recognized over a weighted average period of approximately
8.58 years.
  The
following table summarizes information about stock options outstanding and
exercisable at June 30, 2009.
  Options
      Outstanding
                                      
                                      
                                      Options
      ExercisableWeighted
                                      
                                      
                                      Weighted
                                      
                                      
                                      
                                      
                                      
                                      WeightedAverage
                                      
                                      
                                      Average
                                      
                                      
                                      
                                      
                                      
                                      AverageExercise
                                      
                                      
                                      Number
                                      
                                      
                                      Remaining
                                      
                                      
                                      Exercise
                                      
                                      
                                      Number
                                      
                                      
                                      ExercisePrice
                                      
                                      
                                      of
      Shares
                                      
                                      
                                      Life
      (Years)
                                      
                                      
                                      Price
                                      
                                      
                                      of
      Shares
                                      
                                      
                                      Price$
                                      0.05
                                      
                                      
                                      
                                      820,000
                                      
                                      
                                      
                                      5.12
                                      
                                      
                                      $
                                      0.05
                                      
                                      
                                      
                                      820,000
                                      
                                      
                                      $
                                      0.050.21
                                      
                                      
                                      
                                      6,007,403
                                      
                                      
                                      
                                      8.37
                                      
                                      
                                      
                                      0.21
                                      
                                      
                                      
                                      2,396,165
                                      
                                      
                                      
                                      0.210.25
                                      
                                      
                                      
                                      1,301,161
                                      
                                      
                                      
                                      5.51
                                      
                                      
                                      
                                      0.25
                                      
                                      
                                      
                                      1,301,161
                                      
                                      
                                      
                                      0.250.85
                                      
                                      
                                      
                                      5,604,099
                                      
                                      
                                      
                                      5.59
                                      
                                      
                                      
                                      0.85
                                      
                                      
                                      
                                      5,574,100
                                      
                                      
                                      
                                      0.851.35
                                      
                                      
                                      
                                      150,000
                                      
                                      
                                      
                                      6.81
                                      
                                      
                                      
                                      1.35
                                      
                                      
                                      
                                      150,000
                                      
                                      
                                      
                                      1.352.04
      - 2.11
                                      
                                      
                                      
                                      165,000
                                      
                                      
                                      
                                      6.50
                                      
                                      
                                      
                                      2.07
                                      
                                      
                                      
                                      156,877
                                      
                                      
                                      
                                      2.072.20
      - 2.48
                                      
                                      
                                      
                                      437,917
                                      
                                      
                                      
                                      6.18
                                      
                                      
                                      
                                      2.27
                                      
                                      
                                      
                                      437,917
                                      
                                      
                                      
                                      2.2714,485,580
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      10,836,220
  16. COMMITMENTS AND CONTINGENCIES
 
 The
Company entered into a lease for office and laboratory space in Worcester,
Massachusetts commencing December 2004 and expiring April 2010, and for office
space in Los Angeles, California commencing November 2005 and expiring May 2008.
The Company’s rent at its Los Angeles, California site was on a month-to-month
basis after May 2008. On March 1, 2009, the Company vacated its site in Los
Angeles, California and moved to another site in Los Angeles. The term on this
new lease is through February 28, 2010. Monthly base rent is $2,170. Annual
minimum lease payments are as follows:
  Year
      1
                          
                          $
                          225,281Year
      2
                          
                          
                          -Total
                          
                          $
                          225,281
  Rent
expense recorded in the financial statements for the three months ended June 30,
2009 and 2008 was approximately $183,000 and $310,000, respectively. Rent
expense recorded in the financial statements for the six months ended June 30,
2009 and 2008 was approximately $298,000 and $721,000,
respectively.
  32
  On March
5, 2009, the Company settled a lawsuit originally brought by an investor in
January 2009, who is an investor in the 2007 and 2008 debentures, and associated
with the default on August 6, 2008 on all debentures. As a result of the
lawsuit, the Company was required by court order to reduce the conversion price
on convertible debentures held by this investor to $0.02 per share, effective
immediately, so long as the Company has a sufficient number of authorized shares
to honor the request for conversion. See Note 14.
 
 The
Company has entered into employment contracts with certain executives and
research personnel. The contracts provide for salaries, bonuses and stock option
grants, along with other employee benefits. The employment contracts generally
have no set term and can be terminated by either party. There is a provision for
payments of three months to one year of annual salary as severance if we
terminate a contract without cause, along with the acceleration of certain
unvested stock option grants.
 
 17.
INCOME TAXES
 
 The
Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (“FIN 48”), on January 1, 2007. FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition. Due to the fact that the Company has substantial net operating loss
carryforwards, adoption of FIN 48 had no impact on the Company’s beginning
retained earnings, balance sheets, or statements of operations.
  The
Company files income tax returns in the U.S. federal jurisdiction, and various
states and foreign jurisdictions. With few exceptions, the Company is no longer
subject to U.S. federal, state and local income tax examinations by tax
authorities for years before 2001.
  The
Company recognizes accrued interest and penalties on unrecognized tax benefits
in income tax expense. The Company did not have any unrecognized tax benefits as
of June 30, 2009 and 2008. As a result, the Company did not recognize interest
expense, and additionally, did not record any penalties during the three and six
months ended June 30, 2009 and 2008. The Company does not expect that the
amounts of unrecognized tax benefits will change significantly within the next
12 months.
 
 18.
SUBSEQUENT EVENTS
  Subsequent
to June 30, 2009, the Company drew down an additional $359,130 on its Series A-1
redeemable convertible preferred stock facility. See Note 11.
 
 On June
30, 2009, Alpha Capital submitted a conversion notice in the principle amount of
$150,000 into 7,500,000 shares of common stock at $0.02 per share. The Company
did not have sufficient authorized shares to satisfy this conversion notice. On
July 6, 2009, by means of a settlement between the 2 parties, the Company agreed
to deliver the 7,500,000 shares of its common stock no later than September 25,
2009.  Further, the Company agreed to provide Alpha Capital with an
additional $110,000 Debenture, which is to be upon the same terms and conditions
as the April 2008 Debenture.
 
 Forbearance
and Amendment to 2005, 2006, 2007 and 2008 Debentures
 
 On July
29, 2009, the Company entered into a consent, amendment and exchange agreement
(the “Consent and Amendment”) with holders (the “Holders”) of the Company’s
outstanding convertible debentures and warrants to purchase shares of the
Company’s common stock (the “Warrants”), which were issued in private placements
to the 2005, 2006, 2007 and 2008 debentures.
  Simultaneously
with the execution of Consent and Amendment, and as a condition of the Consent
and Amendment, the Company and the Holders entered into a Standstill and
Forbearance Agreement (the “Forbearance Agreement”). Pursuant to the Forbearance
Agreement:
 
 ·
              The
      Company acknowledged certain defaults that have occurred under the
      Debentures and documents executed in connection therewith (the
      “Transaction Documents”).
  33
 
 ·
              The Holders agreed to forbear
      from exercising their rights and remedies under the Debentures and the
      Transaction Documents.
 ·
              The obligation of the Holders to
      forbear from exercising their rights and remedies under the Debentures and
      the Transaction Documents will terminate on the earliest of (i) the date,
      if any, on which a petition for relief under the date, if any, on which a
      petition for relief under the United States Bankruptcy Code or any similar
      state or Canadian law is filed by or against the Company or any of its
      subsidiaries or (ii) the date the Forbearance Agreement is otherwise
      terminated or expires, it being understood that the Holders holding 67% of
      the then outstanding principal amount of the Debentures shall have the
      right to terminate the Forbearance Agreement on 3 business days’ prior
      notice to the Company.
 ·
              The Company provided a general
      release in favor of the
Holders.
 
 Pursuant
to the Consent and Amendment:
 
 ·
              The Company agreed to issue to
      each Holder in exchange for such Holder’s Debenture an amended and
      restated Debenture (the “Amended and Restated Debentures”) in a principal
      amount equal to the principal amount of such Holder’s Debenture times 1.35
      minus any interest paid
thereon.
 ·
              The conversion price under the
      Amended and Restated Debentures was reduced to $0.10, subject to further
      adjustment as provided therein (including for stock splits, stock
      dividends, and certain subsequent equity
  sales).
 ·
              The maturity date under the
      Amended and Restated Debentures was extended until December 31,
      2010.
 ·
              The Amended and Restated
      Debentures bear interest at the rate of 12% per annum, which shall accrete
      to, and increase the principal amount payable upon
      maturity.
 ·
              The Amended and Restated
      Debentures will begin to amortize on September 25, 2009 at a rate of 6.25%
      of the outstanding principal amount per month, valued at the lesser of the
      then conversion price and 90% of the average volume weighted average price
      for the ten prior trading
days.
 ·
              The Company agreed to issue to
      each Holder in exchange for such Holder’s Warrant an amended and restated
      Warrant (the “Amended and Restated
  Warrants”).
 ·
              The exercise price under the
      Amended and Restated Warrants was reduced to $0.10 subject to further
      adjustment as provided therein (including for stock splits, stock
      dividends, and certain subsequent equity
  sales).
 ·
              The termination date under the
      Amended and Restated Warrants was extended until June 30,
      2014.
 ·
              Each Holder agreed not to convert
      more than 20% of such Holder’s outstanding principal amount of Amended and
      Restated Debenture in any month during the period from September 1, 2009
      through January 31, 2010, provided, however, that this limitation will
      terminate if (i)(a) the volume weighted average price of the Company’s
      common stock for each of 5 consecutive trading days is greater than $0.15
      per share, and (b) the trading volume on such days exceeds 7,500,000
      shares per trading day, or (ii)(a) the volume weighted average price for
      any one trading day is greater than $0.20 per share and (b) the trading
      volume on such day exceeds 10,000,000
  shares.
 ·
              The Company agreed to amend its
      articles of incorporation to increase the number of authorized shares of
      Common Stock (the “Amendment”). If the Company does not receive the
      receive the requisite shareholder approval for, and receive acceptance of
      the filing for, the Amendment by September 25, 2009, the Company shall pay
      to the Holders, monthly commencing on September 25, 2009, until the
      Amendment is duly filed, liquidated damages equal to 5% of the purchase
      price of the Debentures.
 ·
              The Company agreed to increase
      the number of shares available for issuance under the Company’s 2005 Stock
      Incentive Plan to 129,000,000 shares, by September 18,
      2009.
 ·
              The Holders agreed to waive any
      event of default under the Debentures resulting solely from (i) any
      adjustment to the conversion price of the Debenture and exercise price of
      the Warrants that would result from the reduction of the conversion price
      of certain securities of the Company pursuant to the Stipulation of
      Settlement, dated March 11, 2009, between the Company and Alpha Capital,
      and (ii) any failure by the Company to reserve such number of authorized
      but unissued shares of common stock issuable upon conversion of the
      Debentures and exercise of the
Warrants.
  34




CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS




This
Quarterly Report on Form 10-Q and the materials incorporated herein by
reference contain forward-looking statements that involve risks and
uncertainties. We use words such as “may,” “assumes,” “forecasts,” “positions,”
“predicts,” “strategy,” “will,” “expects,” “estimates,” “anticipates,”
“believes,” “projects,” “intends,” “plans,” “budgets,” “potential,” “continue”
and variations thereof, and other statements contained in quarterly report, and
the exhibits hereto, regarding matters that are not historical facts and are
forward-looking statements. Because these statements involve risks and
uncertainties, as well as certain assumptions, actual results may differ
materially from those expressed or implied by such forward-looking statements.
Factors that could cause actual results to differ materially include, but are
not limited to risks inherent in:  our early stage of development,
including a lack of operating history, lack of profitable operations and the
need for additional capital; the development and commercialization of largely
novel and unproven technologies and products; our ability to protect, maintain
and defend our intellectual property rights; uncertainties regarding our ability
to obtain the capital resources needed to continue research and development
operations and to conduct research, preclinical development and clinical trials
necessary for regulatory approvals; uncertainty regarding the outcome of
clinical trials and our overall ability to compete effectively in a highly
complex, rapidly developing, capital intensive and competitive industry. See
“RISK FACTORS THAT MAY AFFECT OUR BUSINESS” set forth herein for a more
complete discussion of these factors. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
that they are made. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as 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.




ITEM
2. 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS




OVERVIEW




The
following discussion should be read in conjunction with the financial statements
and notes thereto included in Part I, Item 1 of this Quarterly Report on
Form 10-Q.





We are a
biotechnology company focused on developing and commercializing human stem cell
technology in the emerging fields of regenerative medicine and stem cell
therapy. Principal activities to date have included obtaining financing,
securing operating facilities, and conducting research and development. We have
no therapeutic products currently available for sale and do not expect to have
any therapeutic products commercially available for sale for a period of years,
if at all. These factors indicate that our ability to continue research and
development activities is dependent upon the ability of management to obtain
additional financing as required.




CRITICAL
ACCOUNTING POLICIES




Deferred Issuance
Cost— Payments, either in cash or share-based payments, made in
connection with the sale of debentures are recorded as deferred debt issuance
costs and amortized using the effective interest method over the lives of the
related debentures. The weighted average amortization period for deferred debt
issuance costs is 48 months.




Fair Value
Measurements — For certain financial instruments, including accounts
receivable, accounts payable, accrued expenses, interest payable, advances
payable and notes payable, the carrying amounts approximate fair value due to
their relatively short maturities.





Emerging
Issues Task Force (“EITF”) No. 00-19 “Accounting for Derivative Financial
Instruments Indexed to and Potentially Settled in, a Company’s Own Stock” (“EITF
00-19”), provides a criteria for determining whether freestanding contracts that
are settled in a company’s own stock, including common stock options and
warrants, should be designated as either an equity instrument, an asset or as a
liability under SFAS No. 133 “Accounting for Derivative Instruments
and Hedging Activities.” Under the provisions of EITF 00-19, a contract
designated as an asset or a liability must be carried at fair value on a
company’s balance sheet, with any changes in fair value recorded in a company’s
results of operations.  Using the criteria in EITF 00-19, we have
determined that our outstanding options, warrants, and embedded derivative
liabilities require liability accounting and record the fair values as
warrant and option derivatives.




