**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, DC 20549**

 

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##### **FORM 10-QSB**

 

**ý****QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d)****OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For The Quarterly Period Ended June30, 2005**

 

**or**

 

**o****TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d)****OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the Transition Period from             to**

 

Commission File Number:**000-50295**

 

**ADVANCED CELL TECHNOLOGY, INC.**

(Exact Name of Registrant as Specified in Its Charter)

 

| **Nevada**                                       | **87-0656515**      |
|--------------------------------------------------|---------------------|
| (State or Other Jurisdiction of                  | (I.R.S. Employer    |
| Incorporation or Organization)                   | Identification No.) |
|                                             |                |
| **381 Plantation Street**** Worcester, MA** | **01605**           |
| (Address of Principal Executive Offices)         | (Zip Code)          |

 

**(508) 756-1212**

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant: (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. 

Yes ý  No o

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o  No ý

 

As of August 12, 2005, the registrant had 23,225,212shares of Common Stock, $0.001 par value per share, outstanding.

 

----

 

**PARTI. FINANCIAL INFORMATION**

 

**Item1. CONSOLIDATED FINANCIAL STATEMENTS**

 

**ADVANCED CELL TECHNOLOGY, INC. ANDSUBSIDIARY**

 

**CONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

# ** **

| ** **                                                                                                                           | ** ** | **June 30,**    | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|------------|------------------|------------|
| ** **                                                                                                                           | ** ** | **2005**        | ** ** | **2004**         | ** ** |
| ** **                                                                                                                           | ** ** | **(Unaudited)** | ** ** | ** **       | ** ** |
| ASSETS                                                                                                                               |       |            |       |             |       |
|                                                                                                                                 |       |            |       |             |       |
| Current assets:                                                                                                                      |       |            |       |             |       |
| Cash and cash  equivalents                                                                                                           |       | $               | 3,246,126  |             | $          | — |   |
| Cash held in  escrow for stock subscriptions                                                                                         |       | —          |       | 3,676,000        |       |
| Accounts  receivable, net of allowance for doubtful accounts of $236,399 and $128,684                                                |       | 29,000          |       | 104,150          |       |
| Prepaid expenses                                                                                                                     |       | 144,552         |       | 31,300           |       |
| Deferred royalty  fees, current portion                                                                                              |       | 142,263         |       | 119,763          |       |
|                                                                                                                                 |       |            |       |             |       |
| Total current  assets                                                                                                                |       | 3,561,941       |       | 3,931,213        |       |
|                                                                                                                                 |       |            |       |             |       |
| Property and  equipment, net                                                                                                         |       | 266,464         |       | 98,455           |       |
|                                                                                                                                 |       |            |       |             |       |
| Due from  stockholder                                                                                                                |       | 655,630         |       | 394,015          |       |
| Deferred royalty  fees, less current portion                                                                                         |       | 658,693         |       | 718,573          |       |
| Deposits                                                                                                                             |       | 82,954          |       | 17,954           |       |
| Deferred  offering costs                                                                                                             |       | 20,000          |       | 12,000           |       |
|                                                                                                                                 |       |            |       |             |       |
| Total assets                                                                                                                         |       | $               | 5,245,682  |             | $          | 5,172,210 |   |
|                                                                                                                                 |       |            |       |             |       |
| LIABILITIES AND  STOCKHOLDERS’ DEFICIT                                                                                          |       |            |       |             |       |
|                                                                                                                                 |       |            |       |             |       |
| Current  liabilities:                                                                                                                |       |            |       |             |       |
| Accounts payable                                                                                                                     |       | $               | 3,338,335  |             | $          | 3,246,482 |   |
| Accrued expenses                                                                                                                     |       | 714,418         |       | 507,570          |       |
| Cash overdraft                                                                                                                       |       | —          |       | 1,409            |       |
| Deferred  revenue, current portion                                                                                                   |       | 332,508         |       | 332,508          |       |
| Interest payable                                                                                                                     |       | 75,207          |       | 111,821          |       |
| Interest payable  - stockholder                                                                                                      |       | 356,877         |       | 296,877          |       |
| Advances payable  - other                                                                                                            |       | 130,000         |       | 130,000          |       |
| Note payable -  stockholder                                                                                                          |       | 1,000,000       |       | 1,000,000        |       |
| Notes payable -  other                                                                                                               |       | 128,014         |       | 967,014          |       |
|                                                                                                                                 |       |            |       |             |       |
| Total current  liabilities                                                                                                           |       | 6,075,359       |       | 6,593,681        |       |
|                                                                                                                                 |       |            |       |             |       |
| Deferred  revenue, net of current portion                                                                                            |       | 1,828,796       |       | 1,995,049        |       |
| Preferred units  subscribed                                                                                                          |       | —          |       | 4,175,999        |       |
|                                                                                                                                 |       |            |       |             |       |
| Total  liabilities                                                                                                                   |       | 7,904,155       |       | 12,764,729       |       |
|                                                                                                                                 |       |            |       |             |       |
| Stockholders’  deficit:                                                                                                         |       |            |       |             |       |
| Common stock,  $0.001 par value; 50,000,000 shares authorized, 23,225,212 and 8,325,883  shares issued and outstanding, respectively |       | 23,225          |       | 8,326            |       |
| Additional  paid-in capital                                                                                                          |       | 14,741,034      |       | 6,158,954        |       |
| Deferred compensation                                                                                                                |       | (21,586         | )          | —           |       |
| Accumulated  deficit                                                                                                                 |       | (17,401,146     | )          | (13,759,799      | )          |
|                                                                                                                                 |       |            |       |             |       |
| Total  stockholders’ deficit                                                                                                    |       | (2,658,473      | )          | (7,592,519       | )          |
|                                                                                                                                 |       |            |       |             |       |
| Total  liabilities and stockholders’ deficit                                                                                    |       | $               | 5,245,682  |             | $          | 5,172,210 |   |
|                                                                                                                                 |       |            |       |             |       |

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

2

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**ADVANCED CELL TECHNOLOGY, INC.AND SUBSIDIARY**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(UNAUDITED)**

 
| ** **                                              | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|---------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                              | ** ** | **2005**                         | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenue:                                                |       |                             |       |                           |       |   |   |   |   |
| License fees and  royalties                             |       | $                                | 120,626    |                           | $          | 256,497 |   | $ | 228,753 |   | $ | 439,733 |   |
|                                                    |       |                             |       |                           |       |   |   |   |   |
| Cost of revenue                                         |       | 58,251                           |       | 101,132                        |       | 103,942 |   | 170,298 |   |
|                                                    |       |                             |       |                           |       |   |   |   |   |
| Gross profit                                            |       | 62,375                           |       | 155,365                        |       | 124,811 |   | 269,435 |   |
|                                                    |       |                             |       |                           |       |   |   |   |   |
| Operating  expenses:                                    |       |                             |       |                           |       |   |   |   |   |
| Research and  development                               |       | 657,024                          |       | 243,333                        |       | 933,619 |   | 536,903 |   |
| Grant  reimbursements                                   |       | (189,408                         | )          | —                         |       | (425,218 | ) | (140,171 | ) |
| General and  administrative                             |       | 2,037,020                        |       | 593,126                        |       | 3,241,500 |   | 1,085,651 |   |
|                                                    |       |                             |       |                           |       |   |   |   |   |
| Total operating  expenses                               |       | 2,504,636                        |       | 836,459                        |       | 3,749,901 |   | 1,482,383 |   |
|                                                    |       |                             |       |                           |       |   |   |   |   |
| Loss from  operations                                   |       | (2,442,261                       | )          | (681,094                       | )          | (3,625,090 | ) | (1,212,948 | ) |
|                                                    |       |                             |       |                           |       |   |   |   |   |
| Other income  (expense):                                |       |                             |       |                           |       |   |   |   |   |
| Interest income                                         |       | 13,852                           |       | —                         |       | 25,959 |   | — |   |
| Gain on  settlement of debt                             |       | —                           |       | —                         |       | 86,513 |   | — |   |
| Interest expense  and late fees                         |       | (18,605                          | )          | (17,168                        | )          | (68,729 | ) | (36,230 | ) |
| Interest expense  - stockholder                         |       | (30,000                          | )          | (30,000                        | )          | (60,000 | ) | (60,000 | ) |
|                                                    |       |                             |       |                           |       |   |   |   |   |
| Total other  income (expense)                           |       | (34,753                          | )          | (47,168                        | )          | (16,257 | ) | (96,230 | ) |
|                                                    |       |                             |       |                           |       |   |   |   |   |
| Net loss                                                |       | $                                | (2,477,014 | )                              | $          | (728,262 | ) | $ | (3,641,347 | ) | $ | (1,309,178 | ) |
|                                                    |       |                             |       |                           |       |   |   |   |   |
| Net loss per  share, basic and diluted                  |       | $                                | (0.11      | )                              | $          | (0.09 | ) | $ | (0.16 | ) | $ | (0.16 | ) |
|                                                    |       |                             |       |                           |       |   |   |   |   |
| Weighted average  shares outstanding, basic and diluted |       | 23,225,212                       |       | 8,325,883                      |       | 23,219,212 |   | 8,325,883 |   |
|                                                    |       |                             |       |                           |       |   |   |   |   |

 

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

 

3

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**ADVANCED CELL TECHNOLOGY, INC.AND SUBSIDIARY**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**CHANGEIN CASH AND CASH EQUIVALENTS**

**(UNAUDITED)**

 
| ** **                                                                                                                                                                                          | ** ** | **Six Months  Ended June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                                                                                                          | ** ** | **2005**                       | ** ** | **2004** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                                                                                                                              |       |                           |       |   |   |
| Net loss                                                                                                                                                                                            |       | $                              | (3,641,347 | ) | $ | (1,309,178 | ) |
| Adjustments to  reconcile net loss to net cash (used in) provided by operating activities:                                                                                                          |       |                           |       |   |   |
| Depreciation and  amortization                                                                                                                                                                      |       | 45,504                         |       | 70,728 |   |
| Bad debt                                                                                                                                                                                            |       | 32,715                         |       | — |   |
| Amortization of  deferred charges                                                                                                                                                                   |       | 59,880                         |       | 102,674 |   |
| Amortization of  deferred revenue                                                                                                                                                                   |       | —                         |       | (209,732 | ) |
| Stock based  compensation                                                                                                                                                                           |       | 106,988                        |       | — |   |
| Gain on  settlement of accounts payable                                                                                                                                                             |       | (86,513                        | )          | — |   |
| Shares issued  for services                                                                                                                                                                         |       | 15,000                         |       | — |   |
| Amortization of  deferred compensation                                                                                                                                                              |       | 6,768                          |       | — |   |
| Changes in  operating assets and liabilities:                                                                                                                                                       |       |                           |       |   |   |
| (Increase)  decrease in:                                                                                                                                                                            |       | —                         |       |   |   |
| Accounts  receivable                                                                                                                                                                                |       | 42,435                         |       | 239,566 |   |
| Prepaid expenses                                                                                                                                                                                    |       | (113,252                       | )          | 31,350 |   |
| Other current  assets                                                                                                                                                                               |       | —                         |       | (2,695 | ) |
| Due from  stockholder                                                                                                                                                                               |       | (261,615                       | )          | (94,574 | ) |
| Deposits                                                                                                                                                                                            |       | (65,000                        | )          | — |   |
| Deferred charges                                                                                                                                                                                    |       | (22,500                        | )          | (108,000 | ) |
| Increase  (decrease) in:                                                                                                                                                                            |       |                           |       |   |   |
| Accounts payable  and accrued expenses                                                                                                                                                              |       | 331,939                        |       | 804,637 |   |
| Interest payable                                                                                                                                                                                    |       | 100,769                        |       | 72,813 |   |
| Deferred revenue                                                                                                                                                                                    |       | (166,253                       | )          | 250,000 |   |
|                                                                                                                                                                                                |       |                           |       |   |   |
| Net cash used in  operating activities                                                                                                                                                              |       | (3,614,482                     | )          | (152,411 | ) |
|                                                                                                                                                                                                |       |                           |       |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                                                                                                                              |       |                           |       |   |   |
| Proceeds from  sale of equipment                                                                                                                                                                    |       | —                         |       | (6,377 | ) |
| Cash paid for acquisition  net of cash acquired                                                                                                                                                     |       | 10,000                         |       | — |   |
| Purchases of  property and equipment                                                                                                                                                                |       | (213,513                       | )          | — |   |
|                                                                                                                                                                                                |       |                           |       |   |   |
| Net cash used in  investing activities                                                                                                                                                              |       | (203,513                       | )          | (6,377 | ) |
|                                                                                                                                                                                                |       |                           |       |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                                                                                                                                              |       |                           |       |   |   |
| Proceeds from  preferred unit subscriptions, net of cost                                                                                                                                            |       | 3,639,530                      |       | — |   |
| Payments on  notes and leases                                                                                                                                                                       |       | (250,000                       | )          | (23,752 | ) |
| Cash overdraft                                                                                                                                                                                      |       | (1,409                         | )          | 178,758 |   |
|                                                                                                                                                                                                |       |                           |       |   |   |
| Net cash  provided by financing activities                                                                                                                                                          |       | 3,388,121                      |       | 155,006 |   |
|                                                                                                                                                                                                |       |                           |       |   |   |
| Net decrease in  cash                                                                                                                                                                               |       | (429,874                       | )          | (3,782 | ) |
|                                                                                                                                                                                                |       |                           |       |   |   |
| Cash and cash  equivalents, beginning of period                                                                                                                                                     |       | $                              | 3,676,000  |   | $ | 3,782 |   |
|                                                                                                                                                                                                |       |                           |       |   |   |
| Cash and cash  equivalents, end of period                                                                                                                                                           |       | $                              | 3,246,126  |   | $ | — |   |
|                                                                                                                                                                                                |       |                           |       |   |   |
| Cash paid for:                                                                                                                                                                                      |       |                           |       |   |   |
| Interest                                                                                                                                                                                            |       | $                              | —     |   | $ | 1,247 |   |
| Income taxes                                                                                                                                                                                        |       | —                         |       | — |   |
|                                                                                                                                                                                                |       |                           |       |   |   |
| Supplemental  schedule of non-cash financing activities:                                                                                                                                       |       |                           |       |   |   |
|                                                                                                                                                                                                |       |                           |       |   |   |
| During the six  months ended June 30, 2005:                                                                                                                                                         |       |                           |       |   |   |
|                                                                                                                                                                                                |       |                           |       |   |   |
| 105,177 Preferred  Units, valued at $89,400, were issued in partial settlement of accounts  payable.                                                                                                |       |                           |       |   |   |
|                                                                                                                                                                                                |       |                           |       |   |   |
| 616,124 shares  of common stock, and 306,062 common stock purchase warrants, were issued upon  conversion of $500,000 of notes payable and $23,708 of accrued interest.                             |       |                           |       |   |   |
|                                                                                                                                                                                                |       |                           |       |   |   |
| 469,247 shares  of common stock, and 234,629 common stock purchase warrants, valued at an  aggregate of $398,860, were issued in consideration of services related to  the Preferred Unit Offering. |       |                           |       |   |   |
|                                                                                                                                                                                                |       |                           |       |   |   |
| A note for $150,000  was issued as a part of a settlement of a note payable of $339,000 and  related accrued interest of $53,675.                                                                   |       |                           |       |   |   |
|                                                                                                                                                                                                |       |                           |       |   |   |
| 9,411,778 shares  of preferred stock converted to 9,411,778 shares of common stock in the  Merger.                                                                                                  |       |                           |       |   |   |

