UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON
D.C. 20549
 
 FORM 10-Q
  
  x
                    
                    QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934FOR
      THE QUARTERLY PERIOD ENDED JUNE 30, 2008ORo
                    
                    TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF
1934
  FOR
THE TRANSITION PERIOD FROM
           TO
          .
  COMMISSION
FILE NUMBER: 0-50295
  
  ADVANCED
CELL TECHNOLOGY, INC.
 (EXACT
NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
  DELAWARE
                
                87-0656515(STATE
      OR OTHER JURISDICTION OF
                
                (I.R.S.
      EMPLOYER IDENTIFICATION NO.)INCORPORATION
      OR ORGANIZATION)
  381
PLANTATION STREET, WORCESTER, MASSACHUSETTS 01605
 (ADDRESS,
INCLUDING ZIP CODE, OF PRINCIPAL EXECUTIVE OFFICES)
  REGISTRANT’S
TELEPHONE NUMBER, INCLUDING AREA CODE: (510) 748-4900
  Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90
days.      Yes  x  No  o
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
  Large accelerated filer o
                    
                    Accelerated filer o
                    
                    Non-accelerated filer o
                    
                    Smaller reporting company x(Do not check if a smaller
                      reporting company)
  Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes o  No x
  Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
  Class:
                
                Outstanding
      at April 28, 2009:Common
      Stock, $0.001 par value per share
                
                499,905,541 shares
  
  ADVANCED
CELL TECHNOLOGY, INC. AND SUBSIDIARY
  INDEX
  PART I.
      FINANCIAL INFORMATIONITEM
      1. FINANCIAL STATEMENTS
                  
                  1ITEM
      2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
    OPERATION
                  
                  36ITEM
      3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
    RISK
                  
                  64ITEM
      4. CONTROLS AND PROCEDURES
                  
                  64PART II.
      OTHER INFORMATIONITEM
      1. LEGAL PROCEEDINGS
                  
                  65ITEM
      2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
    PROCEEDS
                  
                  66ITEM
      3. DEFAULTS UPON SENIOR SECURITIES
                  
                  67ITEM
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
                  
                  67ITEM
      5. OTHER INFORMATION
                  
                  67ITEM
      6. EXHIBITS
                  
                  67SIGNATURE
                  
                  68
  
  Part
I – FINANCIAL INFORMATION
 Item 1. Financial
Statements
 
 ADVANCED
CELL TECHNOLOGY, INC. AND SUBSIDIARY
 CONSOLIDATED
BALANCE SHEETS
 AS
OF JUNE 30, 2008 AND DECEMBER 31, 2007
 
 June
      30,
                                
                                
                                December
      31,2008
                                
                                
                                2007(unaudited)
                                
                                
                                (restated)ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
                                
                                $
                                33,271
                                
                                
                                $
                                1,166,116Accounts
      receivable
                                
                                
                                6,793
                                
                                
                                
                                27,026Prepaid
      expenses
                                
                                
                                107,608
                                
                                
                                
                                68,416Deferred
      royalty fees, current portion
                                
                                
                                257,911
                                
                                
                                
                                341,274Total
      current assets
                                
                                
                                405,583
                                
                                
                                
                                1,602,832Property
      and equipment, net
                                
                                
                                643,617
                                
                                
                                
                                914,504Deferred
      royalty fees, less current portion
                                
                                
                                852,380
                                
                                
                                
                                1,202,430Deposits
                                
                                
                                -
                                
                                
                                
                                115,192Deferred
      issuance costs, net of amortization of $5,471,041 and
      $3,874,300
                                
                                
                                1,895,438
                                
                                
                                
                                4,772,087TOTAL
      ASSETS
                                
                                $
                                3,797,018
                                
                                
                                $
                                8,607,045LIABILITIES AND STOCKHOLDERS'
      DEFICITCURRENT
      LIABILITIES:Accounts
      payable
                                
                                $
                                8,320,902
                                
                                
                                $
                                5,517,876Accrued
      expenses
                                
                                
                                1,827,721
                                
                                
                                
                                1,120,781Deferred
      revenue, current portion
                                
                                
                                884,874
                                
                                
                                
                                497,374Advances
      payable – other
                                
                                
                                130,000
                                
                                
                                
                                130,0002005
      Convertible debenture and embedded derivatives, net of discounts of
      $19,850 and $600,246
                                
                                
                                186,987
                                
                                
                                
                                1,276,8712006
      Convertible debenture and embedded derivatives (fair value $2,033,457 and
      $3,939,862)
                                
                                
                                1,087,454
                                
                                
                                
                                1,625,3272007
      Convertible debenture and embedded derivatives (fair value $3,655,749 and
      $3,874,026)
                                
                                
                                1,800,655
                                
                                
                                
                                1,160,847February
      2008 Convertible debenture and embedded derivatives (fair value $693,947
      and $0)
                                
                                
                                634,581
                                
                                
                                
                                -April
      2008 Convertible debenture and embedded derivatives (fair value $4,429,544
      and $0)
                                
                                
                                1,833,732
                                
                                
                                
                                -Warrant
      and option derivatives - current portion
                                
                                
                                7,504,525
                                
                                
                                
                                14,574Short
      term capital leases
                                
                                
                                12,955
                                
                                
                                
                                31,605Notes
      payable – other
                                
                                
                                468,425
                                
                                
                                
                                468,425Total
      current liabilities
                                
                                
                                24,692,811
                                
                                
                                
                                11,843,6802006
      Convertible debenture and embedded derivatives, less current portion (fair
      value $412,340 and $3,447,230)
                                
                                
                                220,512
                                
                                
                                
                                1,422,1642007
      Convertible debenture and embedded derivatives, less current portion (fair
      value $4,386,898 and $7,748,052)
                                
                                
                                2,160,787
                                
                                
                                
                                2,321,695February
      2008 Convertible debenture and embedded derivatives (fair value $452,994
      and $0)
                                
                                
                                414,241
                                
                                
                                
                                -Warrant
      and option derivatives, less current portion
                                
                                
                                -
                                
                                
                                
                                13,011,751Deferred
      revenue, less current portion
                                
                                
                                1,285,825
                                
                                
                                
                                1,534,485Total
      liabilities
                                
                                
                                28,774,176
                                
                                
                                
                                30,133,775Commitments
      and contingencies
                                
                                
                                -
                                
                                
                                
                                -STOCKHOLDERS'
      DEFICIT:Preferred
      stock, $0.01 par value; 50,000,000 shares authorized, 0 issued and
      outstanding
                                
                                
                                -
                                
                                
                                
                                -Common
      stock, $0.01par value; 500,000,000 shares authorized, 174,828,360 and
      85,027,461 issued and outstanding.
                                
                                
                                174,828
                                
                                
                                
                                85,027Additional
      paid-in capital
                                
                                
                                45,871,181
                                
                                
                                
                                34,302,334Accumulated
      deficit
                                
                                
                                (71,023,167
                                )
                                
                                
                                (55,914,091
                                )Total
      stockholders' deficit
                                
                                
                                (24,977,158
                                )
                                
                                
                                (21,526,730
                                )TOTAL
      LIABILITIES AND STOCKHOLDERS' DEFICIT
                                
                                $
                                3,797,018
                                
                                
                                $
                                8,607,045
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  1
  ADVANCED
CELL TECHNOLOGY, INC. AND SUBSIDIARY
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007
 (UNAUDITED)
 
 Three
      Months Ended June 30,
                  
                  
                  Six
      Months Ended June 30,2008
                  
                  
                  2007
                  
                  
                  2008
                  
                  
                  2007(restated)
                  
                  
                  
                  
                  
                  (restated)Revenue(License
      fees and royalties)
                  
                  $
                  174,388
                  
                  
                  $
                  274,326
                  
                  
                  $
                  298,731
                  
                  
                  $
                  398,669Cost
      of Revenue
                  
                  
                  120,186
                  
                  
                  
                  110,318
                  
                  
                  
                  310,914
                  
                  
                  
                  171,754Gross
      profit (loss)
                  
                  
                  54,202
                  
                  
                  
                  164,008
                  
                  
                  
                  (12,183
                  )
                  
                  
                  226,915Operating
      expenses:Research
      and development
                  
                  
                  2,786,870
                  
                  
                  
                  2,828,842
                  
                  
                  
                  6,754,422
                  
                  
                  
                  6,477,930Grant
      reimbursements
                  
                  
                  -
                  
                  
                  
                  (9,597
                  )
                  
                  
                  (105,169
                  )
                  
                  
                  (67,179
                  )General
      and administrative expenses
                  
                  
                  1,840,116
                  
                  
                  
                  1,246,180
                  
                  
                  
                  3,565,938
                  
                  
                  
                  2,987,284Total
      operating expenses
                  
                  
                  4,626,986
                  
                  
                  
                  4,065,425
                  
                  
                  
                  10,215,191
                  
                  
                  
                  9,398,035Loss
      from operations
                  
                  
                  (4,572,784
                  )
                  
                  
                  (3,901,417
                  )
                  
                  
                  (10,227,374
                  )
                  
                  
                  (9,171,120
                  )Non-operating
      income (expense):Interest
      income
                  
                  
                  1,317
                  
                  
                  
                  24,960
                  
                  
                  
                  8,166
                  
                  
                  
                  103,007Interest
      expense and late fees
                  
                  
                  (8,540,674
                  )
                  
                  
                  (6,362,454
                  )
                  
                  
                  (12,747,290
                  )
                  
                  
                  (13,435,004
                  )Charges
      related to issuance of 2008 convertible debentures
                  
                  
                  (531,769
                  )
                  
                  
                  -
                  
                  
                  
                  (1,217,342
                  )
                  
                  
                  -Charges
      related to repricing of 2005 convertible debenture and
      warrants
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (843,277
                  )Income
      related to repricing of 2006 and 2007 convertible debentures and
      warrants
                  
                  
                  847,588
                  
                  
                  
                  -
                  
                  
                  
                  847,588
                  
                  
                  
                  -Adjustments
      to fair value of derivatives
                  
                  
                  7,206,905
                  
                  
                  
                  23,247,555
                  
                  
                  
                  8,227,176
                  
                  
                  
                  11,614,037Gain
      on settlement
                  
                  
                  -
                  
                  
                  
                  193,862
                  
                  
                  
                  -
                  
                  
                  
                  193,862Total
      non-operating income (expense)
                  
                  
                  (1,016,633
                  )
                  
                  
                  17,103,923
                  
                  
                  
                  (4,881,702
                  )
                  
                  
                  (2,367,375
                  )Income
      (loss) before income tax
                  
                  
                  (5,589,417
                  )
                  
                  
                  13,202,506
                  
                  
                  
                  (15,109,076
                  )
                  
                  
                  (11,538,495
                  )Income
      tax
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Net
      Income (loss)
                  
                  $
                  (5,589,417
                  )
                  
                  $
                  13,202,506
                  
                  
                  $
                  (15,109,076
                  )
                  
                  $
                  (11,538,495
                  )Earnings
      (loss) per share:Basic
                  
                  $
                  (0.04
                  )
                  
                  $
                  0.26
                  
                  
                  $
                  (0.12
                  )
                  
                  $
                  (0.24
                  )Diluted
                  
                  $
                  (0.04
                  )
                  
                  $
                  0.20
                  
                  
                  $
                  (0.12
                  )
                  
                  $
                  (0.24
                  )Weighted
      average shares outstanding :Basic
                  
                  
                  153,438,333
                  
                  
                  
                  51,138,077
                  
                  
                  
                  124,654,606
                  
                  
                  
                  48,978,418Diluted
                  
                  
                  153,438,333
                  
                  
                  
                  67,410,984
                  
                  
                  
                  124,654,606
                  
                  
                  
                  48,978,418
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  2
 
 ADVANCED
CELL TECHNOLOGY, INC. AND SUBSIDIARY
 CONSOLIDATED
STATEMENT OF STOCKHOLDERS' DEFICIT
 FOR
THE SIX MONTHS ENDED JUNE 30, 2008
 
 Additional
                    
                    
                    
                    
                    
                    TotalCommon
      Stock
                    
                    
                    Paid
      in
                    
                    
                    Accumulated
                    
                    
                    Stockholders'Shares
                    
                    
                    Amount
                    
                    
                    Capital
                    
                    
                    Deficit
                    
                    
                    DeficitBalance
      December 31, 2007
                    
                    
                    85,027,461
                    
                    
                    $
                    85,027
                    
                    
                    $
                    34,302,334
                    
                    
                    $
                    (55,914,091
                    )
                    
                    $
                    (21,526,730
                    )Convertible
      debentures redemptions
                    
                    
                    45,030,046
                    
                    
                    
                    45,030
                    
                    
                    
                    4,589,191
                    
                    
                    
                    -
                    
                    
                    
                    4,634,221Convertible
      debentures conversions
                    
                    
                    38,100,654
                    
                    
                    
                    38,101
                    
                    
                    
                    5,877,341
                    
                    
                    
                    -
                    
                    
                    
                    5,915,442Issuance
      of stock for debenture financing costs
                    
                    
                    2,944,177
                    
                    
                    
                    2,944
                    
                    
                    
                    313,115
                    
                    
                    
                    
                    
                    
                    
                    316,059Option
      compensation charges
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    283,577
                    
                    
                    
                    -
                    
                    
                    
                    283,577Adjustment
      to fair value of derivatives
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    78,367
                    
                    
                    
                    -
                    
                    
                    
                    78,367Issuance
      in respect of anti-dilution provision of convertible
    debenture
                    
                    
                    70,503
                    
                    
                    
                    71
                    
                    
                    
                    15,510
                    
                    
                    
                    -
                    
                    
                    
                    15,581Issuance
      of stock in payment of expenses
                    
                    
                    958,256
                    
                    
                    
                    958
                    
                    
                    
                    212,010
                    
                    
                    
                    -
                    
                    
                    
                    212,968Issuance
      of stock under stock incentive plan
                    
                    
                    1,497,263
                    
                    
                    
                    1,497
                    
                    
                    
                    140,936
                    
                    
                    
                    
                    
                    
                    
                    142,433Issuance
      of stock upon exercise of options
                    
                    
                    1,200,000
                    
                    
                    
                    1,200
                    
                    
                    
                    58,800
                    
                    
                    
                    -
                    
                    
                    
                    60,000Net
      loss for the six months ended June 30, 2008
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (15,109,076
                    )
                    
                    
                    (15,109,076
                    )Balance
      at June 30, 2008
                    
                    
                    174,828,360
                    
                    
                    $
                    174,828
                    
                    
                    $
                    45,871,181
                    
                    
                    $
                    (71,023,167
                    )
                    
                    $
                    (24,977,158
                    )
 
 The
accompanying notes are an integral part of these consolidated financial
statements
  3
 
 ADVANCED
CELL TECHNOLOGY, INC. AND SUBSIDIARY
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 FOR
THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007
 (UNAUDITED)
 
 Six
      Months Ended June 30,2008
                                  
                                  
                                  2007(restated)CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                                  
                                  $
                                  (15,109,076
                                  )
                                  
                                  $
                                  (11,538,495
                                  )Adjustments
      to reconcile net loss to net cashused
      in operating activities:Depreciation
      and amortization
                                  
                                  
                                  211,893
                                  
                                  
                                  
                                  189,813Write-off
      of uncollectible accounts receivable
                                  
                                  
                                  25,000
                                  
                                  
                                  
                                  -Amortization
      of deferred charges
                                  
                                  
                                  433,413
                                  
                                  
                                  
                                  146,753Amortization
      of deferred revenue
                                  
                                  
                                  (311,160
                                  )
                                  
                                  
                                  (248,669
                                  )Stock
      based compensation
                                  
                                  
                                  645,602
                                  
                                  
                                  
                                  324,219Amortization
      of deferred issuance costs
                                  
                                  
                                  2,896,649
                                  
                                  
                                  
                                  2,593,843Amortization
      of discounts
                                  
                                  
                                  9,525,843
                                  
                                  
                                  
                                  10,748,822Loss
      on extinguishment of debt
                                  
                                  
                                  -
                                  
                                  
                                  
                                  193,862Adjustements
      to fair value of derivatives
                                  
                                  
                                  (8,227,176
                                  )
                                  
                                  
                                  (11,614,037
                                  )Charges
      related to issuance of 2008 convertible debentures
                                  
                                  
                                  1,217,342
                                  
                                  
                                  
                                  -Repricing
      of 2005 convertible debentures and warrants
                                  
                                  
                                  -
                                  
                                  
                                  
                                  843,277Repricing
      of 2006 annd 2007 convertible debentures and warrants
                                  
                                  
                                  (847,588
                                  )
                                  
                                  
                                  -Shares
      of common stock issued for services
                                  
                                  
                                  8,616
                                  
                                  
                                  
                                  1,376,842Warrants
      issued for consulting services
                                  
                                  
                                  155,281
                                  
                                  
                                  
                                  -Charges
      related to settlement of anti-dilution provision
                                  
                                  
                                  15,581
                                  
                                  
                                  
                                  -Issuance
      of note for services received
                                  
                                  
                                  750,000
                                  
                                  
                                  
                                  -Shares
      of common stock issued for financing costs
                                  
                                  
                                  316,059
                                  
                                  
                                  
                                  -Non-cash
      rent expense
                                  
                                  
                                  254,231
                                  
                                  
                                  
                                  -Forfeiture
      of rent deposits
                                  
                                  
                                  88,504
                                  
                                  
                                  
                                  -(Increase)
      / decrease in assets:Accounts
      receivable
                                  
                                  
                                  (4,767
                                  )
                                  
                                  
                                  37,922Prepaid
      expenses
                                  
                                  
                                  (39,192
                                  )
                                  
                                  
                                  (16,718
                                  )Deferred
      charges
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (573,000
                                  )Increase
      / (decrease) in current liabilities:Accounts
      payable and accrued expenses
                                  
                                  
                                  3,785,714
                                  
                                  
                                  
                                  89,141Interest
      Payable
                                  
                                  
                                  4,813
                                  
                                  
                                  
                                  (75,833
                                  )Deferred
      revenue
                                  
                                  
                                  450,000
                                  
                                  
                                  
                                  -Net
      cash used in operating activities
                                  
                                  
                                  (3,754,418
                                  )
                                  
                                  
                                  (7,522,258
                                  )CASH
      FLOWS FROM INVESTING ACTIVITIESPurchases
      of property and equipment
                                  
                                  
                                  (168,549
                                  )
                                  
                                  
                                  (39,139
                                  )Payment
      of deposits
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (10,000
                                  )Net
      cash used in investing activities
                                  
                                  
                                  (168,549
                                  )
                                  
                                  
                                  (49,139
                                  )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from issuance of convertible notes
                                  
                                  
                                  2,812,432
                                  
                                  
                                  
                                  -Payments
      on convertible debentures
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (139,123
                                  )Payments
      on notes and leases
                                  
                                  
                                  (18,650
                                  )
                                  
                                  
                                  (38,980
                                  )Payment
      for issuance costs on note payable
                                  
                                  
                                  (3,660
                                  )
                                  
                                  
                                  -Settlement
      payment
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (170,249
                                  )Net
      cash provided by (used in) financing activities
                                  
                                  
                                  2,790,122
                                  
                                  
                                  
                                  (348,352
                                  )NET
      DECREASE IN CASH AND CASH EQUIVALENTS
                                  
                                  
                                  (1,132,845
                                  )
                                  
                                  
                                  (7,919,749
                                  )CASH
      AND CASH EQUIVALENTS, BEGINNING BALANCE
                                  
                                  
                                  1,166,116
                                  
                                  
                                  
                                  8,689,336CASH
      AND CASH EQUIVALENTS, ENDING BALANCE
                                  
                                  $
                                  33,271
                                  
                                  
                                  $
                                  769,587CASH
      PAID FOR:Interest
                                  
                                  $
                                  2,504
                                  
                                  
                                  $
                                  5,008Income
      taxes
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -SUPPLEMENTAL
      DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:Issuance
      of 45,030,046 and 5,209,598 shares of common stock in redemption of
      convertible debentures
                                  
                                  $
                                  4,634,221
                                  
                                  
                                  $
                                  3,290,000Issuance
      of 38,100,654 and 14,040,870 shares of common stock in conversion of
      convertible debentures
                                  
                                  $
                                  5,915,442
                                  
                                  
                                  $
                                  7,638,000Issuance
      of 70,503 shares of common stock to settle an anti-dilution provision
      feature ofconvertible
      debenture
                                  
                                  $
                                  15,581
                                  
                                  
                                  $
                                  -Issuance
      of 1,200,000 shares of common stock upon exercise of employee stock
      options
                                  
                                  $
                                  60,000
                                  
                                  
                                  $
                                  -
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  4
  ADVANCED
CELL TECHNOLOGY, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 June
30, 2008
 (UNAUDITED)
  1.
ORGANIZATIONAL MATTERS
 
 Organization
  On
January 31, 2005, Advanced Cell Technology, Inc. (formerly known as
A.C.T. Holdings, Inc.) (the “Company”) completed a merger with Advanced
Cell, Inc. (formerly known as Advanced Cell Technology, Inc.), a
Delaware corporation (“ACT”), pursuant to which a wholly-owned subsidiary of the
Company merged with and into ACT, with ACT remaining as the surviving
corporation and a wholly-owned subsidiary of the Company. Upon the completion of
the merger, the Company ceased all of its pre-merger operations and adopted the
business of ACT.
  Prior to
the merger, the Company had minimal business, operations, revenues and assets,
and had been involved in an industry entirely unrelated to the business of ACT.
Therefore, the acquisition of ACT by the Company represented a complete change
in the nature of the Company’s business and operations, and changed the nature
of any prior investment in the Company.
  The
transaction has been accounted for as a recapitalization of ACT, the accounting
acquirer. The historical financial statements presented for periods prior to the
merger are those of ACT.
  On
November 18, 2005, a majority of the Company’s stockholders approved the
reincorporation of the Company from the state of Nevada to the state of Delaware
pursuant to a merger of the Company with and into a newly formed Delaware
corporation, followed by a “roll up” merger to combine the operating subsidiary
with the Company.
  Nature
of Business
  The
Company is a biotechnology company focused on developing and commercializing
human embryonic and adult stem cell technology in the emerging fields of
regenerative medicine. Principal activities to date have included obtaining
financing, securing operating facilities, and conducting research and
development. The Company has no therapeutic products currently available for
sale and does not expect to have any therapeutic products commercially available
for sale for a period of years, if at all. These factors indicate that the
Company’s ability to continue its research and development activities is
dependent upon the ability of management to obtain additional financing as
required.
  Going
Concern
  As
reflected in the accompanying financial statements, the Company has losses from
operations, negative cash flows from operations, a substantial stockholders’
deficit and current liabilities exceed current assets. The Company may thus not
be able to continue as a going concern and fund cash requirements for operations
through the next 12 months with current cash reserves. As discussed below, the
Company was able to raise additional cash in the second half of 2008 and the
first quarter of 2009.  Notwithstanding success in raising capital, there
continues to be substantial doubt about the Company’s ability to continue as a
going concern.
  In view
of the matters described in the preceding paragraph, recoverability of a major
portion of the recorded asset amounts shown in the accompanying consolidated
balance sheet is dependent upon continued operations of the Company, which, in
turn, is dependent upon the Company’s ability to continue to raise capital and
ultimately generate positive cash flows from operations. The financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or amounts and classifications of
liabilities that might be necessary should the Company be unable to continue its
existence.
  5
  Management
has taken or plans to take the following steps that it believes will be
sufficient to provide the Company with the ability to continue in
existence:
  ·
                On
      April 4, 2008, the Company released closing escrow on the issuance of
      $4,038,880 of its amortizing senior secured convertible debentures and
      associated warrants. The purchasers purchased from the Company senior
      secured convertible debentures and warrants to purchase shares of the
      Company’s common stock. The net cash and cash in-kind received by the
      Company related to this financing was
  $2,212,432.
 
 ·
                On
      April 30, 2008 the Company received a one time payment of $300,000 from
      Terumo International which extended their ability to commence a Phase I
      Clinical Trial in Japan by one
year.
 
 ·
                On
      May 31, 2008, the Company closed its Alameda, California and Charlestown,
      Massachusetts facilities in an effort to streamline and focus on its most
      advanced clinical programs as part of a cost reduction program designed to
      reduce annual operating expenses by $5-6 million. In conjunction with the
      cost reduction activities, the Company has not renewed its Alameda,
      California sublease and has vacated its Charlestown, Massachusetts
      facility.
 
 ·
                On
      June 17, 2008, the Company drew down $60,000 and received $50,000
      (reflecting a 16.66% original issue discount) under Note B described in
      Note 6 to the financial statements.
 
 ·
                On
      July 10, 2008, the Company granted an exclusive license to Embryome
      Sciences, Inc., a wholly owned subsidiary of BioTime, Inc., to use its
      “ACTCellerate” embryonic stem cell technology and a bank of over 140
      diverse progenitor cell lines derived using that technology. Under the
      agreement, the Company received an up-front payment of $470,000, and is
      eligible to receive an 8% royalty on sales of products, services, and
      processes that utilize the licensed technology. However, as discussed in
      more detail in Note 17, in connection with unpaid rents ordered to be paid
      to a landlord, the Company has assigned the landlord rights and interest
      to 62.5% of all royalties on this contract, and 65% of all other
      consideration payable under this license agreement until such time that
      the Company has repaid amounts owed to the landlord that total
      $475,000.
 