35


On
January 1, 2008, we adopted FAS No. 157, “Fair Value Measurements” (“FAS 157”).
FAS 157 defines fair value, and establishes a three-level valuation hierarchy
for disclosures of fair value measurement that enhances disclosure requirements
for fair value measures. The carrying amounts reported in the consolidated
balance sheets for receivables and current liabilities each qualify as financial
instruments and are a reasonable estimate of their fair values because of the
short period of time between the origination of such instruments and their
expected realization and their current market rate of interest. The three levels
of valuation hierarchy are defined as follows:





·
            Level
      1 inputs to the valuation methodology are quoted prices for identical
      assets or liabilities in active
markets.





·
            Level
      2 inputs to the valuation methodology include quoted prices for similar
      assets and liabilities in active markets, and inputs that are observable
      for the asset or liability, either directly or indirectly, for
      substantially the full term of the financial
  instrument.


·
            Level
      3 inputs to the valuation methodology are unobservable and significant to
      the fair value measurement.




FAS 133,
“Accounting for Derivative Instruments and Hedging Activities” requires
bifurcation of embedded derivative instruments and measurement of fair value for
accounting purposes. In addition, FAS 155, “Accounting for Certain Hybrid
Financial Instruments” requires measurement of fair values of hybrid financial
instruments for accounting purposes. We applied the accounting prescribed in FAS
133 to account for its 2005 Convertible Debenture. For practicality in the
valuation of the debentures and for ease of presentation, we applied the
accounting prescribed in FAS 155 to account for the 2006, 2007, February
2008, and April 2008 Convertible Debentures.





In
determining the appropriate fair value of the debentures, we used Level 2 inputs
for our valuation methodology. For the periods from January 1, 2008 through June
30, 2008, we applied the Black-Scholes models, Binomial Option Pricing models,
Standard Put Option Binomial models and the net present value of certain penalty
amounts to value the debentures and their embedded derivatives. At December 31,
2008, to achieve greater cost efficiencies, we changed our application of the
Income Approach as defined under paragraph 18 of FAS 157, by applying the
Black-Scholes option pricing model in valuing all debentures and their embedded
derivatives. This change did not materially impact the results of our valuations
of debentures and embedded derivatives. The impact of the change in the
application of the Income Approach was approximately 1.4% of the fair value of
our debentures and their embedded derivatives. FAS 157, paragraph 20 states that
the disclosure provisions of Statement of Financial Accounting Standards No. 154
Accounting Changes and Error
Corrections (“FAS 154”) for a change in accounting estimate are not
required for revisions resulting from a change in a valuation technique or its
application.





Derivative
liabilities are adjusted to reflect fair value at each period end, with any
increase or decrease in the fair value being recorded in results of operations
as adjustments to fair value of derivatives. The effects of interactions between
embedded derivatives are calculated and accounted for in arriving at the overall
fair value of the financial instruments. In addition, the fair values of
freestanding derivative instruments such as warrant and option derivatives are
valued using the Black-Scholes model.





Revenue
Recognition— Our revenues are generated from license and research
agreements with collaborators. Licensing revenue is recognized on a
straight-line basis over the shorter of the life of the license or the estimated
economic life of the patents related to the license. Deferred revenue represents
the portion of the license and other payments received that has not been earned.
Costs associated with the license revenue are deferred and recognized over the
same term as the revenue. Reimbursements of research expense pursuant to grants
are recorded in the period during which collection of the reimbursement becomes
assured, because the reimbursements are subject to approval.





Stock Based
Compensation— Effective January 1, 2006, we adopted the fair value
recognition provisions of FAS 123(R), using the modified-prospective
transition method. Under this method, stock-based compensation expense is
recognized in the consolidated financial statements for stock options granted,
modified or settled after the adoption date. In accordance with FAS 123(R),
the unamortized portion of options granted prior to the adoption date is
recognized into earnings after adoption. Results for prior periods have not been
restated, as provided for under the modified-prospective method.





Under
FAS 123(R), stock-based compensation expense recognized is based on the
value of the portion of share-based payment awards that are ultimately expected
to vest during the period. Based on this, our stock-based compensation is
reduced for estimated forfeitures at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those
estimates.




Recent
Accounting Pronouncements




In May
2009, the FASB issued Statement of Financial Accounting Standards No. 165,
Subsequent Events (“FAS 165”), which provides guidance to establish general
standards of accounting for and disclosures of events that occur after the
balance sheet date but before financial statements are issued or are available
to be issued. FAS 165 also requires entities to disclose the date through which
subsequent events were evaluated as well as the rationale for why that date was
selected. FAS 165 is effective for interim and annual periods ending after June
15, 2009, and accordingly, we adopted this Standard during the second quarter of
2009. FAS 165 requires that public entities evaluate subsequent events through
the date that the financial statements are issued. Subsequent events have been
evaluated as of the date of this filing and no further disclosures were required
and its adoption did not impact its consolidated results of operations and
financial condition.




Statement 166 is a revision to FASB
Statement No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, and will
require more information about transfers of financial assets, including
securitization transactions, and where entities have continuing exposure to the
risks related to transferred financial assets. It eliminates the concept of a
“qualifying special-purpose entity,” changes the requirements for derecognizing
financial assets, and requires additional disclosures. SFAS 166 enhances information reported to
users of financial statements by providing greater transparency about transfers
of financial assets and an entity’s continuing involvement in transferred
financial assets. SFAS 166
will be effective at the start of a reporting entity’s first fiscal year
beginning after November 15, 2009. Early application is not permitted. We are
currently evaluating the impact of adoption of SFAS 166 on the accounting for
our convertible debt instruments and related warrant liabilities.




36


In June
2009, the FASB issued SFAS No. 167 “Amendments to FASB Interpretation No. 46(R)”
(“SFAS 167”). Statement 167 is a revision to FASB Interpretation No. 46 (Revised
December 2003), Consolidation
of Variable Interest Entities, and changes how a reporting entity
determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. The
determination of whether a reporting entity is required to consolidate another
entity is based on, among other things, the other entity’s purpose and design
and the reporting entity’s ability to direct the activities of the other entity
that most significantly impact the other entity’s economic
performance. SFAS 167 will require a reporting entity to provide additional
disclosures about its involvement with variable interest entities and any
significant changes in risk exposure due to that involvement. A reporting entity
will be required to disclose how its involvement with a variable interest entity
affects the reporting entity’s financial statements. SFAS 167 will be effective
at the start of a reporting entity’s first fiscal year beginning after November
15, 2009. Early application is not permitted. We are currently evaluating
the impact, if any, of adoption of SFAS 167 on our financial
statements.





In June
2009, the FASB issued Statement of Financial Accounting Standards No. 168, The
FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted
Accounting Principles a Replacement of FASB Statement No. 162 (“FAS 168”). This
Standard establishes the FASB Accounting Standards CodificationTM (the
“Codification”) as the source of authoritative accounting principles recognized
by the FASB to be applied by nongovernmental entities in the preparation of
financial statements in conformity with U.S. GAAP. The Codification does not
change current U.S. GAAP, but is intended to simplify user access to all
authoritative U.S. GAAP by providing all the authoritative literature related to
a particular topic in one place. The Codification is effective for interim and
annual periods ending after September 15, 2009, and as of the effective date,
all existing accounting standard documents will be superseded. The Codification
is effective in the third quarter of 2009, and accordingly, the Quarterly Report
on Form 10-Q for the quarter ending September 30, 2009 and all subsequent public
filings will reference the Codification as the sole source of authoritative
literature.




RESULTS
OF OPERATIONS




Comparison
of Three Months Ended June 30, 2009 and 2008




Three
      months ended June 30,
                  
                  
                  Three
      months ended June 30,2009
                  
                  
                  2008%
      of
                  
                  
                  
                  
                  
                  %
      ofAmount
                  
                  
                  Revenue
                  
                  
                  Amount
                  
                  
                  RevenueREVENUE
                  
                  $
                  242,995
                  
                  
                  
                  100.0
                  %
                  
                  $
                  174,388
                  
                  
                  
                  100.0
                  %COST
      OF REVENUE
                  
                  
                  77,347
                  
                  
                  
                  31.8
                  %
                  
                  
                  120,186
                  
                  
                  
                  68.9
                  %GROSS
      PROFIT
                  
                  
                  165,648
                  
                  
                  
                  68.2
                  %
                  
                  
                  54,202
                  
                  
                  
                  31.1
                  %RESEARCH
      AND DEVELOPMENT EXPENSES AND GRANT REIMBURSEMENTS
                  
                  
                  1,138,258
                  
                  
                  
                  468.4
                  %
                  
                  
                  2,786,870
                  
                  
                  
                  1598.1
                  %GENERAL
      AND ADMINSTRATIVE EXPENSES
                  
                  
                  760,556
                  
                  
                  
                  313.0
                  %
                  
                  
                  1,840,116
                  
                  
                  
                  1055.2
                  %OTHER
      INCOME (EXPENSE)
                  
                  
                  (27,703,638
                  )
                  
                  
                  -11400.9
                  %
                  
                  
                  (1,016,633
                  )
                  
                  
                  -583.0
                  %NET
      LOSS
                  
                  $
                  (29,436,804
                  )
                  
                  
                  -12114.2
                  %
                  
                  $
                  (5,589,417
                  )
                  
                  
                  -3205.2
                  %




Revenue




Revenue
for the three months ended June 30, 2009 and 2008 was $242,995 and $174,388,
respectively.  These amounts relate primarily to license fees and
royalties collected that are being amortized over the period of the license
granted, and are therefore typically consistent between periods. The increase in
revenue during the three months ended June 30, 2009, was due to more new
licenses being granted as compared to the three months ended June 30,
2008.





Of the
revenue recognized during the three months ended June 30, 2009, we recognized
$51,470 in license fee revenue from Transition Holdings, Inc. On December 18,
2008, we entered into a license agreement with Transition for certain of our
non-core technology. Under the agreement, Transition agreed to acquire a license
to the technology for a total of $3.5 million in cash. We are recognizing
revenue from this agreement over its 17-year patent useful life.




37




Research
and Development Expenses and Grant Reimbursements





Research
and development expenses (“R&D”) for the three months ended June 30, 2009
and 2008 were $1,138,258 and $2,786,870, respectively, a decrease of
$1,648,612.  R&D consists mainly of facility costs, payroll and payroll
related expenses, research supplies and costs incurred in connection with
specific research grants, and for scientific research.  The decline in
R&D expenditures during the three months ended June, 2009 as compared to the
same period in 2008 is primarily due to the fact that we closed our Charlestown,
Massachusetts and Alameda, California facilities at the end of May
2008.




Our
research and development expenses consist primarily of costs associated with
basic and pre-clinical research exclusively in the field of human stem cell
therapies and regenerative medicine, with focus on development of our
technologies in cellular reprogramming, reduced complexity applications, and
stem cell differentiation. These expenses represent both pre-clinical
development costs and costs associated with non-clinical support activities such
as quality control and regulatory processes. The cost of our research and
development personnel is the most significant category of expense; however, we
also incur expenses with third parties, including license agreements, sponsored
research programs and consulting expenses.





We do not segregate
research and development costs by project because our research is focused
exclusively on human stem cell therapies as a unitary field of study. Although
we have three principal areas of focus for our research, these areas are
completely intertwined and have not yet matured to the point where they are
separate and distinct projects. The intellectual property, scientists and other
resources dedicated to these efforts are not separately allocated to individual
projects, but rather are conducting our research on an integrated
basis.




We expect
that research and development expenses will continue to increase in the
foreseeable future as we add personnel, expand our pre-clinical research, begin
clinical trial activities, and increase our regulatory compliance capabilities.
The amount of these increases is difficult to predict due to the uncertainty
inherent in the timing and extent of progress in our research programs, and
initiation of clinical trials. In addition, the results from our basic research
and pre-clinical trials, as well as the results of trials of similar
therapeutics under development by others, will influence the number, size and
duration of planned and unplanned trials. As our research efforts mature, we
will continue to review the direction of our research based on an assessment of
the value of possible commercial applications emerging from these efforts. Based
on this continuing review, we expect to establish discrete research programs and
evaluate the cost and potential for cash inflows from commercializing products,
partnering with others in the biotechnology or pharmaceutical industry, or
licensing the technologies associated with these programs to third
parties.




We
believe that it is not possible at this stage to provide a meaningful estimate
of the total cost to complete our ongoing projects and bring any proposed
products to market. The use of human embryonic stem cells as a therapy is an
emerging area of medicine, and it is not known what clinical trials will be
required by the FDA in order to gain marketing approval. Costs to complete could
vary substantially depending upon the projects selected for development, the
number of clinical trials required and the number of patients needed for each
study. It is possible that the completion of these studies could be delayed for
a variety of reasons, including difficulties in enrolling patients, delays in
manufacturing, incomplete or inconsistent data from the pre-clinical or clinical
trials, and difficulties evaluating the trial results. Any delay in completion
of a trial would increase the cost of that trial, which would harm our results
of operations. Due to these uncertainties, we cannot reasonably estimate the
size, nature nor timing of the costs to complete, or the amount or timing of the
net cash inflows from our current activities. Until we obtain further relevant
pre-clinical and clinical data, we will not be able to estimate our future
expenses related to these programs or when, if ever, and to what extent we will
receive cash inflows from resulting products.




Grant
reimbursements for the three months ended June 30, 2009 and 2008 were $0 and $0,
respectively.  The Company did not receive any grant reimbursements
during the three months ended June 30, 2009 or 2008.




General
and Administrative Expenses




General
and administrative expenses for the three months ended June 30, 2009 and 2008
were $760,556 and $1,840,116, respectively, a decrease of $1,079,560. 
This expense decrease was primarily a result of management’s efforts to reduce
costs and streamline operations during the three months ended June 30, 2009 so
that we could move closer to achieving profitability. General and administrative
expenses should continue to slightly decrease over the short term as we continue
to streamline our operations and reduce our costs until we are able to
expand.




Other
Income (Loss)




Other
income (loss) for the three months ended June 30, 2009 and 2008 were
($27,703,638) and ($1,016,633), respectively. The change in other income (loss)
in the three months ended June 30, 2009, compared to that of the earlier period,
relates primarily to adjustments to fair value of derivatives related to the
Convertible Debenture financings and default interest charges on all debentures.
Interest income was $137 and $1,317 during the three months ended June 30, 2009
and 2008, respectively. Interest income was lower in the three months ended June
30, 2009 than in the three months ended June 30, 2008 due to the lower cash
balances held in interest-bearing deposits during the periods. Interest expense
was $953,089 and $8,540,674 for the three months ended June 30, 2009 and 2008,
respectively, which represents a decrease of $7,587,585. The decrease in
interest expense in the three months ended June 30, 2009, compared to the
earlier period primarily to amortization of debt discounts and deferred
financing costs being recorded during 2008 for all debentures until their
default on August 6, 2008. Therefore, no additional interest expense arose in
2009 from this amortization. Interest expense during the three months ended June
30, 2009 relates primarily to debenture default interest.