 

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

 

4

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**ADVANCEDCELL TECHNOLOGY, INC.**

**CONSOLIDATEDSTATEMENT OF STOCKHOLDERS’ DEFICIT**

**FOR THESIX MONTH PERIOD ENDED JUNE 30, 2005**

**(UNAUDITED)**

 
| ** **                                         | ** ** | ** **          | ** ** | ** **       | ** ** | ** **  | ** ** | ** **   | ** ** | **Additional**  | ** ** | ** **             | ** ** | ** **  | ** ** | **Total**   | ** ** |
|----------------------------------------------------|------------|---------------------|------------|------------------|------------|-------------|------------|--------------|------------|-----------------|------------|------------------------|------------|-------------|------------|-------------|------------|
| ** **                                         | ** ** | **Preferred Stock** | ** ** | **Common Stock** | ** ** | **Paid-In** | ** ** | **Deferred** | ** ** | **Accumulated** | ** ** | **Stockholders’** | ** ** |
| ** **                                         | ** ** | **Shares**          | ** ** | **Amount**       | ** ** | **Shares**  | ** ** | **Amount**   | ** ** | **Capital**     | ** ** | **Compensation**       | ** ** | **Deficit** | ** ** | **Deficit** | ** ** |
|                                               |       |                |       |             |       |        |       |         |       |            |       |                   |       |        |       |        |       |
| Balance, December  31, 2004                        |       | —              |       | —           |       | 8,325,883   |       | 8,326        |       | 6,158,954       |       | —                 |       | (13,759,799 | )          | (7,592,519  | )          |
|                                               |       |                |       |             |       |        |       |         |       |            |       |                   |       |        |       |        |       |
| Sale of preferred  units for cash                  |       | 9,306,601           |       | 9,306            |       | —      |       | —       |       | 7,901,294       |       | —                 |       | —      |       | 7,910,600   |       |
|                                               |       |                |       |             |       |        |       |         |       |            |       |                   |       |        |       |        |       |
| Issuance of  preferred units for services provided |       | 105,177             |       | 105              |       | —      |       | —       |       | 89,295          |       | —                 |       | —      |       | 89,400      |       |
|                                               |       |                |       |             |       |        |       |         |       |            |       |                   |       |        |       |        |       |
| Issuance of  shares for debt conversion            |       | —              |       | —           |       | 616,124     |       | 616          |       | 523,092         |       | —                 |       | —      |       | 523,708     |       |
|                                               |       |                |       |             |       |        |       |         |       |            |       |                   |       |        |       |        |       |
| Issuance of  shares for services                   |       | —              |       | —           |       | 17,647      |       | 18           |       | 14,982          |       | —                 |       | —      |       | 15,000      |       |
|                                               |       |                |       |             |       |        |       |         |       |            |       |                   |       |        |       |        |       |
| Issuance of units  for offering services           |       | —              |       | —           |       | 469,247     |       | 469          |       | 398,391         |       | —                 |       | —      |       | 398,860     |       |
|                                               |       |                |       |             |       |        |       |         |       |            |       |                   |       |        |       |        |       |
| Conversion of  preferred                           |       | (9,411,778          | )          | (9,411           | )          | 9,411,778   |       | 9,411        |       | —          |       | —                 |       | —      |       | —      |       |
|                                               |       |                |       |             |       |        |       |         |       |            |       |                   |       |        |       |        |       |
| Cost of offering                                   |       | —              |       | —           |       | —      |       | —       |       | (486,530        | )          | —                 |       | —      |       | (486,530    | )          |
|                                               |       |                |       |             |       |        |       |         |       |            |       |                   |       |        |       |        |       |
| Shares retained  by public shareholders            |       | —              |       | —           |       | 4,374,007   |       | 4,374        |       | 5,626           |       | —                 |       | —      |       | 10,000      |       |
|                                               |       |                |       |             |       |        |       |         |       |            |       |                   |       |        |       |        |       |
| Fair value of  consultant options                  |       | —              |       | —           |       | —      |       | —       |       | 72,354          |       | (21,586                | )          | —      |       | 50,768      |       |
|                                               |       |                |       |             |       |        |       |         |       |            |       |                   |       |        |       |        |       |
| Shares cancelled                                   |       | —              |       | —           |       | (1,474      | )          | (1           | )          | —          |       | —                 |       | —      |       | (1          | )          |
|                                               |       |                |       |             |       |        |       |         |       |            |       |                   |       |        |       |        |       |
| Net Loss 3 months  to March 2005              |       |                |       |             |       |        |       |         |       |            |       |                   |       | (1,164,333  | )          | (1,164,333  | )          |
|                                               |       |                |       |             |       |        |       |         |       |            |       |                   |       |        |       |        |       |
| Balance,  March 31, 2005                      |       | —              |       | —           |       | 23,213,212  |       | 23,213       |       | 14,677,458      |       | (21,586                | )          | (14,924,132 | )          | (245,047    | )          |
|                                               |       |                |       |             |       |        |       |         |       |            |       |                   |       |        |       |        |       |
| Options Exercised                                  |       | —              |       | —           |       | 12,000      |       | 12           |       | 588             |       |                   |       | —      |       | 600         |       |
|                                               |       |                |       |             |       |        |       |         |       |            |       |                   |       |        |       |        |       |
| Stock based  compensation                          |       |                |       |             |       |        |       |         |       | 62,988          |       |                   |       |        |       | 62,988      |       |
|                                               |       |                |       |             |       |        |       |         |       |            |       |                   |       |        |       |        |       |
| Net loss 3 months  to June 2005               |       | —              |       | —           |       | —      |       | —       |       | —          |       | —                 |       | (2,477,014  | )          | (2,477,014  | )          |
|                                               |       |                |       |             |       |        |       |         |       |            |       |                   |       |        |       |        |       |
| Balance,  June 30, 2005                       |       | —              |       | —           |       | 23,225,212  |       | 23,225       |       | 14,741,034      |       | (21,586                | )          | (17,401,146 | )          | (2,658,473  | )          |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

5

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**ADVANCED CELL TECHNOLOGY, INC.**

# ** **

# **NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

# **JUNE 30, 2005**

# ** **

# **(UNAUDITED)**

#  

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

###### ** **

**Organization**

 

On January 31, 2005,Advanced Cell Technology, Inc. (formerly known as A.C.T. Holdings, Inc.)(the “Company”) completed the Merger with Advanced Cell, Inc. (formerly knownas Advanced Cell Technology, Inc.), a Delaware corporation (“ACT”),pursuant to which a wholly-owned subsidiary of the Company merged with and intoACT, with ACT remaining as the surviving corporation and a wholly-ownedsubsidiary of the Company.  Upon thecompletion of the Merger, the Company ceased all of its pre-Merger operationsand adopted the business of ACT.

 

Prior to the Merger, theCompany had minimal business, operations, revenues and assets, and had beeninvolved in an industry entirely unrelated to the business of ACT. Therefore,the acquisition of ACT by the Company represented a complete change in thenature of the Company’s business and operations, and changed the nature of anyprior investment in the Company.

 

The transaction has beenaccounted for as a recapitalization of ACT, the accounting acquirer. Thehistorical financial statements presented for periods prior to the merger arethose of ACT. The consolidated accounts of the Company have been included fromJanuary 31, 2005.  All comparisonsof financial results for periods prior to the Merger are to the financialresults of ACT.  Any differences thatwould result from the inclusion of the pre-Merger financial results of theCompany would not be material.

 

**Natureof Business**

** **

The Company is a biotechnologycompany focused on developing and commercializing human stem cell technology inthe emerging fields of regenerative medicine and stem cell therapy. Principalactivities to date have included obtaining financing, securing operatingfacilities and conducting research and development.  The Company has no therapeutic productscurrently available for sale and does not expect to have any therapeuticproducts commercially available for sale for a period of years, if at all.  These factors indicate that the Company’sability to continue its research and development activities is dependent uponthe ability of management to obtain additional financing as required.

 

**Basis of Presentation**

** **

The accompanyingunaudited financial statements as of June 30, 2005 and for the six monthperiods ended June 30, 2005 and 2004 have been prepared pursuant to therules and regulations of the Securities and Exchange Commission (“SEC”),including Form 10-QSB and Regulation S-B. The information furnished hereinreflects all adjustments (consisting of normal recurring accruals andadjustments), which are, in the opinion of management, necessary to fairlypresent the operating results for the respective periods. Certain informationand footnote disclosures normally present in annual financial statementsprepared in accordance with accounting principles generally accepted in theUnited States of America have been omitted pursuant to such rules andregulations. The Company believes that the disclosures provided are adequate tomake the information presented not misleading. These financial statementsshould be read in conjunction with the audited financial statements andexplanatory notes for the year ended December 31, 2004 as disclosed in theCompany’s annual report on Form 10-KSB for that year as filed with theSEC, as it may be amended and in conjunction with ACT’s audited financialstatements and explanatory notes for the year ended December 31, 2004 asdisclosed in the Company’s current report on Form 8-K/A as filed with theSEC on April 18, 2005. 

 

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Interim results ofoperations are not necessarily indicative of the results to be expected for theyear ending December 31, 2005.

 

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

###### ** **

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

 

***RevenueRecognition—***Our revenues are generated from license and researchagreements with collaborators. Licensing revenue is recognized ratably over theshorter of the life of the license or the estimated economic life of thepatents related to the license. Deferred revenue represents the portion of thelicense and other payments received that has not been earned. Costs associatedwith the license revenue are deferred and recognized over same term as therevenue. Reimbursements of research expense pursuant to grants are recorded asa reduction of research and development expense in the period during whichcollection of the reimbursement is reasonably assured, because thereimbursements are subject to approval.

 

***Researchand Development Costs—***Research and development costsconsist of expenditures for the research and development of patents andtechnology, which are not capitalizable. Our research and development costsconsist mainly of payroll and payroll related expenses, research supplies andresearch grants.

 

Reimbursements ofresearch expense pursuant to grants are recorded as a reduction of research anddevelopment expense in the period during which collection of the reimbursementis reasonably assured, because the reimbursements are subject to approval.

 

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

 

The Company uses the fairvalue method for equity instruments granted to non-employees and uses the BlackScholes model for measuring the fair value. The stock based fair value compensation is determined as of the date ofthe grant or the date at which the performance of the services is completed(measurement date) and is recognized over the periods in which the relatedservices are rendered.

 

**Pro FormaInformation**

 

***Employeeand Director Common Share Purchase Options—***Pro formainformation regarding the effects on operations of employee and director commonshare purchase options as required by SFAS No. 123 and SFAS No. 148has been determined as if the Company had accounted for those options under thefair value method. Pro forma information is computed using the Black Scholesmethod at the date of grant of the options.  There were no new grants of options during thequarter ended June 30, 2005. The option valuation model requires input of highly subjectiveassumptions.  

 

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Because common sharepurchase options granted to employees and directors have characteristicssignificantly different from those of traded options, and because changes inthe subjective input assumptions can materially affect the fair value ofestimate, the existing model does not in the opinion of our managementnecessarily provide a reliable single measure of fair value of common sharepurchase options we have granted to our employees and directors.

Pro forma informationrelating to employee and director common share purchase options is as follows:

 
| ** **                                      | ** ** | **For the**** ****Three Months Ended** | ** ** | **For The**** ****Three Months Ended** | ** ** | **For the**** ****Six Months Ended** | ** ** | **For The**** ****Six Months Ended** | ** ** |
|-------------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                      | ** ** | **June 30, 2005**                           | ** ** | **June 30, 2004**                           | ** ** | **June 30, 2005**                         | ** ** | **June 30, 2004**                         | ** ** |
| Net loss as  reported                           |       | $                                           | (2,477,014 | )                                           | $          | (728,262                                  | )          | $                                         | (3,641,347 | ) | $ | (1,309,178 | ) |
| Current period  expense calculated under APB 25 | ** ** | **—**                                  | ** ** | **—**                                  | ** ** | **—**                                | ** ** | **—**                                | ** ** |
| Stock  compensation calculated under SFAS 123   |       | 51,542                                      |       | **—**                                  |       | (74,939                                   | )          | **—**                                | ** ** |
| Pro forma net  loss                             |       | $                                           | (2,425,472 | )                                           | $          | (728,262                                  | )          | $                                         | (3,716,286 | ) | $ | (1,309,178 | ) |
| Basic and  diluted historical loss per share    |       | $                                           | (0.11      | )                                           | $          | (0.09                                     | )          | $                                         | (0.16      | ) | $ | (0.16 | ) |
| Pro forma basic  and diluted loss per share     |       | $                                           | (0.10      | )                                           | $          | (0.09                                     | )          | $                                         | (0.16      | ) | $ | (0.16 | ) |

 

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

 

For the three and sixmonths ended June 30, 2005, 23,078,952 potential shares were excluded from theshares used to calculate diluted earnings per share as their inclusion wouldreduce net loss per share. There were no potentially dilutive shares at June30, 2004.