 ·
                Between
      September 29, 2008 and January 20, 2009, the Company settled certain past
      due accounts payable by the issuance of shares of its common stock. In
      aggregate, the Company settled $1,108,673 in accounts payable through the
      issuance of 260,116,283 shares of its common
  stock.
 
 ·
                On
      December 1, 2008, the Company and CHA Bio & Diostech Co., Ltd. (“CHA”), a leading
      Korean-based biotechnology company focused on the development of stem cell
      technologies, formed an international joint venture. The new company, Stem
      Cell & Regenerative Medicine International, will develop human blood
      cells and other clinical therapies based on certain of the Company’s core
      cell technology. CHA has agreed to contribute $500,000 in working capital
      for the venture as well as paying the Company a license fee of $500,000.
      As of April 30, 2009, CHA has paid the Company the entire $500,000 towards
      payment of the license fee.
 
 ·
                On
      December 18, 2008, the Company entered into a license agreement with an
      Ireland-based investor, Transition Holdings Inc. (“Transition”), for
      certain of its non-core technology. Under the agreement, Transition agreed
      to acquire a license to the technology for $3.5 million in cash. As of
      April 30, 2009, the Company has received the entire $3.5 million in cash
      under this agreement. The Company expects to apply the proceeds towards
      its retinal epithelium (“RPE”) cells
program.
 
 ·
                On
      March 30, 2009, the Company entered into a second license agreement with
      CHA under which the Company will license its RPE technology, for the
      treatment of diseases of the eye, to CHA for development and
      commercialization exclusively in Korea. The Company is eligible to receive
      up to a total of $1.9 million in fees based upon the parties achieving
      certain milestones, including the Company making an IND submission to the
      US FDA to commence clinical trials in humans using the technology. The
      Company received an up-front fee under the license in the amount of
      $750,000. Under the agreement, CHA will incur all of the cost associated
      with the RPA clinical trials in Korea. The agreement is part of the joint
      venture between the two
companies.
  6
  ·
                On
      March 11, 2009, the Company entered into a $5 million credit facility
      (“Facility”) with a life sciences fund. Under the agreement, the proceeds
      from the Facility must be used exclusively for the Company to file an
      investigational new drug (“IND”) for its retinal pigment epithelium
      (“RPE”) program, and will allow the Company to complete both Phase I and
      Phase II studies in humans. An IND is required to commence clinical
      trials. Under the terms of the agreement, the Company may draw down funds,
      as needed for clinical development of the RPE program, from the investor
      through the issuance of Series A-1 convertible preferred stock. The
      preferred stock pays dividends, in kind of preferred stock, at an annual
      rate of 10%, matures in four years from the drawdown date, and is
      convertible into common stock at $0.75 per
  share.
 
 ·
                Management
      anticipates raising additional future capital from its current convertible
      debenture holders, or other financing sources, that will be used to fund
      any capital shortfalls. The terms of any financing will likely be
      negotiated based upon current market terms for similar financings. No
      commitments have been received for additional investment and no assurances
      can be given that this financing will ultimately be
    completed.
 
 ·
                Management
      has focused its scientific operations on product development in order to
      accelerate the time to market products which will ultimately generate
      revenues. While the amount or timing of such revenues cannot be
      determined, management believes that focused development will ultimately
      provide a quicker path to revenues, and an increased likelihood of raising
      additional financing.
 
 ·
                Management
      will continue to pursue licensing opportunities of the Company’s extensive
      intellectual property portfolio.
  2.
RESTATEMENT
  As
indicated in Notes 7 through 9, the Company has issued a series of complex
convertible debentures over the past several years.  The convertible
debentures are issued for less than face value, thus generating significant
original issue discounts.  In conjunction with the instruments, the Company
has issued substantial numbers of warrants, and the value of these warrants as
of the issue date is treated in the same manner as an original issue
discount.  These discounts are amortized into interest expense over the
life of the debenture, which is a complex calculation due to the planned monthly
redemptions after a certain point included in the debenture agreements. 
Further, the Debentures are converted into shares at the holder’s option, the
timing of which depends on the price of the Company’s stock.  The Company
also gives brokers and other intermediaries considerable value via cash and
warrants in order to assist in selling the debentures.  The costs
associated with issuing the debt are capitalized and amortized over the life of
the debt.
  On
September 6, 2006, the Company entered into a securities purchase agreement
in which the purchasers purchased from the Company amortizing convertible
debentures and warrants to purchase shares of the Company’s common stock. In
connection with that transaction, and for each quarter thereafter, the Company
performed a valuation of the debentures and warrants
(see Note 8).
  On
March 24, 2008, the Company discovered that it had been using an incorrect
number of warrants in calculating the appropriate fair value. The Company had
been using 4,541,672 warrants instead of the correct number of
19,064,670 warrants. Upon learning of the error, the Company recalculated
the correct fair value and noted that this change in warrant valuation had no
impact on the value of the related convertible debentures and all the related
embedded derivatives.
  7
  In
mid-May 2008, the Company discovered that the Deferred Issuance costs and
discounts had been amortized over a period longer than the weighted average life
of the instruments, with the result that the discounts and debt issuance costs
should have been charged to interest expense on a faster basis than had been the
case. Upon learning of the error the Company has recalculated the amortization
and resulting interest expense.  The Company also discovered that its
calculations of the weighted average shares used in calculating basic and
diluted earnings per share for the three and six month periods ended June 30,
2007 were in error. The actual basic weighted average shares outstanding for the
three months ended June 30, 2007 was not changed. The actual basic and diluted
weighted average shares outstanding for the six months ended June 30, 2007 was
approximately 53,000 shares higher than reported.
  In
accordance with Statement of Accounting Standards No. 154, the Company has
determined that these were errors, and has therefore restated the accompanying
statements of operations, and cash flows for the three and six months ended
June 30, 2007 and the balance sheet as of December 31, 2007.
 
 As Originally
                          Reported
                        
                        
                        Restated
                        
                        
                        DifferenceDecember 31, 2007Balance
      SheetDeferred
      issuance costs
                        
                        $
                        5,107,599
                        
                        
                        $
                        4,772,087
                        
                        
                        $
                        (335,512
                        )2005
      Convertible debenture and embedded derivatives – current
      portion
                        
                        $
                        1,040,156
                        
                        
                        $
                        1,276,871
                        
                        
                        $
                        236,7152006
      Convertible debenture and embedded derivatives – current
      portion
                        
                        $
                        906,860
                        
                        
                        $
                        1,625,327
                        
                        
                        $
                        718,4672007
      Convertible debenture and embedded derivatives – current
      portion
                        
                        $
                        363,805
                        
                        
                        $
                        1,160,847
                        
                        
                        $
                        797,0422006
      Convertible debenture and embedded derivatives, less current
      portion
                        
                        $
                        793,504
                        
                        
                        $
                        1,422,164
                        
                        
                        $
                        628,6602007
      Convertible debenture and embedded derivatives, less current
      portion
                        
                        $
                        2,364,731
                        
                        
                        $
                        2,321,695
                        
                        
                        $
                        (43,036
                        )Accumulated
      deficit
                        
                        $
                        (53,240,732
                        )
                        
                        $
                        (55,914,091
                        )
                        
                        $
                        (2,673,359
                        )Total
      stockholders’ deficit at December 31, 2007
                        
                        $
                        (18,853,371
                        )
                        
                        $
                        (21,526,730
                        )
                        
                        $
                        (2,673,359
                        )
 
 As Originally
                            Reported
                          
                          
                          Restated
                          
                          
                          DifferenceJune 30, 2007Balance
      SheetDeferred
      issuance costs
                          
                          $
                          3,476,600
                          
                          
                          $
                          3,025,375
                          
                          
                          $
                          (451,225
                          )2005
      Convertible debenture and embedded derivatives – current
      portion
                          
                          $
                          2,968,064
                          
                          
                          $
                          3,016,660
                          
                          
                          $
                          48,5962006
      Convertible debenture and embedded derivatives – current
      portion
                          
                          $
                          3,273,470
                          
                          
                          $
                          1,513,046
                          
                          
                          $
                          (1,760,424
                          )2005
      Convertible debenture and embedded derivatives, less current
      portion
                          
                          $
                          267,943
                          
                          
                          $
                          272,330
                          
                          
                          $
                          4,3872006
      Convertible debenture and embedded derivatives, less current
      portion
                          
                          $
                          6,546,939
                          
                          
                          $
                          3,026,091
                          
                          
                          $
                          (3,520,848
                          )Warrant
      derivatives, less current portion
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          -Accumulated
      deficit
                          
                          $
                          (50,635,448
                          )
                          
                          $
                          (51,553,860
                          )
                          
                          $
                          (918,412
                          )Total
      stockholders’ deficit at June 30, 2007
                          
                          $
                          (23,287,349
                          )
                          
                          $
                          (24,205,761
                          )
                          
                          $
                          (918,412
                          )
  8
 
 Three Months Ended June 30,
      2007Statement
      of OperationsInterest
      expense
                                
                                $
                                (3,390,678
                                )
                                
                                $
                                (6,362,454
                                )
                                
                                $
                                (2,971,776
                                )Adjustments
      related to fair value of warrants
                                
                                $
                                (18,242,544
                                )
                                
                                $
                                (23,247,555
                                )
                                
                                $
                                5,005,011Net
      income
                                
                                $
                                11,169,271
                                
                                
                                $
                                13,202,506
                                
                                
                                $
                                2,033,235Basic
      earnings per share
                                
                                $
                                0.22
                                
                                
                                $
                                0.26
                                
                                
                                $
                                0.04Diluted
      earnings per share
                                
                                $
                                0.17
                                
                                
                                $
                                0.20
                                
                                
                                $
                                0.03Weighted
      average shares - basic
                                
                                
                                51,114,251
                                
                                
                                
                                51,114,251
                                
                                
                                
                                23,826Weighted
      average shares - diluted
                                
                                
                                67,410,984
                                
                                
                                
                                67,410,984
                                
                                
                                
                                -Six Months Ended June 30,
    2007Statement
      of OperationsInterest
      expense
                                
                                $
                                (8,367,818
                                )
                                
                                $
                                (13,435,004
                                )
                                
                                $
                                (5,067,186
                                )Adjustments
      related to fair value of warrants
                                
                                $
                                9,323,413
                                )
                                
                                $
                                11,614,037
                                
                                
                                $
                                2,290,624Net
      loss
                                
                                $
                                (8,761,933
                                )
                                
                                $
                                (11,538,495
                                )
                                
                                $
                                (2,773,562
                                )Basic
      and diluted loss per share
                                
                                $
                                (0.18
                                )
                                
                                $
                                (0.24
                                )
                                
                                $
                                (0.06
                                )Weighted
      average shares – basic and diluted
                                
                                
                                48,925,339
                                
                                
                                
                                48,978,418
                                
                                
                                
                                53,079Statement of Cash FlowsNet
      loss
                                
                                $
                                (8,761,933
                                )
                                
                                $
                                (11,538,495
                                )
                                
                                $
                                (2,773,562
                                )Amortization
      of discount
                                
                                $
                                6,132,861
                                
                                
                                $
                                10,748,822
                                
                                
                                $
                                4,615,961Amortization
      of deferred issuance cost
                                
                                $
                                2,142,618
                                
                                
                                $
                                2,593,843
                                
                                
                                $
                                451,225Adjustments
      related to fair value of derivatives
                                
                                $
                                (9,323,414
                                )
                                
                                $
                                (11,614,038
                                )
                                
                                $
                                (2,290,624
                                )
  3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  Basis of
Presentation—The accompanying interim consolidated financial statements
are unaudited and have been prepared in accordance with accounting principles
generally accepted in the United States of America (“GAAP”) including those for
interim financial information and with the instructions for Form 10-Q and
Article 10 of Regulation S-X issued by the Securities and Exchange
Commission (“SEC”). Accordingly, they do not include all of the information and
note disclosures required by GAAP for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been reflected in
these interim financial statements. These financial statements should be read in
conjunction with the audited financial statements and notes for the year ended
December 31, 2007 included in the Company’s Annual Report on
Form 10-KSB filed with the SEC on April 18, 2008 and amended on June 30,
2008.
  Principles of
Consolidation —The accounts of the Company and Mytogen, Inc.
(“Mytogen”) are included in the accompanying consolidated financial statements
for the period from September 20, 2007 to December 31, 2007. On
September 20, 2007, a newly formed subsidiary of the Company merged into
Mytogen to effect a reorganization of Mytogen. As a result of the merger, the
Company became the owner of 100% of the outstanding shares of Mytogen. During
the period from September 20, 2007 to June 30, 2008, all intercompany
balances and transactions were eliminated in consolidation.
  9
  Use of
Estimates —These consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
and, accordingly, require management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Specifically, the Company’s management has estimated
variables used to calculate the Black-Scholes and binomial lattice model
calculations used to value derivative instruments as discussed below under
“Valuation of Derivative Instruments”. In addition, management has estimated the
expected economic life and value of the Company’s licensed technology, the
Company’s net operating loss for tax purposes, share-based payments for
compensation to employees, directors, consultants and investment banks, and the
useful lives of the Company’s fixed assets and its accounts receivable
allowance. Actual results could differ from those estimates.
  Reclassifications
—Certain prior year financial statement balances have been reclassified to
conform to the current year presentation. These reclassifications had no effect
on the recorded net income (loss).
  Cash and Cash
Equivalents —Cash equivalents are comprised of certain highly liquid
investments with maturities of three months or less when purchased. The Company
maintains its cash in bank deposit accounts, which at times, may exceed
federally insured limits. The Company has not experienced any losses related to
this concentration of risk.
  Accounts
Receivable —The Company periodically assesses its accounts receivable for
collectability on a specific identification basis. If collectability of an
account becomes unlikely, the Company records an allowance for that doubtful
account. Once the Company has exhausted efforts to collect, management writes
off the account receivable against the allowance it has already created. The
Company does not require collateral for its trade accounts
receivable.
  Equipment
— The Company records its equipment at historical cost. The Company expenses
maintenance and repairs as incurred. Depreciation is provided for using the
straight-line method over three to six years. Upon disposition of equipment, the
gross cost and accumulated depreciation are written off and the difference
between the proceeds and the net book value is recorded as a gain or loss on
sale of assets. In the case of certain assets acquired under capital leases, the
assets are recorded net of imputed interest, based upon the net present value of
future payments. Assets under capital lease are pledged as collateral for the
related lease.
  Deferred Issuance
Costs —Payments, either in cash or share-based payments, made in
connection with the sale of debentures are recorded as deferred debt issuance
costs and amortized using the effective interest method over the lives of the
related debentures. The weighted average amortization period for deferred debt
issuance costs is 36 months.
  Intangible and
Long-Lived Assets— The Company follows Statement of Financial Accounting
Standards (“FAS”) No. 144, “Accounting for Impairment of Disposal of
Long-Lived Assets,” which established a “primary asset” approach to determine
the cash flow estimation period for a group of assets and liabilities that
represents the unit of accounting for a long-lived asset to be held and used.
Long-lived assets to be held and used are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The carrying amount of a long-lived asset is not
recoverable if it exceeds the sum of the undiscounted cash flows expected to
result from the use and eventual disposition of the asset. Long-lived assets to
be disposed of are reported at the lower of carrying amount or fair value less
cost to sell. During the three and six months ended June 30, 2008 and 2007, no
impairment loss was recognized.
  Fair Value
Measurements — For certain financial instruments, including accounts
receivable, accounts payable, accrued expenses, interest payable, advances
payable and notes payable, the carrying amounts approximate fair value due to
their relatively short maturities.
 
 Emerging
Issues Task Force (“EITF”) No. 00-19 “Accounting for Derivative Financial
Instruments Indexed to and Potentially Settled in, a Company’s Own Stock” (“EITF
00-19”), provides a criteria for determining whether freestanding contracts that
are settled in a company’s own stock, including common stock options and
warrants, should be designated as either an equity instrument, an asset or as a
liability under FAS No. 133 “Accounting for Derivative Instruments and
Hedging Activities.” Under the provisions of EITF 00-19, a contract designated
as an asset or a liability must be carried at fair value on a company’s balance
sheet, with any changes in fair value recorded in a company’s results of
operations. Using the criteria in EITF 00-19, the Company has determined that
its outstanding options and warrants require liability accounting and records
the fair values as warrant and option derivatives.
  10
  On January 1, 2008, the Company adoptedFAS No. 157, “Fair Value Measurements” (“FAS
157”).FAS 157 defines fair
value, and establishes a three-level valuation hierarchy for disclosures of fair
value measurement that enhances disclosure requirements for fair value measures.
The carrying amounts reported in the consolidated balance sheets for receivables
and current liabilities each qualify as financial instruments and are a
reasonable estimate of their fair values because of the short period of time
between the origination of such instruments and their expected realization and
their current market rate of interest. The three levels of valuation hierarchy
are defined as follows:
 
 ·
                Level 1 inputs to the valuation
      methodology are quoted prices for identical assets or liabilities in
      active markets.
 
 ·
                Level 2 inputs to the valuation
      methodology include quoted prices for similar assets and liabilities in
      active markets, and inputs that are observable for the asset or liability,
      either directly or indirectly, for substantially the full term of the
      financial instrument.
 
 ·
                Level 3 inputs to the valuation
      methodology are unobservable and significant to the fair value
      measurement.
 
 FAS 133,
“Accounting for Derivative Instruments and Hedging Activities” requires
bifurcation of embedded derivative instruments and measurement of fair value for
accounting purposes. In addition, FAS 155, “Accounting for Certain Hybrid
Financial Instruments” requires measurement of fair values of hybrid financial
instruments for accounting purposes. The Company applied the accounting
prescribed in FAS 133 to account for its 2005 Convertible Debenture as described
in Note 9.The Company applied the accounting prescribed in FAS 155 to
account for the 2006, 2007, February 2008, and April 2008 Convertible Debentures
as described below in Notes 5, 6, 7, and 8. In determining the appropriate
fair value, the Company used Level 2 inputs for its valuation methodology
including Black-Scholes models, Binomial Option Pricing models, Standard Put
Option Binomial models and the net present value of certain penalty amounts.
Derivative liabilities are adjusted to reflect fair value at each period end,
with any increase or decrease in the fair value being recorded in results of
operations as Adjustments to Fair Value of Derivatives. The effects of
interactions between embedded derivatives are calculated and accounted for in
arriving at the overall fair value of the financial instruments. In addition,
the fair values of freestanding derivative instruments such as warrant and
option derivatives are valued using the Black-Scholes model.
 
 At June
30, 2008, the Company identified the following assets and liabilities that are
required to be presented on the balance sheet at fair value:
  11
 
 FairValueMeasurementsatFairValue
                      Asof
                    
                    
                    June30,2008
                      UsingFairValueHierarchyDerivativeLiabilities
                    
                    June30,2008
                    
                    
                    Level1
                    
                    
                    Level2
                    
                    
                    Level3Conversion feature - 2005
      debenture
                    
                    $
                    5
                    
                    
                    
                    -
                    
                    
                    $
                    5
                    
                    
                    
                    -Anti-dilution provision - 2005
      debenture
                    
                    
                    20,021
                    
                    
                    
                    -
                    
                    
                    
                    20,021
                    
                    
                    
                    -Default provisions - 2005
      debenture
                    
                    
                    1,426
                    
                    
                    
                    -
                    
                    
                    
                    1,426
                    
                    
                    
                    -2006 Convertible debenture and
      embeded derivatives
                    
                    
                    2,445,797
                    
                    
                    
                    -
                    
                    
                    
                    2,445,797
                    
                    
                    
                    -2007 Convertible debenture and
      embedded derivatives
                    
                    
                    8,042,647
                    
                    
                    
                    -
                    
                    
                    
                    8,042,647
                    
                    
                    
                    -February 2008 Convertible
      debentures and embedded derivatives
                    
                    
                    1,146,941
                    
                    
                    
                    -
                    
                    
                    
                    1,146,941
                    
                    
                    
                    -April 2008 Convertible debenture
      and embedded derivatives
                    
                    
                    4,429,544
                    
                    
                    
                    -
                    
                    
                    
                    4,429,544
                    
                    
                    
                    -Warrant and option
      derivatives
                    
                    
                    7,504,525
                    
                    
                    
                    -
                    
                    
                    
                    7,504,525
                    
                    
                    
                    -$
                    23,590,906
                    
                    
                    
                    -
                    
                    
                    $
                    23,590,906
                    
                    
                    
                    -
 
 For the
three months ended June 30, 2008 and 2007, the Company recognized a gain of
$7,206,905 and $23,247,555, respectively, for the changes in the valuation of
the aforementioned liabilities. For the six months ended June 30, 2008 and 2007,
the Company recognized a gain of $8,227,176 and $11,614,037, respectively, for
the changes in the valuation of the aforementioned liabilities.
 
 The
Company did not identify any other non-recurring assets and liabilities that are
required to be presented in the consolidated balance sheets at fair value in
accordance with FAS 157.
 
 In
February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities” (“FAS 159”). FAS 159 permits entities to
choose to measure many financial assets and financial liabilities at fair value.
Unrealized gains and losses on items for which the fair value option has been
elected are reported in earnings. FAS 159 is effective as of the beginning of an
entity’s first fiscal year that begins after November 15, 2007. The Company
adopted FAS 159 on January 1, 2008. The Company chose not to elect the option to
measure the fair value of eligible financial assets and
liabilities.
 
 Revenue
Recognition — The Company’s revenues are generated from license and
research agreements with collaborators. Licensing revenue is recognized on a
straight-line basis over the shorter of the life of the license or the estimated
economic life of the patents related to the license. Deferred revenue represents
the portion of the license and other payments received that has not been earned.
Costs associated with the license revenue are deferred and recognized over the
same term as the revenue. Reimbursements of research expense pursuant to grants
are recorded in the period during which collection of the reimbursement becomes
assured, because the reimbursements are subject to approval.
  Research and
Development Costs —Research and development costs consist of expenditures
for the research and development of patents and technology, which cannot be
capitalized. The Company’s research and development costs consist mainly of
payroll and payroll related expenses, research supplies and research grants.
Reimbursements of research expense pursuant to grants are recorded in the period
during which collection of the reimbursement becomes assured, because the
reimbursements are subject to approval. Research and development costs are
expensed as incurred.
  Share-Based
Compensation—Effective January 1, 2006, the Company adopted the fair
value recognition provisions of FAS 123(R), using the modified-prospective
transition method. Under this method, stock-based compensation expense is
recognized in the consolidated financial statements for stock options granted,
modified or settled after the adoption date. In accordance with FAS 123(R),
the unamortized portion of options granted prior to the adoption date is
recognized into earnings after adoption. Results for prior periods have not been
restated, as provided for under the modified-prospective
method.
  12
  Under
FAS 123(R), stock-based compensation expense recognized is based on the
value of the portion of share-based payment awards that are ultimately expected
to vest during the period. Based on this, the Company’s stock-based compensation
is reduced for estimated forfeitures at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those
estimates.
  The fair
value of each stock option is estimated on the date of grant using the
Black-Scholes option pricing model. Assumptions relative to volatility and
anticipated forfeitures are determined at the time of grant with the following
weighted average assumptions used in the three and six months ended June 30,
2008:
  Expected life in years
                      
                      
                      4.0Volatility
                      
                      
                      148
                      %Risk
      free interest rate
                      
                      
                      2.50
                      %Expected
      dividends
                      
                      NoneExpected
      forfeitures
                      
                      
                      13
                      %
  The
assumptions used in the Black-Scholes models referred to above are based upon
the following data: (1) The expected life of the option is estimated by
considering the contractual term of the option, the vesting period of the
option, the employees’ expected exercise behavior and the post-vesting employee
turnover rate. (2) The expected stock price volatility of the underlying
shares over the expected term of the option is based upon historical share price
data. (3) The risk free interest rate is based on published U.S. Treasury
Department interest rates for the expected terms of the underlying options.
(4) Expected dividends are based on historical dividend data and expected
future dividend activity. (5) The expected forfeiture rate is based on
historical forfeiture activity and assumptions regarding future forfeitures
based on the composition of current grantees.
  In
accordance with FAS 123(R), the benefits of tax deductions in excess of the
compensation cost recognized for options exercised during the period are
classified as financing cash inflows rather than operating cash
inflows.
  Income
Taxes — Deferred income taxes are provided using the liability method
whereby deferred tax assets are recognized for deductible temporary differences
and operating loss and tax credit carryforwards, and deferred tax liabilities
are recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax
bases. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of the changes in tax laws and rates of
the date of enactment.
  When tax
returns are filed, it is highly certain that some positions taken would be
sustained upon examination by the taxing authorities, while others are subject
to uncertainty about the merits of the position taken or the amount of the
position that would be ultimately sustained. The benefit of a tax position is
recognized in the financial statements in the period during which, based on all
available evidence, management believes it is more likely than not that the
position will be sustained upon examination, including the resolution of appeals
or litigation processes, if any. Tax positions taken are not offset or
aggregated with other positions. Tax positions that meet the
more-likely-than-not recognition threshold are measured as the largest amount of
tax benefit that is more than 50 percent likely of being realized upon
settlement with the applicable taxing authority. The portion of the benefits
associated with tax positions taken that exceeds the amount measured as
described above is reflected as a liability for unrecognized tax benefits in the
accompanying balance sheet along with any associated interest and penalties that
would be payable to the taxing authorities upon examination.
  Applicable
interest and penalties associated with unrecognized tax benefits are classified
as additional income taxes in the statement of income.
  13
  Net Income (Loss)
Per Share — The Company uses FAS No. 128, “Earnings Per Share” for
calculating the basic and diluted income (loss) per share. The Company computes
basic income (loss) per share by dividing the net loss attributable to common
shareholders by the weighted average number of common shares outstanding.
Diluted income (loss) per share is computed similar to basic income (loss) per
share except that the denominator is increased to include the number of
additional common shares that would have been outstanding if the potential
shares had been issued and if the additional shares were dilutive. Common
equivalent shares are excluded from the computation because their exercise price
was greater than the weighted average stock price for the period.
  At June
30, 2008, approximately 214,976,000 potentially dilutive shares were excluded
from the shares used to calculate diluted earnings per share as their inclusion
would be anti-dilutive. There were 58,000,000 potentially dilutive shares at
June 30, 2007 that were excluded from the calculation as their inclusion
would be anti-dilutive.
  Concentrations
and Other Risks —Currently, the Company’s revenues and accounts
receivable are concentrated in one customer. There is also a geographic
concentration of the Company’s primary activities in Northern California and
Massachusetts. Other risks include the uncertainty of the regulatory environment
and the effect of future regulations on the Company’s business activities. As
the Company is a biotechnology research and development company, there is also
the attendant risk that someone could commence legal proceedings over the
Company’s discoveries. Acts of God could also adversely affect the Company’s
business.
  Recent
Accounting Pronouncements
  In
September 2006, the FASB issued FAS 157 “Fair Value Measurements.”
This Statement defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles (GAAP), and expands
disclosures about fair value measurements. This Statement applies under other
accounting pronouncements that require or permit fair value measurements, the
Board having previously concluded in those accounting pronouncements that fair
value is the relevant measurement attribute. Accordingly, this Statement does
not require any new fair value measurements. However, for some entities, the
application of this Statement will change current practice. This Statement is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. Earlier
application is encouraged, provided that the reporting entity has not yet issued
financial statements for that fiscal year, including financial statements for an
interim period within that fiscal year.  The Company has adopted
FAS 157 beginning January 1, 2008 and does not believe the adoption
had a material impact on its financial position, results of operations or cash
flows.
 