38





The gain
(loss) on the fair value of derivatives was ($26,701,374) and $7,206,905, for
the three months ended June 30, 2009 and 2008, respectively.  The
increase in our share price contributed most significantly to the loss on the
fair value of derivatives during the three months ended June 30, 2009. In
periods when the share price increases, the derivative securities become more
attractive to exercise or in-the-money, and therefore the value of the
derivative liabilities increases.





Net
Loss




Net loss
for the three months ended June 30, 2009 and 2008 was $29,436,804 and
$5,589,417, respectively. The change in loss in the current period is the result
of changes to the fair value of derivatives and interest charges related to
convertible debentures.





Comparison
of Six Months Ended June 30, 2009 and 2008




Six
      months ended June 30,
                  
                  
                  Six
      months ended June 30,2009
                  
                  
                  2008%
      of
                  
                  
                  
                  
                  
                  %
      ofAmount
                  
                  
                  Revenue
                  
                  
                  Amount
                  
                  
                  RevenueREVENUE
                  
                  $
                  536,971
                  
                  
                  
                  100.0
                  %
                  
                  $
                  298,731
                  
                  
                  
                  100.0
                  %COST
      OF REVENUE
                  
                  
                  216,099
                  
                  
                  
                  40.2
                  %
                  
                  
                  310,914
                  
                  
                  
                  104.1
                  %GROSS
      PROFIT
                  
                  
                  320,872
                  
                  
                  
                  59.8
                  %
                  
                  
                  (12,183
                  )
                  
                  
                  -4.1
                  %RESEARCH
      AND DEVELOPMENT EXPENSES AND GRANT REIMBURSEMENTS
                  
                  
                  1,438,025
                  
                  
                  
                  267.8
                  %
                  
                  
                  6,649,253
                  
                  
                  
                  2225.8
                  %GENERAL
      AND ADMINSTRATIVE EXPENSES
                  
                  
                  1,507,634
                  
                  
                  
                  280.8
                  %
                  
                  
                  3,565,938
                  
                  
                  
                  1193.7
                  %LOSS
      ON SETTLEMENT OF LITIGATION
                  
                  
                  4,793,949
                  
                  
                  
                  892.8
                  %
                  
                  
                  -
                  
                  
                  
                  0.0
                  %OTHER
      INCOME (EXPENSE)
                  
                  
                  (41,017,944
                  )
                  
                  
                  -7638.8
                  %
                  
                  
                  (4,881,702
                  )
                  
                  
                  -1634.1
                  %NET
      INCOME (LOSS)
                  
                  $
                  (48,436,680
                  )
                  
                  
                  -9020.4
                  %
                  
                  $
                  (15,109,076
                  )
                  
                  
                  -5057.8
                  %




Revenue




Revenue
for the six months ended June 30, 2009 and 2008 was $536,971 and $298,731,
respectively.  These amounts relate primarily to license fees and
royalties collected that are being amortized over the period of the license
granted, and are therefore typically consistent between periods. The increase in
revenue during the six months ended June 30, 2009, was due to more new licenses
being granted as compared to the six months ended June 30, 2008.





Of the
revenue recognized during the six months ended June 30, 2009, we recognized
$95,587 in license fee revenue from Transition Holdings, Inc. On December 18,
2008, we entered into a license agreement with Transition for certain of our
non-core technology. Under the agreement, Transition agreed to acquire a license
to the technology for a total of $3.5 million in cash. We are recognizing
revenue from this agreement over its 17-year patent useful life.





Research
and Development Expenses and Grant Reimbursements




Research
and development expenses (“R&D”) for the six months ended June 30, 2009 and
2008 were $1,574,865 and $6,754,422, respectively, a decrease of
$5,179,557.  R&D consists mainly of facility costs, payroll and payroll
related expenses, research supplies and costs incurred in connection with
specific research grants, and for scientific research.  The decline in
R&D expenditures during the six months ended June, 2009 as compared to the
same period in 2008 is primarily due to the fact that we closed our Charlestown,
Massachusetts and Alameda, California facilities at the end of May
2008.




Our
research and development expenses consist primarily of costs associated with
basic and pre-clinical research exclusively in the field of human stem cell
therapies and regenerative medicine, with focus on development of our
technologies in cellular reprogramming, reduced complexity applications, and
stem cell differentiation. These expenses represent both pre-clinical
development costs and costs associated with non-clinical support activities such
as quality control and regulatory processes. The cost of our research and
development personnel is the most significant category of expense; however, we
also incur expenses with third parties, including license agreements, sponsored
research programs and consulting expenses.


39




We do not segregate
research and development costs by project because our research is focused
exclusively on human stem cell therapies as a unitary field of study. Although
we have three principal areas of focus for our research, these areas are
completely intertwined and have not yet matured to the point where they are
separate and distinct projects. The intellectual property, scientists and other
resources dedicated to these efforts are not separately allocated to individual
projects, but rather are conducting our research on an integrated
basis.




We expect
that research and development expenses will continue to increase in the
foreseeable future as we add personnel, expand our pre-clinical research, begin
clinical trial activities, and increase our regulatory compliance capabilities.
The amount of these increases is difficult to predict due to the uncertainty
inherent in the timing and extent of progress in our research programs, and
initiation of clinical trials. In addition, the results from our basic research
and pre-clinical trials, as well as the results of trials of similar
therapeutics under development by others, will influence the number, size and
duration of planned and unplanned trials. As our research efforts mature, we
will continue to review the direction of our research based on an assessment of
the value of possible commercial applications emerging from these efforts. Based
on this continuing review, we expect to establish discrete research programs and
evaluate the cost and potential for cash inflows from commercializing products,
partnering with others in the biotechnology or pharmaceutical industry, or
licensing the technologies associated with these programs to third
parties.




We
believe that it is not possible at this stage to provide a meaningful estimate
of the total cost to complete our ongoing projects and bring any proposed
products to market. The use of human embryonic stem cells as a therapy is an
emerging area of medicine, and it is not known what clinical trials will be
required by the FDA in order to gain marketing approval. Costs to complete could
vary substantially depending upon the projects selected for development, the
number of clinical trials required and the number of patients needed for each
study. It is possible that the completion of these studies could be delayed for
a variety of reasons, including difficulties in enrolling patients, delays in
manufacturing, incomplete or inconsistent data from the pre-clinical or clinical
trials, and difficulties evaluating the trial results. Any delay in completion
of a trial would increase the cost of that trial, which would harm our results
of operations. Due to these uncertainties, we cannot reasonably estimate the
size, nature nor timing of the costs to complete, or the amount or timing of the
net cash inflows from our current activities. Until we obtain further relevant
pre-clinical and clinical data, we will not be able to estimate our future
expenses related to these programs or when, if ever, and to what extent we will
receive cash inflows from resulting products.




Grant
reimbursements for the six months ended June 30, 2009 and 2008 were $136,840 and
$105,169, respectively. The Company received one grant during the six
months ended June 30, 2009 and one grant during the six months ended June 30,
2008, both from the National Institute of Health.




General
and Administrative Expenses




General
and administrative expenses for the six months ended June 30, 2009 and 2008
were $1,507,634 and $3,565,938, respectively, a decrease of
$2,058,304.  This expense decrease was primarily a result of management’s
efforts to reduce costs and streamline operations during the six months ended
June 30, 2009 so that we could move closer to achieving profitability. General
and administrative expenses should continue to slightly decrease over the short
term as we continue to streamline our operations and reduce our costs until we
are able to expand.





Loss
on Settlement





Loss on
settlement for the six months ended June 30, 2009 and 2008 were $4,793,949 and
$0, respectively. During the six months ended June 30, 2009, we were ordered by
the Circuit Court of the Twelfth Judicial District Court for Sarasosa County,
Florida to settle certain past due accounts payable, for previous professional
services and other operating expenses incurred, by the issuance of shares of our
common stock. During the six months ended June 30, 2009, we settled $505,199 in
accounts payable through the issuance of 39,380,847 shares of our common stock
with a value of $5,299,148. Accordingly, we recorded a loss on settlement of
$4,793,949 for the six months ended June 30, 2009.




Other
Income (Loss)




Other
income (loss) for the six months ended June 30, 2009 and 2008 were ($41,017,944)
and ($4,881,702), respectively. The change in other income (loss) in the six
months ended June 30, 2009, compared to that of the earlier period, relates
primarily to adjustments to fair value of derivatives related to the Convertible
Debenture financings, loss on modification of debentures, and default interest
charges on all debentures. Interest income was $1,758, and $8,166 during the six
months ended June 30, 2009 and 2008, respectively. Interest income was lower in
the six months ended June 30, 2009 than in the six months ended June 30, 2008
due to the lower cash balances held in interest-bearing deposits during the
periods. Interest expense was $1,535,910 and $12,747,290 for the six months
ended June 30, 2009 and 2008, respectively, which represents a decrease of
$11,211,380. The decrease in interest expense in the six months ended June 30,
2009, compared to the earlier period relates primarily to amortization of debt
discounts and deferred financing costs being recorded during 2008 for all
debentures until their default on August 6, 2008. Therefore, no additional
interest expense arose in 2009 from this amortization. Interest expense during
the six months ended June 30, 2009 relates primarily to debenture default
interest.


40





The gain
(loss) on the fair value of derivatives was ($37,542,986) and $8,227,176, for
the six months ended June 30, 2009 and 2008, respectively.  The
increase in our share price contributed most significantly to the loss on the
fair value of derivatives during the six months ended June 30, 2009. In periods
when the share price increases, the derivative securities become more attractive
to exercise or in-the-money, and therefore the value of the derivative
liabilities increases.





During
the six months ended June 30, 2009, we recognized a loss on modification of
debentures in the amount of $1,796,368. This loss arose from a court order that
we allow an investor to convert its 2007 and 2008 debenture balances at $0.02
per share. The change in fair value immediately after the conversion price
reduction from immediately before the conversion price reduction gave rise to
the loss on modification.





Net
Loss




Net loss
for the six months ended June 30, 2009 and 2008 was $48,436,680 and $15,109,076,
respectively. The change in loss in the current period is the result of changes
to the fair value of derivatives, interest charges related to convertible
debentures, a loss on the court order settlement of accounts payable, and loss
on modification of debt.




LIQUIDITY
AND CAPITAL RESOURCES




Cash
Flows





The
following table sets forth a summary of our cash flows for the periods indicated
below:




Six
      months ended June 30,2009
                  
                  
                  2008Net
      cash used in operating activities
                  
                  $
                  (1,931,196
                  )
                  
                  $
                  (3,754,418
                  )Net
      cash used in investing activities
                  
                  
                  (5,558
                  )
                  
                  
                  (168,549
                  )Net
      cash provided by financing activities
                  
                  
                  1,809,761
                  
                  
                  
                  2,790,122Net
      decrease in cash and cash equivalents
                  
                  
                  (126,993
                  )
                  
                  
                  (1,132,845
                  )Cash
      and cash equivalents at the end of the period
                  
                  $
                  689,911
                  
                  
                  $
                  33,271




Operating
Activities





Our net
cash used in operating activities during the six months ended June 30, 2009 and
2008 was $1,931,196 and $3,754,418, respectively. Cash used in operating
activities decreased during the current period primarily due to a decrease in
cash and cash equivalents available for use during the period. Cash used in
operating activities decreased also as a result of the closures in May 2008 of
the Alameda, California and Charlestown, Massachusetts facilities.





Cash
Flows from Investing and Financing Activities





Cash used
in investing activities during the six months ended June 30, 2009 and 2008 was
$5,558 and $168,549, respectively. Our cash used in investing activities during
the six months ended June 30, 2009 was attributed to payment of a deposit on our
leased space in Los Angeles, California as well as a payment for the purchase of
a fixed asset of approximately $3,000. Cash provided by investing activities
during the six months ended June 30, 2008 was primarily due to purchases of
property and equipment. Cash flows provided by financing activities during the
six months ended June 30, 2009 was $1,809,761. During the six months ended
June 30, 2009, we received $1,809,761 from the issuance of Series A-1 redeemable
convertible preferred stock. During the six months ended June 30, 2008, we made
payments of $18,650 on notes and leases and another $3,660 for issuance costs on
a note payable. We also received proceeds of $600,000 from the issuance of a
convertible note payable as well as $2,212,432 from the issuance of notes
payable during the six months ended June 30, 2008.