 

###### **3.**             PROPERTY ANDEQUIPMENT

###### ** **

Our property andequipment as of June 30, 2005 is as follows:

 
| Machinery and equipment         |   |   |   |       |       |       |       | $         |  826,068 |   |
|---------------------------------|--------|--------|--------|------------|------------|------------|------------|-----------|---------------|--------|
| Computers and office  equipment |   |   |   | ** ** | ** ** | ** ** | ** ** | 153,469   |          |
| Leasehold improvements          |   |   |   | ** ** |       |       |       | 21,451    |          |
| Furniture and fixtures          |   |   |   |       |       |       |       | 25,782    |          |
| Total  property and equipment   |   |   |   |       |       |       |       | 1,026,770 |          |
| Accumulated  depreciation       |   |   |   |       |       |       |       | 760,306   |          |
| Property  and equipment, net    |   |   |   |       |       |       |       | $         |  266,464 |   |

 

Depreciationexpense amounted to $45,504 and $70,728 during the six months ended June 30, 2005and 2004, respectively.

 

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

 

During 2004, we issuedpromissory notes aggregating $500,000 face value for cash proceeds of $450,000and the assumption of $50,000 of debt owed by our parent to one of theinvestors. As a result of the assumption of the $50,000 of debt, we have recorded a financing cost in that amount.The notes bear interest at 10% per year. $350,000 of notes matured on December 31,2004 and $150,000 matures on September 30, 2005. The notes are convertibleat the option of the holder into shares of our capital stock sold in asubsequent financing, at an amount equal to the lowest per share selling priceof shares of that stock issued in such financing (see Note 7).

 

As additionalconsideration for the purchase of the notes, we granted to the note holderswarrants entitling them to purchase 700,000 common shares at an exercise priceof $0.05. Warrants for 300,000 shares were exercisable immediately uponissuance and expire two years from the date of issue.  Warrants for 400,000 shares are exercisableon or after February 1, 2006 and expire February 1, 2008. The fairvalue of the warrants was estimated at $0, using the Black Scholes optionpricing model. The assumptions used in the Black Scholes model are as follows:(1) dividend yield of 0%; (2) expected volatility of 0%,(3) risk-free interest rate of 2.75%, and (4) expected life of 2years. Pursuant to EITF 98-6 and EITF 00-27, there has been no allocation ofthe proceeds of the notes to the warrants and no beneficial conversion feature,because the conversion rate is unknown at the date of issue and is presumed tobe at market value.

 

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

 

###### **5.**             OTHER NOTESPAYABLE

###### ** **

On July 1, 2003, weissued a promissory note with a face amount of $339,000 to a law firm as apayment of fees due them. The note bears interest at a rate of 10% per year.The note was due on October 1, 2003. During the first quarter of 2005, thenote, plus accrued interest of $53,675, was settled through (i) the issuanceof 105,177 shares of preferred stock and 52,589 warrants pursuant to thepreferred stock offering described in Note 7, valued at $89,400, (ii) acash payment of $100,000, and (iii) a new note with a face value of$150,000. The new note bears interest at 10%, is due in 3 monthly payments of50,000 each and matures on May 1, 2005. The balance of the note was paidduring the quarter ended June 30, 2005.

 

On July 8, 2003, weissued a promissory note with a face amount of $272,108 to a law firm as apayment of fees due them. The note bears interest at a rate of 5% per year. Thenote is payable in monthly installments of $25,000, including interest. Thenote matured on October 1, 2003. We made payments through January, 2004.At June 30, 2005 there is a remaining principal balance of $128,014, as well asaccrued interest of $9,232 and accrued late fees of $57,500, included inaccrued interest. Late fees accrue at the rate of $2,500 per month.

 

###### **6.**             NOTE PAYABLE— STOCKHOLDER

###### ** **

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

 

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

###### ** **

We are authorized toissue two classes of capital stock, to be designated, respectively, PreferredStock and Common Stock.  The total numberof shares of capital stock which we are authorized to issue is 55,000,000.  The total number of shares of Preferred Stockwe are authorized to issue is 5,000,000, par value $0.001 per share.  The total number of shares of Common Stock weare authorized to issue is 50,000,000, par value $0.001 per share.  We had no Preferred Stock outstanding as ofJune 30, 2005.  We had 23,225,212 sharesof Common Stock outstanding as of June 30, 2005.

 

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On January 31, 2005,the Company closed the Merger described in Note 1.  As a result of the Merger, all of theoutstanding shares of the capital stock of ACT were converted, on a pro ratabasis, into approximately 18,000,000 shares of the Company’s Common Stock.  In addition, all outstanding options andwarrants to acquire shares of the capital stock of ACT were converted into theright to receive shares of the Company’s Common Stock, and the Company hasadopted the ACT stock option plans and all options granted thereunder.

 

On or aboutJanuary 27, 2005, the Company issued 616,124 shares of its common stockand granted associated warrants to purchase 308,062 shares of common stock at aper share price of $1.27 to five holders of $500,000 aggregate principal amountof short-term promissory notes, plus interest of $23,708 in exchange for and inretirement of the notes. The fair value of the warrants was estimated at $0,using the Black Scholes option pricing model. The assumptions used in the BlackScholes model are as follows: (1) dividend yield of 0%; (2) expectedvolatility of 0%, (3) risk-free interest rate of 3.25%, and (4) expectedlife of 2 years.

 

On or aboutJanuary 15, 2005, the Company issued 17,647 shares of common stock, valuedat $15,000, in consideration of accounting services provided to the Company.

 

During the periodbeginning January 3, 2005 through January 31, 2005, ACT completed apreferred unit offering in which ACT sold 4,705,890 investment units to a groupof accredited investors (within the meaning of Rule 501 of Regulation D)for total consideration of $8,000,000. ACT received gross cash proceeds of$7,910,600 and the balance of $89,400 was for payment of non-Merger relatedlegal fees.  The completion of theoffering resulted in the issuance of 9,411,788 shares of ACT’s Series APreferred Stock and associated warrants to purchase 4,705,890 shares of commonstock at a per share price of $1.27.  Inconsideration of services rendered in connection with the preferred unitoffering, ACT paid consultants to the preferred unit offering 469,247investment units, which resulted in the issuance by the Company of 469,247shares of Common Stock and associated warrants to purchase 234,629 shares ofcommon stock at a per share price of $1.27. All preferred shares issuedpursuant to the preferred offering were converted into common stock prior tothe Merger.

 

On December 30,2004, ACT granted warrants to purchase 1,833,260 shares of common stock at aper share price of $0.85 and warrants to purchase 1,291,615 shares of commonstock at a per share price of $2.00. These warrants are exercisable on or afterDecember 30, 2005 and lapse if unexercised on December 30, 2014. Thewarrants were granted as a portion of the consideration for services providedin connection with the Merger. The recipients of the warrants received otherfair value consideration for services rendered, with warrants providingincentive compensation, the value of which is not readily determinable orseparable from the overall compensation arrangement; therefore, the Company hasutilized a Black Scholes analysis as the most readily determinable measure ofvalue. The warrants have been valued at $0, using the Black Scholes pricingmodel with the following assumptions: (1) dividend yield of 0%,(2) expected volatility of 0%, (3) risk-free interest rate of 2.75%,and (4) expected life of 3 years.

 

On December 13,2004, ACT granted warrants to purchase 1,954,000 shares of common stock at aper share price of $0.25. Of these warrants, 1,488,000 are exercisable onFebruary 1, 2006 and lapse if unexercised on December 13, 2014 and546,000 are exercisable immediately upon issuance and lapse if unexercised onDecember 13, 2006. The warrants were granted as a portion of theconsideration for services provided. The recipients of the warrants receivedother fair value consideration for services rendered, with warrants providingincentive compensation, the value of which is not readily determinable orseparable from the overall compensation arrangement; therefore, the Company hasutilized a Black Scholes analysis as the most readily determinable measure ofvalue. The warrants have been valued at $0, using the Black Scholes pricingmodel with the following assumptions: (1) dividend yield of 0%,(2) expected volatility of 0%, (3) risk-free interest rate of 2.75%,and (4) expected life of 3 years.

 

On November 30,2004, ACT granted warrants to purchase 100,000 shares of common stock at a pershare price of $0.25. The warrants are exercisable on or after April 1,2005 and lapse if unexercised on April 1, 2010. The recipient received thewarrants as part of a negotiated settlement package, including other 

 

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consideration, the valueof which is not readily determinable or separable from the overall severancepackage; therefore, the Company has utilized a Black Scholes analysis as themost readily determinable measure of value. The warrants have been valued at$0, using the Black Scholes pricing model with the following assumptions:(1) dividend yield of 0%; (2) expected volatility of 0%,(3) risk-free interest rate of 2.75%, and (4) expected life of 3years.

 

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

 

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

 

**StockPlans**

** **

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

 

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

 

On January 31, 2005,the Company’s Board of Directors approved the establishment of the 2005 StockIncentive Plan (the “2005 Plan”), subject to approval of our shareholders.  The total number of common shares availablefor grant and issuance under the plan may not exceed 9 million shares, plus anannual increase on the fist day of each of the Company’s fiscal years beginningin 2006 equal to 5% of the number of shares of our common stock outstanding onthe last day of the immediately preceding fiscal year, subject to adjustment inthe event of certain recapitalizations, reorganizations and similartransactions.  Common stock purchaseoptions may be exercisable by the payment of cash or by other means asauthorized by the Board of Directors or a committee established by the Board ofDirectors.  At June 30, 2005, we hadgranted 7,808,335 common stock purchase options under the plan.

 

Pursuant to the 2005Plan, on January 31, 2005, we granted 7,273,335 common stock purchaseoptions to our employees. The options granted to employees have an exerciseprice of $0.85 per share and vest over periods not exceeding 4 years. The fairvalue of the options was estimated at $385,472 for pro forma purposes using theBlack Scholes option pricing model. The assumptions used in the Black Scholesmodel are as follows: (1) dividend yield of 0%; (2) expectedvolatility of 0%, (3) risk-free interest rate of 3.25%, and(4) expected life of 2 years.

 

Pursuant to the 2005Plan, on January 31, 2005, we granted 535,000 common stock purchaseoptions to consultants. The options have an exercise price of $0.85 per shareand vest over periods not exceeding 4 years. The fair value of the options atthe date of grant was estimated at $28,354 using the Black Scholes 

 

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option pricing model. Theassumptions used in the Black Scholes model are as follows: (1) dividendyield of 0%; (2) expected volatility of 0%, (3) risk-free interestrate of 3.25%, and (4) expected life of 2 years.  This initial estimate of fair value will beexpensed over the option vesting period. In addition to this initial estimate of fair value, the Companycalculates additional quarterly expense based upon options which vest during theperiod.  During the quarter ended June30, 2005, vested shares resulted in an additional charge of $61,580.  This amount, plus amortization of initialfair value, resulted in a total charge of $62,988 in the quarter ended June 30,2005, bringing total charges related to these options to $106,988 for the sixmonths ended June 30, 2005.  Theassumptions used in the Black Scholes model for this quarterly calculation areas follows: (1) dividend yield of 0%, (2) expected volatility of 139%, (3) riskfree interest rate of 3.625%, and (4) expected life of 2 years.

 

**Common Share Options and WarrantsIssued**

 

The following tablesummarizes information on all common share purchase options and warrants of theCompany outstanding as of June 30, 2005.

 
|                                                               |       | **June 30, 2005** |        |
|--------------------------------------------------------------------|------------|-------------------|-------------|
| ** **                                                         | ** ** | **Number**        | ** **  | **Weighted Average Exercise Price** |   |
| **Outstanding  at beginning of the period**                        |       | **10,034,036**    | ** **  | **$** | **0.51** |   |
| ** **                                                         |       | ** **        | ** **  | ** ** |   |
| **Option  granted to employees and consultants during the period** |       | **7,808,335**     | ** **  | **0.85** |   |
| ** **                                                         |       | ** **        | ** **  | ** ** |   |
| **Warrants  issued during the period**                             |       | **5,248,581**     | ** **  | **1.27** |   |
| ** **                                                         |       | ** **        | ** **  | ** ** |   |
| **Exercise  during the period**                                    |       | **(12,000**       | **) ** | **.05** |   |
| ** **                                                         |       | ** **        | ** **  | ** ** |   |
| **Outstanding  at end of the period**                              |       | **23,078,952**    | ** **  | **0.80** |   |
|                                                                    |            |                   |             |  |  |  |

 

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

###### ** **

We are a party to aresearch collaboration agreement and license agreement with the University ofMassachusetts, as amended from time to time (the “UMass License”). Under theUMass License, we were granted certain exclusive rights to license andsublicense certain products and services invented as part of the collaborativeeffort. The term of the UMass License extends to the later of the expiration ofthe related patents or April 16, 2006. We are required to pay royalties ranging from 2.5% to 4.5% of net salesof licensed products and services, as defined. Minimum royalties of $45,000 per year must be paid to UMass.  For 2005 and 2004, we have paid only theminimum royalty required. Additionally, we are required to pay sublicense feesof 18% for sublicense income, as defined. We are required to spend a minimumannual amount of $200,000 on research and development.

 

During 2004, we enteredinto license agreements with two parties, the terms of which provide for theinitial payment of the license fee through an aggregate of six promissory notestotaling $1,400,000. The notes mature as follows: $333,333 on December 1,2005; $666,667 on December 1, 2006; and $400,000 on June 1, 2007.There is no stated interest rate for $1,000,000 of notes, the remaining$400,000 bear interest at 10% per year, but only if the notes are not paid atmaturity. Because of the uncertainty of the ultimate collection of theprincipal amount of the notes, they have not been recorded in the financialstatements and will not be recorded until their collectibility is reasonableassured.

 

We have entered into alease for our office space commencing December 20, 2004 and expiringApril 30, 2010. Annual minimum lease payments are as follows:

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

 

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Rent expense recorded inthe financial statements for the six month periods ended June 30, 2005 and 2004was $219,388 and $219,637, respectively.