 In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business
Combinations.” FAS No. 141 (Revised 2007) changes how a reporting
enterprise accounts for the acquisition of a business. FAS No. 141 (Revised
2007) requires an acquiring entity to recognize all the assets acquired and
liabilities assumed in a transaction at the acquisition-date fair value, with
limited exceptions, and applies to a wider range of transactions or events. FAS
No. 141 (Revised 2007) is effective for fiscal years beginning on or after
December 15, 2008 and early adoption and retrospective application is
prohibited. The Company believes adopting FAS No. 141R will significantly impact
its financial statements for any business combination completed after December
31, 2008.
 
 In
December 2007, the FASB issued FAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements”, which is an amendment of Accounting Research
Bulletin (“ARB”) No. 51. This statement clarifies that a noncontrolling interest
in a subsidiary is an ownership interest in the consolidated entity that should
be reported as equity in the consolidated financial statements. This statement
changes the way the consolidated income statement is presented, thus requiring
consolidated net income to be reported at amounts that include the amounts
attributable to both parent and the noncontrolling interest. This statement is
effective for the fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. Based on current conditions, the
Company does not expect the adoption of FAS 160 to have a significant impact on
its results of operations or financial position.
  In
February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities”. This Statement permits entities to choose to
measure many financial assets and financial liabilities at fair value.
Unrealized gains and losses on items for which the fair value option has been
elected are reported in earnings. FAS No. 159 is effective as of the beginning
of an entity’s first fiscal year that begins after November 15, 2007. The
Company adopted FAS No. 159 on January 1, 2008. The Company chose not to elect
the option to measure the fair value of eligible financial assets and
liabilities.
  14
  In June
2007, the FASB issued FASB Staff Position No. EITF 07-3, “Accounting for
Nonrefundable Advance Payments for Goods or Services Received for use in Future
Research and Development Activities” (“FSP EITF 07-3”), which addresses whether
nonrefundable advance payments for goods or services that used or rendered for
research and development activities should be expensed when the advance payment
is made or when the research and development activity has been performed.
Management is currently evaluating the effect of this pronouncement on financial
statements.
  In June
2008, the FASB issued Emerging Issues Task Force Issue 07-5 “Determining whether
an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock” (“EITF
No. 07-5”). This Issue is effective for financial statements issued for fiscal
years beginning after December 15, 2008, and interim periods within those fiscal
years. Early application is not permitted. Paragraph 11(a) of Statement of
Financial Accounting Standard No. 133 “Accounting for Derivatives and Hedging
Activities” (“FAS 133”) specifies that a contract that would otherwise meet the
definition of a derivative but is both (a) indexed to the Company’s own
stock and (b) classified in stockholders’ equity in the statement of
financial position would not be considered a derivative financial instrument.
EITF No.07-5 provides a new two-step model to be applied in determining whether
a financial instrument or an embedded feature is indexed to an issuer’s own
stock and thus able to qualify for the FAS 133 paragraph 11(a) scope exception.
The Company believes adopting this statement will not have a material impact on
the financial statements.
 
 In April
2008, the FASB issued FASB Staff Position No. FAS 142-3
 “Determination of the useful life of Intangible Assets” (“FSP FAS 142-3”),
which amends the factors a company should consider when developing renewal
assumptions used to determine the useful life of an intangible asset under
FAS142. This Issue is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within those fiscal
years. FAS 142 requires companies to consider whether renewal can be completed
without substantial cost or material modification of the existing terms and
conditions associated with the asset. FSP FAS 142-3 replaces the previous useful
life criteria with a new requirement—that an entity consider its own historical
experience in renewing similar arrangements. If historical experience does not
exist then the Company would consider market participant assumptions regarding
renewal including 1) highest and best use of the asset by a market participant,
and 2) adjustments for other entity-specific factors included in FAS 142. The
Company is currently evaluating the impact that adopting FSP FAS 142-3 will have
on its financial statements.
 
 In May
2008, the FASB issued FAS 162, “The Hierarchy of Generally Accepted Accounting
Principles.” This Statement identifies the sources of accounting principles and
the framework for selecting the principles to be used in the preparation of
financial statements of nongovernmental entities that are presented in
conformity with generally accepted accounting principles (GAAP) in the United
States (the GAAP hierarchy). The Company is currently evaluating the impact that
adopting FAS No. 162 will have on its financial statements.
 
 In May
2008, the FASB issued SFAS 163, “Accounting for Financial Guarantee Insurance
Contracts, an interpretation of FASB Statement No. 60.” The scope of this
Statement is limited to financial guarantee insurance (and reinsurance)
contracts, as described in this Statement, issued by enterprises included within
the scope of Statement 60. Accordingly, this Statement does not apply to
financial guarantee contracts issued by enterprises excluded from the scope of
Statement 60 or to some insurance contracts that seem similar to financial
guarantee insurance contracts issued by insurance enterprises (such as mortgage
guaranty insurance or credit insurance on trade receivables). This Statement
also does not apply to financial guarantee insurance contracts that are
derivative instruments included within the scope of FASB Statement No. 133,
“Accounting for Derivative Instruments and Hedging Activities.” This Statement
will not have an impact on the Company’s financial statements.
 
 In June
2008, FASB issued EITF 08-4, “Transition Guidance for Conforming Changes to
Issue No. 98-5”. The objective of EITF 08-4 is to provide transition
guidance for conforming changes made to EITF 98-5, “Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios”, that result from EITF 00-27 “Application of Issue No. 98-5
to Certain Convertible Instruments”, and FAS 150, “Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity”. This
Issue is effective for financial statements issued for fiscal years ending after
December 15, 2008. Early application is permitted. The Company is currently
evaluating the impact that adopting EITF 08-4 will have on its financial
statements.
  15
  On
October 10, 2008, the FASB issued FASB Staff Position No. 157-3, “Determining
the Fair Value of a Financial Asset When the Market for That Asset Is Not
Active, FSP FAS” which clarifies the application of FAS 157 in a market that is
not active and provides an example to illustrate key considerations in
determining the fair value of a financial asset when the market for that
financial asset is not active. FSP FAS 157-3 became effective on October 10,
2008, and its adoption will not have a material impact on the Company’s
financial position or results for the year ended December 31, 2008.
 
 In
January 2009, the FASB issued FSP EITF 99-20-1, “Amendments to the Impairment
Guidance of EITF Issue No. 99-20, and EITF Issue No. 99-20, Recognition of
Interest Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets” (“FSP EITF 99-20-1”). FSP EITF 99-20-1 changes the
impairment model included within EITF 99-20 to be more consistent with the
impairment model of FAS No. 115. FSP EITF 99-20-1 achieves this by amending the
impairment model in EITF 99-20 to remove its exclusive reliance on “market
participant” estimates of future cash flows used in determining fair value.
Changing the cash flows used to analyze other-than-temporary impairment from the
“market participant” view to a holder’s estimate of whether there has been a
“probable” adverse change in estimated cash flows allows companies to apply
reasonable judgment in assessing whether an other-than-temporary impairment has
occurred. The adoption of FSP EITF 99-20-1 will not have a material impact on
the Company’s consolidated financial statements.
 
 4.
LICENSE REVENUE
 
 On April
30, 2008 the Company received a one time payment of $300,000 from Terumo
International which extended their ability to commence a Phase I Clinical Trial
in Japan by one year.  All other terms and conditions for the license
agreement between Terumo and the Company remain the same. The Company has
recorded $50,000 in license fee revenue for the three and six months ended June
30, 2008 in its accompanying statements of operations and the remainder of the
license fee has been accrued in deferred revenue in the accompanying balance
sheets at June 30, 2008. The Company is recognizing revenue from this agreement
over the one-year extension period.
 
 On May
23, 2008, the Company received $150,000 from International Stem Cells, Inc. as a
continuing annual payment to renew its license fee for use of certain of the
Company’s technologies. The Company has recorded $12,500 in license fee revenue
for the three and six months ended June 30, 2008, respectively, in its
accompanying consolidated statements of operations and the remainder of the
license fee has been accrued in deferred revenue in the accompanying
consolidated balance sheet at June 30, 2008. The Company is recognizing revenue
from this agreement over a one-year period.
 
 5.
CONVERTIBLE NOTE PAYABLE—APRIL 2008
 
 On April
4, 2008, the Company entered into a Securities Purchase Agreement with
accredited investors for the issuance of an aggregate of $4,038,880 principal
amount of senior secured convertible debentures with an original issue discount
of $820,648 representing approximately 20.32%. The amortizing senior secured
convertible debentures issued at the closing of the 2008 financing will be due
and payable one (1) year from the closing, and will not bear interest. The
debentures begin amortizing on October 1, 2008. The cash purchase price
excluding refinancing of bridge debt and in-kind payments was
$2,212,432. Refinanced bridge debt consisted of the aggregate $130,000 in
unsecured convertible notes previously issued and sold to PDPI LLC and The
Shapiro Family Trust on March 21, 2008. The net outstanding amount of principal
plus interest of the Notes was converted into the debt within the 2008 Financing
on a dollar-for-dollar basis.  Dr. Shapiro, one of the Company’s directors,
may be deemed the beneficial owner of the securities owned by The Shapiro Family
Trust. The convertible debentures are convertible beginning on the six-month
anniversary of the effective date of the note at the option of the holders into
26,925,867 shares of common stock at a fixed conversion price of $0.15 per
share, subject to anti-dilution and other customary adjustments. The Company has
classified the note as short term in the accompanying consolidated balance sheet
as of June 30, 2008. The debenture contains no restrictions as to the use of the
proceeds.
  16
  The note
contains a provision that modifies the conversion rate to $0.15 per common share
and a warrant exercise price of $0.165 per common share, issued to the April
2008 note payable subscribers who are also participants in the 2005, 2006, and
2007 debentures. The Company has considered the impact of Emerging Issue Task
Force statements, or EITFs 96 - 19— Debtor’s Accounting for a
Modification or Exchange of Debt Instruments, 02 - 4—Determining
Whether a Debtor’s Modification or Exchange of Debt Instruments is Within the
Scope of FASB No. 15,and05 - 7—Accounting for
Modifications to Conversion Options Embedded in Debt Instruments and Related
Issues on the accounting treatment of the change in conversion price of
the 2005, 2006, and 2007 Convertible Debentures described above.
EITF 96 - 19 states that a transaction resulting in a significant
change in the nature of a debt instrument should be accounted for as an
extinguishment of debt. The Company has concluded that the change in conversion
price and warrant exercise price does not constitute a significant change in the
nature of the debt and that the transaction should not be treated as an
extinguishment of that debt. The Company recorded an additional debt discount in
the amount of $847,588 in its accompanying consolidated balance sheets at June
30, 2008 for the impact of the change in the conversion price. See Notes 7
through 9.
 
 In
connection with this financing, the Company accrued cash fees to a placement
agent of $20,000 and issued warrants to purchase 26,925,867 shares of Common
Stock at an exercise price of $0.165 per share. The term of the warrants is five
years and is subject to anti-dilution and other customary adjustments. The
initial fair value of the warrants was estimated at approximately $2,587,521
using the Black-Scholes pricing model. The warrants were again valued at
$1,771,289 at June 30, 2008 at fair value using the Black-Scholes model,
representing a decrease in the fair value of the liability of approximately
$816,232, which was recorded through the results of operations as an adjustment
to fair value of derivatives. The assumptions used in the Black-Scholes model at
June 30, 2008 are as follows: (1) dividend yield of 0%; (2) expected
volatility of 143% to 146%, (3) risk-free interest rate of 2.6% to 3.4%,
and (4) expected life of 5 years. Cash fees accrued in the amount of
$20,000, the initial fair value of the original issue discount in the amount of
$820,649, and the initial fair value of the warrant discount in the amount of
$2,587,521 have been capitalized as debt issuance costs (cash paid) and debt
discounts (original issue discount and warrant discount), respectively, and are
being amortized over then note’s term of 12 months, and as redemptions occur the
Company writes off the proportional amount of the original deferred issuance
cost to interest expense.
 
 Under the
terms of the agreement, beginning October 1, 2008, the Company is to amortize
the note resulting in complete repayment by the maturity date. The Company may
make the amortization payment in either cash or equity. If the payment is made
in common stock, the stock will be issued at a price per share equal to the
lesser of (i) the then conversion price, and (ii) 80% of the weighted average
price for common shares for the 10 trading days prior to the amortization
payment date.
 
 The
agreement entered into provides that the Company will pay certain cash amounts
as liquidated damages in the event that the Company does not maintain an
effective registration statement, or if the Company fails to timely execute
stock trading activity. Additionally, penalties will be incurred by the Company
in the event of potential default conditions.
 
 The
agreement included a number of other embedded derivative instruments, and the
Company has complied with the provisions of FAS 155 “Accounting for Certain
Hybrid Financial Instruments”, and recorded the fair value of the convertible
debentures, and related embedded derivatives. The fair value of the debentures
and related derivative instruments was valued using a combination of Binomial
and Black-Scholes models, resulting in a fair value of $4,570,649 at April 4,
2008. The excess of $531,769 of this value over the face value of the note was
recorded through the results of operations as charges related to issuance of
April 2008 convertible note payable.
 
 At June
30, 2008, the note and related embedded derivatives outstanding were again
valued at fair value using a binomial option pricing model, resulting in the
changes shown in the following table in the fair values of the respective
liabilities versus the values at April 4, 2008.  The changes were recorded
through the results of operations as an adjustment to fair value of
derivatives.
 
 Fair Value
    atApril 4,
                              
                              
                              June 30,
                              
                              
                              IncreaseFace Amount
                              
                              
                              Net Purchase Price
                              
                              
                              2008
                              
                              
                              2008
                              
                              
                              (Decrease)$
                              4,038,880
                              
                              
                              $
                              3,218,232
                              
                              
                              $
                              4,570,649
                              
                              
                              $
                              4,429,544
                              
                              
                              $
                              (141,105
                              )
  17
  The
following table summarizes the April 2008 convertible debentures and discounts
outstanding at June 30, 2008:
 
 June 30,
                        2008April 2008 convertible debentures
      at fair value
                      
                      $
                      4,429,544Original issue
      discount
                      
                      
                      (625,042
                      )Warrant derivative
      discount
                      
                      
                      (1,970,770
                      )Net convertible
      debentures
                      
                      $
                      1,833,732Less current
      portion
                      
                      
                      (1,833,732
                      )April 2008 convertible debenture
      and embedded derivatives - long term
                      
                      $
                      -
  As of
April 30, 2009, no repayments or redemptions had been made on the debenture. As
of June 30, 2008, the outstanding principal amount for the 2008 Convertible
Debentures is $4,038,880. Interest expense for the three and six months ended
June 30, 2008 was $817,125.
 
 6.
CONVERTIBLE NOTES PAYABLE—FEBRUARY 2008
  The
Company issued and sold a $600,000 unsecured convertible note dated as of
February 15, 2008 (“Note A”) to JMJ Financial, for a net purchase price of
$500,000 (reflecting a 16.66% original issue discount) in a private placement.
Note A bears interest at the rate of 12% per annum, and is due by February 15,
2010. At any time after the 180th day following the effective date of Note A,
the holder may at its election convert all or part of Note A plus accrued
interest into shares of the Company's common stock at the conversion rate of the
lesser of: (a) $0.38 per share, or (b) 80% of the average of the three lowest
trade prices in the 20 trading days prior to the conversion. Pursuant to the Use
of Proceeds Agreement entered into in connection with the issuance of Note A,
the Company is required to use the proceeds from Note A solely for research and
development dedicated to adult stem cell research.
  Effective
February 15, 2008, in exchange for $1,000,000 in the form of a Secured &
Collateralized Promissory Note (the “JMJ Note”) issued by JMJ Financial to the
Company, the Company issued and sold an unsecured convertible note (“Note B”) to
JMJ Financial in the aggregate principal amount of $1,200,000 or so much as may
be paid towards the balance of the JMJ Note. Note B bears interest at the rate
of 10% per annum, and is due by February 15, 2010. At any time following the
effective date of Note B, the holder may at its election convert all or part of
Note B plus accrued interest into shares of the Company’s common stock at the
conversion rate of the lesser of: (a) $0.38 per share, or (b) 80% of the average
of the three lowest trade prices in the 20 trading days prior to the conversion.
In connection with the issuance of Note B, the Company entered into a Collateral
and Security Agreement dated as of February 15, 2008 with JMJ Financial pursuant
to which the Company granted JMJ Financial a security interest in certain of its
assets securing the JMJ Note. As of June 30, 2008, the Company had drawn down
and received the following amounts under Note B:
  · On March 17, 2008 —
$60,000 for a net purchase price of $50,000 (reflecting a 16.66% original issue
discount).
 · On June 17, 2008 —
$60,000 for a net purchase price of $50,000 (reflecting a 16.66% original issue
discount).
  Pursuant
to the Use of Proceeds Agreement entered into in connection with the issuance of
Note B, the Company is required to use the proceeds from Note B solely for
research and development dedicated to adult stem cell research.
  The
conversion provisions included in Note A and Note B represent embedded
derivative instruments. Accordingly, the Company has complied with the
provisions of FAS 155 “Accounting for Certain Hybrid Financial
Instruments”.  The fair values of Note A and Note B and related embedded
derivatives, valued using a Monte Carlo simulation model, were recorded as of
February 15, 2008. The excess of these values over the face values of Note
A and Note B was recorded through the results of operations as charges related
to issuance of February 2008 convertible notes payable.
  18
  At June 30, 2008, Note A and Note B and
related embedded derivatives outstanding were again valued at fair value using a
Monte Carlo simulation model, resulting in the changes shown in the following
table in the fair values of the respective liabilities versus the values at
February 15, 2008, March 17, 2008, and June 17, 2008.  The decreases
were recorded through the results of operations as an adjustment to fair value
of derivatives.
 
 FairValueatFebruary15,
                          
                          
                          June30,
                          
                          
                          IncreaseFaceAmount
                          
                          
                          NetPurchasePrice
                          
                          
                          2008
                          
                          
                          2008
                          
                          
                          (Decrease)Note A
                          
                          $
                          600,000
                          
                          
                          $
                          500,000
                          
                          
                          $
                          1,229,466
                          
                          
                          $
                          954,912
                          
                          
                          $
                          (274,554
                          )Note B, Tranche
      1
                          
                          
                          60,000
                          
                          
                          
                          50,000
                          
                          
                          
                          116,107
                          *
                          
                          
                          96,014
                          
                          
                          
                          (20,093
                          )Note B, Tranche
      2
                          
                          
                          60,000
                          
                          
                          
                          50,000
                          
                          
                          
                          110,641
                          **
                          
                          
                          96,015
                          
                          
                          
                          (14,626
                          )Total
                          
                          $
                          720,000
                          
                          
                          $
                          600,000
                          
                          
                          $
                          1,456,214
                          
                          
                          $
                          1,146,941
                          
                          
                          $
                          (309,273
                          )
  *
                  Fair
      value at March 17, 2008
 **
                  Fair
      value at June 17, 2008
  The
following table summarizes the February 2008 convertible debentures and
discounts outstanding at June 30, 2008:
 
 February 2008 convertible
      debentures at fair value
                          
                          $
                          1,146,941Original issue
      discount
                          
                          $
                          (98,119
                          )Net convertible
      debentures
                          
                          
                          1,048,822Less current
      portion
                          
                          
                          (634,581
                          )February 2008 convertible
      debenture and embedded derivatives - long term
                          
                          $
                          414,241
 
 As of
June 30, 2008, the outstanding principal amount for the 2008 Convertible
Debentures is $720,000. Interest expense for the three and six months ended June
30, 2008 was $5,006 and $21,881, respectively.
 
 7.
CONVERTIBLE DEBENTURES—2007
  On
August 31, 2007 the Company entered into a Securities Purchase Agreement
with accredited investors for the issuance of an aggregate of $12,550,000
principal amount of convertible debentures with an original issue discount of
$2,550,000 representing approximately 20.3%. In connection with the closing of
the sale of the debentures, the Company received gross proceeds of $10,000,000.
The convertible debentures are convertible at the option of the holders into
36,911,765 shares of common stock at a fixed conversion price of $0.34 per
share, subject to anti-dilution and other customary adjustments. In connection
with the Securities Purchase Agreement, the Company also issued warrants to
purchase an aggregate of 43,240,655 shares of its common stock. The term of the
warrants is five years and the exercise price is $0.38 per share, subject to
anti-dilution and other customary adjustments. The conversion price and warrant
exercise price have each been modified for those subscribers who also
participated in the April 2008 convertible note. See Note 5. The investors have
contractually agreed to restrict their ability to convert the convertible
debentures, exercise the warrants and exercise the additional investment right
and receive shares of the Company’s common stock such that the number of shares
of the Company’s common stock held by them and their affiliates after such
conversion or exercise does not exceed 4.99% of the Company’s then issued and
outstanding shares of its common stock.
  19
  The April
2008 note (See Note 5) contains a provision that modifies the conversion rate to
$0.15 per common share and a warrant exercise price of $0.165 per common share,
issued to the April 2008 note payable subscribers who are also participants in
the 2007 debentures. The Company has considered the impact of Emerging Issue
Task Force statements, or EITFs 96 - 19— Debtor’s Accounting for a
Modification or Exchange of Debt Instruments, 02 - 4—Determining
Whether a Debtor’s Modification or Exchange of Debt Instruments is Within the
Scope of FASB No. 15,and05 - 7—Accounting for
Modifications to Conversion Options Embedded in Debt Instruments and Related
Issues on the accounting treatment of the change in conversion price of
the 2007 Convertible Debentures. EITF 96 - 19 states that a
transaction resulting in a significant change in the nature of a debt instrument
should be accounted for as an extinguishment of debt. The Company has concluded
that the change in conversion price and warrant exercise price does not
constitute a significant change in the nature of the debt and that the
transaction should not be treated as an extinguishment of that debt. The Company
recorded an additional debt discount in the amount of $451,389 in its
accompanying consolidated balance sheets at June 30, 2008 for the impact of the
change in the conversion price. See Note 5.
  The
agreements entered into provide that the Company will pay certain cash amounts
as liquidated damages in the event that the Company does not maintain an
effective registration statement, or if the Company fails to timely execute
stock trading activity.
  Under the
terms of the agreements, principal amounts owed under the debentures become due
and payable commencing six months following closing of the transaction. At that
time, and each month thereafter, the Company is required to either repay 1/30 of the outstanding
balance owed in common stock at the lesser of $0.34 per share or 80% of the
prior ten day’s average closing stock price, immediately preceding the
redemption. The agreements also provide that the Company may force conversion of
outstanding amounts owed under the debentures into common stock, if the Company
has met certain conditions and milestones, and additionally, has a stock price
for 20 consecutive trading days that exceeds 200% of the conversion
price.
  The
agreement included a number of other embedded derivative instruments, and the
Company has complied with the provisions of FAS 155 “Accounting for Certain
Hybrid Financial Instruments”, and recorded the fair value of the convertible
debentures, and related embedded derivatives, as of August 31, 2007. The
fair value of the debentures and related derivative instruments was valued using
a combination of Binomial and Black-Scholes models, resulting in a fair value of
$11,875,539. The excess of this value over the face value of the convertible
debentures was recorded through the results of operations as charges related to
issuance of 2007 convertible debentures and warrants.
 