We are
financing our operations primarily from the following activities:





·
              On December 1, 2008, we formed an
      international joint venture with CHA Bio & Diostech Co., Ltd.(“CHA”), a leading Korean-based
      biotechnology company focused on the development of stem cell
      technologies. CHA has agreed to contribute $500,000 in working capital for
      the venture as well as paying the Company an up-front license fee of
      $500,000. As of June 30, 2009, CHA has paid the Company the entire
      $500,000 towards payment of the up-front license
    fee.
 ·
              On December 18, 2008, we entered
      into a license agreement with an Ireland-based investor, Transition
      Holdings Inc. (“Transition”), for certain of our non-core technology.
      Under the agreement, Transition agreed to acquire a license to the
      technology for $3.5 million in cash. As of June 30, 2009, we have received
      the entire $3.5 million in cash under this
    agreement.
  41
  ·
              On March 30, 2009, we entered
      into a license agreement with CHA under which we will license our RPE
      technology, for the treatment of diseases of the eye, to CHA for
      development and commercialization exclusively in Korea. We are eligible to
      receive up to a total of $1.9 million in fees based upon the parties
      achieving certain milestones, including us making an IND submission to the
      US FDA to commence clinical trials in humans using the technology. We
      received an up-front fee under the license in the amount of $1,100,000.
      Under the agreement, CHA will incur all of the cost associated with the
      RPA clinical trials in Korea. The agreement is part of the joint venture
      between the two companies.
 ·
              On March 11, 2009, we entered
      into a $5 million credit facility (“Facility”) with a life sciences fund.
      Under the agreement, the proceeds from the Facility must be used
      exclusively for us to file an investigational new drug (“IND”) for our
      retinal pigment epithelium (“RPE”) program, and will allow us to complete
      both Phase I and Phase II studies in humans. An IND is required to
      commence clinical trials. Under the terms of the agreement, we may draw
      down funds, as needed for clinical development of the RPE program, from
      the investor through the issuance of Series A-1 convertible preferred
      stock. The preferred stock pays dividends, in kind of preferred stock, at
      an annual rate of 10%, matures in four years from the initial issuance
      date, and is convertible into common stock at $0.75 per share. As of
      August 10, 2009, we have drawn down approximately $2,169,000 on this
      facility.
 ·
              On May 13, 2009, the Company
      entered into another  license agreement with CHA under which the
      Company will license its proprietary “single blastomere technology,” which
      has the potential to generate stable cell lines, including RPE for the
      treatment of diseases of the eye, for development and commercialization
      exclusively in Korea. We received an upfront license fee of
      $300,000.
 ·
              On
      July 29, 2009, we entered into a consent, amendment and exchange agreement
      with holders of our outstanding convertible debentures and warrants, which
      were issued in private placements to the 2005, 2006, 2007 and 2008
      debentures. We agreed to issue to each debenture holder in exchange for
      the holder’s debenture an amended and restated debenture in a principle
      amount equal to the principal amount of the holder’s debenture times 1.35
      minus any interest paid thereon. The conversion price under the amended
      and restated debentures was reduced to $0.10, subject to certain customary
      anti-dilution adjustments. The maturity date under the amended and
      restated debentures was extended until December 30, 2010. The amended and
      restated debentures bear interest at 12% per annum. Further, we agreed to
      issue to each holder in exchange for the holder’s warrant an amended and
      restated warrant, which exercise price was reduced to $0.10, subject to
      certain customary anti-dilution adjustments. The termination date under
      the amended and restated warrants was extended until June 30, 2014.
      Simultaneously with the signing of this agreement, we and the debenture
      holders entered into a standstill and forbearance agreement, whereby the
      debenture holders agreed to forbear from exercising their rights and
      remedies under the original debentures and transaction
      documents.





To a
substantially lesser degree, financing of our operations is provided through
grant funding, payments received under license agreements, and interest earned
on cash and cash equivalents.




With the
exception of 2002, when we sold certain assets of a subsidiary resulting in a
gain for the year, we have incurred substantial net losses each year since
inception as a result of research and development and general and administrative
expenses in support of our operations. We anticipate incurring substantial net
losses in the future.




Our cash
and cash equivalents are limited. In the short term, we will require substantial
additional funding prior to June 30, 2010 in order to maintain our current level
of operations.  If we are unable to raise additional funding, we will be
forced to either substantially scale back our business operations or curtail our
business operations entirely.




On a
longer term basis, we have no expectation of generating any meaningful revenues
from our product candidates for a substantial period of time and will rely on
raising funds in capital transactions to finance our research and development
programs.  Our future cash requirements will depend on many factors,
including the pace and scope of our research and development programs, the costs
involved in filing, prosecuting and enforcing patents, and other costs
associated with commercializing our potential products. We intend to seek
additional funding primarily through public or private financing transactions,
and, to a lesser degree, new licensing or scientific collaborations, grants from
governmental or other institutions, and other related transactions.  If we
are unable to raise additional funds, we will be forced to either scale back or
business efforts or curtail our business activities entirely.  We
anticipate that our available cash and expected income will be sufficient to
finance most of our current activities for at least four months from the date we
file these financial statements, although certain of these activities and
related personnel may need to be reduced.  We cannot assure you that public
or private financing or grants will be available on acceptable terms, if at
all.  Several factors will affect our ability to raise additional funding,
including, but not limited to, the volatility of our Common Stock.





RISK
FACTORS THAT MAY AFFECT OUR BUSINESS





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-Q. Any
of these risks could materially adversely affect our business, operating results
and financial condition.




42




Risks
Relating to the Company’s Early Stage Development





We may not be able to continue as a
going concern. Our consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. We have a history
of operating losses that are likely to continue in the future. Our auditors have
included an explanatory paragraph in their Report of Independent Registered
Public Accounting Firm included in our audited consolidated financial statements
for the years ended December 31, 2008 and 2007 to the effect that our
significant losses from operations and our dependence on equity and debt
financing raise substantial doubt about our ability to continue as a going
concern. Our consolidated financial statements do not include any adjustments
that might be necessary should we be unable to continue as a going
concern.





Our business is at an early stage of
development and we may not develop therapeutic products that can be
commercialized. We do not yet have any product candidates in late-stage
clinical trials or in the marketplace. Our potential therapeutic products will
require extensive preclinical and clinical testing prior to regulatory approval
in the United States and other countries. We may not be able to obtain
regulatory approvals (see REGULATORY RISKS), enter clinical trials for any of
our products, or commercialize any products. Our therapeutic and product
candidates may prove to have undesirable and unintended side effects or other
characteristics adversely affecting their safety, efficacy or cost-effectiveness
that could prevent or limit their use. Any product using any of our technology
may fail to provide the intended therapeutic benefits, or achieve therapeutic
benefits equal to or better than the standard of treatment at the time of
testing or production. In addition, we will need to determine whether any of our
potential products can be manufactured in commercial quantities or at an
acceptable cost. Our efforts may not result in a product that can be or will be
marketed successfully. Physicians may not prescribe our products, and patients
or third party payors may not accept our products. For these reasons we may not
be able to generate revenues from commercial production.





We have limited clinical testing,
regulatory, manufacturing, marketing, distribution and sales capabilities which
may limit our ability to generate revenues. Due to the relatively early
stage of our therapeutic products, regenerative medical therapies and stem cell
therapy-based programs, we have not yet invested significantly in regulatory,
manufacturing, marketing, distribution or product sales resources.  We
cannot assure you that we will be able to invest or develop any of these
resources successfully or as expediently as necessary. The inability to do so
may inhibit or harm our ability to generate revenues or operate
profitably.





We have limited capital resources and
we may not obtain the significant additional capital required to sustain our
research and development efforts. We will need additional capital to
conduct our operations and develop our products and our ability to obtain the
necessary funding is uncertain. (see FINANCIAL RISKS) We have losses from
operations, negative cash flows from operations and a substantial stockholders’
deficit and we do not believe that our cash from all sources (including cash,
cash equivalents, anticipated revenues from licensing fees and sponsored
research contracts) is sufficient for us to continue operations beyond December
31, 2009.





Management
continues to evaluate alternatives and sources of additional funding. These may
include public and private investors, strategic partners, and grant programs
available through specific states of foundations. However, there is no assurance
that such sources will result in raising additional capital. Lack of necessary
funding may require us to delay, scale back or eliminate some or all of our
research and product development programs and/or capital expenditures, to
license our potential products or technologies to third parties, to consider
business combinations related to ongoing business operations, or to shut down
some, or all, of our operations.





Additionally,
our cash requirements may vary materially from our current projections due to
unforeseen and unexpected results in product research and development, or
changes in any of the following: potential relationships with strategic
partners, the focus and direction of our research and development programs, the
competitive landscape, litigation required to protect our technology,
technological advances, the cost of pre-clinical and clinical testing, the
regulatory process of the FDA (and of foreign regulators), among others. Our
current cash reserves are not sufficient to fund our operations through the
commercialization of our first products and/or services.





We have a history of operating losses
and we may not achieve future revenues or operating profits. We have
generated modest 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 income from licensing fees and the Company does not
generate significant revenue outside of licensing non-core technologies.
Additionally, even if we are able to commercialize our technologies or any
products or services related to our technologies it is not certain that they
will result in revenue or profitability.





We are in the Early Stages of a
Strategic Joint Venture which may slow, impede or result in the termination of
potential therapeutic products whose development is now the responsibility of
the partnership and not solely of the Company. The Company
has entered into a new partnership (CHA) and as a result, we are subject to 3
rd
party interests (see RISKS RELATED TO THIRD PARTY RELIANCE) and control issues,
not the least of which relates to certain of our employees no longer being
exclusively managed by us. We therefore could be at risk for losing key
employees. Additionally substantial operating and working capital will be
required and there is no assurance that CHA Biotech Co. limited, partner in our
joint venture, will be able to fund their requirements.


43





We have a limited operating history
on which investors may evaluate our operations and prospects for profitable
operations. If we continue to suffer losses as we have in the past,
investors may not receive any return on their investment and may their entire
investment. 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 an early 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.




Risks
Relating to Technology





We are dependent on new and unproven
technologies. Our risks as an early stage company are compounded by our
heavy dependence on emerging and sometimes unproven technologies. If these
technologies do not produce satisfactory results, our business may be harmed.
Additionally some of our technologies and 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.





Over the last twelve months we have
narrowed our potential product pool to focusing on our Retinal Program as well
as the applications of our I.P.S. technology, which will limit our revenue
sources. Our human embryonic stem cell and regenerative medical therapy
programs are in the pre-clinical stage and the Company doesn’t foresee having a
commercial product until clinical trials are completed. We have identified the
programs that we are working to get into the clinical testing phase. We have
narrowed the scope of our developmental focus to our Retinal Program and those
related therapies, focusing our products related to our I.P.S. technology and,
as part of our recently established partnership with CHA, developing products in
the Hemangioblast/immunology arena. (see BUSINESS Section of 10K). As a result
of our narrower product focus, we have fewer revenue sources. Our emphasis on
fewer programs may hinder our results if these programs are not successful.
Although our adult stem cell myoblast program has completed Phase I and Ib FDA
clinical trials we have suspended that program indefinitely due to a lack of
funding in the cardiac area.  As a result of our
emphasis on our retinal program, our hemangioblast program and our IPS
technology, our ability to progress as a company is more significantly hinged on
the success of fewer programs and thus, a setback or adverse development
relating to any one of them could potentially have a significant impact on share
price as well as an inhibitory effect on our ability to raise additional
capital. 
Additionally, we partially rely on nuclear transfer and embryonic stem cell and
myoblast 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. (Note that the Myoblast program has
been put on hold indefinitely due to a lack of funding for the next stage of
Clinical trials) 
We cannot guarantee that we will be able to successfully develop our Retinal,
hemangioblast, IPS-related technologies, nuclear transfer technology, embryonic
stem cell or myoblast 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.





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 wrong
products or services. Any of these factors either alone or in concert could
materially harm our ability to earn revenues or 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.





Risks
Related to Intellectual Property





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.


44




Certain
of these licenses also contain restrictions, such as 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.





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, 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 is
unfavorable, our business could 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 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 in a timely manner or at all, or that the breadth or degree of
      protection of 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,
      and
 -
              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.





Patents obtained by other persons may
result in infringement claims against us that are costly to defend and which may
limit our ability to use the disputed technologies and prevent us from pursuing
research and development or commercialization of potential products. A
number of other pharmaceutical, biotechnology and other companies, universities
and research institutions have filed patent applications or have been issued
patents relating to cell therapies, stem cells, and other technologies
potentially relevant to or required by our expected products. We cannot predict
which, if any, of such applications will issue as patents or the claims that
might be allowed. We are aware that a number of companies have filed
applications relating to stem cells. We are also aware of a number of patent
applications and patents claiming use of stem cells and other modified cells to
treat disease, disorder or injury.





If third
party patents or patent applications contain claims infringed by either our
licensed technology or other technology required to make and use our potential
products and such claims are ultimately determined to be valid, there can be no
assurance that we would be able to obtain licenses to these patents at a
reasonable cost, if at all, or be able to develop or obtain alternative
technology. If we are unable to obtain such licenses at a reasonable cost, we
may not be able to develop some products commercially. We may be required to
defend ourselves in court against allegations of infringement of third party
patents. Patent litigation is very expensive and could consume substantial
resources and create significant uncertainties. And adverse outcome in such a
suit could subject us to significant liabilities to third parties, require
disputed rights to be licensed from third parties, or require us to cease using
such technology.





We are not in full compliance with
some of our license agreements. We are not in full compliance
with some of our licenses (see Our Intellectual Property in the BUSINESS section
of this 10k) and due to limited financial resources we cannot guarantee that we
will regain full compliance status. If we are unable to be in compliance with
our license agreements, our business may be harmed.




45


We may not be able to adequately
defend 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 potential competitors are located in these countries.
The laws protecting intellectual property in some of those countries may not
provide adequate protection to prevent our competitors from misappropriating our
intellectual property. Several of these potential competitors may be further
along in the process of product development and also operate large,
company-funded research and development programs. As a result, our competitors
may develop more competitive or affordable products, or achieve earlier patent
protection or product commercialization than we are able to achieve. Competitive
products may render any products or product candidates that we develop
obsolete.




Regulatory
Risks





We cannot market our product
candidates until we receive regulatory approval. We must comply with
extensive government regulations in order to obtain and maintain marketing
approval for our products in the United States and abroad. The process of
obtaining regulatory approval is lengthy, expensive and uncertain. In the United
States, the FDA imposes substantial requirements on the introduction of
biological products and many medical devices through lengthy and detailed
laboratory and clinical testing procedures, sampling activities and other costly
and time-consuming procedures. Satisfaction of these requirements typically
takes several years and the time required to do so may vary substantially based
upon the type and complexity of the biological product or medical
device.





In
addition, product candidates that we believe should be classified as medical
devices for purposes of the FDA regulatory pathway may be determined by the FDA
to be biologic products subject to the satisfaction of significantly more
stringent requirements for FDA approval. Any difficulties that we encounter in
obtaining regulatory approval may have a substantial adverse impact on our
business and cause our stock price to significantly decline.





We cannot assure you that we will
obtain FDA or foreign regulatory approval to market any of our product
candidates for any indication in a timely manner or at all. If we fail to
obtain regulatory approval of any of our product candidates for at least one
indication, we will not be permitted to market our product candidates and may be
forced to cease our operations.