 

We have entered intoemployment contracts with certain executives and research personnel. Thecontracts provide for salaries, bonuses and stock option grants, along withother employee benefits. The employment contracts generally have no set termand can be terminated by either party. There is a provision for payments ofthree months to one year of annual salary as severance if we terminate acontract without cause, along with the acceleration of certain unvested stockoption grants. Certain of the agreements provide for salary increases upon theclosing of an equity funding of $10 million.

 

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

 

**Geron-Related Proceedings**

 

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

 

University ofMassachusetts and Advanced Cell Technology, Inc. v. Roslin Institute(Edinburgh), Geron Corporation and Exeter Life Sciences, Inc.,U.S. District Court for the District of Columbia. The Company filed an actionon February 18, 2005 in the U.S. District Court for the District of Columbia.The Company brought this action under 35 U.S.C. 146 to reverse the decision ofthe Board of Patent Appeals and Interferences regarding a patent to a method ofcloning non-human animals. The patent, U.S. Patent No. 5,945,577, is licensedby the University of Massachusetts exclusively to the Company. The parties haveagreed to stay all proceedings until September 8, 2005.  Adverse determinations in this proceedingwould have a materially adverse effect on our business.

 

University ofMassachusetts and Advanced Cell Technology, Inc. v. Roslin Institute(Edinburgh), Geron Corporation and Exeter Life Sciences, Inc.,U.S. District Court for the District of Columbia. The Company filed an actionon April 7, 2005 in the U.S. District Court for the District of Columbia. TheCompany brought this action under 35 U.S.C. 146 to reverse the decision of theBoard of Patent Appeals and Interferences regarding a patent to a method ofcreating embryonic stem cells. The patent, U.S. Patent No. 6,235,970, is licensedby the University of Massachusetts exclusively to the Company. The parties haveagreed to stay all proceedings until September 8, 2005.  Adverse determinations in this proceedingwould have a materially adverse effect on our business.

 

**Other Legal Proceedings**

 

Gary D. Aronson and JohnGorton v. A.C.T. Group, Inc., Advanced Cell Technology, Inc., Michael D. West,and Gunnar L. Engstrom. Commonwealth of MassachusettsSuperior Court, Worcester. C.A. No. 040523B. This proceeding is a claim forbreach of contract and failure to pay brought by two of the individuals whohold Promissory Notes issued by ACT Group Inc., a Delaware corporation (“ACTGroup”). ACT is a named defendant in this proceeding. In April 2004, the courtentered an order denying a request for a temporary restraining order andpreliminary injunction with respect to our subsidiary ACT. In its order, theCourt stated that, based upon the record before the Court at that stage of theproceeding, ACT was “not legally 

 

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responsible” for these ACT Group obligations. InAugust 2004, the plaintiffs obtained a judgment against ACT Group for $690,040.The Massachusetts Superior Court before which this proceeding is pending hasentered an Order requiring all 6,811,146 shares of our stock held by ACT Groupbe placed in escrow pending sale to satisfy this judgment. Although the Orderspecifies that the sale must be conducted in a commercially reasonable manner,we cannot assure you that the plaintiffs in this action will effect the sale ina manner that will not have a materially adverse impact upon the trading valueof our stock.  The Company and certainofficers and directors have been named as contemnors in a related contemptcomplaint seeking to enforce the judgment against ACT Group and have beenordered to show cause why they should not be held in contempt for allegedlyaiding and abetting ACT Group’s alleged contempt.  The Company and certain officers have movedto dismiss the contempt complaint.  Atthe request of the parties, the Massachusetts Superior Court has delayedscheduling a hearing on the show cause order and the Company’s motion todismiss. If ACT Group is unable to resolve this dispute on terms that aresatisfactory to it and the Company, our business may be materially adverselyaffected. Although our operations and those of ACT Group are distinct andseparate, with separate governance structures, and the two companies observestrict corporate formalities distinct to the respective entities, theplaintiffs in this action seek to pierce the corporate veil and hold usresponsible for ACT Group’s liabilities. To date, those claims have not beensuccessful. However, we cannot assure you that there will not be furtherattempts to pierce the corporate veil, or that they will be unsuccessful indoing so. If there are such future attempts, they could result in significantlegal expenses in defending such claims. Moreover, if the plaintiffs creditorsare successful in piercing the corporate veil and holding us responsible forthese ACT obligations, there will be a material adverse effect on our businessand operations.

 

###### **11.**          SUBSEQUENTEVENTS

 

On July 6, 2005, the Company’s shareholders approvedan amendment to the Company’s Certificate of Incorporation to increase theauthorized capital stock of the Company to 50,000,000 shares of Preferred Stockand 100,000,000 shares of Common Stock.

 

In consideration for service on the Company’s Board ofDirectors and Audit Committee, on August 1, 2005, the Company granted Dr. AlanShapiro the option to purchase 50,000 shares of Common Stock under theCompany’s 2005 Stock Incentive Plan. The options are fully vested as of thedate of grant.

 

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

## ** **

## **OVERVIEW**

## ** **

This Quarterly Report onForm 10-QSB contains forward-looking statements that involve risks anduncertainties.****We use words suchas “may,” “assumes,” “forecasts,” “positions,” “predicts,” “strategy,” “will,”“expects,” “estimates,” “anticipates,” “believes,” “projects,” “intends,”“plans,” “budgets,” “potential,” “continue” and variations thereof, and otherstatements contained in quarterly report, and the exhibits hereto, regardingmatters that are not historical facts and are forward-looking statements.Because these statements involve risks and uncertainties, as well as certainassumptions, actual results may differ materially from those expressed orimplied 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; thedevelopment and commercialization of largely novel and unproven technologiesand products; our ability to protect, maintain, and defend our intellectualproperty rights: uncertainties regarding our ability to obtain the capitalresources needed to continue research and development operations and to conductresearch, preclinical development and clinical trials necessary for regulatoryapprovals; uncertainty regarding the outcome of clinical trials and our overallability to compete effectively in a highly complex, rapidly developing, capitalintensive and competitive industry.  See *“*RISK FACTORS THAT MAY AFFECT FUTURERESULTS*”* set forth inPart I, Item 2 of this Quarterly Report on Form 10-QSB for a morecomplete discussion of these factors. Readers are cautioned not to place undue reliance on theseforward-looking statements, which speak only as of the date that they aremade.  We undertake no obligation topublicly update or revise any forward-looking statements, whether as a resultof new information, future events or otherwise.

 

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

## ** **

Weare a biotechnology company focused on developing and commercializing humanstem cell technology in the emerging fields of regenerative medicine and stemcell therapy.

## ** **

## **SIGNIFICANT ACCOUNTING POLICIES**

## ** **

## **Our consolidated financialstatements have been prepared in accordance with accounting principles generallyaccepted in the United States of America. The preparation of these financialstatements requires management to make estimates and assumptions that affectthe reported amounts of assets, liabilities, revenues and expenses. Note 1 ofthe Notes to Consolidated Financial Statements describes the significantaccounting policies used in the preparation of the consolidated financialstatements. Certain of these significant accounting policies are considered tobe critical accounting policies, as defined below. We do not believe that therehave been significant changes to our accounting policies during the threemonths ended June 30, 2005, as compared to those policies disclosed in theDecember 31, 2004 financial statements filed in our Current Report on Form 8-K/Awith the SEC on April 18, 2005.**

## ** **

## **A critical accounting policy isdefined as one that is both material to the presentation of our financialstatements and requires management to make difficult, subjective or complexjudgments that could have a material effect on our financial condition andresults of operations. Specifically, critical accounting estimates have thefollowing attributes: 1) we are required to make assumptions about matters thatare highly uncertain at the time of the estimate; and 2) different estimates wecould reasonably have used, or changes in the estimate that are reasonablylikely to occur, would have a material effect on our financial condition orresults of operations.**

## ** **

Estimates and assumptionsabout future events and their effects cannot be determined with certainty. Webase our estimates on historical experience and on various other assumptionsbelieved to be applicable and reasonable under the circumstances. Theseestimates may change as new events occur, as additional information is obtainedand as our operating environment changes. These changes have historically beenminor and have been included in the consolidated financial statements as soonas they became known. Based on a critical assessment of our accounting policiesand the underlying judgments and uncertainties affecting the application ofthose policies, management believes that our consolidated financial statementsare fairly stated in accordance with accounting principles generally acceptedin the United States, and present a meaningful presentation of our financialcondition and results of operations. We believe the following criticalaccounting policies reflect our more significant estimates and assumptions usedin the preparation of our consolidated financial statements:

 

***Use of Estimates -***These financialstatements have been prepared in accordance with accounting principlesgenerally accepted in the United States and, accordingly, require management tomake estimates and assumptions that affect the reported amounts of assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period.  Specifically, ourmanagement has estimated the expected economic life and value of our licensedtechnology, our net operating loss for tax purposes and our stock, option andwarrant expenses related to compensation to employees and directors,consultants and investment banks.  Actual results could differ from thoseestimates.

 

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

 

***Cash and Equivalents -***Cashequivalents are comprised of certain highly liquid investments with maturity ofthree months or less when purchased.  We maintain our cash in bank depositaccounts, which at times, may exceed federally insured limits.  We havenot experienced any losses in such account.

 

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

 

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***Revenue Recognition -***Our revenues aregenerated from license and research agreements with collaborators. Licensingrevenue is recognized ratably over the life of the license. Deferred revenuerepresents the portion of the license and other payments received that has notbeen earned. Costs associated with the license revenue are deferred andrecognized over the same term as the revenue. Reimbursements of researchexpense pursuant to grants are recorded as a reduction of research anddevelopment expense once the reimbursements are approved and the Company isassured of collectibility.

 

***Intangible and Long-Lived Assets -***Wefollow SFAS No. 144, “*Accounting forImpairment of Disposal of Long-Lived Assets*”, which established a“primary asset” approach to determine the cash flow estimation period for agroup of assets and liabilities that represents the unit of accounting for along lived asset to be held and used.  Long-lived assets to be held andused are reviewed for impairment whenever events or changes in circumstancesindicate that the carrying amount of an asset may not be recoverable.  Thecarrying amount of a long-lived asset is not recoverable if it exceeds the sumof the undiscounted cash flows expected to result from the use and eventualdisposition of the asset.  Long-lived assets to be disposed of arereported at the lower of carrying amount or fair value less cost to sell. During the periods ended June 30, 2005 and March 31, 2005, no impairment losseswere recognized.

 

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

 

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

 

ACT uses the fair valuemethod for equity instruments granted to non-employees and uses the BlackScholes model for measuring the fair value.  The stock based fair valuecompensation is determined as of the date of the grant or the date at which theperformance of the services is completed (measurement date) and is recognizedover the periods in which the related services are rendered.

 

## **RESULTSOF OPERATIONS**

 

***Revenues***

 

Revenues for the threeand six months ended June 30, 2005 and June 30, 2004 were approximately $121,000, $229,000, $256,000 and $440,000respectively. These amounts relate primarily to license fees and royaltiescollected that are being amortized over the period of the license granted. Thereduction in revenue in current periods was due to decreased revenue levelsfrom licensees’ operations.

 

***Research and Development Expenses and Grant Reimbursements***

 

Research and developmentexpenses for the three and six months ended June 30, 2005 and June 30, 2004were approximately $657,000, $934,000, $243,000 and $537,000,respectively.  The increase in expenses incurrent periods, which consist mainly of payroll and payroll related expenses,research supplies and costs incurred in connection with specific research grants,relate principally to increased staffing and spending for scientific researchbeing done 

 

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pursuant to a scientificgrant from the US National Institute of Standards and Technology (NIST) thatexpires in 2006.

 

Our research and development expenses consistprimarily of costs associated with basic and pre-clinical research exclusivelyin the field of human stem cell therapies and regenerative medicine, with focuson development of our technologies in cellular reprogramming, reducedcomplexity applications, and stem cell differentiation. These expensesrepresent both pre-clinical development costs and costs associated withnon-clinical support activities such as quality control and regulatory processes.The cost of our research and development personnel is the most significantcategory of expense; however, we also incur expenses with third parties,including license agreements, sponsored research programs and consultingexpenses.

 

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

 

We expect that researchand development expenses will continue to increase in the foreseeable future aswe add personnel, expand our pre-clinical research, begin clinical trialactivities, and increase our regulatory compliance capabilities. The amount ofthese increases is difficult to predict due to the uncertainty inherent in thetiming and extent of progress in our research programs, and initiation ofclinical trials. In addition, the results from our basic research and pre-clinicaltrials, as well as the results of trials of similar therapeutics underdevelopment by others, will influence the number, size and duration of plannedand unplanned trials. As our research efforts mature, we will continue toreview the direction of our research based on an assessment of the value ofpossible commercial applications emerging from these efforts.  Based on this continuing review, we expect toestablish discrete research programs and evaluate the cost and potential forcash inflows from commercializing products, partnering with others in thebiotechnology or pharmaceutical industry, or licensing the technologiesassociated with these programs to third parties.

 

Webelieve that it is notpossible at this stage to provide a meaningful estimate of the total cost tocomplete our ongoing projects and bring any proposed products to market. Theuse 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 togain marketing approval. Costs to complete could vary substantially dependingupon the projects selected for development, the number of clinical trialsrequired and the number of patients needed for each study. It is possible thatthe 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, anddifficulties evaluating the trial results. Any delay in completion of a trialwould increase the cost of that trial, which would harm our results ofoperations. 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 netcash inflows from our current activities. Until we obtain further relevantpre-clinical and clinical data, we will not be able to estimate our futureexpenses related to these programs or when, if ever, and to what extent we willreceive cash inflows from resulting products.

 

Grant reimbursements for the three and six monthsended June 30, 2005 and June 30, 2004 were approximately $189,000, $425,000, $0and $140,000, respectively. These amounts represent approved reimbursementspursuant the grant from NIST. At June 30, 2005, ACT had approximately $1,000,000of funds available under the grant that can be used to reimburse futureapproved research expenditures. We will lose the availability of any unusedfunds upon the expiration of the grant.

 

##### ***General and AdministrativeExpenses***

 

General and administrative expenses for the three andsix months ended June 30, 2005 and June 30, 2004 were approximately $2,037,000,$3,242,000, $593,000 and $1,086,000, respectively.  The principal increase in expense in thecurrent periods versus the same periods last year is a result of additionalsalary costs related to the 

 

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addition of key personnel, increased professional fees related to ACT’smerger into a public company, and costs of preparing documents and records forvarious public filings with the Securities and Exchange Commission.