 The 2007
convertible debentures and related embedded derivatives outstanding at June 30,
2008 were again valued at fair value using a combination of Binomial and
Black-Scholes models, resulting in an increase in the fair value of the
liability of approximately $1,518,774 for the three months ended June 30, 2008
and $1,301,276 for the six months ended June 30, 2008, which was recorded
through the results of operations as an adjustment to fair value of
derivatives.
  In
connection with this financing, the Company paid cash fees to a placement agent
of $1,001,800 and issued a warrant to purchase 6,328,890 shares of common stock
at an exercise price of $0.38 per share (modified for holders who are also
subscribers of the April 2008 note payable – see Note 5). The initial fair value
of the warrant was estimated at approximately $2,025,000 using the Black-Scholes
pricing model. The broker-dealer warrants were again valued at June 30, 2008 at
fair value using the Black-Scholes model, resulting in a decrease in the fair
value of the liability from December 31, 2007 of approximately $536,500, which
was recorded through the results of operations as an adjustment to fair value of
derivatives. The assumptions used in the Black-Scholes model at June 30, 2008
are as follows: (1) dividend yield of 0%; (2) expected volatility of
143%, (3) risk-free interest rate of 3.34%, and (4) expected life of
4.25 years. Cash fees paid, and the initial fair value of the warrant, have
been capitalized as debt issuance costs and are being amortized over
36 months, and as redemptions occur the Company writes off the proportional
amount of the original deferred issuance cost to interest
expense.
  20
  The
following table summarizes the 2007 Convertible Debentures and discounts
outstanding at June 30, 2008 and December 31, 2007:
 
 June 30,
                          2008
                        
                        
                        December 31,
                          20072007 convertible debentures at
      fair value
                        
                        $
                        8,042,647
                        
                        
                        $
                        11,622,078Original issue
      discount
                        
                        
                        (2,848,949
                        )
                        
                        
                        (6,063,955
                        )Warrant derivative
      discount
                        
                        
                        (1,232,256
                        )
                        
                        
                        (2,075,581
                        )Net convertible
      debentures
                        
                        $
                        3,961,442
                        
                        
                        $
                        3,482,542Less current
      portion
                        
                        
                        (1,800,655
                        )
                        
                        
                        (1,160,847
                        )2007 convertible debenture and
      embedded derivatives - long term
                        
                        $
                        2,160,787
                        
                        
                        $
                        2,321,695
 
 As of
June 30, 2008, the outstanding principal amount for the 2007 Convertible
Debentures is $7,669,282. Interest expense for the three and six months ended
June 30, 2008 was $4,170,216 and $5,817,827, respectively.
 
 8. CONVERTIBLE
DEBENTURES—2006
  On
September 6, 2006, the Company entered into a Securities Purchase Agreement
with accredited investors for the issuance of an aggregate of $10,981,250
principal amount of convertible debentures with an original issue discount of
$2,231,250 representing approximately 20.3%. In connection with the closing of
the sale of the debentures, the Company received gross proceeds of $8,750,000.
The Company may make the amortization payment in either cash or equity. If the
payment is made in common stock, the stock will be issued at a price per share
equal to the lesser of (i) the then conversion price, and (ii) 85% of the
weighted average price for common shares for the 10 trading days prior to the
amortization payment date. The convertible debentures are convertible at the
option of the holders into 38,129,340 shares of common stock at a fixed
conversion price of $0.288 per share, subject to anti-dilution and other
customary adjustments.
 
 The April
2008 note (see Note 5) contains a provision that modifies the conversion rate to
$0.15 per common share and a warrant exercise price of $0.165 per common share,
issued to the April 2008 note payable subscribers who are also participants in
the 2006 debentures. The Company has considered the impact of Emerging Issue
Task Force statements, or EITFs 96 - 19— Debtor’s Accounting for a
Modification or Exchange of Debt Instruments, 02 - 4—Determining
Whether a Debtor’s Modification or Exchange of Debt Instruments is Within the
Scope of FASB No. 15, and 05 - 7—Accounting for
Modifications to Conversion Options Embedded in Debt Instruments and Related
Issues on the accounting treatment of the change in conversion price of
the 2006 Convertible Debentures. EITF 96 - 19 states that a
transaction resulting in a significant change in the nature of a debt instrument
should be accounted for as an extinguishment of debt. The Company has concluded
that the change in conversion price and warrant exercise price does not
constitute a significant change in the nature of the debt and that the
transaction should not be treated as an extinguishment of that debt. The Company
recorded an additional debt discount in the amount of $396,199 in its
accompanying consolidated balance sheets at June 30, 2008 for the impact of the
change in the conversion price. See Note 5.
  21
  The
following table summarizes the 2006 Convertible Debentures and discounts
outstanding at June 30, 2008 and December 31, 2007:
 
 June 30,
                      
                      
                      December 31,2008
                      
                      
                      20072006 convertible debentures at
      fair value
                      
                      $
                      2,445,797
                      
                      
                      $
                      7,386,912Original issue
      discount
                      
                      
                      (865,519
                      )
                      
                      
                      (3,777,403
                      )Warrant derivative
      discount
                      
                      
                      (272,312
                      )
                      
                      
                      (562,018
                      )Net convertible
      debentures
                      
                      $
                      1,307,966
                      
                      
                      $
                      3,047,491Less current
      portion
                      
                      
                      (1,087,454
                      )
                      
                      
                      (1,625,327
                      )2006 convertible debenture and
      embedded derivatives - long term
                      
                      $
                      220,512
                      
                      
                      $
                      1,422,164
  In
connection with this financing, the Company paid cash fees to a broker-dealer of
$525,000 and issued a warrant to purchase 4,575,521 shares of common stock at an
exercise price of $0.3168 per share (modified for holders who are also
subscribers of the April 2008 note payable – see Note 5). The broker-dealer
warrants were again valued at June 30, 2008 at fair value using the
Black-Scholes model, resulting in a decrease in the fair value of the liability
of approximately $1,397,605 and $1,478,336 for the three and six months ended
June 30, 2008, respectively, which was recorded through the results of
operations as a debit to Adjustments to Fair Value of Derivatives. The
assumptions used in the Black-Scholes model at June 30, 2008 are as follows:
(1) dividend yield of 0%; (2) expected volatility of 144% to 146%,
(3) risk-free interest rate of 2.1% to 2.9%, and (4) expected life of
3.4 years. Cash fees paid, and the initial fair value of the warrant, have
been capitalized as debt issuance costs and are being amortized over
36 months, and as redemptions occur the Company writes off the proportional
amount of the original deferred issuance cost to interest expense.
  As of
June 30, 2008, the outstanding principal amount for the 2006 Convertible
Debentures is $2,221,579. Interest expense for the three and six months ended
June 30, 2008 was $2,880,835 and $4,893,878, respectively.
  9.
CONVERTIBLE DEBENTURES—2005
  On
September 15, 2005, the Company entered into a Securities Purchase
Agreement with accredited investors for the issuance of an aggregate of
$22,276,250 principal amount of convertible debentures with an original issue
discount of $4,526,250 representing approximately 20.3%. In connection with the
closing of the sale of the debentures, the Company received gross proceeds of
$17,750,000.
  The
agreement included a number of embedded derivative instruments that required
separate valuation in accordance with the requirements of FAS 133,
EITF 05 - 04 and related accounting literature. The following
summarizes the fair values of embedded derivatives at June 30, 2008 and
December 31, 2007, followed by a description of the valuation methodology
utilized to determine fair values:
  Fair value
                          
                          
                          Fair valueJune 30,
                          
                          
                          December 31,Embedded Derivative Liability
      (Asset)
                          
                          2008
                          
                          
                          2007Conversion
      feature
                          
                          $
                          5
                          
                          
                          $
                          1,736Anti-dilution
      protection
                          
                          
                          20,021
                          
                          
                          
                          194,356Default
      provisions
                          
                          
                          1,426
                          
                          
                          
                          3,122Company right to force
      conversion
                          
                          
                          -
                          
                          
                          
                          -$
                          21,452
                          
                          
                          $
                          199,214
  The fair
value at June 30, 2008 of the derivative for the conversion feature was valued
as an American call option using the Binomial Option Pricing Model with the
following inputs: (1) closing stock price from $0.08 to $0.12
(2) exercise price equal to the $0.34 conversion price (3) volatility
based upon the Company’s stock trading of 103% to 144% (4) Treasury note
rates with terms commensurate with the remaining term of the Notes of 1.5% to
1.9%, and (5) duration of the note as an amortizing debenture of
approximately 0.04 to 0.09 years.
  22
  The fair
value at June 30, 2008 of the derivative for anti-dilution protection was valued
using a standard put option binomial model, adjusted for the probability of
subsequent financing at prices below the principal’s conversion option with the
following inputs: (1) closing stock price as of the valuation date from
$0.08 to $0.12 (2) exercise price equal to the $0.34 conversion price
(3) volatility based upon the Company’s stock trading of 103% to 144%
(4) Treasury note rates with terms commensurate with the remaining term of
the Notes of 1.5% to 1.9% and (5) duration of the note as an amortizing
debenture of approximately 0.04 to 0.09 years.
  The fair
value at June 30, 2008 of the derivative for contractual default provisions was
determined by taking the monthly amortization schedule, and multiplying the
result by the contractual penalty of 120%. The present value of this penalty was
then adjusted by the estimated probability of default for each valuation
date.
  The fair
value at June 30, 2008 of the derivative asset related to the Company’s right to
force conversion was based upon a binomial option pricing model with the
following inputs: (1) closing stock price at the valuation date from $0.08
to $0.12 (2) exercise price of $0.68 per share which is required for the
forced conversion (3) volatility based upon the Company’s stock trading of
103% to 144% (4) Treasury note rate with terms commensurate with the
remaining term of the Notes of 1.5% to 1.9% and (5) duration of the note as
an amortizing debenture of approximately 0.04 to 0.09 years.
  During
the three and six months ended June 30, 2008 a decrease in the fair value of the
embedded derivative amounts of approximately $79,309 and $168,857, respectively,
was recorded through results of operations as adjustment to fair value of
derivatives.
  In
connection with this financing, we paid cash fees to a broker-dealer of
$1,065,000 and issued a warrant to purchase 1,162,239 shares of Common Stock at
an exercise price of $2.53 per share. The fair value of the warrant at June 30,
2008 was estimated at approximately $52,000 using the Black-Scholes pricing
model. The assumptions used in the Black-Scholes model as of June 30, 2008 are
as follows: (1) dividend yield of 0%; (2) expected volatility of 143%,
(3) risk-free interest rate of 2.4%, and (4) expected life of
1.3 years. Cash fees paid, and the fair value of the warrant, have been
capitalized as debt issuance costs and are being amortized over 36 months,
and as redemptions occur the Company writes off the proportional amount of the
original deferred issuance cost to interest expense. During the three and six
months ended June 30, 2008 the Company recorded approximately $337,770 and
$868,114, respectively, as interest expense in its accompanying consolidated
statements of operations..
  In
January 2007, the Company’s Board of Directors agreed to reduce the
exercise price of the warrants issued in connection with the 2005 debentures to
$0.95 per share and to reduce the conversion price of the debentures to $0.90
per share. The conversion price and warrant exercise price have each been
further modified in April 2008 for those subscribers who also participated in
the April 2008 convertible note. See Note 5.
  The
Company has considered the impact of Emerging Issue Task Force statements, or
EITFs 96 - 19— Debtor’s Accounting for a
Modification or Exchange of Debt Instruments, 02 - 4—Determining
Whether a Debtor’s Modification or Exchange of Debt Instruments is Within the
Scope of FASB No. 15, and05 - 7—Accounting for
Modifications to Conversion Options Embedded in Debt Instruments and Related
Issues on the accounting treatment of the change in conversion price of
the 2005 Convertible Debentures described in the paragraph above.
EITF 96 - 19 states that a transaction resulting in a significant
change in the nature of a debt instrument should be accounted for as an
extinguishment of debt. The Company has concluded that the change in conversion
price and warrant exercise price does not constitute a significant change in the
nature of the debt and that the transaction should not be treated as an
extinguishment of that debt.
  23
  Reduction
of Exercise Price
 
 On
August 24, 2006, the Company’s Board of Directors agreed to reduce the
exercise price of the warrants issued in connection with the 2005 debentures
from $2.53 per share to $0.95 per share for approximately three days. As a
result of this repricing, warrant holders with an aggregate of 4,541,672
warrants exercised their rights generating approximately $4,315,000 of cash
proceeds. Warrant holders who exercised their warrants were issued replacement
warrants to purchase an equivalent number of shares at an exercise price of
$1.60 per share. Warrant holders who did not exercise their warrants had the
conversion price of their convertible debentures reduced to $0.95. As a result
of anti-dilution protection specified in the original warrant agreement, certain
of the warrant holders who did not exercise their warrants received
anti-dilution protection and had the number of shares covered under the warrant
agreement increased to 2,135,615, and the exercise price reduced to $0.95 per
share. One warrant holder waived the right to reprice the holder’s warrant from
$2.53 to $0.95 and did not exercise all of the holder’s warrants. The holder’s
remaining warrants on an aggregate of 581,119 common shares remain outstanding
at an exercise price of $2.53 per share.
  The
Company has considered the impact of EITFs 96 - 19,
02 - 4 and 05 - 7 on the accounting treatment of the change
in conversion price of a portion of the 2005 Convertible Debentures described in
the paragraph above. EITF 96 - 19 states that a company should
recognize as an extinguishment of debt a significant change in the nature of a
debt instrument. EITF 05 - 7 states that if the change in the
cash flows of the debt instrument plus the change in the fair value of the
conversion derivative as a result of the change is greater than 10%, the change
should be treated as significant and the debt is considered extinguished. The
Company has concluded that the change in conversion price from $2.30 to $0.95 of
a portion of the outstanding Debenture does not constitute an extinguishment of
that debt.
  Anti-dilution
Impact
  As a
result of the 2007 Financing, described more fully in Note 7, the warrants
issued in connection with the 2005 Financing were automatically diluted down to
$0.34. The result of this was to impact both the number and price of the
original warrants and replacement warrants issued to both the investors and the
brokers.
  The new
number of original warrants issued to investors totaled 2,335,005. The
broker-dealer warrants were again valued at June 30, 2008 at fair value using
the Black-Scholes model, resulting in a decrease in the fair value of the
liability of approximately $141,407 for the three months ended June 30, 2008 and
a decrease of $156,014 for the six months ended June 30, 2008, which was
recorded through the results of operations as adjustments to fair value of
derivatives. The assumptions used in the Black-Scholes model to value the
warrants as of June 30, 2008 were as follows: (1) dividend yield of 0%;
(2) expected volatility of 143%, (3) risk-free interest rate of 2.63%,
and (4) expected life of 2 years.
  The new
number of replacement warrants issued to investors and brokers totaled
12,689,966. The warrants were valued at June 30, 2008 at fair value using the
Black-Scholes model resulting in a decrease in the fair value of the liability
of approximately $912,776 for the three months ended June 30, 2008 and a
decrease of $956,978 for the six months ended June 30, 2008, which was recorded
through the results of operations as a credit to adjustments to fair value of
derivatives. The assumptions used in the Black-Scholes model as of June 30,
2008 are as follows: (1) dividend yield of 0%; (2) expected volatility
of 143%, (3) risk-free interest rate of 2.9%, and (4) expected life of
3.3 years.
  The
following table summarizes the 2005 Convertible Debentures and embedded
derivatives outstanding at June 30, 2008 and December 31, 2007:
  24
  June 30,
                          
                          
                          December 31,2008
                          
                          
                          20072005 convertible debenture at
      $0.34 face value
                          
                          $
                          185,383
                          
                          
                          $
                          1,677,904Discounts on
      debenturesOriginal issue
      discount
                          
                          
                          (5,027
                          )
                          
                          
                          (152,073
                          )Conversion feature
      derivative
                          
                          
                          (6,384
                          )
                          
                          
                          (193,084
                          )Warrant
      derivative
                          
                          
                          (8,127
                          )
                          
                          
                          (245,825
                          )Other
      derivatives
                          
                          
                          (311
                          )
                          
                          
                          (9,266
                          )Net convertible
      debentures
                          
                          
                          165,534
                          
                          
                          
                          1,077,656Embedded
      derivatives
                          
                          
                          21,453
                          
                          
                          
                          199,2152005 convertible debentures and
      embedded derivatives
                          
                          
                          186,987
                          
                          
                          
                          1,276,871less current
      portion
                          
                          
                          (186,987
                          )
                          
                          
                          (1,276,871
                          )2005 convertible debenture and
      embedded derivatives - long term portion
                          
                          $
                          -
                          
                          
                          $
                          -
  10.
                  WARRANT
      DERIVATIVES—OTHER
 
 In
January, 2008 the Company issued 680,636 warrants to purchase common stock at
$0.39 per share in connection with consulting services provided during the
previous quarter.  The warrants were initially valued at $112,492 using the
Black-Scholes pricing model with the following assumptions: 
(1) dividend yield of 0%; (2) expected volatility of 145%;
(3) risk-free interest rate of 3.5%, and expected life of 10 years. 
These warrants are classified as a warrant derivative liability.  The
warrants were again valued at June 30, 2008 at fair value using the
Black-Scholes pricing model resulting in a decrease in the fair value of the
liability of $60,377 for the three months ended June 30, 2008 and a decrease in
the fair value of the liability of $60,628 for the six months ended June 30,
2008, which was recorded through the results of operations as a debit to
adjustments to fair value of derivatives. The assumptions used in the
Black-Scholes model as of June 30, 2008 are as follows: (1) dividend yield
of 0%; (2) expected volatility of 143%, (3) risk-free interest rate of
4.0%, and (4) expected life of 9.6 years.
 
 11.
WARRANT SUMMARY
 
 Warrant
Activity
  A summary
of warrant activity for the six months ended June 30, 2008 is presented
below:
 WeightedWeighted
                            
                            
                            Average
                            
                            
                            AggregateAverage
                            
                            
                            Remaining
                            
                            
                            IntrinsicNumber of
                            
                            
                            Exercise
                            
                            
                            Contractual
                            
                            
                            ValueWarrants
                            
                            
                            Price
                            
                            
                            Life (in years)
                            
                            
                            
                            (000)Outstanding, December 31,
      2007
                            
                            
                            96,290,263
                            
                            
                            $
                            0.29
                            
                            
                            
                            3.61
                            
                            
                            $
                            454Granted
                            
                            
                            27,606,503
                            
                            
                            $
                            0.17Exercised
                            
                            
                            -
                            
                            
                            $
                            -Forfeited
                            
                            
                            (6,140,036
                            )
                            
                            $
                            0.25Outstanding, June 30,
      2008
                            
                            
                            117,756,730
                            
                            
                            $
                            0.26
                            
                            
                            
                            3.69
                            
                            
                            $
                            29Vested and expected to vest at
      June 30, 2008
                            
                            
                            117,756,730
                            
                            
                            $
                            0.40
                            
                            
                            
                            4.33
                            
                            
                            $
                            -Exercisable, June 30,
      2008
                            
                            
                            117,631,730
                            
                            
                            $
                            0.26
                            
                            
                            
                            3.69
                            
                            
                            $
                            29
 The
aggregate intrinsic value in the table above is before applicable income taxes
and is calculated based on the difference between the exercise price of the
warrants and the quoted price of the Company’s common stock as of the reporting
date.
  25
  A summary
of the status of unvested warrants as of June 30, 2008 and changes during the
period then ended, is presented below:
 
 Warrants
      Outstanding
                            
                            
                            Warrants
      ExercisableWeighted
                            
                            
                            Weighted
                            
                            
                            
                            
                            
                            WeightedAverage
                            
                            
                            Average
                            
                            
                            
                            
                            
                            AverageExercise
                            
                            
                            Number
                            
                            
                            Remaining
                            
                            
                            Exercise
                            
                            
                            Number
                            
                            
                            ExercisePrice
                            
                            
                            of Shares
                            
                            
                            Life (Years)
                            
                            
                            Price
                            
                            
                            of Shares
                            
                            
                            Price$
                            0.05
                            
                            
                            
                            950,000
                            
                            
                            
                            0.48
                            
                            
                            $
                            0.05
                            
                            
                            
                            950,000
                            
                            
                            $
                            0.050.17
                            
                            
                            
                            95,706,496
                            
                            
                            
                            3.92
                            
                            
                            
                            0.17
                            
                            
                            
                            95,706,496
                            
                            
                            
                            0.170.32
                            
                            
                            
                            4,575,521
                            
                            
                            
                            1.13
                            
                            
                            
                            0.32
                            
                            
                            
                            4,575,521
                            
                            
                            
                            0.320.38 - 0.40
                            
                            
                            
                            8,728,890
                            
                            
                            
                            4.20
                            
                            
                            
                            0.38
                            
                            
                            
                            8,603,890
                            
                            
                            
                            0.380.85 - 0.96
                            
                            
                            
                            5,869,831
                            
                            
                            
                            2.43
                            
                            
                            
                            0.95
                            
                            
                            
                            5,869,831
                            
                            
                            
                            0.952.20
                            
                            
                            
                            155,917
                            
                            
                            
                            1.73
                            
                            
                            
                            2.20
                            
                            
                            
                            155,917
                            
                            
                            
                            2.202.48 - 2.54
                            
                            
                            
                            1,770,075
                            
                            
                            
                            1.46
                            
                            
                            
                            2.54
                            
                            
                            
                            1,770,075
                            
                            
                            
                            2.54117,756,730
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            117,631,730
 
 The
following table summarizes information about warrants outstanding and
exercisable at June 30, 2008.
 
 WeightedAverageGrant DateShares
                        
                        
                        Fair ValueUnvested at January 1,
      2008
                        
                        
                        375,000
                        
                        
                        $
                        0.46Granted
                        
                        
                        30,606,503
                        
                        
                        
                        0.11Vested
                        
                        
                        (30,856,503
                        )
                        
                        
                        0.11Forfeited
                        
                        
                        -
                        
                        
                        
                        -Unvested at June 30,
      2008
                        
                        
                        125,000
                        
                        
                        $
                        0.08
 
 12.
                  ADJUSTMENT TO FAIR
      VALUE OF DERIVATIVES
 
 The
following table summarizes the components of the adjustment to fair value of
derivatives which were recorded as charges to results of operations for the
three and six months ended June 30, 2008. The table summarizes by category of
derivative liability the (increase) decrease in fair value from market changes
during the three and six months ended June 30, 2008, the impact of additional
investments and repricing and exercise of certain warrants.
 
 June
      30, 2008
                    
                    Three Months
                      Ended
                    
                    
                    Six Months
                      EndedEmbedded
      Pipe derivatives - 9.05
                    
                    $
                    79,309
                    
                    
                    $
                    168,857Pipe
      Hybrid instrument – 9.06
                    
                    
                    280,948
                    
                    
                    
                    695,790Pipe
      Hybrid- FAS 155 – 8.07
                    
                    
                    (1,518,774
                    )
                    
                    
                    (1,301,276
                    )Pipe
      Hybrid- February 2008
                    
                    
                    195,270
                    
                    
                    
                    258,632Pipe
      Hybrid- April 2008
                    
                    
                    141,105
                    
                    
                    
                    141,105Original
      warrants PIPE 2005 , excluding replacement warrants
                    
                    
                    141,407
                    
                    
                    
                    156,014Replacement
      Warrants
                    
                    
                    912,776
                    
                    
                    
                    956,978Warrants
      – PIPE 2006-investors
                    
                    
                    1,397,606
                    
                    
                    
                    1,478,337Warrants
      – PIPE 2007-investors
                    
                    
                    3,338,410
                    
                    
                    
                    3,286,787Warrants
      – PIPE 2008-investors
                    
                    
                    816,232
                    
                    
                    
                    816,232Other
      Warrant Derivatives- 2005 and 2006
                    
                    
                    1,173,275
                    
                    
                    
                    1,296,746Other
      Warrants Derivatives - 2007
                    
                    
                    249,341
                    
                    
                    
                    272,974$
                    7,206,905
                    
                    
                    $
                    8,227,176
  26
  13.
                    STOCKHOLDERS’
      EQUITY TRANSACTIONS
  The
Company is authorized to issue two classes of capital stock, to be designated,
respectively, Preferred Stock and Common Stock. The total number of shares of
Preferred Stock the Company is authorized to issue is 50,000,000 par value
$0.001 per share. The total number of shares of Common Stock the Company is
authorized to issue is 500,000,000, par value $0.001 per share. The Company had
no Preferred Stock outstanding as of June 30, 2008 and had 174,828,360 shares of
Common Stock outstanding as of June 30, 2008.
 