Even if some of our product
candidates receive regulatory approval, these approvals may be subject to
conditions, and we and our third party manufacturers will in any event be
subject to significant ongoing regulatory obligations and oversight. Even
if any of our product candidates receives regulatory approval, the
manufacturing, marketing and sale of our product candidates will be subject to
stringent and ongoing government regulation. Conditions of approval, such as
limiting the category of patients who can use the product, may significantly
impact our ability to commercialize the product and may make it difficult or
impossible for us to market a product profitably. Changes we may desire to make
to an approved product, such as cell culturing changes or revised labeling, may
require further regulatory review and approval, which could prevent us from
updating or otherwise changing an approved product. If our product candidates
are approved by the FDA or other regulatory authorities for the treatment of any
indications, regulatory labeling may specify that our product candidates be used
in conjunction with other therapies.





Once obtained, regulatory approvals
may be withdrawn and can be expensive to maintain. Regulatory approval
may be withdrawn for a number of reasons, including the later discovery of
previously unknown problems with the product. Regulatory approval may also
require costly post-marketing follow-up studies, and failure of our product
candidates to demonstrate sufficient efficacy and safety in these studies may
result in either withdrawal of marketing approval or severe limitations on
permitted product usage. In addition, numerous additional regulatory
requirements relating to, among other processes, the labeling, packaging,
adverse event reporting, storage, advertising, promotion and record-keeping will
also apply. Furthermore, regulatory agencies subject a marketed product, its
manufacturer and the manufacturer's facilities to continual review and periodic
inspections. Compliance with these regulatory requirements are time consuming
and require the expenditure of substantial resources.





If any of
our product candidates is approved, we will be required to report certain
adverse events involving our products to the FDA, to provide updated safety and
efficacy information and to comply with requirements concerning the
advertisement and promotional labeling of our products. As a result, even if we
obtain necessary regulatory approvals to market our product candidates for any
indication, any adverse results, circumstances or events that are subsequently
discovered, could require that we cease marketing the product for that
indication or expend money, time and effort to ensure full compliance, which
could have a material adverse effect on our business.





If our products do not comply with
applicable laws and regulations our business will be harmed.
Any failure by us, or by any third parties that may manufacture or market our
products, to comply with the law, including statutes and regulations
administered by the FDA or other U.S. or foreign regulatory authorities, could
result in, among other things, warning letters, fines and other civil penalties,
suspension of regulatory approvals and the resulting requirement that we suspend
sales of our products, refusal to approve pending applications or supplements to
approved applications, export or import restrictions, interruption of
production, operating restrictions, closure of the facilities used by us or
third parties to manufacture our product candidates, injunctions or criminal
prosecution. Any of the foregoing actions could have a material adverse effect
on our business.





Our products may not be accepted in
the marketplace .   If we are successful in obtaining
regulatory approval for any of our product candidates, the degree of market
acceptance of those products will depend on many factors,
including:




46




-
              Our ability to provide acceptable
      evidence and the perception of patients and the healthcare community,
      including third party payors, of the positive characteristics of our
      product candidates relative to existing treatment methods, including their
      safety, efficacy, cost effectiveness and/or other potential
      advantages,
 -
              The incidence and severity of any
      adverse side effects of our product
  candidates,
 -
              The availability of alternative
      treatments,
 -
              The labeling requirements imposed
      by the FDA and foreign regulatory agencies, including the scope of
      approved indications and any safety
  warnings,
 -
              Our ability to obtain sufficient
      third party insurance coverage or reimbursement for our products
      candidates,
 -
              The inclusion of our products on
      insurance company coverage
policies,
 -
              The willingness and ability of
      patients and the healthcare community to adopt new
      technologies,
 -
              The procedure time associated
      with the use of our product
candidates,
 -
              Our ability to manufacture or
      obtain from third party manufacturers sufficient quantities of our product
      candidates with acceptable quality and at an acceptable cost to meet
      demand, and
 -
              Marketing and distribution
      support for our
products.




We cannot
predict or guarantee that physicians, patients, healthcare insurers, third party
payors or health maintenance organizations, or the healthcare community in
general, will accept or utilize any of our product candidates.  Failure to
achieve market acceptance would limit our ability to generate revenue and would
have a material adverse effect on our business. In addition, if any of our
product candidates achieve market acceptance, we may not be able to maintain
that market acceptance over time if competing products or technologies are
introduced that are received more favorably or are more
cost-effective.





Risks
Related to Domestic Governmental Regulation




Companies such as ours engaged in
research using embryonic stem cells, adult stem cells and IPS technology 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.   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
I.P.S. (Induced Pluripotent Stem Cell) technology generally or the use of IPS
technology in the development of therapies specifically. Further, we cannot
assure you that legislative or administrative restrictions directly or
indirectly delaying, limiting or preventing the use of IPS in the development of
products or human embryonic material or the sale, manufacture or use of products
or services derived from IPS or human embryonic material will not be adopted in
the future.




Restrictions on the use of human
embryonic stem cells, and the ethical, legal and social implications of that
research, could prevent us from developing or gaining acceptance for
commercially viable products in these areas. Some of our most important
programs involve the use of stem cells that are derived from human embryos. The
use of human embryonic stem cells gives rise to ethical, legal and social issues
regarding the appropriate use of these cells. In the event that our research
related to human embryonic stem cells becomes the subject of adverse commentary
or publicity, the market price for our common stock could be significantly
harmed. Some political and religious groups have voiced opposition to our
technology and practices. We use stem cells derived from human embryos that have
been created for in vitro fertilization procedures but are no longer desired or
suitable for that use and are donated with appropriate informed consent for
research use. Many research institutions, including some of our scientific
collaborators, have adopted policies regarding the ethical use of human
embryonic tissue. These policies may have the effect of limiting the scope of
research conducted using human embryonic stem cells, thereby impairing our
ability to conduct research in this field.





Despite the rescission of the
President Bush’s Exec order in August 2001 by President Barak Obama in March
2009, the overall effect of new laws drafted by the NIH and put into effect
regarding the dropping of restrictions on hES research has yet to be seen or
made clear. While it is unclear whether Federal law continues to restrict
the use of federal funds for human embryonic cell research, commonly referred to
as hES cell research, there can be no assurance that our operations will not be
restricted by any future legislative or administrative efforts by politicians or
groups opposed to the development of hES call technology or nuclear transfer
technology. Additionally there are no allowances made addressing the legality of
therapies resulting from IPS technology. Additionally the executive order does
not overturn the Dickey–Wicker Amendment, a 13-year-old ban on federal funding
for the actual creation of new stem cell lines, an act that destroys an embryo.
In the United States these efforts still must be funded privately or by state
governments. Further, there can be no assurance that legislative or
administrative restrictions directly or indirectly delaying, limiting or
preventing the use of hES technology, nuclear transfer technology, IPS
technology, the use of human embryonic material, or the sale, manufacture or use
of products or services derived from nuclear transfer technology or other hES
technology will not be adopted or extended in the future.




Because we or our collaborators must
obtain regulatory approval to market our products in the United States and other
countries, we cannot predict whether or when we will be permitted to
commercialize our products.   Federal, state and local
governments in the United States and governments in other countries have
significant regulations in place that govern many of our activities. We are or
may become subject to various federal, state and local laws, regulations and
recommendations relating to safe working conditions, laboratory and
manufacturing practices, the experimental use of animals and the use and
disposal of hazardous or potentially hazardous substances used in connection
with our research and development work. The preclinical testing and clinical
trials of the products that we or our collaborators develop are subject to
extensive government regulation that may prevent us from creating commercially
viable products from our discoveries. In addition, the sale by us or our
collaborators of any commercially viable product will be subject to government
regulation from several standpoints, including manufacturing, advertising and
promoting, selling and marketing, labeling, and distributing.


47




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 "DESCRIPTION
OF BUSINESS— Government
Regulation " above.




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 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
"DESCRIPTION OF BUSINESS— Government Regulation "
above.




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, which is described more fully under the heading "DESCRIPTION OF
BUSINESS— California
Proposition 71 " above. Recent developments regarding the State of
California deep and significant financial problems has had a direct and
significant impact on the availability of funds: funding commitments have not
been met by CIRM and there is no guarantee that any funds will flow to
for-profit institutions as most of it will go to state and not-for-profit
institutions. Additionally state 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 you that funding, if any, will be available to us, or any for-profit
entity.




The government maintains certain
rights in technology that we develop using government grant money and we may
lose the revenues from such technology if we do not commercialize and utilize
the technology pursuant to established government guidelines. Certain of
our and our licensors' research has been or is being funded in part by
government grants. In connection with certain grants, the U.S. government
retains rights in the technology developed with the grant. These rights could
restrict our ability to fully capitalize upon the value of this
research.





Risks
Related to International Regulation





We may not be able to obtain required
approvals in other countries. The requirements governing the
conduct of clinical trials and cell culturing and marketing of our product
candidates outside the United States vary widely from country to country.
Foreign approvals may take longer to obtain than FDA approvals and can require,
among other things, additional testing and different clinical trial designs.
Foreign regulatory approval processes generally include all of the risks
associated with the FDA approval processes. Some foreign regulatory agencies
also must approve prices of the products. Regulatory approval in one country
does not ensure regulatory approval in another, but a failure or delay in
obtaining regulatory approval in one country may negatively impact the
regulatory process in others. We may not be able to file for regulatory
approvals and may not receive necessary approvals to market our product
candidates in any foreign country. If we fail to comply with these regulatory
requirements or fail to obtain and maintain required approvals in any foreign
country, we will not be able to sell our product candidates in that country and
our ability to generate revenue will be adversely affected.





Financial
Risks





We may not be able to raise the
required capital to conduct our operations and develop and commercialize our
products.   We require substantial additional capital resources
in order to conduct our operations and develop and commercialize our products
and run our facilities. We will need significant additional funds or a
collaborative partner, or both, to finance the research and development
activities of our therapies and potential products. Accordingly, we are
continuing to pursue additional sources of financing.  Our future
capital requirements will depend upon many factors, including:


-
              The continued progress and cost
      of our research and development
programs,
 -
              The progress with pre-clinical
      studies and clinical trials,
 -
              The time and costs involved in
      obtaining regulatory
clearance,
 -
              The costs in preparing, filing,
      prosecuting, maintaining and enforcing patent
    claims,
 -
              The costs of developing sales,
      marketing and distribution channels and our ability to sell the
      therapies/products if
developed,
 -
              The costs involved in
      establishing manufacturing capabilities for commercial quantities of our
      proposed products,
 -
              Competing technological and
      market developments,
  48
  -
              Market acceptance of our proposed
      products,
 -
              The costs for recruiting and
      retaining employees and consultants,
and
 -
              The costs for educating and
      training physicians about our proposed
      therapies/products.




Additional
financing through strategic collaborations, public or private equity financings
or other financing sources may not be available on acceptable terms, or at all.
Additional equity financing could result in significant dilution to our
shareholders. Further, if additional funds are obtained through arrangements
with collaborative partners, these arrangements may require us to relinquish
rights to some of our technologies, product candidates or products that we would
otherwise seek to develop and commercialize on our own. If sufficient capital is
not available, we may be required to delay, reduce the scope of or eliminate one
or more of our programs or potential products, any of which could have a
material adverse affect on our financial condition or business
prospects.





Risks
Relating to the September 2005, September 2006, August 2007 and March 2008
Financings





If we are required for any reason to
repay our outstanding debentures we would be required to deplete our working
capital, if available, or raise additional funds. Our failure to repay the
convertible debentures, if required, could result in legal action against us,
which could require the sale of substantial assets. We
have outstanding, as of June 30, 2009, $13,434,892 aggregate original principal
amount of convertible debentures with an original issue discount of 20.3187%
with $4,758,880 in 2008 Debentures $6,739,215 in 2007 Debentures, $1,854,875 in
2006 Debentures, and $81,922 in 2005 Debentures. We are required to redeem on a
monthly basis, by payment, at our option, with cash or with shares of our common
stock, 1/30th of the aggregate original principal amount of the debentures. On
August 6, 2008, we enacted a moratorium on redemption of all debentures, which
moratorium is still in effect as of June 15, 2009. This moratorium triggered an
event of default under the terms of all Debentures.





The 2005
Debentures were due and payable on September 15, 2008, the 2006 Debentures are
due and payable on September 6, 2009, the 2007 Debentures are due and payable on
August 31, 2010, the February 2008 Debenture is due and payable February 15,
2010, and the April 2008 Debenture was due and payable on March 31, 2009. Any
event of default could require the early repayment of the convertible
debentures, and additional interest is accruing on the outstanding principal
balance of the debentures. We anticipate that the full amount of the convertible
debentures will be converted into shares of our common stock, in accordance with
the terms of the convertible debentures; however no assurance can be provided
that any amount of debentures will be converted. If, prior to the maturity date,
we are required to repay the convertible debentures in full, we would be
required to use our limited working capital and raise additional funds. If we
remain unable to repay the notes when required, the debenture holders could
commence legal action against us to recover the amounts due. Any such action
could require us to curtail or cease operations.





On July
29, 2009, we entered into a consent, amendment and exchange agreement with
holders of our outstanding convertible debentures and warrants, which were
issued in private placements to the 2005, 2006, 2007 and 2008 debentures. We
agreed to issue to each debenture holder in exchange for the holder’s debenture
an amended and restated debenture in a principle amount equal to the principal
amount of the holder’s debenture times 1.35 minus any interest paid thereon. The
conversion price under the amended and restated debentures was reduced to $0.10,
subject to certain customary anti-dilution adjustments. The maturity date under
the amended and restated debentures was extended until December 30, 2010. The
amended and restated debentures bear interest at 12% per annum. Further, we
agreed to issue to each holder in exchange for the holder’s warrant an amended
and restated warrant, which exercise price was reduced to $0.10, subject to
certain customary anti-dilution adjustments. The termination date under the
amended and restated warrants was extended until June 30, 2014. Simultaneously
with the signing of this agreement, we and the debenture holders entered into a
standstill and forbearance agreement, whereby the debenture holders agreed to
forbear from exercising their rights and remedies under the original debentures
and transaction documents.





There are a large number of shares
underlying our convertible debentures in full, and warrants that and the Company
is liable to provide. The sale of these shares may depress the market price of
our common stock. As of June 30, 2009, on an aggregated basis our 2005,
2006, 2007 and 2008 financings may result in being converted into 102,000,000
shares of our common stock, and warrants, options and preferred stock that may
be converted into approximately 146,000,000 shares of our common
stock.





Sales of
a substantial number of shares of our common stock in the public market could
adversely affect the market price for our common stock and make it more
difficult for you to sell shares of our common stock at times and prices that
you feel are appropriate.