 

##### ***Other Income (Expense)***

 

Other expense for the three and six months ended June30, 2005 and June 30, 2004 were approximately $35,000, $16,000, $47,000 and $96,000,respectively.

 

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

 

Net loss for the three and six months ended June 30,2005 and June 30, 2004 was approximately $2,477,000, $3,641,000, $728,000 and$1,309,000, respectively.  The increasedloss in the current periods is the result of increased general andadministrative expenses, offset in part by increased interest income and thegain on settlement of debt.

 

## ***Recent AccountingPronouncements***

## ** **

In December 2004, the Financial AccountingStandards Board (“FASB”) issued SFAS No. 153, “Exchanges of NonmonetaryAssets, an amendment of APB Opinion No. 29, Accounting for NonmonetaryTransactions.” The amendments made by Statement 153 are based on the principlethat exchanges of nonmonetary assets should be measured based on the fair valueof the assets exchanged.  Further, theamendments eliminate the narrow exception for nonmonetary exchanges of similarproductive assets and replace it with a broader exception for exchanges ofnonmonetary assets that do not have commercial substance.  Previously, Opinion 29 required that theaccounting for an exchange of a productive asset for a similar productive assetor an equivalent interest in the same or similar productive asset should bebased on the recorded amount of the asset relinquished.  Opinion 29 provided an exception to its basicmeasurement principle (fair value) for exchanges of similar productiveassets.  The FASB believes that exceptionrequired that some nonmonetary exchanges, although commercially substantive, berecorded on a carryover basis.  Byfocusing the exception on exchanges that lack commercial substance, the FASBbelieves this statement produces financial reporting that more faithfullyrepresents the economics of the transactions. SFAS 153 is effective for nonmonetary asset exchanges occurring infiscal periods beginning after June 15, 2005.  Earlier application is permitted fornonmonetary asset exchanges occurring in fiscal periods beginning after thedate of issuance.  The provisions of SFAS153 shall be applied prospectively.  TheCompany has evaluated the impact of the adoption of SFAS 153, and does notbelieve the impact will be significant to the Company’s overall results ofoperations or financial position.

## ** **

In December 2004, the FASB issued SFASNo. 123 (revised 2004), “Share-Based Payment”.  SFAS 123(R) willprovide investors and other users of financial statements with more completeand neutral financial information by requiring that the compensation costrelating to share-based payment transactions be recognized in financialstatements.  That cost will be measured based on the fair value of theequity or liability instruments issued.  SFAS 123(R) covers a wide rangeof share-based compensation arrangements including share options, restrictedshare plans, performance-based awards, share appreciation rights, and employeeshare purchase plans.  SFAS 123(R) replaces FASB Statement No. 123,“Accounting for Stock-Based Compensation”, and supersedes APB OpinionNo. 25, “Accounting for Stock Issued to Employees”. SFAS 123, asoriginally issued in 1995, established as preferable a fair-value-based methodof accounting for share-based payment transactions with employees. However, that statement permitted entities the option of continuing to applythe guidance in Opinion 25, as long as the footnotes to financial statementsdisclosed what net income would have been had the preferable fair-value-basedmethod been used.  Public entities (other than those filing as smallbusiness issuers) will be required to apply SFAS 123(R) as of the first interimor annual reporting period that begins after June 15, 2005. SFAS 123(R) isapplicable for ACT effective the first interim period that starts afterDecember 15, 2005. The Company has evaluated the impact of the adoption ofSFAS 123(R), and believes that the impact may be significant to the Company’soverall results of operations and financial position (a pro forma effect, asestimated by management, is disclosed earlier in this note).

 

In December 2004, the FASB issued SFASNo. 152, “Accounting for Real Estate Time-Sharing 

 

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Transactions, an amendment of FASB Statements No. 66 and 67 (SFAS152)”. The amendments made by Statement 152 amend FASB Statement No. 066,“Accounting for Sales of Real Estate”, to reference the financial accountingand reporting guidance for real estate time-sharing transactions that isprovided in AICPA Statement of Position (SOP) 04-2, “Accounting for Real EstateTime-Sharing Transactions”. This Statement also amends FASB StatementNo. 67, “Accounting for Costs and Initial Rental Operations of Real EstateProjects”, to state that the guidance for (1) incidental operations and(2) costs incurred to sell real estate projects does not apply to realestate time-sharing transactions. The accounting for those operations and costsis subject to the guidance in SOP 04-2. This statement is effective forfinancial statements for fiscal years beginning after June 15, 2005, withearlier application encouraged. The Company has evaluated the impact of theadoption of SFAS 152, and does not believe the impact will be significant tothe Company’s overall results of operations or financial position since theCompany does not enter into such transactions.

 

In December 2004, the FASB issued two FASB StaffPositions—FSP FAS 109-1, Application of FASB Statement 109 “Accounting forIncome Taxes” to the Tax Deduction on Qualified Production Activities Providedby the American Jobs Creation Act of 2004, and FSP FAS 109-2 Accounting andDisclosure Guidance for the Foreign Earnings Repatriation Provision within theAmerican Jobs Creation Act of 2004. Neither of these affected the Company as itdoes not participate in the related activities.

 

In November 2004, the FASB issued SFASNo. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4”.The amendments made by Statement 151 clarify that abnormal amounts of idlefacility expense, freight, handling costs, and wasted materials (spoilage)should be recognized as current period charges and require the allocation offixed production overheads to inventory based on the normal capacity of theproduction facilities. The guidance is effective for inventory costs incurredduring fiscal years beginning after June 15, 2005. Earlier application ispermitted for inventory costs incurred during fiscal years beginning afterNovember 23, 2004. The Company has evaluated the impact of the adoption ofSFAS 151, and does not believe the impact will be significant to the Company’soverall results of operations or financial position since the Company currentlydoes not have any manufacturing operations or inventory.

 

In March 2004, the FASB approved the consensusreached on the Emerging Issues Task Force (EITF) Issue No. 03-1, “TheMeaning of Other-Than-Temporary Impairment and Its Application to CertainInvestments.” The objective of this Issue is to provide guidancefor identifying impaired investments. EITF 03-1 also provides newdisclosure requirements for investments that are deemed to be temporarily impaired.The accounting provisions of EITF 03-1 are effective for all reporting periodsbeginning after June 15, 2004, while the disclosure requirements forcertain investments are effective for annual periods ending afterDecember 15, 2003, and for other investments such disclosure requirementsare effective for annual periods ending after June 15, 2004.

 

In December 2003, the SEC issued Staff AccountingBulletin (“SAB”) No. 104 (“SAB No. 104”), “Revenue Recognition.” SABNo. 104 supersedes SAB No. 101, “Revenue Recognition in FinancialStatements.” SAB No. 104, which was effective upon issuance, rescindedcertain guidance contained in SAB No. 101 related to multiple elementrevenue arrangements, and replaced such guidance with that contained in EITF00-21, “Accounting for Revenue Arrangements with Multiple Deliverables.”Additionally, SAB No. 104 rescinded the SEC’s Revenue Recognition inFinancial Statements Frequently Asked Questions and Answers issued with SABNo. 101. The revenue recognition principles of SAB No. 101 remainlargely unchanged by the issuance of SAB No. 104, and therefore theadoption of SAB No. 104 did not have a material effect on the Company’sresults of operations or financial condition.

 

In January 2003, the FASB issued FASBInterpretation No. (“FIN”) 46, “Consolidation of Variable InterestEntities” (“FIN 46”). In December 2003, FIN 46 was replaced by FASBinterpretation No. 46(R) “Consolidation of Variable Interest Entities.”FIN 46(R) clarifies the application of Accounting Research Bulletin No. 51,“Consolidated Financial Statements,” to certain entities in which equityinvestors do not have the characteristics of a controlling financial interestor do not have sufficient equity at risk for the entity to finance itsactivities without additional subordinated financial support from otherparties. FIN 46(R) requires an enterprise to consolidate a variable interestentity if that enterprise will absorb a majority of the entity’s expectedlosses, is entitled to receive a majority of the entity’s expected residualreturns, or both. FIN 46(R) is effective for entities being evaluated under 

 

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FIN 46(R) for consolidation no later than the end of the firstreporting period that ends after March 15, 2004. The Company does notcurrently have any variable interest entities that will be impacted by adoptionof FIN 46(R).

 

In May 2005, the Financial Accounting Standards Board(FASB) issued Statement of Financial Accounting Standard (SFAS) No. 154,Accounting Changes and Error Corrections - a replacement of APB Opinion No. 20and FASB Statement No. 3.  SFAS No. 154requires retrospective application to prior periods’ financial statements ofchanges in accounting principle, unless it is impracticable to determine eitherthe period-specific effects or the cumulative effect of the change.  SFAS No. 154 also requires that retrospectiveapplication of a change in accounting principle be limited to the directeffects of the change.  Indirect effectsof a change in accounting principle, such as a change in nondiscretionaryprofit-sharing payments resulting from an accounting change, should berecognized in the period of the accounting change.  SFAS No. 154 also requires that a change indepreciation, amortization or depletion method for long-lived, non-financialassets be accounted for as a change in accounting estimate effected by a changein accounting principle.  SFAS No. 154 iseffective for accounting changes and corrections of errors made in fiscal yearsbeginning after December 15, 2005.  Earlyadoption is permitted for accounting changes and corrections of errors made infiscal years beginning after the date this Statement is issued.  Management does not expect the implementationof this new standard to have a material impact on our financial position,results of operations and cash flows.

 

In March 2005, the SEC released Staff AccountingBulletin No. 107, “Share-Based Payment”(“SAB 107”), which provides interpretiveguidance related to the interaction between SFAS 123(R) and certain SEC rulesand regulations.  It also provides theSEC staff’s views regarding valuation of share-based payment arrangements.  In April 2005, the SEC amended the compliancedates for SFAS 123(R), to allow companies to implement the standard at thebeginning of their next fiscal year, instead of the next reporting periodbeginning after June 15, 2005. Management is currently evaluating the impact SAB 107 will have on ourconsolidated financial statements.

 

##### **LIQUIDITY AND CAPITAL RESOURCES**

 

We are financing our operations primarily with theproceeds of the sale of $8,000,000 of investment units, consisting of Series APreferred Stock and associated warrants, by our subsidiary, ACT, in January2005, prior to the closing of the Merger. To a substantially lesser degree, financing of our operations isprovided through grant funding, payments received under license agreements, andinterest earned on cash and cash equivalents.

 

With the exception of 2002, when we sold certainassets of a subsidiary resulting in a gain for the year, we have incurredsubstantial net losses each year since inception as a result of research anddevelopment and general and administrative expenses in support of ouroperations. We anticipate incurring substantial net losses in the future.

 

Cash, cash equivalents, and cash held in escrow atJune 30, 2005 and December 31, 2004 were approximately $3,246,000 and$3,676,000, respectively.  We haveexpended a substantial portion of the proceeds of the 8,000,000 Series APreferred Stock and warrants issued in January 2005 to support ongoingoperations.  The increase in the currentperiod is the result of closing the financing described above, net of amountsspent for payment of notes and accounts payable, increased legal and accountingfees, and increases in other general and administrative expenses.

 

At June 30, 2005 and December 31, 2004, we had a notepayable in the principal amount of $1,000,000, and related accrued interestof  approximately $357,000 and $297,000,respectively.  As an offset to theseamounts owed to ACT Group, we had a receivable at June 30, 2005 and December31, 2004 of approximately $656,000 and $394,000, respectively, primarilyrelated to expenses incurred by ACT on behalf of ACT Group for salaries, legalfees and other costs incurred.

 

Our cash and cash equivalents are limited.  We expect to require substantial additionalfunding.  Our future cash requirementswill depend on many factors, including the pace and scope of our research anddevelopment programs, the costs involved in filing, prosecuting, maintainingand enforcing patents and other costs associated with commercializing ourpotential products.  We intend to seekadditional funding primarily through public or private financing transactions,and, to a lesser degree, new licensing or scientific collaborations, grantsfrom 

 

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governmental or other institutions, and other relatedtransactions.   If we are unable to raiseadditional funds, we will be forced to either scale back our business effortsor curtail our business activities entirely. We anticipate that our availablecash and expected income will be sufficient to finance most of our currentactivities  for at least twelve monthsfrom the date of the financial statements, although certain of these activitiesand related personnel may need to be reduced. We cannot assure you that public or private financing or grants will beavailable 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 FUTURE RESULTS**

#  

*Our business is subject to various risks, included butnot limited to those described below. You should carefully consider these factors, together with all the otherinformation disclosed in this Quarterly Report on Form 10-QSB.  Any of these risks could materially adverselyaffect our business, operating results and financial condition.*

 

**RisksRelating to Our Early Stage of Development**

 

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

 

**•**                  we have fewer resources than an establishedcompany;

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

**•**                  we may be more vulnerable operationally andfinancially to any mistakes that may be made, as well as to external factorsbeyond our control.

 

Thesedifficulties are compounded by our heavy dependence on emerging and sometimesunproven technologies.  In addition, thefact that some of our significant potential revenue sources involve ethicallysensitive and controversial issues which could become the subject oflegislation or regulations that could materially restrict our operations and,therefore, harm our financial condition, operating results and prospects forbringing our investors a return on their investment.

 

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

 

Wehave no commercially marketable products and no immediate ability to generaterevenue from commercial products, nor any assurance of being able to developour technologies for commercial applications. As a result, we may never be able to operate profitably. We are justbeginning to identify products available for pre-clinical trials and may notreceive significant revenues from commercial sales of our products for the nextseveral years, if at all, although we do generate revenues from licensingactivities.  We have marketed only alimited amount of services based on our technologies and have little experiencein doing so. Our technologies and any potential products or services that wemay develop will require significant additional effort and investment prior tomaterial commercialization and, in the case of any biomedical products,pre-clinical and clinical testing and regulatory 

 

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approvals.  We cannot assure you that we will be able todevelop any such technologies or any products or services, or that suchtechnologies, products or services will prove to be safe and efficacious inclinical trials, meet applicable regulatory standards, be capable of beingproduced in commercial quantities at acceptable costs or be successfullymarketed.  For that reason, we may not beable to generate revenues from commercial production or operate profitably.