 Effective
as of April 1, 2008, Jonathan F. Atzen, the Company’s Senior Vice President,
General Counsel and Secretary, resigned from his positions with the Company and
terminated his employment arrangement with the Company. Pursuant to the terms of
an agreement between the Company and Mr. Atzen effective April 1,
2008, the Company agreed to (i) pay Mr. Atzen $48,333.33 in cash as a
severance payment, (ii) issue a fully vested option to purchase an
aggregate of 400,000 shares of common stock pursuant to the Company’s 2005 Stock
Incentive Plan, as amended (the “2005 Plan”), (iii) issue an aggregate of
936,692 shares of the common stock pursuant to the 2005 Plan, (iv) provide
for the vesting of all outstanding stock options held by Mr. Atzen and
(v) provide Mr. Atzen and his family with full healthcare and dental
coverage for a period of 6 months as was provided to Mr. Atzen during
his employment.
 
 Effective
as of March 17, 2008, Ivan Wolkind, the Company's Senior Vice
President—Finance, Administration & Chief Accounting Officer, resigned
from all positions with the Company and voluntarily terminated his employment
arrangement with the Company for personal reasons. On April 2, 2008, the
Company entered into a Consulting Agreement with Mr. Wolkind. Pursuant to
the Consulting Agreement, Mr. Wolkind agreed for a period of 90 days
to provide up to 20 hours per week of financial consulting services to the
Company including but not limited to (i) assisting with general accounting
and investor diligence, (ii) commenting on the structure of proposed
financial transactions, (iii) responding to queries regarding ACT's
corporate structure, and (iv) reviewing strategic and financial documents
as appropriate. As consideration for the services to be provided, the Company
agreed to pay Mr. Wolkind an aggregate of $45,834 of which was paid on
April 2, 2008. As additional consideration for the services to be provided,
the Company agreed to issue to Mr. Wolkind 238,719 shares of common stock
pursuant to the 2005 Plan. On May 2, 2008, the consulting contract was
terminated with no future payments due.
  27
  14.
                  STOCK-BASED
      COMPENSATION
 
 Stock
Plans
 
 On
August 12, 2004, ACT’s Board of Directors approved the establishment of the
2004 Stock Option Plan (the “2004 Stock Plan”). Stockholder approval was
received on December 13, 2004. The total number of common shares available
for grant and issuance under the plan may not exceed 2,800,000 shares, subject
to adjustment in the event of certain recapitalizations, reorganizations and
similar transactions. Common stock purchase options may be exercisable by the
payment of cash or by other means as authorized by the Board of Directors or a
committee established by the Board of Directors. At June 30, 2008, ACT had
granted 2,492,000 common share purchase options under the plan. At June 30,
2008, there were 308,000 options available for grant under this
plan.
  On
December 13, 2004, ACT’s Board of Directors and stockholders approved the
establishment of the 2004 Stock Option Plan II (the “2004 Stock Plan II”). The
total number of common shares available for grant and issuance under the plan
may not exceed 1,301,161 shares, subject to adjustment in the event of certain
recapitalizations, reorganizations and similar transactions. Common stock
purchase options may be exercisable by the payment of cash or by other means as
authorized by the Board of Directors or a committee established by the Board of
Directors. At June 30, 2008, ACT had granted 1,301,161 common share purchase
options under the plan. At June 30, 2008, there were no options available for
grant under this plan.
  On
January 31, 2005, the Company’s Board of Directors approved the
establishment of the 2005 Stock Incentive Plan (the “2005 Plan”), subject to
approval of our shareholders. The total number of common shares available for
grant and issuance under the plan may not exceed 9 million shares, plus an
annual increase on the first day of each of the Company’s fiscal years beginning
in 2006 equal to 5% of the number of shares of our common stock outstanding on
the last day of the immediately preceding fiscal year, subject to adjustment in
the event of certain recapitalizations, reorganizations and similar
transactions. On January 24, 2008, the Company’s shareholders approved an
increase of 25,000,000 shares to the 2005 Plan. Common stock purchase options
may be exercisable by the payment of cash or by other means as authorized by the
Board of Directors or a committee established by the Board of Directors. At June
30, 2008, we had granted 19,958,707 (net of forfeitures) common stock purchase
options and 4,964,010 shares of common stock under the plan. At June 30, 2008,
there were 17,718,017 options available for grant under this
plan.
  28
  Stock
Option Activity
  A summary
of option activity for the six months ended June 30, 2008 is presented
below:
 
 WeightedWeighted
                                  
                                  
                                  Average
                                  
                                  
                                  AggregateAverage
                                  
                                  
                                  Remaining
                                  
                                  
                                  IntrinsicNumber of
                                  
                                  
                                  Exercise
                                  
                                  
                                  Contractual
                                  
                                  
                                  ValueOptions
                                  
                                  
                                  Price
                                  
                                  
                                  Life (in years)
                                  
                                  
                                  
                                  (000)Outstanding, December 31, 2007
                                  
                                  
                                  11,620,971
                                  
                                  
                                  $
                                  0.78
                                  
                                  
                                  
                                  7.16
                                  
                                  
                                  $
                                  255Granted
                                  
                                  
                                  11,875,734
                                  
                                  
                                  $
                                  0.21Exercised
                                  
                                  
                                  (1,200,000
                                  )
                                  
                                  $
                                  0.05Forfeited
                                  
                                  
                                  (7,910,681
                                  )
                                  
                                  $
                                  0.52Outstanding, June 30,
      2008
                                  
                                  
                                  14,386,024
                                  
                                  
                                  $
                                  0.51
                                  
                                  
                                  
                                  8.18
                                  
                                  
                                  $
                                  28Vested and expected to vest at
      June 30, 2008
                                  
                                  
                                  13,444,547
                                  
                                  
                                  $
                                  0.28
                                  
                                  
                                  
                                  9.39
                                  
                                  
                                  $
                                  -Exercisable, June 30,
      2008
                                  
                                  
                                  7,143,896
                                  
                                  
                                  $
                                  0.75
                                  
                                  
                                  
                                  6.94
                                  
                                  
                                  $
                                  28
  The
aggregate intrinsic value in the table above is before applicable income taxes
and is calculated based on the difference between the exercise price of the
options and the quoted price of the Company’s common stock as of the reporting
date.
  A summary
of the status of unvested employee stock options as of June 30, 2008 and changes
during the period then ended, is presented below:
 
 WeightedAverageGrant DateFair ValueShares
                      
                      
                      Per ShareUnvested at January 1,
      2008
                      
                      
                      783,814
                      
                      
                      $
                      0.46Granted
                      
                      
                      11,875,734
                      
                      
                      $
                      0.21Vested
                      
                      
                      (1,278,168
                      )
                      
                      $
                      0.40Forfeited
                      
                      
                      (4,377,758
                      )
                      
                      $
                      0.26Unvested at June 30,
      2008
                      
                      
                      7,003,622
                      
                      
                      $
                      0.26
  As of
June 30, 2008, total unrecognized stock-based compensation expense related to
nonvested stock options was approximately $2,294,000, which is expected to be
recognized over a weighted average period of approximately
9.51 years.
  The
following table summarizes information about stock options outstanding and
exercisable at June 30, 2008.
  29
 
 OptionsOutstanding
                          
                          
                          OptionsExercisableWeighted
                          
                          
                          Weighted
                          
                          
                          
                          
                          
                          WeightedAverage
                          
                          
                          Average
                          
                          
                          
                          
                          
                          AverageExercise
                          
                          Number
                          
                          
                          Remaining
                          
                          
                          Exercise
                          
                          
                          Number
                          
                          
                          ExercisePrice
                          
                          ofShares
                          
                          
                          Life(Years)
                          
                          
                          Price
                          
                          
                          ofShares
                          
                          
                          Price0.05
                          
                          
                          922,000
                          
                          
                          
                          6.12
                          
                          
                          $
                          0.05
                          
                          
                          
                          922,000
                          
                          
                          $
                          0.050.21
                          
                          
                          7,440,000
                          
                          
                          
                          9.61
                          
                          
                          
                          0.21
                          
                          
                          
                          757,414
                          
                          
                          
                          0.210.25
                          
                          
                          1,301,161
                          
                          
                          
                          6.45
                          
                          
                          
                          0.25
                          
                          
                          
                          1,301,161
                          
                          
                          
                          0.250.35
                          
                          
                          65,000
                          
                          
                          
                          8.04
                          
                          
                          
                          0.35
                          
                          
                          
                          31,146
                          
                          
                          
                          0.350.75 - 0.76
                          
                          
                          20,000
                          
                          
                          
                          8.33
                          
                          
                          
                          0.75
                          
                          
                          
                          8,337
                          
                          
                          
                          0.750.85
                          
                          
                          3,455,446
                          
                          
                          
                          6.56
                          
                          
                          
                          0.85
                          
                          
                          
                          3,075,445
                          
                          
                          
                          0.851.35
                          
                          
                          235,000
                          
                          
                          
                          7.81
                          
                          
                          
                          1.35
                          
                          
                          
                          195,323
                          
                          
                          
                          1.352.04 - 2.11
                          
                          
                          295,000
                          
                          
                          
                          7.49
                          
                          
                          
                          2.07
                          
                          
                          
                          229,271
                          
                          
                          
                          2.072.20 - 2.48
                          
                          
                          652,417
                          
                          
                          
                          7.15
                          
                          
                          
                          2.34
                          
                          
                          
                          623,799
                          
                          
                          
                          2.3414,386,024
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          7,143,896
  15.
                  COMMITMENTS
      AND CONTINGENCIES
 
 The
Company entered into a lease for office and laboratory space in Massachusetts
commencing December 2004 and expiring April 2010, and for office space
in Los Angeles, California commencing November 2005 and expiring
May 2008. The Company’s rent at its Los Angeles, California site was on a
month-to-month basis after May 2008. Annual minimum lease payments are as
follows:
  Year
      1
                        
                        $
                        236,304Year
      2
                        
                        
                        196,920Total
                        
                        $
                        433,224
  Rent
expense recorded in the financial statements for the three months ended June 30,
2008 and 2007 was approximately $310,000 and $324,000, respectively. Rent
expense recorded in the financial statements for the six months ended June 30,
2008 and 2007 was approximately $721,000 and $652,000,
respectively.
 
 The
Company has entered into employment contracts with certain executives and
research personnel. The contracts provide for salaries, bonuses and stock option
grants, along with other employee benefits. The employment contracts generally
have no set term and can be terminated by either party. There is a provision for
payments of three months to one year of annual salary as severance if we
terminate a contract without cause, along with the acceleration of certain
unvested stock option grants.
 
 As stated in Note 13,
effective as of April 1, 2008, Jonathan F. Atzen, the Company’s Senior
Vice President, General Counsel and Secretary, resigned from his positions with
the Company and terminated his employment arrangement with the Company. Mr.
Atzen had no disagreements with the Company, its Board of Directors or its
management in any matter relating to the Company’s operations, policies or
practices.
 
 As stated
in Note 13, effective as of March 17, 2008, Ivan Wolkind, the Company's
Senior Vice President—Finance, Administration & Chief Accounting
Officer, resigned from all positions with the Company and voluntarily terminated
his employment arrangement with the Company for personal reasons. Mr. Wolkind had no
disagreements with the Company, its Board of Directors or its management in any
matter relating to the Company’s operations, policies or
practices.
 
 On May
26, 2008, Alan G. Walton, Ph., D.Sc. announced his resignation from the Board of
Directors of the Company, effective immediately.  Dr. Walton had no
disagreements with the Company, its Board of Directors or its management in any
matter relating to the Company’s operations, policies or
practices.
  30
  On May
31, 2008, the Company settled a dispute as a subtenant to its Alameda,
California office for nonpayment of rent to its sublandlord. The sublease
expired on May 31, 2008. As of that date, $445,000 of base rent, additional
rent, and equipment payments, plus late fees and costs due under the sublease
for a grand total of approximately $475,000 remained unpaid during the period
from January 1, 2008 through May 31, 2008. On the date of the lease expiration,
the Company vacated the premises but failed to remove the equipment that
belonged to the Company. Consequently, the Company has agreed to assign all
rights to the equipment to the sublandlord in partial settlement of amounts
owed. Further, the Company has agreed to assign the sublandlord 62.5% of the
Company’s right, title, and interest in all royalties and 65% of subtenant’s
right, title, and interest in all other consideration payable to the Company
under a license agreement with Embryome Sciences, Inc., dated July 10, 2008,
until such time as the sublandlord has received royalty and other payments equal
to $475,000, including the value of the equipment assigned to the sublandlord.
Accordingly, the Company has recorded accrued rents relating to this matter in
the amount of $448,000, which is the $475,000 settlement amount net of the
withheld deposit of $27,000, in the accompanying consolidated balance sheet at
June 30, 2008.
 
 The
Company and its subsidiary Mytogen, Inc. are currently defending themselves
against a civil action brought in Suffolk Superior Court, No. 09-442-B, by their
former landlord at 79/96 Thirteenth Street, Charlestown, Massachusetts, a
property vacated by the Company and Mytogen effective May 31, 2008. In that
action, Alexandria Real Estate-79/96 Charlestown Navy Yard (“ARE”) is alleging
that it has been unable to relet the premises and therefore seeking rent for the
vacated premises since September 2008.  Alexandria is also seeking certain
clean-up and storage expenses.  The Company is defending against the suit,
claiming that ARE had breached the covenant of quiet enjoyment as of when
Mytogen vacated, and that had ARE used reasonable diligence in its efforts to
secure a new tenant, it would have been more successful.  No trial date has
been set. At this
time, management cannot determine the amount of a potential settlement and thus
no amount has been accrued in its financial statements.
 
 16.
                INCOME
      TAXES
 
 The
Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (“FIN 48”), on January 1, 2007. FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition. Due to the fact that the Company has substantial net operating loss
carryforwards, adoption of FIN 48 had no impact on the Company’s beginning
retained earnings, balance sheets, or statements of operations.
  The
Company files income tax returns in the U.S. federal jurisdiction, and various
states and foreign jurisdictions. With few exceptions, the Company is no longer
subject to U.S. federal, state and local income tax examinations by tax
authorities for years before 2001.
  The
Company recognizes accrued interest and penalties on unrecognized tax benefits
in income tax expense. The Company did not have any unrecognized tax benefits as
of June 30, 2008 and 2007. As a result, the Company did not recognize interest
expense, and additionally, did not record any penalties during the three and six
months ended June 30, 2008 and 2007. The Company does not expect that the
amounts of unrecognized tax benefits will change significantly within the next
12 months.
 
 17.
                SUBSEQUENT
      EVENTS
  On July
10, 2008, the Company granted an exclusive license to Embryome Sciences, Inc., a
wholly owned subsidiary of BioTime, Inc., to use its “ACTCellerate” embryonic
stem cell technology and a bank of over 140 diverse progenitor cell lines
derived using that technology. Under the agreement, the Company received an
up-front payment of $470,000, and is eligible to receive an 8% royalty on sales
of products, services, and processes that utilize the licensed technology.
However, in connection with the rent judgment discussed in the following
paragraph, in connection with unpaid rents settled with its landlord, the
Company has assigned the landlord rights and interest to 62.5% of all royalties
on this contract, and 65% of all other consideration payable under this license
agreement until such time that the Company has repaid amounts owed to the
landlord that total $475,000.
  31
  On August
6, 2008, the Company issued a moratorium on amortization of all outstanding
debentures at June 30, 2008 and September 30, 2008. As of April 30, 2009, the
moratorium remains in effect. See Notes 5, 6, 7, 8, and 9 for descriptions of
these debentures. Under the terms of the debenture agreements, the moratorium
constitutes an event of default and thus the debentures all incur default
interest penalties. The debenture agreement requires in the event of default
that the full principle amount of the debentures, together with other amounts
owing in respect thereof, to the date of acceleration shall become, at the
Holder’s election, immediately due and payable in cash. The aggregate amount
payable upon event of default shall be equal to the mandatory default amount.
The mandatory default amount equals the sum of (i) the greater of: (A) 120% of
the principle amount of the debentures to be repaid plus 100% of the accrued and
unpaid interest, or (B) the principle amount of the debentures to be repaid,
divided by the conversion price on (x) the date the mandatory default amount
came due or (y) the date the mandatory default amount is paid in full, whichever
is less, multiplied by the closing price on (x) the date the mandatory default
amount is demanded or otherwise due or (y) the date the mandatory default amount
is paid in full, whichever is greater, and (ii) all other amounts, costs,
expenses and liquidated damages due in respect to the debentures. Commencing 5
days after the occurrence of any event of default that results in the eventual
acceleration of the debentures, the interest rate on the debentures shall accrue
at the rate of 18% per annum.
 
 On
September 19, 2008, the Company was delivered judgment with respect to the
landlord of its Charlestown, Massachusetts site over unpaid lease amounts. The
Company failed to make its monthly lease payments after December 2007, which
constituted an event of default under the lease agreement. Accordingly, the
Company settled with the landlord in total of $1,689,000 for unpaid rent
expenses, attorney fees and damages for unpaid rent incurred through September
9, 2008. The Company settled a portion of amounts owed under the judgment by
disposal of its fixed assets at this site through an assignment of all rights to
these fixed assets, amounting to $228,000. The Company accrued the remaining
$874,000 for the portion of damages incurred from January 1, 2008 through June
30, 2008 in accrued expenses its accompanying balance sheet at June 30, 2008.
The Company has recorded the remaining $587,000 in the three months ended
September 30, 2008 in accrued expenses in it accompanying balance sheet. As of
April 30, 2009, the Company had paid the entire amount under the judgment and no
longer has any obligations with respect to this judgment.
 
 Between
September 29, 2008 and January 20, 2009, the Company was ordered by the Circuit
Court of the Twelfth Judicial District Circuit for Sarasosa County, Florida to
settle certain past due accounts payable. The Company settled the accounts
payable by the issuance of shares of its common stock, based on a formula that
divides the amount due in dollars by the settlement date stock price, and
multiplied by a specified factor. In aggregate, the Company settled $1,108,673
in accounts payable through the issuance of 260,116,283 shares of its common
stock.
 
 On
December 18, 2008, the Company entered into a license agreement with Transition
for certain of its non-core technology. Under the agreement, Transition agreed
to acquire a license to the technology for $3.5 million in cash. As of April 30,
2009, the Company has received the entire $3.5 million in cash under this
agreement. The Company expects to apply the proceeds towards its retinal
epithelium (“RPE”) cells program.
 
 On March
1, 2009, the Company vacated a site in Los Angeles, California and moved to
another site in Los Angeles. The lease term is through February 28, 2010.
Monthly base rent is $2,170.
 
 On March
5, 2009, the Company settled a lawsuit originally brought by Alpha Capital on
February 11, 2009, who is an investor in the 2006, 2007, and 2008 debentures,
and associated with the default on August 6, 2008 on all debentures. In
settlement of the lawsuit, the Company agreed to reduce the conversion price on
convertible debentures held by Alpha Capital to $0.02 per share, effective
immediately, so long as the Company has a sufficient number of authorized shares
to honor the request for conversion.
 
 On March
11, 2009, the Company entered into a $5 million credit facility (“Facility”)
with a life sciences fund. Under the agreement, the proceeds from the Facility
must be used exclusively for the Company to file an investigational new drug
(“IND”) for its RPE program, and will allow the Company to complete both Phase I
and Phase II studies in humans. An IND is required to commence clinical trials.
Under the terms of the agreement, the Company may draw down funds, as needed for
clinical development of the RPE program, from the investor through the issuance
of Series A-1 convertible preferred stock. The preferred stock pays dividends,
in kind of preferred stock, at an annual rate of 10%, matures in four years from
the drawdown date, and is convertible into common stock at $0.75 per share. As
of April 30, 2009, the Company has not drawn down any money on this credit
facility.
  32
  CHA
Bio & Diostech Co., Ltd.
 
 On
December 1, 2008, the Company and CHA Bio & Diostech Co., Ltd. (“CHA”), a leading
Korean-based biotechnology company focused on the development of stem cell
technologies, formed an international joint venture. The new company, Stem Cell
& Regenerative Medicine International, will develop human blood cells and
other clinical therapies based on certain of the Company’s core cell technology.
Under the terms of the agreement, the Company has exclusively licensed to the
joint venture, which is majority owned by CHA, core stem cell technology. The
Company has also contributed certain of its own research and science personnel
to the joint venture. Additionally, the Company has agreed to collaborate with
the joint venture in securing grants to further research and development of its
technology. In return, CHA has agreed to contribute $500,000 in working capital
for the venture as well as paying the Company a license fee of $500,000. As of
April 30, 2009, CHA has paid the Company the entire $500,000 towards payment of
the license fee.
 
 On March
30, 2009, the Company entered into a second license agreement with CHA under
which the Company will license its RPE technology, for the treatment of diseases
of the eye, to CHA for development and commercialization exclusively in Korea.
The Company is eligible to receive up to a total of $1.9 million in fees based
upon the parties achieving certain milestones, including the Company making an
IND submission to the US FDA to commence clinical trials in humans using the
technology. The Company received an up-front fee under the license in the amount
of $750,000. Under the agreement, CHA will incur all of the cost associated with
the RPA clinical trials in Korea. The agreement is part of the joint venture
between the two companies.
  33
 CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
  This
Quarterly Report on Form 10-Q and the materials incorporated herein by
reference contain forward-looking statements that involve risks and
uncertainties. We use words such as “may,” “assumes,” “forecasts,” “positions,”
“predicts,” “strategy,” “will,” “expects,” “estimates,” “anticipates,”
“believes,” “projects,” “intends,” “plans,” “budgets,” “potential,” “continue”
and variations thereof, and other statements contained in quarterly report, and
the exhibits hereto, regarding matters that are not historical facts and are
forward-looking statements. Because these statements involve risks and
uncertainties, as well as certain assumptions, actual results may differ
materially from those expressed or implied by such forward-looking statements.
Factors that could cause actual results to differ materially include, but are
not limited to risks inherent in:  our early stage of development,
including a lack of operating history, lack of profitable operations and the
need for additional capital; the development and commercialization of largely
novel and unproven technologies and products; our ability to protect, maintain
and defend our intellectual property rights; uncertainties regarding our ability
to obtain the capital resources needed to continue research and development
operations and to conduct research, preclinical development and clinical trials
necessary for regulatory approvals; uncertainty regarding the outcome of
clinical trials and our overall ability to compete effectively in a highly
complex, rapidly developing, capital intensive and competitive industry. See
“RISK FACTORS THAT MAY AFFECT OUR BUSINESS” set forth on page 17
herein for a more complete discussion of these factors. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date that they are made. We undertake no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
  Forward-looking
statements include our plans and objectives for future operations, including
plans and objectives relating to our products and our future economic
performance. Assumptions relating to the foregoing involve judgments with
respect to, among other things, future economic, competitive and market
conditions, future business decisions, and the time and money required to
successfully complete development and commercialization of our technologies, all
of which are difficult or impossible to predict accurately and many of which are
beyond our control. Although we believe that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of those
assumptions could prove inaccurate and, therefore, we cannot assure you that the
results contemplated in any of the forward-looking statements contained herein
will be realized. Based on the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of any such statement
should not be regarded as a representation by us or any other person that our
objectives or plans will be achieved.
  Explanatory
Note
  As
previously disclosed in its Form 8-K filed on March 27, 2008, as
amended on April 7, 2008, Advanced Cell Technology, Inc. (the
“Company”) determined that it is required to amend and restate its previously
issued audited consolidated financial statements and other financial information
for the year ended December 31, 2006, and the unaudited consolidated
financial statements for the quarters ended September 30, 2006,
March 31, 2007, June 30, 2007, and September 30, 2007 (the “First
Restatement Periods”) as a result of errors associated with the Company’s
valuation of certain warrants.
  As
previously disclosed in its Form 8-K filed on June 30, 2008, in mid-May 2008 the
Company discovered that the Discounts and Deferred Issuance costs related to its
outstanding debentures had been amortized over a period longer than the weighted
average life of the instruments, with the result that the discounts and debt
issuance costs should have been charged to interest expense on a faster basis
than previously reported. Upon learning of the error the Company has
recalculated the amortization and resulting interest expense.  The Company
also discovered that its calculation of the weighted average shares used in
calculating basic and diluted earnings per share for the three month period
ended March 31, 2007 was in error, with the actual weighted average shares
being approximately 6.2 million higher than reported.  On June 24, 2008,
the Company’s management and the Audit Committee of its Board of Directors
determined that the Company is required to amend and restate its previously
issued audited consolidated financial statements and other financial information
for the year ended December 31, 2007, and the unaudited consolidated
financial statements for the quarters ended March 31, 2007, June 30,
2007, and September 30, 2007 (the “Second Restatement Periods” together
with the First Restatement Periods, the “Relevant Periods”).
  34
  These
restatements are outlined in Note 2 to the Consolidated Financial
Statements.    The reader should not rely on the prior annual and
quarterly filings for the Relevant Periods with the exception of the Company’s
Annual Report on Form 10-KSB originally filed on April 18, 2008 and amended on
June 30, 2008. This Quarterly Report on Form 10-Q corrects these errors for
the periods reported herein.
  35
  ITEM
2.MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
  OVERVIEW
 
 This
Quarterly Report on Form 10-Q contains forward-looking statements that
involve risks and uncertainties. We use words such as “may,” “assumes,”
“forecasts,” “positions,” “predicts,” “strategy,” “will,” “expects,”
“estimates,” “anticipates,” “believes,” “projects,” “intends,” “plans,”
“budgets,” “potential,” “continue” and variations thereof, and other statements
contained in quarterly report, and the exhibits hereto, regarding matters that
are not historical facts and are forward-looking statements. Because these
statements involve risks and uncertainties, as well as certain assumptions,
actual results may differ materially from those expressed or implied by such
forward-looking statements. Factors that could cause actual results to differ
materially include, but are not limited to risks inherent in: our early stage of
development, including a lack of operating history, lack of profitable
operations and the need for additional capital; the development and
commercialization of largely novel and unproven technologies and products; our
ability to protect, maintain, and defend our intellectual property rights:
uncertainties regarding our ability to obtain the capital resources needed to
continue research and development operations and to conduct research,
preclinical development and clinical trials necessary for regulatory approvals;
uncertainty regarding the outcome of clinical trials and our overall ability to
compete effectively in a highly complex, rapidly developing, capital intensive
and competitive industry. See “RISK FACTORS THAT MAY AFFECT OUR BUSINESS”
set forth below on page 17 for a more complete discussion of these factors.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date that they are made. We undertake no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise.
  The
following discussion should be read in conjunction with the financial statements
and notes thereto included in Part I, Item 1 of this Quarterly Report on
Form 10-Q.
  We are a
biotechnology company focused on developing and commercializing human stem cell
technology in the emerging fields of regenerative medicine and stem cell
therapy.
  CRITICAL
ACCOUNTING POLICIES
  Deferred Issuance
Cost— Payments, either in cash or share-based payments, made in
connection with the sale of debentures are recorded as deferred debt issuance
costs and amortized using the effective interest method over the lives of the
related debentures. The weighted average amortization period for deferred debt
issuance costs is 36 months.
  Fair Value
Measurements — For certain financial instruments, including accounts
receivable, accounts payable, accrued expenses, interest payable, advances
payable and notes payable, the carrying amounts approximate fair value due to
their relatively short maturities.
 