The issuance of shares upon
conversion of the convertible debentures and exercise of outstanding warrants
will cause immediate and substantial dilution to our existing
stockholders. The issuance of shares upon conversion of the convertible
debentures and exercise of warrants, including the replacement warrants, will
result in substantial dilution to the interests of other stockholders since the
selling security holders may ultimately convert and sell the full amount
issuable on conversion. Although no single selling security holder may convert
its convertible debentures and/or exercise its warrants if such conversion or
exercise would cause it to own more than 4.99% of our outstanding common stock,
this restriction does not prevent each selling security holder from converting
and/or exercising some of its holdings and then converting the rest of its
holdings. In this way, each selling security holder could sell more than this
limit while never holding more than this limit. There is no upper limit on the
number of shares that may be issued which will have the effect of further
diluting the proportionate equity interest and voting power of holders of our
common stock. In addition, the issuance of the 2008 Debentures and the 2008
Warrants triggered certain anti-dilution rights for certain third parties
currently holding our securities resulting in substantial dilution to the
interests of other stockholders.


49




Our
outstanding indebtedness on our 2005, 2006, 2007 and 2008 Debentures imposes
certain restrictions on how we conduct our business. In addition, all of our
assets, including our intellectual property, are pledged to secure this
indebtedness. If we fail to meet our obligations under the Debentures, our
payment obligations may be accelerated and the collateral securing the debt may
be sold to satisfy these obligations.





The
Debentures and related agreements contain various provisions that restrict our
operating flexibility. Pursuant to the agreement, we may not, among other
things:


-
              Except for certain permitted
      indebtedness, enter into, create, incur, assume, guarantee or suffer to
      exist any indebtedness for borrowed money of any kind, including but not
      limited to, a guarantee, on or with respect to any of its property or
      assets now owned or hereafter acquired or any interest therein or any
      income or profits therefrom,
 -
              Except for certain permitted
      liens, enter into, create, incur, assume or suffer to exist any liens of
      any kind, on or with respect to any of its property or assets now owned or
      hereafter acquired or any interest therein or any income or profits
      therefrom,
 -
              Amend our certificate of
      incorporation, bylaws or other charter documents so as to materially and
      adversely affect any rights of holders of the Debentures and
      Warrants,
 -
              Repay, repurchase or offer to
      repay, repurchase or otherwise acquire more than a de minimis number of
      shares of our common stock or common stock
    equivalents,
 -
              Enter into any transaction with
      any of our affiliates, which would be required to be disclosed in any
      public filing with the Securities and Exchange Commission, unless such
      transaction is made on an arm's-length basis and expressly approved by a
      majority of our disinterested directors (even if less than a quorum
      otherwise required for board
approval),
 -
              Pay cash dividends or
      distributions on any of our equity
  securities,
 -
              Grant certain registration
      rights,
 -
              Enter into any agreement with
      respect to any of the foregoing,
or
 -
              Make cash expenditures in excess
      of $1,000,000 per calendar month, subject to certain specified
      exceptions.




These
provisions could have important consequences for us, including (i) making it
more difficult for us to obtain additional debt financing from another lender,
or obtain new debt financing on terms favorable to us, (ii) causing us to use a
portion of our available cash for debt repayment and service rather than other
perceived needs and/or (iii) impacting our ability to take advantage of
significant, perceived business opportunities.





Our obligations under the Securities
Purchase Agreement are secured by substantially all of our assets. Our
obligations under certain security agreements, executed in connection with both
the 2007 Financing and 2008 Financings, with the holders of the debentures and
warrants are secured by substantially all of our assets. As a result, if we
default under the terms of the security agreement, such holders could foreclose
on their security interest and liquidate all of our assets. This would cause
operations to cease.





Risks
Related to Third Party Reliance





We depend on third parties to assist
us in the conduct of our preclinical studies and clinical trials, and any
failure of those parties to fulfill their obligations could result in costs and
delays and prevent us from obtaining regulatory approval or successfully
commercializing our product candidates on a timely basis, if at all. We
engage consultants and contract research organizations to help design, and to
assist us in conducting, our preclinical studies and clinical trials and to
collect and analyze data from those studies and trials. The consultants and
contract research organizations we engage interact with clinical investigators
to enroll patients in our clinical trials. As a result, we depend on these
consultants and contract research organizations to perform the studies and
trials in accordance with the investigational plan and protocol for each product
candidate and in compliance with regulations and standards, commonly referred to
as "good clinical practice", for conducting, recording and reporting results of
clinical trials to assure that the data and results are credible and accurate
and the trial participants are adequately protected, as required by the FDA and
foreign regulatory agencies. We may face delays in our regulatory approval
process if these parties do not perform their obligations in a timely or
competent fashion or if we are forced to change service providers.





We depend on our collaborators to
help us develop and test our proposed products, and our ability to develop and
commercialize products may be impaired or delayed if collaborations are
unsuccessful. Our strategy for the development, clinical testing and
commercialization of our proposed products requires that we enter into
collaborations with corporate partners, licensors, licensees and others. We are
dependent upon the subsequent success of these other parties in performing their
respective responsibilities and the continued cooperation of our partners. Under
agreements with collaborators, we may rely significantly on such collaborators
to, among other things:


-
              Design and conduct advanced
      clinical trials in the event that we reach clinical
      trials;
 -
              Fund research and development
      activities with us;
 -
              Pay us fees upon the achievement
      of milestones; and
 -
              market with us any commercial
      products that result from our
  collaborations.




50





Our
collaborators may not cooperate with us or perform their obligations under our
agreements with them. We cannot control the amount and timing of our
collaborators’ resources that will be devoted to our research and development
activities related to our collaborative agreements with them. Our collaborators
may choose to pursue existing or alternative technologies in preference to those
being developed in collaboration with us.





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.





We are in the Early Stages of a
Strategic Joint Venture which may slow, impede or result in the termination of
potential therapeutic products whose development is now the responsibility of
the partnership and not solely of the Company.  T he Company
has entered into a new partnership (CHA) and as a result, we are subject to 3
rd
party interests and control issues, not the least of which relates to certain of
our employees no longer being exclusively managed by us. We therefore could be
at risk for losing key employees. Additionally substantial operating and working
capital will be required and there is no assurance that CHA Biotech Co. limited,
partner in our joint venture, will be able to fund their requirements. Any
failure on their part could negatively impact our product development, human
capital and financial resources allocated to other of our programs.





In an effort to conserve financial
resources (see FINANCIAL RISK), we have implemented reductions in our work
force. As a result of these and other factors, we may not be successful
in hiring or retaining key personnel. Our inability to replace any key employee
could harm our operations.





Our reliance on the activities of our
non-employee consultants, research institutions, and scientific contractors,
whose activities are not wholly within our control, may lead to delays in
development of our proposed products. We rely extensively upon and have
relationships with scientific consultants at academic and other institutions,
some of whom conduct research at our request, and other consultants with
expertise in clinical development strategy or other matters. These consultants
are not our employees and may have commitments to, or consulting or advisory
contracts with, other entities that may limit their availability to us. We have
limited control over the activities of these consultants and, except as
otherwise required by our collaboration and consulting agreements to the extent
they exist, can expect only limited amounts of their time to be dedicated to our
activities. These research facilities may have commitments to other commercial
and non-commercial entities. We have limited control over the operations of
these laboratories and can expect only limited amounts of time to be dedicated
to our research goals.





Preclinical
& Clinical Product Development Risks





Limited experience in conducting and
managing preclinical development activities, clinical trials and the application
process necessary to obtain regulatory approvals. Our limited experience
in conducting and managing preclinical development activities, clinical trials
and the application process necessary to obtain regulatory approvals might
prevent us from successfully designing or implementing a preclinical study or
clinical trial. If we do not succeed in conducting and managing our preclinical
development activities or clinical trials, or in obtaining regulatory approvals,
we might not be able to commercialize our product candidates, or might be
significantly delayed in doing so, which will materially harm our
business.





Our
ability to generate revenues from any of our product candidates will depend on a
number of factors, including our ability to successfully complete clinical
trials, obtain necessary regulatory approvals and implement our
commercialization strategy. In addition, even if we are successful in obtaining
necessary regulatory approvals and bringing one or more product candidates to
market, we will be subject to the risk that the marketplace will not accept
those products. We may, and anticipate that we will need to, transition from a
company with a research and development focus to a company capable of supporting
commercial activities and we may not succeed in such a transition.




Because of the numerous risks and
uncertainties associated with our product development and commercialization
efforts, we are unable to predict the extent of our future losses or when or if
we will become profitable. Our failure to successfully commercialize our
product candidates or to become and remain profitable could depress the market
price of our common stock and impair our ability to raise capital, expand our
business, diversify our product offerings and continue our
operations.





None of the products that we are
currently developing has been approved by the FDA or any similar regulatory
authority in any foreign country. Our approach of using cell-based therapy for
the treatment of Retinal disease (we are beginning with a treatment for
Startgardt’s disease and Age-related Macular Degeneration) is risky and unproven
and no products using this approach have received regulatory approval in the
United States or Europe. We believe that no company has yet been
successful in its efforts to obtain regulatory approval in the United States or
Europe of a cell-based therapy product for the treatment of retinal disease or
degeneration in humans. Cell-based therapy products, in general, may be
susceptible to various risks, including undesirable and unintended side effects,
unintended immune system responses, inadequate therapeutic efficacy or other
characteristics that may prevent or limit their approval by regulators or
commercial use. Many companies in the industry have suffered significant
setbacks in advanced clinical trials, despite promising results in earlier
trials. If our clinical trials are unsuccessful or significantly delayed, or if
we do not complete our clinical trials, we will not receive regulatory approval
for or be able to commercialize our product candidates.


51




Our lead product candidate, our
therapeutic Retinal program has note yet started Phase I Clinical Trials and has
not yet received approval from the FDA or any similar foreign regulatory
authority for any indication. We cannot market any product candidate
until regulatory agencies grant approval or licensure. In order to obtain
regulatory approval for the sale of any product candidate, we must, among other
requirements, provide the FDA and similar foreign regulatory authorities with
preclinical and clinical data that demonstrate to the satisfaction of regulatory
authorities that our product candidates are safe and effective for each
indication under the applicable standards relating to such product candidate.
The preclinical studies and clinical trials of any product candidates must
comply with the regulations of the FDA and other governmental authorities in the
United States and similar agencies in other countries. Our therapeutic Retinal
program may never receive approval from the FDA or any similar foreign
regulatory authority.




We
may experience numerous unforeseen events during, or as a result of, the
clinical trial process that could delay or prevent regulatory approval and/or
commercialization of our product candidates, including the
following:




-
              The FDA or similar foreign
      regulatory authorities may find that our product candidates are not
      sufficiently safe or effective or may find our cell culturing processes or
      facilities unsatisfactory,
 -
              Officials at the FDA or similar
      foreign regulatory authorities may interpret data from preclinical studies
      and clinical trials differently than we
  do,
 -
              Our clinical trials may produce
      negative or inconclusive results or may not meet the level of statistical
      significance required by the FDA or other regulatory authorities, and we
      may decide, or regulators may require us, to conduct additional
      preclinical studies and/or clinical trials or to abandon one or more of
      our development programs,
 -
              The FDA or similar foreign
      regulatory authorities may change their approval policies or adopt new
      regulations,
 -
              There may be delays or failure in
      obtaining approval of our clinical trial protocols from the FDA or other
      regulatory authorities or obtaining institutional review board approvals
      or government approvals to conduct clinical trials at prospective
      sites,
 -
              We, or regulators, may suspend or
      terminate our clinical trials because the participating patients are being
      exposed to unacceptable health risks or undesirable side
      effects,
 -
              We may experience difficulties in
      managing multiple clinical
sites,
 -
              Enrollment in our clinical trials
      for our product candidates may occur more slowly than we anticipate, or we
      may experience high drop-out rates of subjects in our clinical trials,
      resulting in significant
delays,
 -
              We may be unable to manufacture
      or obtain from third party manufacturers sufficient quantities of our
      product candidates for use in clinical trials,
  and
 -
              Our product candidates may be
      deemed unsafe or ineffective, or may be perceived as being unsafe or
      ineffective, by healthcare providers for a particular
      indication.




Any delay
of regulatory approval will harm our business.





Risks
Related to Competition





The market for therapeutic stem cell
products is highly competitive. We expect that our most significant
competitors will be fully integrated pharmaceutical companies and more
established biotechnology companies. These companies are developing stem
cell-based products and they have significantly greater capital resources in
research and development, manufacturing, testing, obtaining regulatory
approvals, and marketing capabilities. Many of these potential competitors are
further along in the process of product development and also operate large,
company-funded research and development programs. As a result, our competitors
may develop more competitive or affordable products, or achieve earlier patent
recognition and filings.





The biotechnology industries are
characterized by rapidly evolving technology and intense competition. Our
competitors include major multinational pharmaceutical companies, specialty
biotechnology companies and chemical and medical products companies operating in
the fields of regenerative medicine, cell therapy, tissue engineering and tissue
regeneration. Many of these companies are well-established and possess
technical, research and development, financial and sales and marketing resources
significantly greater than ours. In addition, certain smaller biotech companies
have formed strategic collaborations, partnerships and other types of joint
ventures with larger, well established industry competitors that afford these
companies' potential research and development and commercialization advantages.
Academic institutions, governmental agencies and other public and private
research organizations are also conducting and financing research activities
which may produce products directly competitive to those we are developing.
Moreover, many of these competitors may be able to obtain patent protection,
obtain FDA and other regulatory approvals and begin commercial sales of their
products before we do.





In the general area
of cell-based therapies (including both ES cell and autologous cell therapies),
we compete with a variety of companies, most of whom are specialty biotechnology
companies, such as Geron Corporation, Genzyme Corporation, StemCells, Inc.,
Aastrom Biosciences, Inc., Viacell, Inc., MG Biotherapeutics, Celgene, BioHeart,
Inc., Baxter Healthcare, Osiris Therapeutics and Cytori.Each of these companies are
well-established and have substantial technical and financial resources compared
to us. However, as cell-based products are only just emerging as medical
therapies, many of our direct competitors are smaller biotechnology and
specialty medical products companies. These smaller companies may become
significant competitors through rapid evolution of new technologies. Any of
these companies could substantially strengthen their competitive position
through strategic alliances or collaborative arrangements with large
pharmaceutical or biotechnology companies.