 

Wehave sold the agricultural portion of our business in order to financeoperations.  The agriculturalapplications of our technology generally have a more rapid realization ofrevenues due to more limited regulatory requirements and testing.  Our ability to generate revenue from anyagricultural applications of our technology is limited to existing licenseroyalties.

 

***We will require substantial additionalfunds to continue operating which may not be available on acceptable terms, ifat all.*****We believe our cash from all sources (cash,cash equivalents and anticipated revenue stream from licensing fees andsponsored research contracts) is sufficient for the Company to continue as agoing concern through June 30, 2006.  However,without substantial additional financing during this period, we will need tosignificantly limit our capital and operational spending and therefore belimited in our ability to advance our scientific efforts or further our effortsto operate profitably.

 

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

 

Inaddition, our cash requirements may vary materially from those now plannedbecause of results of research and development, potential relationships withstrategic partners, changes in the focus and direction of our research anddevelopment programs, competition, litigation required to protect ourtechnology, technological advances, the cost of pre-clinical and clinicaltesting, the regulatory process of the United States Food and DrugAdministration, or FDA, and foreign regulators, whether any of our productsbecome approved or the market acceptance of any such products and otherfactors.  Our current cash reserves arenot sufficient to fund our operations through the commercialization of ourfirst products or services.

 

***We have limited clinical testing,regulatory, manufacturing, marketing, distribution and sales capabilities whichmay limit our ability to generate revenues.*****Because of the relatively early stage of ourresearch and development programs, we have not yet invested significantly inclinical testing, regulatory, manufacturing, or in marketing, distribution orproduct sales resources. We cannot assure you that we will be able to developany such resources successfully or as quickly as may be necessary. Theinability to do so may harm our ability to generate revenues or operateprofitably.

 

**RisksRelating to Our Technology**

 

***We rely on nuclear transfer and embryonicstem cell technologies that we may not be able to successfully develop, whichwill prevent us from generating revenues, operating profitably or providinginvestors any return on their investment.*****We have concentrated our research on our nucleartransfer and embryonic stem cell technologies, and our ability to operateprofitably will depend on being able to successfully develop these technologiesfor human applications. These are emerging technologies with, as yet, limitedhuman applications. We cannot guarantee that we will be able to successfullydevelop our nuclear transfer and embryonic stem cell technologies or that suchdevelopment will result in products or services with any significant commercialutility. We anticipate that the commercial sale of such products or services,and royalty / licensing fees related to our technology, would be our primarysources of revenues. If we are unable to develop our technologies, investorswill likely lose their entire investment in us.

 

***The outcome of pre-clinical, clinical andproduct testing of our products is uncertain, and if we are unable tosatisfactorily complete such testing, or if such testing yields unsatisfactoryresults, we will be unable to commercially produce our proposed products. ***Before obtaining regulatory approvals for the commercial sale of 

 

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anypotential human products, our products will be subjected to extensivepre-clinical and clinical testing to demonstrate their safety and efficacy inhumans.  We cannot assure you that theclinical trials of our products, or those of our licensees or collaborators,will demonstrate the safety and efficacy of such products at all, or to theextent necessary to obtain appropriate regulatory approvals, or that thetesting of such products will be completed in a timely manner, if at all, orwithout significant increases in costs, program delays or both, all of whichcould harm our ability to generate revenues. In addition, our prospective products may not prove to be moreeffective for treating disease or injury than current therapies. Accordingly,we may have to delay or abandon efforts to research, develop or obtainregulatory approval to market our prospective products. Many companies involved in biotechnologyresearch and development have suffered significant setbacks in advancedclinical trials, even after promising results in earlier trials. The failure toadequately demonstrate the safety and efficacy of a therapeutic product underdevelopment could delay or prevent regulatory approval of the product and couldharm our ability to generate revenues, operate profitably or produce any returnon an investment in us.

 

Whilethe marketing of cloned or transgenic animals does not currently requireregulatory approval, such approval may be required in the future.  We cannot assure you that we would obtainsuch approvals or that our licensees’ products would be accepted in themarketplace.  This lack of approval couldreduce or preclude any royalty revenues we might receive from our licensees inthat field.

 

***We may not be able to commercially developour technologies and proposed product lines, which, in turn, wouldsignificantly harm our ability to earn revenues and result in a loss ofinvestment.*****Our ability to commercially develop ourtechnologies will be dictated in large part by forces outside our control whichcannot be predicted, including, but not limited to, general economicconditions, the success of our research and pre-clinical and field testing, theavailability of collaborative partners to finance our work in pursuingapplications of nuclear transfer technology and technological or otherdevelopments in the biomedical field which, due to efficiencies, technologicalbreakthroughs or greater acceptance in the biomedical industry, may render oneor more areas of commercialization more attractive, obsolete or competitivelyunattractive. It is possible that one or more areas of commercialization willnot be pursued at all if a collaborative partner or entity willing to fundresearch and development cannot be located. Our decisions regarding the ultimate products and/or services we pursuecould have a significant adverse affect on our ability to earn revenue if wemisinterpret trends, underestimate development costs and/or pursue that wrongproducts or services. Any of these factors either alone or in concert couldmaterially harm our ability to earn revenues and could result in a loss of anyinvestment in us.

 

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

 

***We may not be able to protect ourproprietary technology, which could harm our ability to operate profitably.*****The biotechnology and pharmaceuticalindustries place considerable importance on obtaining patent and trade secretprotection for new technologies, products and processes. Our success willdepend, to a substantial degree, on our ability to obtain and enforce patentprotection for our products, preserve any trade secrets and operate withoutinfringing the proprietary rights of others. We cannot assure you that:

 

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

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

**•**                  patent applications relating to our potentialproducts or technologies will result in the issuance of any patents or that, ifissued, such patents will afford adequate protection to us or not bechallenged, invalidated or infringed; or

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

 

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Weare aware of certain patents that have been granted to others and certainpatent applications that have been filed by others with respect to nucleartransfer technologies.  The fields inwhich we operate have been characterized by significant efforts by competitorsto establish dominant or blocking patent rights to gain a competitiveadvantage, and by considerable differences of opinion as to the value and legallegitimacy of competitors’ purported patent rights and the technologies theyactually utilize in their businesses.

 

***Our business is highly dependent uponmaintaining licenses with respect to key technology.*****Several of the key patents we utilize arelicensed to us by third parties.  Theselicenses are subject to termination under certain circumstances (including, forexample, our failure to make minimum royalty payments or to timely achieve developmentand commercialization benchmarks).  Theloss of any of such licenses, or the conversion of such licenses tonon-exclusive licenses, could harm our operations and/or enhance the prospectsof our competitors.

 

Certainof such licenses also contain restrictions (e.g., limitations on our ability togrant sublicenses)  that could materiallyinterfere with our ability to generate revenue through the licensing or sale tothird parties of important and valuable technologies that we have, forstrategic reasons, elected not to pursue directly.  The possibility exists that in the future wewill require further licenses to complete and/or commercialize our proposedproducts.  We cannot assure you that wewill be able to acquire any such licenses on a commercially viable basis.

 

***Certain of our technology is notprotectable by patent.*****Certain parts of our know-how and technologyare not patentable. To protect our proprietary position in such know-how andtechnology, we intend to require all employees, consultants, advisors andcollaborators to enter into confidentiality and invention ownership agreementswith 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 useor disclosure. Further, in the absence of patent protection, competitors whoindependently develop substantially equivalent technology may harm ourbusiness.

 

***We may not be able to adequately protectagainst piracy of intellectual property in foreign jurisdictions.*** Considerable research in the areas of stemcells, cell therapeutics and regenerative medicine is being performed incountries outside of the United States, and a number of our competitors arelocated in those countries.  The lawsprotecting intellectual property in some of those countries may not provideprotection for our trade secrets and intellectual property adequate to preventour competitors from misappropriating our trade secrets or intellectual property.  If our trade secrets or intellectual propertyare misappropriated in those countries, we may be without adequate remedies toaddress the issue.

 

**RisksRelating to Government Regulation**

 

***Companies such as ours engaged in researchusing nuclear transfer and embryonic stem cells are currently subject to strictgovernment regulations, and our operations could be harmed by any legislativeor administrative efforts impacting the use of nuclear transfer technology orhuman embryonic material.**** *Our business is focused on human cell therapy, which includes theproduction of human differentiated cells from stem cells and involves the useof nuclear transfer technology, human oocytes, and embryonic material.  Nuclear transfer technology, commonly knownas therapeutic cloning, and research utilizing embryonic stem cells arecontroversial subjects, and are currently subject to intense scrutiny, both inthe United States, the United Nations and throughout the world, particularly inthe area of nuclear transfer of human cells and the use of human embryonicmaterial.

 

Wecannot assure you that our operations will not be harmed by any legislative oradministrative efforts by politicians or groups opposed to the development ofnuclear transfer technology generally or the use of nuclear transfer fortherapeutic cloning of human cells specifically. Further, we cannot assure youthat legislative or administrative restrictions directly or indirectlydelaying, limiting or preventing the use of nuclear transfer technology or humanembryonic material or the sale, manufacture or use of products or servicesderived from nuclear transfer technology or human embryonic material will notbe adopted in the future.

 

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***Restrictions on theuse of human embryonic stem cells, and the ethical, legal and socialimplications of that research, could prevent us from developing or gainingacceptance for commercially viable products in these areas.*** Some of our most important programs involvethe use of stem cells that are derived from human embryos. The use of humanembryonic stem cells gives rise to ethical, legal and social issues regardingthe appropriate use of these cells. In the event that our research related tohuman embryonic stem cells becomes the subject of adverse commentary orpublicity, the market price for our common stock could be significantlyharmed.  Some political and religiousgroups have voiced opposition to our technology and practices. We use stemcells derived from human embryos that have been created for in vitrofertilization procedures but are no longer desired or suitable for that use andare donated with appropriate informed consent for research use. Many researchinstitutions, including some of our scientific collaborators, have adoptedpolicies regarding the ethical use of human embryonic tissue. These policiesmay have the effect of limiting the scope of research conducted using humanembryonic stem cells, thereby impairing our ability to conduct research in thisfield.

 

Potential and actuallegislation and regulation related to our technology could limit our activitiesand ability to develop products for commercial sales, depriving us of ouranticipated source of future revenues. In July 2001, the House of Representativesof the United States Congress passed a bill, HR 2505, the “Human CloningProhibition Act of 2001”.  This bill wasplaced on the calendar of the U.S. Senate in August 2002, where it did notpass.  However, similar bills could beintroduced in the future aiming to prohibit the use or commercialization ofsomatic cell nuclear transfer technology or of any products resulting from it,including those related to human therapeutic cloning and regenerative medicine.  If passed, such a bill could have asignificant influence on our ability to pursue our research, development andcommercialization plans in the United States.

 

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

 

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

 

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

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

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

**•     **causing adecrease in the price of our stock.

 

***Because we or our collaborators must obtain regulatory approvalto market our products in the United States and other countries, we cannotpredict whether or when we will be permitted to commercialize our products.***Federal,state and local governments in the United States and governments in othercountries have significant regulations in place that govern many of ouractivities.  We are or may become subject to various federal, state and local laws,regulations and recommendations relating to safe working conditions, laboratoryand manufacturing practices, the experimental use of animals and the use anddisposal of hazardous or potentially hazardous substances used in connectionwith our research and development work. The preclinical testing andclinical trials of the products that 

 

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we or our collaboratorsdevelop are subject to extensive government regulation that may prevent us fromcreating commercially viable products from our discoveries. In addition, thesale by us or our collaborators of any commercially viable product will besubject to government regulation from several standpoints, includingmanufacturing, advertising and promoting, selling and marketing, labeling, anddistributing.

 

If,and to the extent that, we are unable to comply with these regulations, ourability to earn revenues will be materially and negatively impacted.  The regulatory process, particularly in thebiotechnology field, is uncertain, can take many years and requires theexpenditure of substantial resources. Biological drugs and non-biological drugsare rigorously regulated. In particular, proposed human pharmaceuticaltherapeutic product candidates are subject to rigorous preclinical and clinicaltesting and other requirements by the FDA in the United States and similarhealth authorities in other countries in order to demonstrate safety andefficacy. We may never obtain regulatory approval to market our proposedproducts.

 

***Our products may not receive FDA approval,which would prevent us from commercially marketing our products and producingrevenues.*****The FDA and comparable government agencies inforeign countries impose substantial regulations on the manufacture andmarketing of pharmaceutical products through lengthy and detailed laboratory,pre-clinical and clinical testing procedures, sampling activities and othercostly and time-consuming procedures. Satisfaction of these regulationstypically takes several years or more and varies substantially based upon thetype, complexity and novelty of the proposed product. We cannot yet accuratelypredict when we might first submit any Investigational New Drug, or IND,application to the FDA, or whether any such IND application would be granted ona timely basis, if at all, nor can we assure you that we will successfullycomplete any clinical trials in connection with any such IND application.Further, we cannot yet accurately predict when we might first submit anyproduct license application for FDA approval or whether any such productlicense application would be granted on a timely basis, if at all.  As a result, we cannot assure you that FDAapprovals 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 approvalscould have a material adverse effect on the marketing of our products and ourability to generate product revenue.

 

***For-profit entities may be prohibited frombenefiting from grant funding***.  There has been much publicityabout grant resources for stem cell research, including Proposition 71 inCalifornia. To date, California has not provided any funding related toresearch activities pursuant to this Proposition, and there is ongoinglitigation in California that may delay, or prevent the sale of State bondsthat would fund the activities contemplated by California voters.  In addition, rules and regulationsrelated to any funding that may ultimately be provided, the type of entity thatwill be eligible for funding, the science to be funded, and funding detailshave not been finalized.  As a result of theseuncertainties regarding Proposition 71, we cannot assure you that funding, if any, will be available to theCompany, or any for-profit entity.