 Emerging
Issues Task Force (“EITF”) No. 00-19 “Accounting for Derivative Financial
Instruments Indexed to and Potentially Settled in, a Company’s Own Stock” (“EITF
00-19”), provides a criteria for determining whether freestanding contracts that
are settled in a company’s own stock, including common stock options and
warrants, should be designated as either an equity instrument, an asset or as a
liability under FAS No. 133 “Accounting for Derivative Instruments and
Hedging Activities.” Under the provisions of EITF 00-19, a contract designated
as an asset or a liability must be carried at fair value on a company’s balance
sheet, with any changes in fair value recorded in a company’s results of
operations.  Using the criteria in EITF 00-19, the Company has
determined that its outstanding options and warrants require liability
accounting and records the fair values as warrant and option
derivatives.
  36
  On
January 1, 2008, the Company adopted FAS No. 157, “Fair Value Measurements”
(“FAS 157”). FAS 157 defines fair value, and establishes a three-level valuation
hierarchy for disclosures of fair value measurement that enhances disclosure
requirements for fair value measures. The carrying amounts reported in the
consolidated balance sheets for receivables and current liabilities each qualify
as financial instruments and are a reasonable estimate of their fair values
because of the short period of time between the origination of such instruments
and their expected realization and their current market rate of interest. The
three levels of valuation hierarchy are defined as follows:
 
 ·
              Level
      1 inputs to the valuation methodology are quoted prices for identical
      assets or liabilities in active
markets.
 
 ·
              Level
      2 inputs to the valuation methodology include quoted prices for similar
      assets and liabilities in active markets, and inputs that are observable
      for the asset or liability, either directly or indirectly, for
      substantially the full term of the financial
  instrument.
 
 ·
              Level
      3 inputs to the valuation methodology are unobservable and significant to
      the fair value measurement.
 
 FAS 133,
“Accounting for Derivative Instruments and Hedging Activities” requires
bifurcation of embedded derivative instruments and measurement of fair value for
accounting purposes. In addition, FAS 155, “Accounting for Certain Hybrid
Financial Instruments” requires measurement of fair values of hybrid financial
instruments for accounting purposes. We applied the accounting prescribed in FAS
133 to account for its 2005 Convertible Debenture as described in Note 9 of the
Financial Statements. We applied the accounting prescribed in FAS 155 to
account for the 2006, 2007, February 2008, and April 2008 Convertible Debentures
as described in Notes 5, 6, 7, and 8 of the Financial Statements. In
determining the appropriate fair value, we used Level 2 inputs for our valuation
methodology including Black-Scholes models, Binomial Option Pricing models,
Standard Put Option Binomial models and the net present value of certain penalty
amounts. Derivative liabilities are adjusted to reflect fair value at each
period end, with any increase or decrease in the fair value being recorded in
results of operations as Adjustments to Fair Value of Derivatives. The effects
of interactions between embedded derivatives are calculated and accounted for in
arriving at the overall fair value of the financial instruments. In addition,
the fair values of freestanding derivative instruments such as warrant and
option derivatives are valued using the Black-Scholes model.
 
 At June
30, 2008, we identified the following assets and liabilities that are required
to be presented on the balance sheet at fair value:
  Fair Value
                              
                              
                              Fair Value Measurements at
                                June 30, 2008As of
                              
                              
                              Using Fair Value HierarchyDerivative Liabilities
                              
                              June 30, 2008
                              
                              
                              Level 1
                              
                              
                              Level 2
                              
                              
                              Level 3Conversion
      feature - 2005debenture
                              
                              $
                              5
                              
                              
                              
                              -
                              
                              
                              $
                              5
                              
                              
                              
                              -Anti-dilution
      provision - 2005 debenture
                              
                              
                              20,021
                              
                              
                              
                              -
                              
                              
                              
                              20,021
                              
                              
                              
                              -Default
      provisions - 2005 debenture
                              
                              
                              1,426
                              
                              
                              
                              -
                              
                              
                              
                              1,426
                              
                              
                              
                              -2006
      Convertible debenture and embededderivatives
                              
                              
                              2,445,797
                              
                              
                              
                              -
                              
                              
                              
                              2,445,797
                              
                              
                              
                              -2007
      Convertible debenture and embeddedderivatives
                              
                              
                              8,042,647
                              
                              
                              
                              -
                              
                              
                              
                              8,042,647
                              
                              
                              
                              -February
      2008 Convertible debentures andembedded
      derivatives
                              
                              
                              1,146,941
                              
                              
                              
                              -
                              
                              
                              
                              1,146,941
                              
                              
                              
                              -April
      2008 Convertible debenture andembedded
      derivatives
                              
                              
                              4,429,544
                              
                              
                              
                              -
                              
                              
                              
                              4,429,544
                              
                              
                              
                              -Warrant
      and option derivatives
                              
                              
                              7,504,525
                              
                              
                              
                              -
                              
                              
                              
                              7,504,525
                              
                              
                              
                              -$
                              23,590,906
                              
                              
                              
                              -
                              
                              
                              $
                              23,590,906
                              
                              
                              
                              -
 
 For the
three months ended June 30, 2008 and 2007, we recognized a gain of $7,206,905
and $23,247,555, respectively, for the changes in the valuation of the
aforementioned liabilities. For the six months ended June 30, 2008 and 2007, we
recognized a gain of $8,227,176 and $11,614,037, respectively, for the changes
in the valuation of the aforementioned liabilities.
  37
  We did
not identify any other non-recurring assets and liabilities that are required to
be presented in the consolidated balance sheets at fair value in accordance with
FAS 157.
 
 In
February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities” (“FAS 159”). FAS 159 permits entities to
choose to measure many financial assets and financial liabilities at fair value.
Unrealized gains and losses on items for which the fair value option has been
elected are reported in earnings. FAS 159 is effective as of the beginning of an
entity’s first fiscal year that begins after November 15, 2007. We adopted FAS
159 on January 1, 2008. We chose not to elect the option to measure the fair
value of eligible financial assets and liabilities.
  Revenue
Recognition— Our revenues are generated from license and research
agreements with collaborators. Licensing revenue is recognized on a
straight-line basis over the shorter of the life of the license or the estimated
economic life of the patents related to the license. Deferred revenue represents
the portion of the license and other payments received that has not been earned.
Costs associated with the license revenue are deferred and recognized over the
same term as the revenue. Reimbursements of research expense pursuant to grants
are recorded in the period during which collection of the reimbursement becomes
assured, because the reimbursements are subject to approval.
  Stock Based
Compensation— Effective January 1, 2006, we adopted the fair value
recognition provisions of FAS 123(R), using the modified-prospective
transition method. Under this method, stock-based compensation expense is
recognized in the consolidated financial statements for stock options granted,
modified or settled after the adoption date. In accordance with FAS 123(R),
the unamortized portion of options granted prior to the adoption date is
recognized into earnings after adoption. Results for prior periods have not been
restated, as provided for under the modified-prospective method.
  Under
FAS 123(R), stock-based compensation expense recognized is based on the
value of the portion of share-based payment awards that are ultimately expected
to vest during the period. Based on this, our stock-based compensation is
reduced for estimated forfeitures at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those
estimates.
  The fair
value of each stock option is estimated on the date of grant using the
Black-Scholes option pricing model. Assumptions relative to volatility and
anticipated forfeitures are determined at the time of grant with the following
weighted average assumptions used in the three and six months ended June 30,
2008:
  Expected life in years
                    
                    
                    4.0Volatility
                    
                    
                    148
                    %Risk
      free interest rate
                    
                    
                    2.50
                    %Expected
      dividends
                    
                    NoneExpected
      forfeitures
                    
                    
                    13
                    %
  The
assumptions used in the Black-Scholes models referred to above are based upon
the following data: (1) The expected life of the option is estimated by
considering the contractual term of the option, the vesting period of the
option, the employees’ expected exercise behavior and the post-vesting employee
turnover rate. (2) The expected stock price volatility of the underlying
shares over the expected term of the option is based upon historical share price
data. (3) The risk free interest rate is based on published U.S. Treasury
Department interest rates for the expected terms of the underlying options.
(4) Expected dividends are based on historical dividend data and expected
future dividend activity. (5) The expected forfeiture rate is based on
historical forfeiture activity and assumptions regarding future forfeitures
based on the composition of current grantees.
  In
accordance with FAS 123(R), the benefits of tax deductions in excess of the
compensation cost recognized for options exercised during the period are
classified as financing cash inflows rather than operating cash
inflows.
  38
  Recent
Accounting Pronouncements
 
 In
September 2006, the FASB issued FAS 157 “Fair Value Measurements.”
This Statement defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles (GAAP), and expands
disclosures about fair value measurements. This Statement applies under other
accounting pronouncements that require or permit fair value measurements, the
Board having previously concluded in those accounting pronouncements that fair
value is the relevant measurement attribute. Accordingly, this Statement does
not require any new fair value measurements. However, for some entities, the
application of this Statement will change current practice. This Statement is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. Earlier
application is encouraged, provided that the reporting entity has not yet issued
financial statements for that fiscal year, including financial statements for an
interim period within that fiscal year.  We have adopted FAS 157
beginning January 1, 2008 and do not believe the adoption had a material
impact on our financial position, results of operations or cash
flows.
 
 In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business
Combinations.” FAS No. 141 (Revised 2007) changes how a reporting
enterprise accounts for the acquisition of a business. FAS No. 141 (Revised
2007) requires an acquiring entity to recognize all the assets acquired and
liabilities assumed in a transaction at the acquisition-date fair value, with
limited exceptions, and applies to a wider range of transactions or events. FAS
No. 141 (Revised 2007) is effective for fiscal years beginning on or after
December 15, 2008 and early adoption and retrospective application is
prohibited.  We believe adopting FAS No. 141R will significantly
impact our financial statements for any business combination completed after
December 31, 2008.
 
 In
December 2007, the FASB issued FAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements”, which is an amendment of Accounting Research
Bulletin (“ARB”) No. 51.  This statement clarifies that a
noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements.  This statement changes the way the consolidated
income statement is presented, thus requiring consolidated net income to be
reported at amounts that include the amounts attributable to both parent and the
noncontrolling interest.  This statement is effective for the fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008.  Based on current conditions, we do not expect the
adoption of FAS 160 to have a significant impact on our results of operations or
financial position.
  In
February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities”. This Statement permits entities to choose to
measure many financial assets and financial liabilities at fair value.
Unrealized gains and losses on items for which the fair value option has been
elected are reported in earnings. FAS No. 159 is effective as of the beginning
of an entity’s first fiscal year that begins after November 15, 2007. The
Company adopted FAS No. 159 on January 1, 2008. We chose not to elect the option
to measure the fair value of eligible financial assets and
liabilities.
  In June
2007, the FASB issued FASB Staff Position No. EITF 07-3, “Accounting for
Nonrefundable Advance Payments for Goods or Services Received for use in Future
Research and Development Activities” (“FSP EITF 07-3”), which addresses whether
nonrefundable advance payments for goods or services that used or rendered for
research and development activities should be expensed when the advance payment
is made or when the research and development activity has been performed.
Management is currently evaluating the effect of this pronouncement on financial
statements.
  In June
2008, the FASB issued Emerging Issues Task Force Issue 07-5 “Determining whether
an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock” (“EITF
No. 07-5”). This Issue is effective for financial statements issued for fiscal
years beginning after December 15, 2008, and interim periods within those fiscal
years. Early application is not permitted. Paragraph 11(a) of Statement of
Financial Accounting Standard No 133 “Accounting for Derivatives and Hedging
Activities” (“FAS 133”) specifies that a contract that would otherwise meet the
definition of a derivative but is both (a) indexed to the Company’s own
stock and (b) classified in stockholders’ equity in the statement of
financial position would not be considered a derivative financial instrument.
EITF No.07-5 provides a new two-step model to be applied in determining whether
a financial instrument or an embedded feature is indexed to an issuer’s own
stock and thus able to qualify for the FAS 133 paragraph 11(a) scope exception.
We believe adopting this statement will not have a material impact on the
financial statements.
  39
  In April
2008, the FASB issued FASB Staff Position No. FAS 142-3 “Determination of the
useful life of Intangible Assets”, (“FSP FAS 142-3”) which amends the
factors a company should consider when developing renewal assumptions used to
determine the useful life of an intangible asset under FAS 142. This Issue is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. FAS 142
requires companies to consider whether renewal can be completed without
substantial cost or material modification of the existing terms and conditions
associated with the asset. FSP 142-3 replaces the previous useful life criteria
with a new requirement—that an entity consider its own historical experience in
renewing similar arrangements. If historical experience does not exist then the
Company would consider market participant assumptions regarding renewal
including 1) highest and best use of the asset by a market participant, and 2)
adjustments for other entity-specific factors included in FAS 142. We are
currently evaluating the impact that adopting FSP FAS 142-3 will have on the
financial statements
 
 In May
2008, the FASB issued FAS 162, “The Hierarchy of Generally Accepted Accounting
Principles.” This Statement identifies the sources of accounting principles and
the framework for selecting the principles to be used in the preparation of
financial statements of nongovernmental entities that are presented in
conformity with generally accepted accounting principles (GAAP) in the United
States (the GAAP hierarchy). We are currently evaluating the impact that
adopting FAS No. 162 will have on the financial statements.
 
 In May
2008, the FASB issued FAS 163, “Accounting for Financial Guarantee Insurance
Contracts, an interpretation of FASB Statement No. 60.” The scope of this
Statement is limited to financial guarantee insurance (and reinsurance)
contracts, as described in this Statement, issued by enterprises included within
the scope of Statement 60. Accordingly, this Statement does not apply to
financial guarantee contracts issued by enterprises excluded from the scope of
Statement 60 or to some insurance contracts that seem similar to financial
guarantee insurance contracts issued by insurance enterprises (such as mortgage
guaranty insurance or credit insurance on trade receivables). This Statement
also does not apply to financial guarantee insurance contracts that are
derivative instruments included within the scope of FASB Statement No. 133,
“Accounting for Derivative Instruments and Hedging Activities.” This Statement
will not have an impact on our financial statements.
 
 In June
2008, FASB issued EITF 08-4, “Transition Guidance for Conforming Changes to
Issue No. 98-5”. The objective of EITF 08-4 is to provide transition
guidance for conforming changes made to EITF 98-5, “Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios”, that result from EITF 00-27 “Application of Issue No. 98-5
to Certain Convertible Instruments”, and FAS 150, “Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity”. This
Issue is effective for financial statements issued for fiscal years ending after
December 15, 2008. Early application is permitted. We are currently
evaluating the impact that adopting EITF 08-4 will have on the financial
statements.
 
 On
October 10, 2008, the FASB issued FSP 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active,” which clarifies
the application of FAS 157 in a market that is not active and provides an
example to illustrate key considerations in determining the fair value of a
financial asset when the market for that financial asset is not active. FSP
157-3 became effective on October 10, 2008, and its adoption will not have a
material impact on the Company’s financial position or results for the year
ended December 31, 2008.
 
 In
January 2009, the FASB issued FSP EITF 99-20-1, “Amendments to the Impairment
Guidance of EITF Issue No. 99-20, and EITF Issue No. 99-20, Recognition of
Interest Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets” (“FSP EITF 99-20-1”). FSP EITF 99-20-1 changes the
impairment model included within EITF 99-20 to be more consistent with the
impairment model of SFAS No. 115. FSP EITF 99-20-1 achieves this by amending the
impairment model in EITF 99-20 to remove its exclusive reliance on “market
participant” estimates of future cash flows used in determining fair value.
Changing the cash flows used to analyze other-than-temporary impairment from the
“market participant” view to a holder’s estimate of whether there has been a
“probable” adverse change in estimated cash flows allows companies to apply
reasonable judgment in assessing whether an other-than-temporary impairment has
occurred. The adoption of FSP EITF 99-20-1 will not have a material impact on
our consolidated financial statements.
  40
  RESULTS
OF OPERATIONS
 
 Comparison
of Three Months Ended June 30, 2008 and 2007
 
 Three months ended June 30,
                                    
                                    
                                    Three months ended June30,2008
                                    
                                    
                                    2007Amount
                                    
                                    
                                    % of
                                      Revenue
                                    
                                    
                                    Amount
                                    
                                    
                                    % of
                                      RevenueREVENUE
                                    
                                    $
                                    174,388
                                    
                                    
                                    
                                    100.0
                                    %
                                    
                                    $
                                    274,326
                                    
                                    
                                    
                                    100.0
                                    %COST
      OF REVENUE
                                    
                                    
                                    120,186
                                    
                                    
                                    
                                    68.9
                                    %
                                    
                                    
                                    110,318
                                    
                                    
                                    
                                    63.3
                                    %GROSS
      PROFIT
                                    
                                    
                                    54,202
                                    
                                    
                                    
                                    31.1
                                    %
                                    
                                    
                                    164,008
                                    
                                    
                                    
                                    94.0
                                    %RESEARCH
      AND DEVELOPMENT EXPENSES AND GRANT REIMBURSEMENTS
                                    
                                    
                                    2,786,870
                                    
                                    
                                    
                                    1598.1
                                    %
                                    
                                    
                                    2,819,245
                                    
                                    
                                    
                                    1616.7
                                    %GENERAL
      AND ADMINSTRATIVE EXPENSES
                                    
                                    
                                    1,840,116
                                    
                                    
                                    
                                    1055.2
                                    %
                                    
                                    
                                    1,246,180
                                    
                                    
                                    
                                    714.6
                                    %OTHER
      INCOME (EXPENSE)
                                    
                                    
                                    (1,016,633
                                    )
                                    
                                    
                                    -583.0
                                    %
                                    
                                    
                                    17,103,923
                                    
                                    
                                    
                                    9808.0
                                    %NET
      INCOME (LOSS)
                                    
                                    $
                                    (5,589,417
                                    )
                                    
                                    
                                    -3205.2
                                    %
                                    
                                    $
                                    13,202,506
                                    
                                    
                                    
                                    7570.8
                                    %
 
 Revenues
 
 Revenues
for the three months ended June 30, 2008 and 2007 were $174,388 and $274,326,
respectively. These amounts relate primarily to license fees and royalties
collected that are being amortized over the period of the license granted, and
are therefore typically consistent between periods. The decrease in revenue
during the three months ended June 30, 2008 was due to fewer new licenses being
granted as compared to the three months ended June 30, 2007.
  Research
and Development Expenses and Grant Reimbursements
 
 Research
and development expenses (“R&D”) for the three months ended June 30, 2008
and 2007 were $2,786,870 and $2,828,842 respectively, a decrease of
$41,972.  R&D consists mainly of facility costs, payroll and payroll
related expenses, research supplies and costs incurred in connection with
specific research grants, and for scientific research. The minor decline in
R&D expenditures during the three months ended June 30, 2008 as compared to
the same period in 2007 is primarily due to the fact that we closed our
Charlestown, Massachusetts and Alameda, California facilities at the end of May
2008.
  Our
research and development expenses consist primarily of costs associated with
basic and pre-clinical research exclusively in the field of human stem cell
therapies and regenerative medicine, with focus on development of our
technologies in cellular reprogramming, reduced complexity applications, and
stem cell differentiation. These expenses represent both pre-clinical
development costs and costs associated with non-clinical support activities such
as quality control and regulatory processes. The cost of our research and
development personnel is the most significant
category of expense; however, we also incur expenses with third parties,
including license agreements, sponsored research programs and consulting
expenses.
  We do not
segregate research and development costs by project because our research is
focused exclusively on human stem cell therapies as a unitary field of study.
Although we have three principal areas of focus for our research, these areas
are completely intertwined and have not yet matured to the point where they are
separate and distinct projects. The intellectual property, scientists and other
resources dedicated to these efforts are not separately allocated to individual
projects, but rather are conducting our research on an integrated
basis.
  41
  We expect
that research and development expenses will continue to increase in the
foreseeable future as we add personnel, expand our pre-clinical research, begin
clinical trial activities, and increase our regulatory compliance capabilities.
The amount of these increases is difficult to predict due to the uncertainty
inherent in the timing and extent of progress in our research programs, and
initiation of clinical trials. In addition, the results from our basic research
and pre-clinical trials, as well as the results of trials of similar
therapeutics under development by others, will influence the number, size and
duration of planned and unplanned trials. As our research efforts mature, we
will continue to review the direction of our research based on an assessment of
the value of possible commercial applications emerging from these efforts. Based
on this continuing review, we expect to establish discrete research programs and
evaluate the cost and potential for cash inflows from commercializing products,
partnering with others in the biotechnology or pharmaceutical industry, or
licensing the technologies associated with these programs to third
parties.
  We
believe that it is not possible at this stage to provide a meaningful estimate
of the total cost to complete our ongoing projects and bring any proposed
products to market. The use of human embryonic stem cells as a therapy is an
emerging area of medicine, and it is not known what clinical trials will be
required by the FDA in order to gain marketing approval. Costs to complete could
vary substantially depending upon the projects selected for development, the
number of clinical trials required and the number of patients needed for each
study. It is possible that the completion of these studies could be delayed for
a variety of reasons, including difficulties in enrolling patients, delays in
manufacturing, incomplete or inconsistent data from the pre-clinical or clinical
trials, and difficulties evaluating the trial results. Any delay in completion
of a trial would increase the cost of that trial, which would harm our results
of operations. Due to these uncertainties, we cannot reasonably estimate the
size, nature nor timing of the costs to complete, or the amount or timing of the
net cash inflows from our current activities. Until we obtain further relevant
pre-clinical and clinical data, we will not be able to estimate our future
expenses related to these programs or when, if ever, and to what extent we will
receive cash inflows from resulting products.
  Grant
reimbursements for the three months ended June 30, 2008 and 2007 were $0 and
$9,597, respectively. The grant reimbursement received during the three months
ended June 30, 2007 was from the Small Business Technology Transfer Program. We
did not receive grant reimbursements during the three months ended June 30,
2008.
  General
and Administrative Expenses
 