52




The diseases and medical conditions
we are targeting have no effective long-term therapies. Nevertheless, we expect
that our technologies and products will compete with a variety of therapeutic
products and procedures offered by major pharmaceutical companies (in the
Retinal Disease indication one of our primary competitors is Celgene). Many
pharmaceutical and biotechnology companies are investigating new drugs and
therapeutic approaches for the same purposes, which may achieve new efficacy
profiles, extend the therapeutic window for such products, alter the prognosis
of these diseases, or prevent their onset. We believe that our products,
when and if successfully developed, will compete with these products principally
on the basis of improved and extended efficacy and safety and their overall
economic benefit to the health care system.





Competition
for any stem cell products that we may develop may be in the form of existing
and new drugs, other forms of cell transplantation, ablative and simulative
procedures, and gene therapy. We believe that some of our competitors are also
trying to develop stem and progenitor cell-based technologies. We expect that
all of these products will compete with our potential stem cell products based
on efficacy, safety, cost and intellectual property positions. We may also face
competition from companies that have filed patent applications relating to the
use of genetically modified cells to treat disease, disorder or injury. In the
event our therapies should require the use of such genetically modified cells,
we may be required to seek licenses from these competitors in order to
commercialize certain of our proposed products, and such licenses may not be
granted.





If
we develop products that receive regulatory approval, they would then have to
compete for market acceptance and market share. For certain of our potential
products, an important success factor will be the timing of market introduction
of competitive products. This timing will be a function of the relative speed
with which we and our competitors can develop products, complete the clinical
testing and approval processes, and supply commercial quantities of a product to
market. These competitive products may also impact the timing of clinical
testing and approval processes by limiting the number of clinical investigators
and patients available to test our potential products.




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. Private and public
academic and research institutions also compete with us in the research and
development of therapeutic products based on human embryonic and adult stem cell
technologies. 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.




The biotechnology and pharmaceutical
industries are characterized by intense competition. We compete against numerous
companies, both domestic and foreign, many of which have substantially greater
experience and 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, many of which
have substantially greater resources and experience in our fields than we do,
are well situated to effectively compete with us. 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
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.




In addition, many of our competitors
have significantly greater experience than we have in the development,
pre-clinical testing and human clinical trials of biotechnology and
pharmaceutical products, in obtaining FDA and other regulatory approvals of such
products and in manufacturing and marketing such products. Accordingly
our competitors may succeed in obtaining FDA approval for products more rapidly
or effectively than we can. Our competitors may also be the first to discover
and obtain a valid patent to a particular stem cell technology which may
effectively block all others from doing so. It will be important for us or our
collaborators to be the first to discover any stem cell technology that we are
seeking to discover. Failure to be the first could prevent us from
commercializing all of our research and development affected by that discovery.
Additionally, if we commence commercial sales of any products, we will also be
competing with respect to manufacturing efficiency and sales and marketing
capabilities, areas in which we have no experience.




General
Risks Relating to Our Business




We are subject to litigation that
will be costly to defend or pursue and uncertain in its outcome. Our
business may bring us into conflict with our licensees, licensors, or others
with whom we have contractual or other business relationships, or with our
competitors or others whose interests differ from ours. If we are unable to
resolve those conflicts on terms that are satisfactory to all parties, we may
become involved in litigation brought by or against us. That litigation is
likely to be expensive and may require a significant amount of management's time
and attention, at the expense of other aspects of our business. The outcome of
litigation is always uncertain, and in some cases could include judgments
against us that require us to pay damages, enjoin us from certain activities, or
otherwise affect our legal or contractual rights, which could have a significant
adverse effect on our business. See "LEGAL PROCEEDINGS" set forth in
Part I, Item 3 of this Annual Report on Form 10-K for a more
complete discussion of currently pending litigation against the
Company.


53




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, and they may not be profitable if we are unable to
control the costs to manufacture them. Our products are likely to be
significantly more expensive to manufacture than most other drugs currently on
the market today. Our present manufacturing processes produce modest quantities
of product intended for use in our ongoing research activities, and we have not
developed processes, procedures and capability to produce commercial volumes of
product. We hope to substantially reduce manufacturing costs through process
improvements, development of new science, increases in manufacturing scale and
outsourcing to experienced manufacturers. If we are not able to make these or
other improvements, and depending on the pricing of the product, our profit
margins may be significantly less than that of most drugs on the market today.
In addition, we may not be able to charge a high enough price for any cell
therapy product we develop, even if they are safe and effective, to make a
profit. If we are unable to realize significant profits from our potential
product candidates, our business would be materially harmed.




Our current source of revenues
depends on the stability and performance of our sub-licensees. Our
ability to collect royalties on product sales from our sub-licensees will depend
on the financial and operational success of the companies operating under a
sublicense. 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 embryonic stem cells is largely dependent upon
the support of our Ethics Advisory Board. Because the use of human
embryonic stem cells gives rise to ethical, legal and social issues, we have
instituted an Ethics Advisory Board. Our Ethics Advisory Board is made up of
highly qualified individuals with expertise in the field of human embryonic stem
cells. We cannot assure you that these members will continue to serve on our
Ethics Advisory Board, and the loss of any such member may affect the
credibility and effectiveness of the Board. As a result, our business may be
materially harmed 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 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.


54




We presently have members of
management and other key employees located in various locations throughout the
country which adds complexities to the operation of the business.
Presently, we have members of management and other key employees located in both
California and Massachusetts, which adds complexities to the operation of our
business.




We face risks related to compliance
with corporate governance laws and financial reporting standards. The
Sarbanes-Oxley Act of 2002, as well as related new rules and regulations
implemented by the Securities and Exchange Commission and the Public Company
Accounting Oversight Board, require changes in the corporate governance
practices and financial reporting standards for public companies. These new
laws, rules and regulations, including compliance with Section 404 of the
Sarbanes-Oxley Act of 2002 relating to internal control over financial
reporting, referred to as Section 404, have materially increased our legal
and financial compliance costs and made some activities more time-consuming and
more burdensome.





Risks
Relating to Our Common Stock




Stock prices for biotechnology
companies have historically tended to be very volatile.
    Stock prices and trading volumes for many biotechnology
companies fluctuate widely for a number of reasons, including but not limited to
the following factors, some of which may be unrelated to their businesses or
results of operations:




-
              Clinical trial
      results,
 -
              The amount of cash resources and
      ability to obtain additional
funding,
 -
              Announcements of research
      activities, business developments, technological innovations or new
      products by companies or their
  competitors,
 -
              Entering into or terminating
      strategic relationships,
 -
              Changes in government
      regulation,
 -
              Disputes concerning patents or
      proprietary rights,
 -
              Changes in revenues or expense
      levels,
 -
              Public concern regarding the
      safety, efficacy or other aspects of the products or methodologies being
      developed,
 -
              Reports by securities
      analysts,
 -
              Activities of various interest
      groups or organizations,
 -
              Media coverage,
      and
 -
              Status of the investment
      markets.




This
market volatility, as well as general domestic or international economic, market
and political conditions, could materially and adversely affect the market price
of our common stock and the return on your investment.




A significant number of shares of our
common stock have become available for sale and their sale could depress the
price of our common stock. On March 1, 2008, a significant number of
our outstanding securities (including the 2007 Debentures and the 2007 Warrants
and the shares of common stock underlying such securities) that were previously
restricted became eligible for sale under Rule 144 of the Securities Act,
and their sale will not be subject to any volume limitations.




Not
including the shares of common stock underlying the 2005 Debentures, the 2005
Warrants, the 2006 Debentures, the 2006 Warrants, the replacement warrants, the
2007 Debentures, the 2007 Warrants, the February and April 2008 Debentures, the
February and April 2008 Warrants, there are presently approximately 53,443,000
outstanding options, warrants and other securities convertible or exercisable
into shares of our common stock.




We may
also sell a substantial number of additional shares of our common stock in
connection with a private placement or public offering of shares of our common
stock (or other series or class of capital stock to be designated in the
future). The terms of any such private placement would likely require us to
register the resale of any shares of capital stock issued or issuable in the
transaction. We have also issued common stock to certain parties, such as
vendors and service providers, as payment for products and services. Under these
arrangements, we may agree to register the shares for resale soon after their
issuance. We may also continue to pay for certain goods and services with
equity, which would dilute your interest in the company.




Sales of
a substantial number of shares of our common stock under any of the
circumstances described above could adversely affect the market price for our
common stock and make it more difficult for you to sell shares of our common
stock at times and prices that you feel are appropriate.




We do not intend to pay cash
dividends on our common stock in the foreseeable future. Any payment of
cash dividends will depend upon our financial condition, results of operations,
capital requirements and other factors and will be at the discretion of our
board of directors. We do not anticipate paying cash dividends on our common
stock in the foreseeable future. Furthermore, we may incur additional
indebtedness that may severely restrict or prohibit the payment of
dividends.


55




Our securities are quoted on the Pink
Sheets (PK), which may limit the liquidity and price of our securities more than
if our securities were quoted or listed on the Nasdaq Stock Market or a national
exchange. Our securities are currently quoted on the Pink Sheets, an
NASD-sponsored and operated inter-dealer automated quotation system for equity
securities not included in the Nasdaq Stock Market. Quotation of our securities
on the Pink Sheets may limit the liquidity and price of our securities more than
if our securities were quoted or listed on The Nasdaq Stock Market or a national
exchange. Some investors may perceive our securities to be less attractive
because they are traded in the over-the-counter market. In addition, as an Pink
Sheets listed company, we do not attract the extensive analyst coverage that
accompanies companies listed other exchanges. Further, institutional and other
investors may have investment guidelines that restrict or prohibit investing in
securities traded on the Pink Sheets. These factors may have an adverse impact
on the trading and price of our securities.




Our common stock is subject to "penny
stock" regulations and restrictions on initial and secondary broker-dealer
sales. The Securities and Exchange Commission has adopted 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 an exercise price of less
than $5.00 per share, subject to certain exemptions. Penny stocks are subject to
certain additional oversight and regulatory requirements. Brokers and dealers
affecting transactions in our common stock in many circumstances must obtain the
written consent of a customer prior to purchasing our common stock, must obtain
information from the customer and must provide disclosures to the customer.
These requirements may restrict the ability of broker-dealers to sell our common
stock and may affect your ability to sell your shares of our common stock in the
secondary market.




We have an insufficient number of
shares of our common stock authorized to satisfy requests to exercise warrants
or options, or to convert our outstanding Debentures. As of June 30,
2009, we had 500,000,000 shares authorized and 499,905,641 shares outstanding.
We currently have an additional approximately 249,000,000 common stock
equivalents outstanding.




We have not timely filed our
financial statements in accordance with SEC rules and regulations. We did
not file our June 30, 2008 Form 10Q, September 30, 2008 Form 10Q, December 31,
2008 Form 10K, or March 31, 2009 Form 10Q timely in accordance with
timelines required by the SEC.




ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK




Not
applicable.




56




ITEM
4. CONTROLS AND PROCEDURES





Disclosure
Controls and Procedures




We
maintain disclosure controls and procedures designed to ensure that information
required to be disclosed in the reports we file pursuant to the Exchange Act are
recorded, processed, summarized and reported within the time periods specified
in the rules and forms of the Securities and Exchange Commission, and that
such information is accumulated and communicated to our Chief Executive Officer
(“CEO”), who also serves as the Company’s Principal Financial Officer (“PFO”),
to allow timely decisions regarding required disclosure. In designing and
evaluating the disclosure controls and procedures, management recognized that
any controls and procedures, no matter how well designed and operated, can only
provide a reasonable assurance of achieving the desired control objectives, and
in reaching a reasonable level of assurance, management necessarily was required
to apply its judgment in evaluating the cost-benefit relationship of possible
controls and procedures. Management designed the disclosure controls and
procedures to provide reasonable assurance of achieving the desired control
objectives.




We
carried out an evaluation, under the supervision and with the participation of
our management, including our CEO and PFO, of the effectiveness of the design
and operation of our disclosure controls and procedures as of the end of the
period covered by this Quarterly Report.  We have determined that the loss
of certain personnel in our legal, accounting and finance departments, when
considered collectively in light of the number and complexity of accounting
matters requiring consideration, created a possibility that a material
misstatement of our financial statements could occur and may not be prevented or
detected.  In addition, we have identified material weaknesses in internal
control over financial reporting as discussed in our most recent annual report
filed on Form 10-K.  As a result, our disclosure controls and
procedures were not effective as of June 30, 2009.  To address these
material weaknesses, we have retained an outside accounting consulting firm to
assist the Company in preparing and reviewing the consolidated financial
statements and preparing this Quarterly Report on Form 10-Q.





Nothwithstanding
any material weaknesses identified above, we believe our financial statements
fairly present in all material respects the financial position, results of
operations and cash flows for the interim periods presented in our quarterly
report on Form 10-Q.




Changes
in Internal Control over Financial Reporting




There
have been no other significant changes in our internal controls over financial
reporting (as such term is defined in Rule 13a-15(f) and
15d-15(f) under the Securities Exchange Act) during the quarter ended June
30, 2009 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.





PART II.
OTHER INFORMATION




ITEM
1. LEGAL PROCEEDINGS




Gary D. Aronson v. Advanced Cell
Technology, Inc., Superior Court of California, County of Alameda, Case No.
RG07348990. John S.
Gorton v. Advanced Cell Technology, Inc, Superior Court of California, County of
Alameda Case No. RG07350437.  On October 1, 2007 Gary D. Aronson
brought suit against us with respect to a dispute over the interpretation of the
anti-dilution provisions of our warrants issued to Mr. Aronson on or about
September 14, 2005. John S. Gorton initiated a similar suit on October 10,
2007.  The two cases have been consolidated. The plaintiffs allege that we
breached warrants to purchase securities issued by us to these individuals by
not timely issuing stock after the warrants were exercised, failing to issue
additional shares of stock in accordance with the terms of the warrants and
failing to provide proper notice of certain events allegedly triggering
Plaintiffs' purported rights to additional shares.  Plaintiffs
assert monetary damages in excess of $14 million.  Plaintiffs may
alternatively seek additional shares in the Company with a value potentially in
excess of $14 million, or may seek a combination of monetary damages and shares
in the Company.  Plaintiffs also seek prejudgment interest and
attorney fees.  Discovery is not complete and no conclusions have been
reached as to the potential exposure to us or whether we have liability.