 

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

 

**RisksRelating to Competition**

 

***Our competition includes both public andprivate organizations and collaborations among academic institutions and largepharmaceutical companies, most of which have significantly greater experienceand financial resources than we do.*****The biotechnology and pharmaceuticalindustries are characterized by intense competition. We compete againstnumerous companies, many of which have substantially greater financial andother resources than we have. Several such enterprises have initiated celltherapy research programs and/or efforts to treat the same diseases targeted byus. Companies such as Geron Corporation, Genzyme Corporation,StemCells, Inc., Aastrom Biosciences, Inc. and Viacell, Inc., aswell as others, have substantially greater resources and experience in our fieldsthan we do, and are well situated to compete with us effectively.  Of course, any of the world’s largestpharmaceutical companies represents a significant actual or potentialcompetitor with vastly greater resources than ours.

 

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Thesecompanies hold licenses to genetic selection technologies and othertechnologies that are competitive with those of our technologies.  These and other competitive enterprises havedevoted, and will continue to devote, substantial resources to the developmentof technologies and products in competition with us.

 

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

 

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

 

***The United States is encountering tremendous competition from manyforeign countries that are providing an environment more attractive for stemcell research.***Thegovernments of numerous foreign countries are investing in, providingfacilities, personnel and legal environments intended to attract biotechnologycompanies and encourage stem cell research and development of stem cell-relatedtechnologies.

 

Theseefforts by foreign countries may make it more difficult to effectively competein our industry and may generate competitors with substantially greaterresources than ours.

 

**RisksRelating to Our Reliance on Third Parties**

 

***We depend on our collaborators to help usdevelop and test our proposed products, and our ability to develop andcommercialize products may be impaired or delayed if collaborations areunsuccessful***.  Our strategy for the development, clinicaltesting and commercialization of our proposed products requires that we enterinto collaborations with corporate partners, licensors, licensees and others.We are dependent upon the subsequent success of these other parties inperforming their respective responsibilities and the continued cooperation ofour partners. Our collaborators may not cooperate with us or perform theirobligations under our agreements with them. We cannot control the amount andtiming of our collaborators’ resources that will be devoted to our research anddevelopment activities related to our collaborative agreements with them. Ourcollaborators may choose to pursue existing or alternative technologies inpreference to those being developed in collaboration with us.

 

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

 

**•****                 **design and conduct advanced clinical trials inthe event that we reach clinical trials;

**•****                 **fund research and development activities withus;

**•****                 **pay us fees upon the achievement ofmilestones; and

**•****                 **market with us any commercial products thatresult from our collaborations.

 

Thedevelopment and commercialization of potential products will be delayed ifcollaborators fail to conduct these activities in a timely manner or at all. Inaddition, our collaborators could terminate their agreements with us and we maynot receive any development or milestone payments. If we do not achievemilestones set forth in the agreements, or if our collaborators breach orterminate their collaborative agreements with us, our business may bematerially harmed.

 

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***Our reliance on the activities of ournon-employee consultants, research institutions, and scientific contractors,whose activities are not wholly within our control, may lead to delays indevelopment of our proposed products***. We rely extensively upon and haverelationships with scientific consultants at academic and other institutions,some of whom conduct research at our request, and other consultants withexpertise in clinical development strategy or other matters. These consultantsare not our employees and may have commitments to, or consulting or advisorycontracts with, other entities that may limit their availability to us. We havelimited control over the activities of these consultants and, except asotherwise required by our collaboration and consulting agreements to the extentthey exist, can expect only limited amounts of their time to be dedicated toour activities.

 

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

 

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

 

**RisksRelating to A.C.T. Group, Inc.**

 

***One of our largest shareholders is infinancial distress which may harm our ability to conduct operations.*****One of**our largest shareholders, ACT Group, is facinginsolvency.  Two of our Board membersalso serve in similar positions at ACT Group.  Our Chairman, President and Chief ScientificOfficer is the President of ACT Group. Although our operations and those of ACT Group are distinct andseparate, with separate governance structures, and the two companies observestrict corporate formalities distinct to the respective entities, there havebeen several attempts by the debt holders of ACT Group, via a legal complaint,to pierce the corporate veil and hold ACT responsible for ACT Group’sliabilities.  To date, those claims havenot been successful.  However, we cannotassure you that there will not be further attempts by creditors of ACT Group topierce the corporate veil, or that they will be unsuccessful in doing so.  If there are such future attempts, they couldresult in significant legal expenses in defending such claims.  Moreover, if ACT Group creditors aresuccessful in piercing the corporate veil and holding us responsible for ACTGroup debts, there will be a material adverse effect on our business andoperations.

 

***ACT Group isinvolved in certain litigation proceedings, which, if not resolved on termssatisfactory to us, could adversely affect our business. ***ACT Group is involvedin litigation relating to a claim for breach of contract and failure to paybrought by two of the individuals who hold Promissory Notes issued by ACTGroup, as discussed in more detail in Part II, Item 1 “LEGAL PROCEEDINGS.”  Theplaintiffs have obtained a judgment in the amount of approximately$690,000.  Our subsidiary, ACT, isa named defendant in this proceeding.  IfACT Group is unable to resolve this dispute on terms that are satisfactory toit and ACT, our business may be materially adversely affected.  The Massachusetts Superior Court has enteredan order requiring all shares of our stock held by ACT Group be placed inescrow pending sale to satisfy this judgment. Although the order specifies that the sale must be conducted in acommercially reasonable manner, we cannot assure you that the plaintiffs inthis action will effect the sale in a manner that will not have a materiallyadverse impact upon the trading value of our stock.  Other creditors of ACT Group have also filedsuit against ACT Group.  We cannot assureyou that these creditors will not also take action against that company thatcould have a material adverse impact upon the trading value of our stock due tothe significant block of our stock held by ACT Group.

 

**GeneralRisks Relating to Our Business**

 

***We may be subject to litigation that will be costly todefend or pursue and uncertain in its outcome. ***Our business may bring us into conflict with ourlicensees, licensors, or others with whom we have contractual or other businessrelationships, or with our competitors or others whose interests differ fromours. If we are unable to resolve those conflicts on terms that aresatisfactory to all parties, we may become involved in litigation brought by oragainst us. 

 

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That litigation is likelyto be expensive and may require a significant amount of management’s time andattention, at the expense of other aspects of our business. Theoutcome of litigation is always uncertain, and in some cases could includejudgments against us that require us to pay damages, enjoin us from certainactivities, or otherwise affect our legal or contractual rights, which couldhave a significant adverse effect on our business.  Additional discussion regarding litigation inwhich the Company and/or ACT is involved is contained in Part II, Item 1“LEGAL PROCEEDINGS.”

 

***Patent litigation presents an ongoingthreat to our business with respect to both outcomes and costs.*****We have previously been involved in patentinterference litigation with Infigen, Inc., and are currently involved intwo patent disputes with Geron Corporation, and it is possible that furtherlitigation over patent matters with one or more competitors could arise. Wecould incur substantial litigation or interference costs in defending ourselvesagainst suits brought against us or in suits in which we may assert our patentsagainst others. If the outcome of any such litigation, including our currentdisputes with Geron Corporation, is unfavorable, our business would likely bematerially adversely affected. To determine the priority of inventions, we mayalso have to participate in interference proceedings declared by the UnitedStates Patent and Trademark Office, which could result in substantial cost tous.  Without additional capital, we maynot have the resources to adequately defend or pursue this litigation.

 

***We may not be able to obtain third-partypatient reimbursement or favorable product pricing, which would reduce ourability to operate profitably.***Our ability to successfully commercialize certain of our proposedproducts in the human therapeutic field may depend to a significant degree onpatient reimbursement of the costs of such products and related treatments atacceptable levels from government authorities, private health insurers andother organizations, such as health maintenance organizations. We cannot assureyou that reimbursement in the United States or foreign countries will beavailable for any products we may develop or, if available, will not bedecreased in the future, or that reimbursement amounts will not reduce thedemand for, or the price of, our products with a consequent harm to ourbusiness. We cannot predict what additional regulation or legislation relatingto the health care industry or third-party coverage and reimbursement may beenacted in the future or what effect such regulation or legislation may have onour business. If additional regulations are overly onerous or expensive, or ifhealth care related legislation makes our business more expensive or burdensomethan originally anticipated, we may be forced to significantly downsize ourbusiness plans or completely abandon our business model.

 

Our products are likelyto be expensive to manufacture, and they may not be profitable if we are unableto control the costs to manufacture them. Our products are likely to be significantly more expensive tomanufacture than most other drugs currently on the market today.  Our present manufacturing processes producemodest quantities of product intended for use in our ongoing researchactivities, and we have not developed processes, procedures and capability toproduce commercial volumes of product We hope to substantially reducemanufacturing costs through 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 thepricing of the product, our profit margins may be significantly less than thatof most drugs on the market today. In addition, we may not be able to charge ahigh enough price for any cell therapy product we develop, even if they aresafe and effective, to make a profit. If we are unable to realize significantprofits from our potential product candidates, our business would be materiallyharmed.

 

***To be successful, our proposed productsmust be accepted by the health care community, which can be very slow to adoptor unreceptive to new technologies and products***.  Ourproposed products and those developed by our collaborative partners, ifapproved for marketing, may not achieve market acceptance since hospitals,physicians, patients or the medical community in general may decide not toaccept and utilize these products. The products that we are attempting todevelop represent substantial departures from established treatment methods andwill compete with a number of more conventional drugs and therapiesmanufactured and marketed by major pharmaceutical companies. The degree ofmarket acceptance of any of our developed products will depend on a number offactors, including:

 

**•****                 **our establishment and demonstration to themedical community of the clinical efficacy and safety of our proposed products;

 

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**•****                 **our ability to create products that aresuperior to alternatives currently on the market;

**•****                 **our ability to establish in the medicalcommunity the potential advantage of our treatments over alternative treatmentmethods; and

**•****                 **reimbursement policies of government andthird-party payors.

 

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

 

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

 

***We depend on key personnel for ourcontinued operations and future success, and a loss of certain key personnelcould significantly hinder our ability to move forward with our business plan.*****Because of the specialized nature of ourbusiness, we are highly dependent on our ability to identify, hire, train andretain highly qualified scientific and technical personnel for the research anddevelopment activities we conduct or sponsor. The loss of one or more certainkey executive officers, or scientific officers, would be significantlydetrimental to us.  In addition, recruiting and retainingqualified scientific personnel to perform research and development work iscritical to our success. Our anticipated growth and expansion into areas andactivities requiring additional expertise, such as clinical testing, regulatorycompliance, manufacturing and marketing, will require the addition of newmanagement personnel and the development of additional expertise by existingmanagement personnel. There is intense competition for qualified personnel inthe areas of our present and planned activities, and there can be no assurancethat we will be able to continue to attract and retain the qualified personnelnecessary for the development of our business. The failure to attract andretain such personnel or to develop such expertise would adversely affect ourbusiness.

 

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

 

***Our insurance policies may be inadequateand potentially expose us to unrecoverable risks.***  Wehave limited director and officer insurance and commercial insurance policies.Any significant insurance claims would have a material adverse effect on ourbusiness, financial condition and results of operations.  Insurance availability, coverage terms andpricing continue to vary with market conditions. We endeavor to obtainappropriate insurance coverage for insurable risks that we identify, however,we may fail to correctly anticipate or quantify insurable risks, we may not beable to obtain appropriate insurance coverage, and insurers may not respond aswe intend to cover insurable events that may occur. We have observed rapidlychanging conditions in the insurance markets relating to nearly all areas oftraditional corporate insurance. Such conditions have resulted in higherpremium costs, higher policy deductibles, and lower coverage limits. For somerisks, we may not have or maintain insurance coverage because of cost oravailability.

 

***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 saleof human therapeutic products entail an inherent risk of product liabilityclaims, and we cannot assure you that substantial product liability claims willnot be asserted against us. We have no product liability insurance. In theevent we are forced to expend significant funds on 

 

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defendingproduct liability actions, and in the event those funds come from operatingcapital, we will be required to reduce our business activities, which couldlead to significant losses.

 

Wecannot assure you that adequate insurance coverage will be available in thefuture on acceptable terms, if at all, or that, if available, we will be ableto maintain any such insurance at sufficient levels of coverage or that anysuch insurance will provide adequate protection against potential liabilities.Whether or not a product liability insurance policy is obtained or maintainedin the future, any product liability claim could harm our business or financialcondition.

 

***We need to improve our financial control procedures. ***Since the Merger, we have determined that there are serious deficienciesin the operating effectiveness of our internal controls over financialreporting that we believe would collectively constitute significant deficienciesand material weaknesses under standards established by the American Instituteof Certified Public Accountants, resulting in more than a remote likelihoodthat a material misstatement of the annual or interim financial statements ofthe Company will not be prevented or detected.

 

In our opinion, we have notestablished and did not maintain effective internal control over financialreporting as of June 30, 2005.  We alsobelieve that because of the effect of the material weakness we have identified,we have not maintained effective internal control over financial reporting asof June 30, 2005, based on criteria established in Internal Control —Integrated Framework issued by the Committee of Sponsoring Organizations of theTreadway Commission. The Company has taken initial remedial steps, and willcontinue its on-going evaluation of internal controls and expects to improveits internal controls over financial reporting as necessary to assure theireffectiveness, but there can be no assurance that it will succeed or that otherdeficiencies will not be identified.

 

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

 

***We face risksrelated to compliance with corporate governance laws and financial reportingstandards***.  TheSarbanes-Oxley Act of 2002, as well as related new rules and regulationsimplemented by the Securities and Exchange Commission and the Public CompanyAccounting Oversight Board, required changes in the corporate governancepractices and financial reporting standards for public companies. These newlaws, rules and regulations, including compliance with Section 404 ofthe Sarbanes-Oxley Act of 2002 relating to internal control over financialreporting (“Section 404”), have materially increased our legal andfinancial compliance costs and made some activities more time-consuming andmore burdensome. Section 404 of the Sarbanes-Oxley Act of 2002 requiresthat our management assess our internal control over financial reportingannually and include a report on its assessment in our annual report. Ourindependent registered public accounting firm is required to audit both thedesign and operating effectiveness of our internal controls and management’sassessment of the design and the operating effectiveness of its internalcontrols. As described below in Part I, Item 3 of this Quarterly Report onForm 10-QSB, there exist material weaknesses and deficiencies at this timein the Company’s internal controls. These weaknesses and deficiencies could have a material adverse effecton our business and operations.