 General
and administrative expenses for the three months ended June 30, 2008 and 2007
were $1,840,116 and $1,246,180 respectively, an increase of $593,936. 
This expense increase was primarily a result of an increase in legal,
accounting, investor relations services and other professional costs incurred
during the three months ended June 30, 2008.
  Other
Income (Expense)
 
 Other
income (expense), net, for the three months ended June 30, 2008 and 2007 were
($1,016,633) and $17,103,923 respectively. The change in net other income
(expense) in the three months ended June 30, 2008, compared to that of the
earlier period, relates primarily to adjustments to fair value of derivatives
related to the Convertible Debenture financings and the charges related to
issuance and repricing of Convertible Debentures. Interest income in the three
months ended June 30, 2008 was lower than in the three months ended June 30,
2007 due to the lower cash balances held in interest-bearing deposits during the
periods. The increase in interest expense in the three months ended June 30,
2008, compared to the earlier period relates primarily to interest recorded in
connection with the convertible debentures, which decreased as principal
balances declined.
  Net
Income (Loss)
 
 Net
income (loss) for the three months periods ended June 30, 2008 and 2007 was
($5,589,417) and $13,202,506, respectively. The change in net income (loss) in
the current period is the result of changes to the fair value of derivatives,
charges related to issuance of Convertible Debentures along with increased
general and administrative and research and development expenses, as well as
decreased grant reimbursements.
  42
  Comparison
of Six Months Ended June 30, 2008 and 2007
 
 Six months ended June 30,
                                      
                                      
                                      Six months ended June 30,2008
                                      
                                      
                                      2007% of
                                      
                                      
                                      
                                      
                                      
                                      % ofAmount
                                      
                                      
                                      Revenue
                                      
                                      
                                      Amount
                                      
                                      
                                      RevenueREVENUE
                                      
                                      $
                                      298,731
                                      
                                      
                                      
                                      100.0
                                      %
                                      
                                      $
                                      398,669
                                      
                                      
                                      
                                      100.0
                                      %COST
      OF REVENUE
                                      
                                      
                                      310,914
                                      
                                      
                                      
                                      178.3
                                      %
                                      
                                      
                                      171,754
                                      
                                      
                                      
                                      98.5
                                      %GROSS
      PROFIT
                                      
                                      
                                      (12,183
                                      )
                                      
                                      
                                      -7.0
                                      %
                                      
                                      
                                      226,915
                                      
                                      
                                      
                                      130.1
                                      %RESEARCH
      AND DEVELOPMENT EXPENSES ANDGRANT
    REIMBURSEMENTS
                                      
                                      
                                      6,649,253
                                      
                                      
                                      
                                      3812.9
                                      %
                                      
                                      
                                      6,410,751
                                      
                                      
                                      
                                      3676.1
                                      %GENERAL
      AND ADMINSTRATIVE EXPENSES
                                      
                                      
                                      3,565,938
                                      
                                      
                                      
                                      2044.8
                                      %
                                      
                                      
                                      2,987,284
                                      
                                      
                                      
                                      1713.0
                                      %OTHER
      INCOME (EXPENSE)
                                      
                                      
                                      (4,881,702
                                      )
                                      
                                      
                                      -2799.3
                                      %
                                      
                                      
                                      (2,367,375
                                      )
                                      
                                      
                                      -1357.5
                                      %NET
      LOSS
                                      
                                      $
                                      (15,109,076
                                      )
                                      
                                      
                                      -8664.1
                                      %
                                      
                                      $
                                      (11,538,495
                                      )
                                      
                                      
                                      -6616.6
                                      %
  Revenues
 
 Revenues
for the six months ended June 30, 2008 and 2007 were $298,731 and $398,669,
respectively. These amounts relate primarily to license fees and royalties
collected that are being amortized over the period of the license granted, and
are therefore typically consistent between periods. The decrease in revenue
during the six months ended June 30, 2008 was due to fewer new licenses being
granted as compared to the six months ended June 30, 2007.
  Research
and Development Expenses and Grant Reimbursements
 
 Research
and development expenses (“R&D”) for the six months ended June 30, 2008 and
2007 were $6,754,422 and $6,477,930 respectively, an increase of
$276,492.  R&D consists mainly of facility costs, payroll and payroll
related expenses, research supplies and costs incurred in connection with
specific research grants, and for scientific research. The increase in expenses
in the current period relates largely to the Company’s Mytogen
subsidiary.
  Our
research and development expenses consist primarily of costs associated with
basic and pre-clinical research exclusively in the field of human stem cell
therapies and regenerative medicine, with focus on development of our
technologies in cellular reprogramming, reduced complexity applications, and
stem cell differentiation. These expenses represent both pre-clinical
development costs and costs associated with non-clinical support activities such
as quality control and regulatory processes. The cost of our research and
development personnel is the most significant
category of expense; however, we also incur expenses with third parties,
including license agreements, sponsored research programs and consulting
expenses.
  We do not
segregate research and development costs by project because our research is
focused exclusively on human stem cell therapies as a unitary field of study.
Although we have three principal areas of focus for our research, these areas
are completely intertwined and have not yet matured to the point where they are
separate and distinct projects. The intellectual property, scientists and other
resources dedicated to these efforts are not separately allocated to individual
projects, but rather are conducting our research on an integrated
basis.
  43
  We expect
that research and development expenses will continue to increase in the
foreseeable future as we add personnel, expand our pre-clinical research, begin
clinical trial activities, and increase our regulatory compliance capabilities.
The amount of these increases is difficult to predict due to the uncertainty
inherent in the timing and extent of progress in our research programs, and
initiation of clinical trials. In addition, the results from our basic research
and pre-clinical trials, as well as the results of trials of similar
therapeutics under development by others, will influence the number, size and
duration of planned and unplanned trials. As our research efforts mature, we
will continue to review the direction of our research based on an assessment of
the value of possible commercial applications emerging from these efforts. Based
on this continuing review, we expect to establish discrete research programs and
evaluate the cost and potential for cash inflows from commercializing products,
partnering with others in the biotechnology or pharmaceutical industry, or
licensing the technologies associated with these programs to third
parties.
  We
believe that it is not possible at this stage to provide a meaningful estimate
of the total cost to complete our ongoing projects and bring any proposed
products to market. The use of human embryonic stem cells as a therapy is an
emerging area of medicine, and it is not known what clinical trials will be
required by the FDA in order to gain marketing approval. Costs to complete could
vary substantially depending upon the projects selected for development, the
number of clinical trials required and the number of patients needed for each
study. It is possible that the completion of these studies could be delayed for
a variety of reasons, including difficulties in enrolling patients, delays in
manufacturing, incomplete or inconsistent data from the pre-clinical or clinical
trials, and difficulties evaluating the trial results. Any delay in completion
of a trial would increase the cost of that trial, which would harm our results
of operations. Due to these uncertainties, we cannot reasonably estimate the
size, nature nor timing of the costs to complete, or the amount or timing of the
net cash inflows from our current activities. Until we obtain further relevant
pre-clinical and clinical data, we will not be able to estimate our future
expenses related to these programs or when, if ever, and to what extent we will
receive cash inflows from resulting products.
  Grant
reimbursements for the six months ended June 30, 2008 and 2007 were $105,169 and
$67,179, respectively, from the Small Business Technology Transfer
Program.
  General
and Administrative Expenses
 
 General
and administrative expenses for the six months ended June 30, 2008 and 2007 were
$3,565,938 and $2,987,284, respectively, a decrease of $578,654.  This
expense increase was primarily a result of an increase in legal, accounting,
investor relations services, and other professional costs incurred during the
six months ended June 30, 2008.
  Other
Income (Expense)
 
 Other
income (expense), net, for the six months ended June 30, 2008 and 2007 was
($4,881,702) and ($2,367,375), respectively. The change in net other income
(expense) in the six months ended June 30, 2008, compared to that of the earlier
period, relates primarily to interest expense related to the Convertible
Debenture financings and the Charges related to issuance and repricing of
Convertible Debentures. Interest income in the six months ended June 30, 2008
was lower than in the six months ended June 30, 2007 due to the lower cash
balances held in interest-bearing deposits during the periods. The decrease in
interest expense in the six months ended June 30, 2008, compared to the earlier
period relates primarily to interest recorded in connection with the convertible
debentures, which decreased as principal balances declined.
  Net
Loss
 
 Net loss
for the six months periods ended June 30, 2008 and 2007 was $15,109,076 and
$11,538,495, respectively. The change in loss in the current period is the
result of changes to the fair value of derivatives, interest charges related to
convertible debentures and charges related to issuance of Convertible Debentures
along with increased general and administrative and research and development
expenses, as well as decreased grant reimbursements.
  44
  LIQUIDITY
AND CAPITAL RESOURCES
  Cash
Flows
  The
following table sets forth a summary of our cash flows for the periods indicated
below:
 
 Six months ended June 30,2008
                            
                            
                            2007Net
      cash used in operating activities
                            
                            $
                            (3,754,418
                            )
                            
                            $
                            (7,522,258
                            )Net
      cash used in investing activities
                            
                            
                            (168,549
                            )
                            
                            
                            (49,139
                            )Net
      cash provided by (used in) financing activities
                            
                            
                            2,790,122
                            
                            
                            
                            (348,352
                            )Net
      decrease in cash and cash equivalents
                            
                            
                            (1,132,845
                            )
                            
                            
                            (7,919,749
                            )Cash
      and cash equivalents at the end of the period
                            
                            $
                            33,271
                            
                            
                            $
                            769,587
 
 Operating
Activities
 
 Our net
cash used in operating activities during the six months ended June 30, 2008 and
2007 was $3,754,418 and $7,522,258, respectively. Cash used operating activities
decreased during the current period primarily due to a decrease in cash and cash
equivalents available for use during the period.
 
 Cash
Flows from Investing and Financing Activities
 
 Cash used
in investing activities during the six months ended June 30, 2008 and 2007 was
$168,549 and $49,139, respectively. Our cash used in investing activities during
each of the two respective periods are primarily attributed to purchases of
property and equipment. Cash flows provided by financing activities during the
six months ended June 30, 2008 consisted of proceeds of $2,812,432 from the
issuance of convertible debentures.  During the six months ended June
30, 2007, we made payments of $139,123 on convertible debentures and also made a
settlement payment of $170,249.
 
 We are
financing our operations primarily from the following activities:
 
 ·
              On
      April 4, 2008, we released closing escrow on the issuance of
      $4,038,880 of its amortizing senior secured convertible debentures and
      associated warrants. The net cash and cash in-kind received by the Company
      related to this financing was
$2,332,431.
 ·
              On
      April 30, 2008 we received a one time payment of $300,000 from Terumo
      International which extended their ability to commence a Phase I Clinical
      Trial in Japan by one year.
 ·
              On
      June 17, 2008, the Company drew down $60,000 and received $50,000
      (reflecting a 16.66% original issue discount) under Note B described in
      Note 6 to the financial statements.
 ·
              On
      July 10, 2008, we granted an exclusive license to Embryome Sciences, Inc.,
      a wholly owned subsidiary of BioTime, Inc., to use its “ACTCellerate”
      embryonic stem cell technology and a bank of over 140 diverse progenitor
      cell lines derived using that technology. Under the agreement, we received
      an up-front payment of $470,000, and are eligible to receive an 8% royalty
      on sales of products, services, and processes that utilize the licensed
      technology.
 ·
              Between
      September 29, 2008 and January 20, 2009, we settled certain past due
      accounts payable by the issuance of shares of its common stock. In
      aggregate, we settled $1,108,673 in accounts payable through the issuance
      of 260,116,283 shares of our common
stock.
 ·
              On
      December 1, 2008, we formed an international joint venture with CHA Bio
      & Diostech Co., Ltd. (“CHA”), a leading
      Korean-based biotechnology company focused on the development of stem cell
      technologies. CHA has agreed to contribute $500,000 in working capital for
      the venture as well as paying the Company a license fee of $500,000. As of
      April 30, 2009, CHA has paid the Company the entire $500,000 towards
      payment of the license fee.
 ·
              On
      December 18, 2008, we entered into a license agreement with an
      Ireland-based investor, Transition Holdings Inc. (“Transition”), for
      certain of our non-core technology. Under the agreement, Transition agreed
      to acquire a license to the technology for $3.5 million in cash. As of
      April 30, 2009, we have received the entire $3.5 million in cash under
      this agreement. We expect to apply the proceeds towards its retinal
      epithelium (“RPE”) cells
program.
  45
  ·
              On
      March 30, 2009, we entered into a second license agreement with CHA under
      which we will license our RPE technology, for the treatment of diseases of
      the eye, to CHA for development and commercialization exclusively in
      Korea. We are eligible to receive up to a total of $1.9 million in fees
      based upon the parties achieving certain milestones, including us making
      an IND submission to the US FDA to commence clinical trials in humans
      using the technology. We received an up-front fee under the license in the
      amount of $750,000. Under the agreement, CHA will incur all of the cost
      associated with the RPA clinical trials in Korea. The agreement is part of
      the joint venture between the two
companies.
 
 To a
substantially lesser degree, financing of our operations is provided through
grant funding, payments received under license agreements, and interest earned
on cash and cash equivalents.
  With the
exception of 2002, when we sold certain assets of a subsidiary resulting in a
gain for the year, we have incurred substantial net losses each year since
inception as a result of research and development and general and administrative
expenses in support of our operations. We anticipate incurring substantial net
losses in the future.
  Our cash
and cash equivalents are limited. In the short term, we will require substantial
additional funding prior to July 31, 2008 in order to maintain our current
level of operations.  If we are unable to raise additional funding, we will
be forced to either substantially scale back our business operations or curtail
our business operations entirely.
  On a longer term basis, we have no
expectation of generating any meaningful revenues from our product candidates
for a substantial period of time and will rely on raising funds in capital
transactions to finance our research and development programs.  Our future
cash requirements will depend on many factors, including the pace and scope
of our research and development programs, the costs involved in filing,
prosecuting and enforcing patents, and other costs associated with
commercializing our potential products. We intend to seek additional funding
primarily through public or private financing transactions, and, to a lesser
degree, new licensing or scientific collaborations, grants from governmental or
other institutions, and other related transactions.  If we are unable to
raise additional funds, we will be forced to either scale back or business
efforts or curtail our business activities entirely.  We anticipate that
our available cash and expected income will be sufficient to finance most of our
current activities for at least four months from the date we file these
financial statements, although certain of these activities and related personnel
may need to be reduced.  We cannot assure you that public or private
financing or grants will be available on acceptable terms, if at all. 
Several factors will affect our ability to raise additional funding, including,
but not limited to, the volatility of our Common
Stock.
  RISK
FACTORS THAT MAY AFFECT OUR BUSINESS
  Our
business is subject to various risks, included but not limited to those
described below. You should carefully consider these factors, together with all
the other information disclosed in this Quarterly Report on Form 10-Q. Any
of these risks could materially adversely affect our business, operating results
and financial condition.
  Risks
Relating to Our Early Stage of Development
  We have a limited operating history
on which potential investors may evaluate our operations and prospects for
profitable operations.  We have a limited operating history on which
a potential investor may base an evaluation of us and our prospects. If we are
unable to begin and sustain profitable operations, investors may lose their
entire investment in us. Our human embryonic stem cell programs are in the
pre-clinical stage, and our adult stem cell myoblast program has completed
Phase I and Ib FDA clinical trials. Our prospects must be considered
speculative in light of the risks, expenses and difficulties frequently
encountered by companies in their early stages of development, particularly in
light of the uncertainties relating to the new, competitive and rapidly evolving
markets in which we anticipate we will operate. To attempt to address these
risks, we must, among other things, further develop our technologies, products
and services, successfully implement our research, development, marketing and
commercialization strategies, respond to competitive developments and attract,
retain and motivate qualified personnel. A substantial risk is involved in
investing in us because, as an early stage company,
  46
  ·
              we
      have fewer resources than an established
  company,
 
 ·
              our
      management may be more likely to make mistakes at such an early stage,
      and
 
 ·
              we
      may be more vulnerable operationally and financially to any mistakes that
      may be made, as well as to external factors beyond our
      control.
 
  These
difficulties are compounded by our heavy dependence on emerging and sometimes
unproven technologies. In addition, some of our significant potential revenue
sources involve ethically sensitive and controversial issues which could become
the subject of legislation or regulations that could materially restrict our
operations and, therefore, harm our financial condition, operating results and
prospects for bringing our investors a return on their investment.
  We have a history of operating
losses, and we cannot assure you that we will achieve future revenues or
operating profits.  We have generated modest revenue to date from
our operations. Historically, we have had net operating losses each year since
our inception. We have limited current potential sources of revenue from license
fees and product development revenues, and we cannot assure you that we will be
able to develop such revenue sources or that our operations will become
profitable, even if we are able to commercialize our technologies or any
products or services developed from those technologies. If we continue to suffer
losses as we have in the past, investors may not receive any return on their
investment and may lose their entire investment.
  Although
we have revenues from license fees and royalties, we have no commercially
marketable products and no immediate ability to generate revenue from commercial
products, nor any assurance of being able to develop our technologies for
commercial applications. As a result, we may never be able to operate
profitably. We are just beginning to identify products available for
pre-clinical trials and may not receive significant revenues from commercial
sales of our products for the next several years, if at all, although we do
generate revenues from licensing activities. We have marketed only a limited
amount of services based on our technologies and have little experience in doing
so. Our technologies and any potential products or services that we may develop
will require significant additional effort and investment prior to material
commercialization and, in the case of any biomedical products, pre-clinical and
clinical testing and regulatory approvals. We cannot assure you that we will be
able to develop any such technologies or any products or services, or that such
technologies, products or services will prove to be safe and efficacious in
clinical trials, meet applicable regulatory standards, be capable of being
produced in commercial quantities at acceptable costs or be successfully
marketed. For that reason, we may not be able to generate revenues from
commercial production or operate profitably. The December 31, 2007 audit opinion
included a going concern paragraph.
  We have
sold agricultural portion of our business in order to finance operations. The
agricultural applications of our technology generally have a more rapid
realization of revenues due to more limited regulatory requirements and testing.
Our ability to generate revenue from any agricultural applications of our
technology is limited to existing license royalties, if any.
  We will require substantial
additional funds to continue operating which may not be available on acceptable
terms, if at all.  We have losses from operations, negative cash
flows from operations and a substantial stockholders’ deficit that raise
substantial doubt about our ability to continue as a going concern. We do not
believe that our cash from all sources, including cash, cash equivalents and
anticipated revenue stream from licensing fees and sponsored research contracts
is sufficient for us to continue operations through the next 12 months without
raising additional funds.
  Management
continues to evaluate alternatives and sources for additional funding, which may
include public or private investors, strategic partners, and grant programs
available through specific states or foundations, although there is no assurance
that such sources will result in raising additional capital. Lack of necessary
funds may require us to delay, scale back or eliminate some or all of our
research and product development programs and/or our capital expenditures, to
license our potential products or technologies to third parties, to consider
business combinations related to ongoing business operations, or shut down some,
or all, of our operations.
  47
  In
addition, our cash requirements may vary materially from those now planned
because of results of research and development, potential relationships with
strategic partners, changes in the focus and direction of our research and
development programs, competition, litigation required to protect our
technology, technological advances, the cost of pre-clinical and clinical
testing, the regulatory process of the FDA, and foreign regulators, whether any
of our products become approved or the market acceptance of any such products
and other factors. Our current cash reserves are not sufficient to fund our
operations through the commercialization of our first products or
services.
  We have limited clinical testing,
regulatory, manufacturing, marketing, distribution and sales capabilities which
may limit our ability to generate revenues.  Because of the
relatively early stage of our research and development programs, we have not yet
invested significantly in regulatory, manufacturing, marketing, distribution or
product sales resources. We cannot assure you that we will be able to develop
any such resources successfully or as quickly as may be necessary. The inability
to do so may harm our ability to generate revenues or operate
profitably.
  Risks
Relating to Competition
  Our competition includes both public
and private organizations and collaborations among academic institutions and
large pharmaceutical companies, most of which have significantly greater
experience and financial resources than we do.  The biotechnology
and pharmaceutical industries are characterized by intense competition. We
compete against numerous companies, both domestic and foreign, many of which
have substantially greater experience and financial and other resources than we
have. Several such enterprises have initiated cell therapy research programs
and/or efforts to treat the same diseases targeted by us. Companies such as
Geron Corporation, Genzyme Corporation, StemCells, Inc., Aastrom
Biosciences, Inc. and Viacell, Inc., as well as others, many of which
have substantially greater resources and experience in our fields than we do,
are well situated to effectively compete with us. Any of the world’s largest
pharmaceutical companies represents a significant actual or potential competitor
with vastly greater resources than ours.
  These
companies hold licenses to genetic selection technologies and other technologies
that are competitive with our technologies. These and other competitive
enterprises have devoted, and will continue to devote, substantial resources to
the development of technologies and products in competition with
us.
  Private
and public academic and research institutions also compete with us in the
research and development of therapeutic products based on human embryonic and
adult stem cell technologies. In the past several years, the pharmaceutical
industry has selectively entered into collaborations with both public and
private organizations to explore the possibilities that stem cell therapies may
present for substantive breakthroughs in the fight against disease.
  In
addition, many of our competitors have significantly greater experience than we
have in the development, pre-clinical testing and human clinical trials of
biotechnology and pharmaceutical products, in obtaining FDA and other regulatory
approvals of such products and in manufacturing and marketing such products.
Accordingly our competitors may succeed in obtaining FDA approval for products
more rapidly or effectively than we can. Our competitors may also be the first
to discover and obtain a valid patent to a particular stem cell technology which
may effectively block all others from doing so. It will be important for us or
our collaborators to be the first to discover any stem cell technology that we
are seeking to discover. Failure to be the first could prevent us from
commercializing all of our research and development affected by that discovery.
Additionally, if we commence commercial sales of any products, we will also be
competing with respect to manufacturing efficiency and sales and marketing
capabilities, areas in which we have no experience.
  The
United States is encountering tremendous competition from many foreign countries
that are providing an environment more attractive for stem cell research. The
governments of numerous foreign countries are investing in stem cell research,
providing facilities, personnel and legal environments intended to attract
biotechnology companies and encourage stem cell research and development of stem
cell-related technologies.
  48
  These
efforts by foreign countries may make it more difficult to effectively compete
in our industry and may generate competitors with substantially greater
resources than ours.
  Risks
Relating to Our Technology
  We rely on nuclear transfer and
embryonic stem cell and myoblast technologies that we may not be able to
successfully develop, which will prevent us from generating revenues, operating
profitably or providing investors any return on their investment. 
We have concentrated our research on our nuclear transfer, embryonic stem cell
and myoblast technologies, and our ability to operate profitably will depend on
being able to successfully develop these technologies for human applications.
These are emerging technologies with, as yet, limited human applications. We
cannot guarantee that we will be able to successfully develop our nuclear
transfer, embryonic stem cell or myoblast technologies or that such development
will result in products or services with any significant commercial utility. We
anticipate that the commercial sale of such products or services, and
royalty/licensing fees related to our technology, would be our primary sources
of revenues. If we are unable to develop our technologies, investors will likely
lose their entire investment in us.
  The
outcome of pre-clinical, clinical and product testing of our products is
uncertain, and if we are unable to satisfactorily complete such testing, or if
such testing yields unsatisfactory results, we will be unable to commercially
produce our proposed products. Before obtaining regulatory approvals for the
commercial sale of any potential human products, our products will be subjected
to extensive pre-clinical and clinical testing to demonstrate their safety and
efficacy in humans. We cannot assure you that the clinical trials of our
products, or those of our licensees or collaborators, will demonstrate the
safety and efficacy of such products at all, or to the extent necessary to
obtain appropriate regulatory approvals, or that the testing of such products
will be completed in a timely manner, if at all, or without significant
increases in costs, program delays or both, all of which could harm our ability
to generate revenues. In addition, our prospective products may not prove to be
more effective for treating disease or injury than current therapies.
Accordingly, we may have to delay or abandon efforts to research, develop or
obtain regulatory approval to market our prospective products. Many companies
involved in biotechnology research and development have suffered significant
setbacks in advanced clinical trials, even after promising results in earlier
trials. The failure to adequately demonstrate the safety and efficacy of a
therapeutic product under development could delay or prevent regulatory approval
of the product and could harm our ability to generate revenues, operate
profitably or produce any return on an investment in us.
  While the
marketing of cloned or transgenic animals does not currently require regulatory
approval, such approval may be required in the future. We cannot assure you that
we would obtain such approvals or that our licensees’ products would be accepted
in the marketplace. This lack of approval could reduce or preclude any royalty
revenues we might receive from our licensees in that field.
  We may not be able
to commercially develop our technologies and proposed product lines, which, in
turn, would significantly harm our ability to earn revenues and result in a loss
of investment.Our
ability to commercially develop our technologies will be dictated in large part
by forces outside our control which cannot be predicted,
including, but not limited to, general economic conditions, the success of our
research and pre-clinical and field testing, the availability of collaborative
partners to finance our work in pursuing applications of nuclear transfer
technology and technological or other developments in the biomedical field
which, due to efficiencies, technological breakthroughs or greater acceptance in
the biomedical industry, may render one or more areas of commercialization more
attractive, obsolete or competitively unattractive. It is possible that one or
more areas of commercialization will not be pursued at all if a collaborative
partner or entity willing to fund research and development cannot be located.
Our decisions regarding the ultimate products and/or services we pursue could
have a significant adverse affect on our ability to earn revenue if we
misinterpret trends, underestimate development costs and/or pursue wrong
products or services. Any of these factors either alone or in concert could
materially harm our ability to earn revenues and could result in a loss of any
investment in us.
  If we are unable to keep up with
rapid technological changes in our field or compete effectively, we will be
unable to operate profitably.  We are engaged in activities in the
biotechnology field, which is characterized by extensive research efforts and
rapid technological progress. If we fail to anticipate or respond adequately to
technological developments, our ability to operate profitably could suffer. We
cannot assure you that research and discoveries by other biotechnology,
agricultural, pharmaceutical or other companies will not render our technologies
or potential products or services uneconomical or result in products superior to
those we develop or that any technologies, products or services we develop will
be preferred to any existing or newly-developed technologies, products or
services.
  49
  We may not be able to protect our
proprietary technology, which could harm our ability to operate
profitably.  The biotechnology and pharmaceutical industries place
considerable importance on obtaining patent and trade secret protection for new
technologies, products and processes. Our success will depend, to a substantial
degree, on our ability to obtain and enforce patent protection for our products,
preserve any trade secrets and operate without infringing the proprietary rights
of others. We cannot assure you that:
  ·
                we
      will succeed in obtaining any patents in a timely manner or at all, or
      that the breadth or degree of protection of any such patents will protect
      our interests,
 
 ·
                the
      use of our technology will not infringe on the proprietary rights of
      others,
 
 ·
                patent
      applications relating to our potential products or technologies will
      result in the issuance of any patents or that, if issued, such patents
      will afford adequate protection to us or not be challenged invalidated or
      infringed, and
 
 ·
                patents
      will not issue to other parties, which may be infringed by our potential
      products or technologies.
 