Alexandria Real Estate-79/96
Charlestown Navy Yard v.
Advanced Cell Technology, Inc. and Mytogen, Inc. (Suffolk County,
Massachusetts) :  The Company and its subsidiary Mytogen, Inc. are
currently defending themselves against a civil action brought in Suffolk
Superior Court, No. 09-442-B, by their former landlord at 79/96 Thirteenth
Street, Charlestown, Massachusetts, a property vacated by us and Mytogen
effective May 31, 2008. In that action, Alexandria Real Estate-79/96 Charlestown
Navy Yard (“ARE”) is alleging that it has been unable to relet the premises and
therefore seeking rent for the vacated premises since September 2008. 
Alexandria is also seeking certain clean-up and storage expenses.  We are
defending against the suit, claiming that ARE had breached the covenant of quiet
enjoyment as of when Mytogen vacated, and that had ARE used reasonable diligence
in its efforts to secure a new tenant, it would have been more successful. 
No trial date has been set.





Alpha Capital Ansalt v. Advanced
Cell Technology, Inc., Case No.09 Civ 670 (LAK), United States District Court,
Southern District of New York: On March 5, 2009, we settled a lawsuit
originally brought by Alpha Capital on February 11, 2009, who is an investor in
the 2006, 2007, and 2008 debentures, and associated with the default on August
6, 2008 on all debentures. In settlement of the lawsuit, we agreed to reduce the
conversion price on convertible debentures held by Alpha Capital to $0.02 per
share, effective immediately, so long as we have a sufficient number of
authorized shares to honor the request for conversion.


57




ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS




The
issuances of the equity securities described below were made in reliance upon
the exemption from registration under Section 4(2) of the Securities
Act of 1933, as amended, relating to sales by an issuer not involving a public
offering, and/or pursuant to the requirements of one or more of the safe harbors
provided in Regulation D under the Securities Act.





Effective
March 3, 2009, we entered into a $5 million credit facility (“Facility”) with a
life sciences fund. Under the terms of the agreement, we may draw down funds, as
needed, from the investor through the issuance of Series A-1 convertible
preferred stock, par value $.001, at a basis of 1 share of Series A-1
convertible preferred stock for every $10,000 invested. The preferred stock pays
dividends, in kind of preferred stock, at an annual rate of 10%, matures in four
years from the initial drawdown date, and is convertible at the option of the
holder into common stock at $0.75 per share. Upon the earlier of (i) the fourth
anniversary of the issuance date, and (ii) the occurrence of a major
transaction, each holder shall have the right, at such holder’s option, to
require the Company to redeem all or a portion of such holder’s share of Series
A-1 preferred stock, at a price per share equal to the Series A-1 liquidation
value. A major transaction includes (i) the consolidation, merger, or other
business combination of the Company with or into another entity, (ii) the sale
or transfer of more than 50% of the Company’s assets other than inventory in the
ordinary course of business in one or more related series of transactions, or
(iii) closing of a purchase, tender or exchange offer made  to the
holders of more than 50% of the outstanding shares of common stock in which more
than 50% of the outstanding shares of common stock were tendered and accepted.
The Company shall have the right, at the Company’s option, to redeem all or a
portion of the shares of Series A-1 preferred stock, at any time at a price per
share of Series A-1 preferred stock equal to 100% of the Series A-1 liquidation
value. In the event the closing price of the our common stock during the 5
trading days following the put notice falls below 75% of the average of the
closing bid price in the 5 trading days prior to the put closing date, the
investor may, at its option, and without penalty, decline to purchase the
applicable put shares on the put closing date. We may terminate the agreement
and our right to initiate future draw-downs by providing 30 days advanced
written notice to the investor. Upon any liquidation, dissolution or winding up
of the Company, whether voluntary or involuntary, after payment or provision for
payment of debts and other liabilities of the Corporation, before any
distribution or payment shall be made to the holders of any other equity
securities of the Company by reason of their ownership thereof, the holders of
the Series A-1 preferred stock shall first be entitled to be paid out of the
assets of the Company available for distribution to its stockholders an amount
with respect to each share of Series A-1 preferred stock equal to $10,000, plus
any accrued by unpaid dividends. If, upon dissolution or winding up of the
Company, the assets of the Company shall be insufficient to make payment in full
to all holders, then such assets shall be distributed among the holders at the
time outstanding, ratably in proportion to the full amounts to which they would
otherwise be respectively entitled.





Conditions
precedent to the Company’s right to deliver a put notice:





·
            The
      common stock shall be listed for and actively trading on a trading market,
      and to the Company’s knowledge there is no notice of any suspension or
      delisting with respect to the trading of the shares of common stock on
      such market or exchange;


·
            The
      representations and warranties of the Company set forth in the agreement
      are true and correct in all material respects as if made on such date, and
      no default shall have occurred under the agreement, or any other agreement
      with the investor, or investor affiliate, and the Company shall deliver an
      Officer’s Closing Certificate, signed by an officer of the Company, to
      such effect, to the investor;


·
            The
      Company has timely filed (or obtained extension in respect thereof and
      filed within the applicable grace period) all reports to be filed by the
      Company pursuant to the exchange
agreement;


·
            There
      have been no material changes in the Company’s business prospects or
      financial condition since the investment commitment closing, including but
      not limited to incurring material
liabilities;


·
            Except
      for the debenture agreements, the Company is not, and will not be as a
      result of the applicable put, in default of any material
      agreement;


·
            There
      is no current legal action against the Company whereby the transaction
      would be affected, of which the investor has not been made
      aware;


·
            Except
      with prior approval of the investor, the proceeds from the facility shall
      be used only for the purposes of advancement of the Company’s Retinal
      Pigment Epithelial (RPE) Program for the treatment of macular degeneration
      and other retinal degenerative
diseases;


·
            All
      DWAC shares are DTC eligible and can be immediately converted into
      electronic form without restrictions on resale;
  and


·
            The
      Company has a sufficient number of duly authorized shares of common stock
      for issuance in such amount as may be required to fulfill its obligations
      pursuant to its outstanding agreements with the investor or any investor
      affiliate.





As of
August 10, 2009, we had drawn down approximately $2,169,000 on this credit
facility.




ITEM
3. DEFAULTS UPON SENIOR SECURITIES




On August
6, 2008, the Company issued a moratorium on amortization of its 2005, 2006, 2007
and 2008 debentures. Under the terms of the debenture agreements, the moratorium
constitutes an event of default and thus the debentures incur default interest
penalties. The debenture agreements require in the event of default that the
full principle amount of the debentures, together with other amounts owing in
respect thereof, to the date of acceleration shall become, at the Holder’s
election, immediately due and payable in cash. The aggregate amount payable upon
event of default shall be equal to the mandatory default amount. The mandatory
default amount equals the sum of (i) the greater of: (A) 120% of the principle
amount of the debentures to be repaid plus 100% of the accrued and unpaid
interest, or (B) the principle amount of the debentures to be repaid, divided by
the conversion price on (x) the date the mandatory default amount came due or
(y) the date the mandatory default amount is paid in full, whichever is less,
multiplied by the closing price on (x) the date the mandatory default amount is
demanded or otherwise due or (y) the date the mandatory default amount is paid
in full, whichever is greater, and (ii) all other amounts, costs, expenses and
liquidated damages due in respect to the debentures. Commencing 5 days after the
occurrence of any event of default that results in the eventual acceleration of
the debentures, the interest rate on the debentures shall accrue at the rate of
18% per annum. Accrued default interest has been incurred in the amount of
$4,826,991 through June 30, 2009.


58





On July
29, 2009, we entered into a consent, amendment and exchange agreement with
holders of our outstanding convertible debentures and warrants, which were
issued in private placements to the 2005, 2006, 2007 and 2008 debentures. We
agreed to issue to each debenture holder in exchange for the holder’s debenture
an amended and restated debenture in a principle amount equal to the principal
amount of the holder’s debenture times 1.35 minus any interest paid thereon. The
conversion price under the amended and restated debentures was reduced to $0.10,
subject to certain customary anti-dilution adjustments. The maturity date under
the amended and restated debentures was extended until December 30, 2010. The
amended and restated debentures bear interest at 12% per annum. Further, we
agreed to issue to each holder in exchange for the holder’s warrant an amended
and restated warrant, which exercise price was reduced to $0.10, subject to
certain customary anti-dilution adjustments. The termination date under the
amended and restated warrants was extended until June 30, 2014. Simultaneously
with the signing of this agreement, we and the debenture holders entered into a
standstill and forbearance agreement, whereby the debenture holders agreed to
forbear from exercising their rights and remedies under the original debentures
and transaction documents. The total principal balance cured by the amendment
and forbearance is $12,832,912.




ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS




On August
11, 2009, our Board of Directors filed a definitive proxy statement with the
Securities and Exchange Commission relating to the following
proposals:





1.
            To
      consider and act upon a proposal to approve an amendment to the Company’s
      2005 Stock Incentive Plan to increase the number of shares issuable
      thereunder to a total of 145,837,250 shares;
and


2.
            To
      consider and act upon a proposal to approve an amendment to the
      Certificate of Incorporation of the Company to effect an increase in the
      authorized shares of common stock, par value $0.001 of the Company from
      500,000,000 to 1,750,000,000.





These
matters will be submitted for a vote during a special meeting of stockholders on
September 10, 2009.




ITEM
5. OTHER INFORMATION





Effective
March 3, 2009, we entered into a $5 million credit facility (“Facility”) with a
life sciences fund. Under the terms of the agreement, we may draw down funds, as
needed, from the investor through the issuance of Series A-1 convertible
preferred stock, par value $.001, at a basis of 1 share of Series A-1
convertible preferred stock for every $10,000 invested. The preferred stock pays
dividends, in kind of preferred stock, at an annual rate of 10%, matures in four
years from the initial drawdown date, and is convertible at the option of the
holder into common stock at $0.75 per share. Upon the earlier of (i) the fourth
anniversary of the issuance date, and (ii) the occurrence of a major
transaction, each holder shall have the right, at such holder’s option, to
require the Company to redeem all or a portion of such holder’s share of Series
A-1 preferred stock, at a price per share equal to the Series A-1 liquidation
value. A major transaction includes (i) the consolidation, merger, or other
business combination of the Company with or into another entity, (ii) the sale
or transfer of more than 50% of the Company’s assets other than inventory in the
ordinary course of business in one or more related series of transactions, or
(iii) closing of a purchase, tender or exchange offer made  to the
holders of more than 50% of the outstanding shares of common stock in which more
than 50% of the outstanding shares of common stock were tendered and accepted.
The Company shall have the right, at the Company’s option, to redeem all or a
portion of the shares of Series A-1 preferred stock, at any time at a price per
share of Series A-1 preferred stock equal to 100% of the Series A-1 liquidation
value. In the event the closing price of the our common stock during the 5
trading days following the put notice falls below 75% of the average of the
closing bid price in the 5 trading days prior to the put closing date, the
investor may, at its option, and without penalty, decline to purchase the
applicable put shares on the put closing date. We may terminate the agreement
and our right to initiate future draw-downs by providing 30 days advanced
written notice to the investor. Upon any liquidation, dissolution or winding up
of the Company, whether voluntary or involuntary, after payment or provision for
payment of debts and other liabilities of the Corporation, before any
distribution or payment shall be made to the holders of any other equity
securities of the Company by reason of their ownership thereof, the holders of
the Series A-1 preferred stock shall first be entitled to be paid out of the
assets of the Company available for distribution to its stockholders an amount
with respect to each share of Series A-1 preferred stock equal to $10,000, plus
any accrued by unpaid dividends. If, upon dissolution or winding up of the
Company, the assets of the Company shall be insufficient to make payment in full
to all holders, then such assets shall be distributed among the holders at the
time outstanding, ratably in proportion to the full amounts to which they would
otherwise be respectively entitled.





Conditions
precedent to the Company’s right to deliver a put notice:





·
            The
      common stock shall be listed for and actively trading on a trading market,
      and to the Company’s knowledge there is no notice of any suspension or
      delisting with respect to the trading of the shares of common stock on
      such market or exchange;


·
            The
      representations and warranties of the Company set forth in the agreement
      are true and correct in all material respects as if made on such date, and
      no default shall have occurred under the agreement, or any other agreement
      with the investor, or investor affiliate, and the Company shall deliver an
      Officer’s Closing Certificate, signed by an officer of the Company, to
      such effect, to the investor;




59




·
            The
      Company has timely filed (or obtained extension in respect thereof and
      filed within the applicable grace period) all reports to be filed by the
      Company pursuant to the exchange
agreement;


·
            There
      have been no material changes in the Company’s business prospects or
      financial condition since the investment commitment closing, including but
      not limited to incurring material
liabilities;


·
            Except
      for the debenture agreements, the Company is not, and will not be as a
      result of the applicable put, in default of any material
      agreement;


·
            There
      is no current legal action against the Company whereby the transaction
      would be affected, of which the investor has not been made
      aware;


·
            Except
      with prior approval of the investor, the proceeds from the facility shall
      be used only for the purposes of advancement of the Company’s Retinal
      Pigment Epithelial (RPE) Program for the treatment of macular degeneration
      and other retinal degenerative
diseases;


·
            All
      DWAC shares are DTC eligible and can be immediately converted into
      electronic form without restrictions on resale;
  and


·
            The
      Company has a sufficient number of duly authorized shares of common stock
      for issuance in such amount as may be required to fulfill its obligations
      pursuant to its outstanding agreements with the investor or any investor
      affiliate.





As of
August 14, 2009, we had drawn down approximately $2,169,000 on this credit
facility.


60




ITEM
6. EXHIBITS




Exhibit Description




31.1
              Section 302
      Certification of Principal Executive Officer.*31.2
              Section
      302 Certification of Principal Financial Officer.*32.1
              Certification
      of Principal Executive Officer and Principal Financial Officer pursuant to
      18 U.S.C. Section 1350.*









*
            Filed
      herewith




61




SIGNATURE





Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.




ADVANCED
      CELL TECHNOLOGY, INC.By:
              /s/
      William M. Caldwell, IVWilliam
      M. Caldwell, IVChief Executive Officer (Principal Executive Officer and
                Principle
      Financial Officer)Dated:
      August 14, 2009




62