 

**RisksRelating to Our Common Stock**

 

***Stock prices for biotechnology companieshave historically tended to be very volatile***.  Stockprices and trading volumes for many biotechnology companies fluctuate widelyfor 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 our cash resources and ourability to obtain additional funding;

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

 

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**•****                 **entering into or terminating strategicrelationships;

**•****                 **changes in government regulation;

**•****                 **disputes concerning patents or proprietaryrights;

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

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

**•****                 **reports by securities analysts;

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

**•****                 **media coverage; and

**•****                 **status of the investment markets.

 

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

 

***The sale or issuance of a substantialnumber of shares may adversely affect the market price for our commonstock. ***Sale of a substantial number of shares of ourcommon stock in the public market, or the perception that such sales couldoccur, could significantly and negatively affect the market price for ourcommon stock.  We expect that we willlikely issue a substantial number of shares of our capital stock in financingtransactions in order to fund our operations and the growth of ourbusiness.  In addition, we have issuedcommon stock to certain parties, such as vendors and service providers, aspayment for products and services. Under these arrangements, we may agree toregister the shares for resale soon after their issuance. We may also continueto pay for certain goods and services with equity, which would dilute yourinterest in the Company. Also, sales of the shares issued in this manner couldnegatively affect the market price of our stock.

 

***We do not intend to pay cash dividends onour common stock in the foreseeable future***.  Anypayment of cash dividends will depend upon our financial condition, results ofoperations, capital requirements and other factors and will be at thediscretion of the Board of Directors. We do not anticipate paying cashdividends on our common stock in the foreseeable future. Furthermore, we mayincur additional indebtedness that may severely restrict or prohibit thepayment of dividends.

 

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

 

***Our common stock is subject to “pennystock” regulations and restrictions on initial and secondary broker-dealersales***. TheSecurities and Exchange Commission has adopted regulations which generallydefine “penny stock” to be any listed, trading equity security that has amarket price less than $5.00 per share or an exercise price of less than $5.00per share, subject to certain exemptions. Penny stocks are subject to certain additional oversight and regulatoryrequirements.  Brokers and dealersaffecting transactions in our Common Stock in many circumstances must obtainthe written consent of a customer prior to purchasing our Common Stock, mustobtain information from the customer and must provide disclosures to thecustomer.  These requirements mayrestrict the ability of broker-dealers to sell our Common Stock and may affectyour ability to sell your shares of our Common Stock in the secondary market.

 

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**ITEM 3. CONTROLS AND PROCEDURES**

 

(a) *Evaluation of disclosure controls and procedures.*  The Company’s management, with the participation of our principalexecutive officer, has evaluated the effectiveness of our disclosure controlsand procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended (the“Exchange Act”)), as of the end of the period covered by this Quarterly Reporton Form 10-QSB. Based on such evaluation, due to the material weaknessesin our internal controls over financial reporting further described below, ourprincipal executive officer has concluded that such disclosure controls andprocedures were not effective in providing reasonable assurance thatinformation required to be disclosed by us in the reports we file or submittedby us under the Exchange Act is recorded, processed, summarized and reported,within the time periods specified in the SEC’s rules and forms.  The Company is therefore in the process ofdesigning new disclosure controls and procedures to ensure that informationrequired to be disclosed by us in reports that we file or submit under theExchange Act is recorded, processed, summarized and reported with the timeperiods specified in applicable SEC rules and forms are effective.

 

(b) *Changes in internal controls*.  The Company’s management is responsiblefor establishing and maintaining adequate internal control over financialreporting.  Our internal control systemis intended to provide reasonable assurance to the Company’s management andboard of directors regarding the preparation and fair presentation of publishedfinancial statements.  The Company’smanagement assessed the effectiveness of the Company’s internal control overfinancial reporting as of June 30, 2005. In making its assessment of internalcontrol over financial reporting, management used the criteria set forth by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal Control — Integrated Framework.

 

Management’sassessment identified material deficiencies in the Company’s internal controlover financial reporting.  Thesedeficiencies include lack of segregation of duties, limited capability tointerpret and apply United States generally accepted accounting principles,lack of adequate documentation of our system of internal controls, lack offormal accounting policy and procedures and related documentation, deficienciesin our information technology systems and lack of a formal budgeting process.We also have not yet instituted new internal control processes related to ouridentified material weaknesses, significant deficiencies and deficiencies, ashas been characteristic of companies that have completed their review ofinternal controls and have had to report on the effect or such review.Accordingly, our internal control over financial reporting may be subject toadditional material weaknesses and deficiencies that we have notidentified.  Management has determinedthat these significant deficiencies, in the aggregate, constituted a materialweakness in the design and operation of the Company’s internal controls ineffect prior to June 30, 2005. Although the Company hired a chief financialofficer on April 1, 2005, and added additional finance personnel, the newcontrols these additions allowed were in the process of being implementedduring the quarter ended June 30, 2005. As a result of the material weaknesses described in the precedingparagraph, we believe that, as of June 30, 2005, the Company’s internal controlover financial reporting was not effective based on the COSO criteria.

 

**PART II. OTHER INFORMATION**

 

## **ITEM1.  LEGAL PROCEEDINGS**

## ** **

Currently, we are involved in several legal proceedings as described inPart II, Item 1 of our Quarterly Report on Form 10-QSB for the period endedMarch 31, 2005, as filed with the Securities and Exchange Commission on May 23,2005.  In addition, material developmentswith regard to such proceedings are disclosed herein.

 

 

Gary D. Aronsonand John Gorton v. A.C.T. Group, Inc., Advanced CellTechnology, Inc., Michael D. West, and Gunnar L. Engstrom.Commonwealth of Massachusetts Superior Court. Worcester. C.A. No. 040523B.  Thisproceeding is a claim for breach of contract and failure to pay brought by twoof the individuals who hold Promissory Notes issued by ACT Group. ACT isa named defendant in this proceeding.  In April 2004, the court entered an orderdenying a request for a temporary restraining order and preliminary injunctionwith respect to our subsidiary ACT.  Inits order, the Court stated that, based upon the record before the Court at 

 

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thatstage of the proceeding, ACT, was “not legally responsible” for these ACT Groupobligations.  In August 2004, theplaintiffs obtained a judgment against ACT Group for $690,040. TheMassachusetts Superior Court before which this proceeding is pending hasentered an Order requiring all 6,811,146 shares of our stock held by ACT Groupbe placed in escrow pending sale to satisfy this judgment.  Although the Order specifies that the salemust be conducted in a commercially reasonable manner, we cannot assure youthat the plaintiffs in this action will effect the sale in a manner that willnot have a materially adverse impact upon the trading value of our stock.  TheCompany and certain of its officers and directors have been named as contemnorsin a related contempt complaint seeking to enforce the judgment against ACTGroup.  and have been ordered to show causewhy they should not be held in contempt for allegedly aiding and abetting ACTGroup’s alleged contempt.  The Companyand certain officers have moved to dismiss the contempt complaint.  At the request of the parties, theMassachusetts Superior Court has delayed scheduling a hearing on the show causeorder and to Company’s motion to dismiss.  If ACT Group is unable to resolve this dispute on terms that aresatisfactory to it and the Company, our business may be materially adverselyaffected.  Although our operations andthose of ACT Group are distinct and separate, with separate governancestructures, and the two companies observe strict corporate formalities distinctto the respective entities, the plaintiffs in this action seek to pierce thecorporate veil and hold us responsible for ACT Group’s liabilities.  To date, those claims have not beensuccessful.  However, we cannot assureyou that there will not be further attempts to pierce the corporate veil, orthat they will be unsuccessful in doing so. If there are such future attempts, they could result in significantlegal expenses in defending such claims. Moreover, if the plaintiffs creditors are successful in piercing thecorporate veil and holding us responsible for these ACT obligations, there willbe a material adverse effect on our business and operations.

 

University ofMassachusetts and Advanced Cell Technology, Inc. v. Roslin Institute(Edinburgh), Geron Corporation and Exeter Life Sciences, Inc.,U.S. District Court for the District of Columbia. The Company filed an actionon February 18, 2005 in the U.S. District Court for the District of Columbia.The Company brought this action under 35 U.S.C. 146 to reverse the decision ofthe Board of Patent Appeals and Interferences regarding a patent to a method ofcloning non-human animals. The patent, U.S. Patent No. 5,945,577, is licensedby the University of Massachusetts exclusively to the Company.  The parties have agreed to stay allproceedings until September 8, 2005.  Adverse determinations in this proceedingwould have a materially adverse effect on our business.

 

University ofMassachusetts and Advanced Cell Technology, Inc. v. Roslin Institute(Edinburgh), Geron Corporation and Exeter Life Sciences, Inc.,U.S. District Court for the District of Columbia. The Company filed an actionon April 7, 2005 in the U.S. District Court for the District of Columbia. TheCompany brought this action under 35 U.S.C. 146 to reverse the decision of theBoard of Patent Appeals and Interferences regarding a patent to a method ofcreating embryonic stem cells. The patent, U.S. Patent No. 6,235,970, islicensed by the University of Massachusetts exclusively to the Company. Theparties have agreed to stay all proceedings until September 8, 2005.  Adverse determinations in this proceedingwould have a materially adverse effect on our business.

 

University ofMassachusetts v. James M. Robl and Phillippe Collas,Massachusetts Superior Court (Suffolk County). The University of Massachusetts, referred to as UMass, filed a complainton February 22, 2004 in the Superior Court (Suffolk County) for theCommonwealth of Massachusetts.  We arenot a party to this litigation; however, a decision adverse to UMass in thislitigation could have a materially adverse effect on the Company’sbusiness.  ACT has moved to intervene inthis action in which UMass is seeking to establish its ownership of inventionsmade by the defendants while they were employed UMass.  ACT filed its motion to protect is interestas exclusive licensee in the inventions made at UMass.  The court has yet to rule on the motion tointervene.

 

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

## ** **

On May 6, 2005, the Company issued 12,000 shares to aformer employee as a result of the exercise of stock options awarded under theCompany’s 2004 Stock Option Plan.

 

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

## ** **

None.

 

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

## ** **

No matters were submitted to stockholders during theperiod covered by this Quarterly Report.

 

Following the close of the period covered by thisQuarterly Report, on July 6, 2005, certain matters were submitted to a vote ofour stockholders, and approved by the requisite vote of our stockholders asfollows:

 

1.     To amend the Company’s Articles of Incorporation to increase the number ofauthorized shares of the Company’s common stock, par value $0.001 per share, to100,000,000, and to increase the number of authorized shares of the Company’sundesignated preferred stock, par value $0.001 per share, to 50,000,000, ineach case with no change in the par value receiving the following votes:

 

| **Number of Shares** | ** ** |
|----------------------|------------|
| **For**              | ** ** | **Against** | ** ** | **Withheld** | ** ** | **Not Voted** | ** ** |
| 12,774,522           |       | 1,000 |   | 25 |   | 0 |   |

 

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2.     To adopt the Company’s 2005 Stock Incentive Planwhich provides for equity based awards to the Company’s employees, directorsand consultants, and to reserve up to 18,000,000 shares of Common Stock forissuance pursuant to the grant of awards thereunder receiving the followingvotes:

 

| **Number of Shares** | ** ** |
|----------------------|------------|
| **For**              | ** ** | **Against** | ** ** | **Withheld** | ** ** | **Not Voted** | ** ** |
| 12,775,197           |       | 225 |   | 125 |   | 0 |   |

 

The number of shares ofour common stock eligible to vote as of the record date of June 6, 2005 was23,225,212 shares.

 

**ITEM 5.  OTHERINFORMATION**

 

**ITEM6.  EXHIBITS**

 

The exhibits listed on the accompanying exhibit indexare filed as a part of this Quarterly Report on Form 10-QSB.

 

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**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
| ** **             | **ADVANCED  CELL TECHNOLOGY, INC.**             |
|------------------------|-------------------------------------------------|
|                   |                                            |
|                   |                                            |
| Date: August 15,  2005 | /s/ William M. Caldwell, IV                     |
|                   | William M. Caldwell, IV                         |
| * *               | *Chief Executive Officer*                       |
| * *               | (*Principal  Executive Officer*)                |
|                   |                                            |
|                   |                                            |
| Date: August 15,  2005 | /s/ James G. Stewart                            |
|                   | James G. Stewart                                |
| * *               | *Chief Financial Officer*                       |
| * *               | (*Principal  Financial and Accounting Officer*) |

 

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**EXHIBITINDEX**

 
| **Exhibit** | ** ** | ** **                                                                                                                                                                                                  |
|-------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Description**                                                                                                                                                                                             |
| 3.1         |       | Certificate of Amendment to Certificate of  Incorporation (previously filed as Exhibit 3.1 to the Registrant’s Current  Report on Form 8-K dated July 7, 2005).                                        |
| 3.2         |       | Certificate of Amendment to Certificate of  Incorporation (previously filed as Exhibit 3.1 to the Registrant’s Current  Report on Form 8-K dated June 22, 2005).                                       |
| 10.1        |       | Amendment No. 1  to Employment Agreement of Michael D. West, PhD, dated as of August 1, 2005  (previously filed as Exhibit 10.1 to the Registrant’s Current Report on Form  8-K filed August 5, 2005). |
| 10.2        |       | Research  Collaboration Agreement between the Registrant and The Burnham Institute  dated as of May 23, 2005 (filed herewith).                                                                              |
| 14.1        |       | Code of Ethics for Designated Senior Financial  Managers (previously filed as Exhibit 14.1 to the Registrant’s Current Report  on Form 8-K dated August 5, 2005).                                      |
| 14.2        |       | Code of Business Conduct and Ethics (previously  filed as Exhibit 14.2 to the Registrant’s Current Report on Form 8-K dated  August 5, 2005).                                                          |
| 16.1        |       | Copy of letter from Pritchett, Siler &  Hardy, P.A. (previously filed as Exhibit 16.1 to the Registrant’s Current  Report on Form 8-K dated May 10, 2005).                                    |
| 31.1        |       | Certification of  the Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the  Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.      |
| 31.2        |       | Certification of the Chief Financial Officer  pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of  1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.       |
| 32.1        |       | Certification of  the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                    |
| 32.2        |       | Certification of  the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                    |

 

 

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