 We are
aware of certain patents that have been granted to others and certain patent
applications that have been filed by others with respect to nuclear transfer
technologies. The fields in which we operate have been characterized by
significant efforts by competitors to establish dominant or blocking patent
rights to gain a competitive advantage, and by considerable differences of
opinion as to the value and legal legitimacy of competitors’ purported patent
rights and the technologies they actually utilize in their
businesses.
  Our business is highly dependent upon
maintaining licenses with respect to key technology.  Several of the
key patents we utilize are licensed to us by third parties. These licenses are
subject to termination under certain circumstances (including, for example, our
failure to make minimum royalty payments or to timely achieve development and
commercialization benchmarks). The loss of any of such licenses, or the
conversion of such licenses to non-exclusive licenses, could harm our operations
and/or enhance the prospects of our competitors.
  Certain
of these licenses also contain restrictions, such as limitations on our ability
to grant sublicenses that could materially interfere with our ability to
generate revenue through the licensing or sale to third parties of important and
valuable technologies that we have, for strategic reasons, elected not to pursue
directly. The possibility exists that in the future we will require further
licenses to complete and/or commercialize our proposed products. We cannot
assure you that we will be able to acquire any such licenses on a commercially
viable basis.
 
 We may not be able to adequately
protect against piracy of intellectual property in foreign
jurisdictions.  Considerable research in the areas of stem cells,
cell therapeutics and regenerative medicine is being performed in countries
outside of the United States, and a number of our competitors are located in
those countries. The laws protecting intellectual property in some of those
countries may not provide protection for our trade secrets and intellectual
property adequate to prevent our competitors from misappropriating our trade
secrets or intellectual property. If our trade secrets or intellectual property
are misappropriated in those countries, we may be without adequate remedies to
address the issue.
  Certain of our technology is not
protectable by patent.  Certain parts of our know-how and technology
are not patentable. To protect our proprietary position in such know-how and
technology, we intend to require all employees, consultants, advisors and
collaborators to enter into confidentiality and invention ownership agreements
with us. We cannot assure you, however, that these agreements will provide
meaningful protection for our trade secrets, know-how or other proprietary
information in the event of any unauthorized use or disclosure. Further, in the
absence of patent protection, competitors who independently develop
substantially equivalent technology may harm our business.
  50
  Patent litigation presents an ongoing
threat to our business with respect to both outcomes and costs.  We
have previously been involved in patent interference litigation, and it is
possible that further litigation over patent matters with one or more
competitors could arise. We could incur substantial litigation or interference
costs in defending ourselves against suits brought against us or in suits in
which we may assert our patents against others. If the outcome of any such
litigation is unfavorable, our business could be materially adversely affected.
To determine the priority of inventions, we may also have to participate in
interference proceedings declared by the United States Patent and Trademark
Office, which could result in substantial cost to us. Without additional
capital, we may not have the resources to adequately defend or pursue this
litigation.
  Risks
Related to Product Development
  Limited experience in conducting and
managing preclinical development activities, clinical trials and the application
process necessary to obtain regulatory approvals.  Our limited
experience in conducting and managing preclinical development activities,
clinical trials and the application process necessary to obtain regulatory
approvals might prevent us from successfully designing or implementing a
preclinical study or clinical trial. If we do not succeed in conducting and
managing our preclinical development activities or clinical trials, or in
obtaining regulatory approvals, we might not be able to commercialize our
product candidates, or might be significantly delayed in doing so, which will
materially harm our business.
  None of
the products that we are currently developing has been approved by the FDA or
any similar regulatory authority in any foreign country. Our ability to generate
revenues from any of our product candidates will depend on a number of factors,
including our ability to successfully complete clinical trials, obtain necessary
regulatory approvals and implement our commercialization strategy. In addition,
even if we are successful in obtaining necessary regulatory approvals and
bringing one or more product candidates to market, we will be subject to the
risk that the marketplace will not accept those products. We may, and anticipate
that we will need to, transition from a company with a research and development
focus to a company capable of supporting commercial activities and we may not
succeed in such a transition.
  Because
of the numerous risks and uncertainties associated with our product development
and commercialization efforts, we are unable to predict the extent of our future
losses or when or if we will become profitable. Our failure to successfully
commercialize our product candidates or to become and remain profitable could
depress the market price of our common stock and impair our ability to raise
capital, expand our business, diversify our product offerings and continue our
operations.
  Our approach of
using cell-based therapy for the treatment of heart damage is risky and unproven
and no products using this approach have received regulatory approval in the
United States or Europe.We believe that no company has
yet been successful in its efforts to obtain regulatory approval in the United
States or Europe of a cell-based therapy product for the treatment of heart
disease in humans. Cell-based therapy products, in general, may be susceptible
to various risks, including undesirable and unintended side effects, unintended
immune system responses, inadequate therapeutic efficacy or other
characteristics that may prevent or limit their approval by regulators
or commercial use. Many companies in the industry have suffered significant
setbacks in advanced clinical trials, despite promising results in earlier
trials.
  If our clinical trials are
unsuccessful or significantly delayed, or if we do not complete our clinical
trials, we will not receive regulatory approval for or be able to commercialize
our product candidates.  Our lead product candidate, our myoblast
program, is still in clinical testing and has not yet received approval from the
FDA or any similar foreign regulatory authority for any indication. Although
this product candidate has received positive results in Phase I and Ib
clinical trials, it may never receive regulatory approval or be commercialized
in the United States or other countries.
  51
  We cannot
market any product candidate until regulatory agencies grant approval or
licensure. In order to obtain regulatory approval for the sale of any product
candidate, we must, among other requirements, provide the FDA and similar
foreign regulatory authorities with preclinical and clinical data that
demonstrate to the satisfaction of regulatory authorities that our product
candidates are safe and effective for each indication under the applicable
standards relating to such product candidate. The preclinical studies and
clinical trials of any product candidates must comply with the regulations of
the FDA and other governmental authorities in the United States and similar
agencies in other countries.
  Even
though we have achieved positive interim results in clinical trials, these
results do not necessarily predict final results, and positive results in early
trials may not be indicative of success in later trials. For example, our
myoblast program has been studied in a limited number of patients to date. Even
though our early data has been promising, we have not yet completed any
large-scale pivotal trials to establish the safety and efficacy of this therapy.
There is a risk that safety concerns relating to our product candidates or
cell-based therapies in general will result in the suspension or termination of
our clinical trials.
  We may
experience numerous unforeseen events during, or as a result of, the clinical
trial process that could delay or prevent regulatory approval and/or
commercialization of our product candidates, including the
following:
  ·
                the
      FDA or similar foreign regulatory authorities may find that our product
      candidates are not sufficiently safe or effective or may find our cell
      culturing processes or facilities
  unsatisfactory,
 
 ·
                officials
      at the FDA or similar foreign regulatory authorities may interpret data
      from preclinical studies and clinical trials differently than we
      do,
 
 ·
                our
      clinical trials may produce negative or inconclusive results or may not
      meet the level of statistical significance required by the FDA or other
      regulatory authorities, and we may decide, or regulators may require us,
      to conduct additional preclinical studies and/or clinical trials or to
      abandon one or more of our development
programs,
 
 ·
                the
      FDA or similar foreign regulatory authorities may change their approval
      policies or adopt new
regulations,
 
 ·
                there
      may be delays or failure in obtaining approval of our clinical trial
      protocols from the FDA or other regulatory authorities or obtaining
      institutional review board approvals or government approvals to conduct
      clinical trials at prospective
sites,
 
 ·
                we,
      or regulators, may suspend or terminate our clinical trials because the
      participating patients are being exposed to unacceptable health risks or
      undesirable side effects,
 
 ·
                we
      may experience difficulties in managing multiple clinical
      sites,
 
 ·
                enrollment
      in our clinical trials for our product candidates may occur more slowly
      than we anticipate, or we may experience high drop-out rates of subjects
      in our clinical trials, resulting in significant
  delays,
  ·
                we
      may be unable to manufacture or obtain from third party manufacturers
      sufficient quantities of our product candidates for use in clinical
      trials, and
 
 ·
                our
      product candidates may be deemed unsafe or ineffective, or may be
      perceived as being unsafe or ineffective, by healthcare providers for a
      particular indication.
  52
  We depend on third parties to assist
us in the conduct of our preclinical studies and clinical trials, and any
failure of those parties to fulfill their obligations could result in costs and
delays and prevent us from obtaining regulatory approval or successfully
commercializing our product candidates on a timely basis, if at
all.  We engage consultants and contract research organizations to
help design, and to assist us in conducting, our preclinical studies and
clinical trials and to collect and analyze data from those studies and trials.
The consultants and contract research organizations we engage interact with
clinical investigators to enroll patients in our clinical trials. As a result,
we depend on these consultants and contract research organizations to perform
the studies and trials in accordance with the investigational plan and protocol
for each product candidate and in compliance with regulations and standards,
commonly referred to as “good clinical practice”, for conducting, recording and
reporting results of clinical trials to assure that the data and results are
credible and accurate and the trial participants are adequately protected, as
required by the FDA and foreign regulatory agencies. We may face delays in our
regulatory approval process if these parties do not perform their obligations in
a timely or competent fashion or if we are forced to change service
providers.
  We must comply with extensive
government regulations in order to obtain and maintain marketing approval for
our products in the United States and abroad. If we do not obtain regulatory
approval for our product candidates, we may be forced to cease our
operations.  Our product candidates are subject to extensive
regulation in the United States and in every other country where they will be
tested or used. These regulations are wide-ranging and govern, among other
things:
  ·
                product
      design, development, manufacture and
testing,
 
 ·
                product
      safety and efficacy,
 
 ·
                product
      labeling,
 
 ·
                product
      storage and shipping,
 
 ·
                record
      keeping,
 
 ·
                pre-market
      clearance or approval,
 
 ·
                advertising
      and promotion, and
 
 ·
                product
      sales and distribution.
 
 We cannot
market our product candidates until we receive regulatory approval. The process
of obtaining regulatory approval is lengthy, expensive and uncertain. Any
difficulties that we encounter in obtaining regulatory approval may have a
substantial adverse impact on our business and cause our stock price to
significantly decline.
  In the
United States, the FDA imposes substantial requirements on the introduction of
biological products and many medical devices through lengthy and detailed
laboratory and clinical testing procedures, sampling activities and other costly
and time-consuming procedures. Satisfaction of these requirements typically
takes several years and the time required to do so may vary substantially based
upon the type and complexity of the biological product or medical
device.
  In
addition, product candidates that we believe should be classified as medical
devices for purposes of the FDA regulatory pathway may be determined by the FDA
to be biologic products subject to the satisfaction of significantly more
stringent requirements for FDA approval.
  The
requirements governing the conduct of clinical trials and cell culturing and
marketing of our product candidates outside the United States vary widely from
country to country. Foreign approvals may take longer to obtain than FDA
approvals and can require, among other things, additional testing and different
clinical trial designs. Foreign regulatory approval processes generally include
all of the risks associated with the FDA approval processes. Some foreign
regulatory agencies also must approve prices of the products. Regulatory
approval in one country does not ensure regulatory approval in another, but a
failure or delay in obtaining regulatory approval in one country may negatively
impact the regulatory process in others. We may not be able to file for
regulatory approvals and may not receive necessary approvals to market our
product candidates in any foreign country. If we fail to comply with these
regulatory requirements or fail to obtain and maintain required approvals in any
foreign country, we will not be able to sell our product candidates in that
country and our ability to generate revenue will be adversely
affected.
  53
  We cannot
assure you that we will obtain FDA or foreign regulatory approval to market any
of our product candidates for any indication in a timely manner or at all. If we
fail to obtain regulatory approval of any of our product candidates for at least
one indication, we will not be permitted to market our product candidates and
may be forced to cease our operations.
  Even if some of our product
candidates receive regulatory approval, these approvals may be subject to
conditions, and we and our third party manufacturers will in any event be
subject to significant ongoing regulatory obligations and
oversight.  Even if any of our product candidates receives
regulatory approval, the manufacturing, marketing and sale of our product
candidates will be subject to stringent and ongoing government regulation.
Conditions of approval, such as limiting the category of patients who can use
the product, may significantly impact our ability to commercialize the product
and may make it difficult or impossible for us to market a product profitably.
Changes we may desire to make to an approved product, such as cell culturing
changes or revised labeling, may require further regulatory review and approval,
which could prevent us from updating or otherwise changing an approved product.
If our product candidates are approved by the FDA or other regulatory
authorities for the treatment of any indications, regulatory labeling may
specify that our product candidates be used in conjunction with other
therapies.
  Once
obtained, regulatory approvals may be withdrawn for a number of reasons,
including the later discovery of previously unknown problems with the product.
Regulatory approval may also require costly post-marketing follow-up studies,
and failure of our product candidates to demonstrate sufficient efficacy and
safety in these studies may result in either withdrawal of marketing approval or
severe limitations on permitted product usage. In addition, numerous additional
regulatory requirements relating to, among other processes, the labeling,
packaging, adverse event reporting, storage, advertising, promotion and
record-keeping will also apply. Furthermore, regulatory agencies subject a
marketed product, its manufacturer and the manufacturer’s facilities to
continual review and periodic inspections. Compliance with these regulatory
requirements are time consuming and require the expenditure of substantial
resources.
  If any of
our product candidates is approved, we will be required to report certain
adverse events involving our products to the FDA, to provide updated safety and
efficacy information and to comply with requirements concerning the
advertisement and promotional labeling of our products. As a result, even if we
obtain necessary regulatory approvals to market our product candidates for any
indication, any adverse results, circumstances or events that are subsequently
discovered, could require that we cease marketing the product for that
indication or expend money, time and effort to ensure full compliance, which
could have a material adverse effect on our business.
  Any
failure by us, or by any third parties that may manufacture or market our
products, to comply with the law, including statutes and regulations
administered by the FDA or other U.S. or foreign regulatory authorities, could
result in, among other things, warning letters, fines and other civil penalties,
suspension of regulatory approvals and the resulting requirement that we suspend
sales of our products, refusal to approve pending applications or supplements to
approved applications, export or import restrictions, interruption of
production, operating restrictions, closure of the facilities used by us or
third parties to manufacture our product candidates, injunctions or criminal
prosecution. Any of the foregoing actions could have a material adverse effect
on our business.
  The
healthcare community has relatively little experience with therapies based on
cellular medicine and, accordingly, if our product candidates do not become
widely accepted by physicians, patients, third party payors or the healthcare
community, we may be unable to generate significant revenue, if
any.
  54
  We are
developing cell-based therapy product candidates for the treatment of heart
damage that represent novel and unproven treatments and, if approved, will
compete with a number of more conventional products and therapies manufactured
and marketed by others, including major pharmaceutical companies. We cannot
predict or guarantee that physicians, patients, healthcare insurers, third party
payors or health maintenance organizations, or the healthcare community in
general, will accept or utilize any of our product candidates. We anticipate
that, if approved, we will market our myoblast product primarily to
interventional cardiologists, who are generally not the primary care physicians
for patients who may be eligible for treatment with MyoCell. Accordingly, our
commercial success may be dependent on third party physicians referring their
patients to interventional cardiologists for MyoCell treatment.
  If
we are successful in obtaining regulatory approval for any of our product
candidates, the degree of market acceptance of those products will depend on
many factors, including:
  ·
                our
      ability to provide acceptable evidence and the perception of patients and
      the healthcare community, including third party payors, of the positive
      characteristics of our product candidates relative to existing treatment
      methods, including their safety, efficacy, cost effectiveness and/or other
      potential advantages,
 
 ·
                the
      incidence and severity of any adverse side effects of our product
      candidates,
 
 ·
                the
      availability of alternative
treatments,
 
 ·
                the
      labeling requirements imposed by the FDA and foreign regulatory agencies,
      including the scope of approved indications and any safety
      warnings,
 
 ·
                our
      ability to obtain sufficient third party insurance coverage or
      reimbursement for our products
candidates,
 
 ·
                the
      inclusion of our products on insurance company coverage
      policies,
 
 ·
                the
      willingness and ability of patients and the healthcare community to adopt
      new technologies,
 
 ·
                the
      procedure time associated with the use of our product
      candidates,
 
 ·
                our
      ability to manufacture or obtain from third party manufacturers sufficient
      quantities of our product candidates with acceptable quality and at an
      acceptable cost to meet demand,
and
 
 ·
                marketing
      and distribution support for our
products.
 
 Failure
to achieve market acceptance would limit our ability to generate revenue and
would have a material adverse effect on our business. In addition, if any of our
product candidates achieve market acceptance, we may not be able to maintain
that market acceptance over time if competing products or technologies are
introduced that are received more favorably or are more
cost-effective.
  Risks
Relating to the September 2005, September 2006, August 2007,
February 2008, and April 2008 Financings
  If we are required for any reason to
repay our outstanding debentures we would be required to deplete our working
capital, if available, or raise additional funds. Our failure to repay the
convertible debentures, if required, could result in legal action against us,
which could require the sale of substantial assets.  We have
outstanding, as of April 30, 2009, $13,616,520 aggregate original principal
amount of convertible debentures with an original issue discount of 20.3187%
with $4,038,880 in April 2008 Debentures, $720,000 in February 2008 Debentures,
$6,860,531 in 2007 Debentures, $1,907,168 in 2006 Debentures, and $89,941 in
2005 Debentures. We are required to redeem on a monthly basis, by payment, at
our option, with cash or with shares of our common stock, 1/30th of the
aggregate original principal amount of the debentures.
  55
  Unless
sooner converted into shares of our common stock the 2005 Debentures were due
and payable on September 14, 2008, the 2006 Debentures are due and payable
on September 6, 2009, the 2007 Debentures are due and payable on August 31,
2010, the February 2008 Debentures are due and payable February 15, 2010, and
the April 2008 Debentures are due and payable April 4, 2009. Any event of
default could require the early repayment of the convertible debentures,
including the accruing of interest on the outstanding principal balance of the
debentures if the default is not cured with the specified grace period. We
anticipate that the full amount of the convertible debentures will be converted
into shares of our common stock, in accordance with the terms of the convertible
debentures; however no assurance can be provided that any amount of debentures
will be converted. If, prior to the maturity date, we are required to repay the
convertible debentures in full, we would be required to use our limited working
capital and raise additional funds. If we were unable to repay the notes when
required, the debenture holders could commence legal action against us to
recover the amounts due. Any such action could require us to curtail or cease
operations.
  There are a large number of shares
underlying our convertible debentures and warrants, and the sale of these shares
may depress the market price of our common stock.There are a substantial
number of shares underlying convertible debentures issued by the Company in
connection with the 2005, 2006, 2007 and 2008 financings. When shares underlying
our convertible debentures and warrants are eligible for resale under Rule 144
of the Securities Act, the trading of such shares in the public market could
adversely affect the market price of our common stock and make it difficult for
you to sell shares of our common stock at times and prices that you feel are
appropriate.
  The issuance of shares upon
conversion of the convertible debentures and exercise of outstanding warrants
will cause immediate and substantial dilution to our existing
stockholders. The issuance of shares upon conversion of the convertible
debentures and exercise of warrants, including the replacement warrants, will
result in substantial dilution to the interests of other stockholders since the
selling security holders may ultimately convert and sell the full amount
issuable on conversion. Although no single selling security holder may convert
its convertible debentures and/or exercise its warrants if such conversion or
exercise would cause it to own more than 4.99% of our outstanding common stock,
this restriction does not prevent each selling security holder from converting
and/or exercising some of its holdings and then converting the rest of its
holdings. In this way, each selling security holder could sell more than this
limit while never holding more than this limit. There is no upper limit on the
number of shares that may be issued which will have the effect of further
diluting the proportionate equity interest and voting power of holders of our
common stock. In addition, the issuance of the 2008 Debentures and the 2008
Warrants triggered certain anti-dilution rights for certain third parties
currently holding our securities resulting in substantial dilution to the
interests of other stockholders.
  Payment of mandatory monthly
redemptions in shares of common stock will result in substantial
dilution. We expect to satisfy all or a significant portion of our
obligation to redeem 1/30th of the aggregate original principal amount of
debentures per month through issuance of additional shares of our common stock.
This approach will result in substantial dilution to the interests of other
stockholders.
  Our
outstanding indebtedness on our 2005, 2006, 2007 and 2008 Debentures imposes
certain restrictions on how we conduct our business. In addition, all of our
assets, including our intellectual property, are pledged to secure this
indebtedness. If we fail to meet our obligations under the Debentures, our
payment obligations may be accelerated and the collateral securing the debt may
be sold to satisfy these obligations.
  The
Debentures and related agreements contain various provisions that restrict our
operating flexibility. Pursuant to the agreement, we may not, among other
things:
  ·
                except
      for certain permitted indebtedness, enter into, create, incur, assume,
      guarantee or suffer to exist any indebtedness for borrowed money of any
      kind, including but not limited to, a guarantee, on or withrespect
      to any of its property or assets now owned or hereafter acquired or any
      interest therein or any income or profits
  therefrom,
 56
 ·
                except
      for certain permitted liens, enter into, create, incur, assume or suffer
      to exist any liens of any kind, on or with respect to any of its property
      or assets now owned or hereafter acquired or any interest therein or any
      income or profits therefrom,
 
 ·
                amend
      our certificate of incorporation, bylaws or other charter documents so as
      to materially and adversely affect any rights of holders of the Debentures
      and Warrants,
 
 ·
                repay,
      repurchase or offer to repay, repurchase or otherwise acquire more than a
      de minimis number
      of shares of our common stock or common stock
  equivalents,
 
 ·
                enter
      into any transaction with any of our affiliates, which would be required
      to be disclosed in any public filing with the Securities and Exchange
      Commission, unless such transaction is made on an arm’s-length basis and
      expressly approved by a majority of our disinterested directors (even if
      less than a quorum otherwise required for board
  approval),
 
 ·
                pay
      cash dividends or distributions on any of our equity
      securities,
 
 ·
                grant
      certain registration rights,
 
 ·
                enter
      into any agreement with respect to any of the foregoing,
  or
 
 ·
                make
      cash expenditures in excess of $1,000,000 per calendar month, subject to
      certain specified exceptions.
 
 These
provisions could have important consequences for us, including (i) making
it more difficult for us to obtain additional debt financing from another
lender, or obtain new debt financing on terms favorable to us, (ii) causing
us to use a portion of our available cash for debt repayment and service rather
than other perceived needs and/or (iii) impacting our ability to take
advantage of significant, perceived business opportunities.
  Our obligations under the Securities
Purchase Agreement are secured by substantially all of our assets. Our
obligations under certain security agreements, executed in connection with both
the 2007 Financing and 2008 Financing, with the holders of the debentures and
warrants are secured by substantially all of our assets. As a result, if we
default under the terms of the security agreement, such holders could foreclose
on their security interest and liquidate all of our assets. This would cause
operations to cease.
  Risks
Relating to Government Regulation
  Companies such as ours engaged in
research using nuclear transfer and embryonic and adult stem cells are currently
subject to strict government regulations, and our operations could be harmed by
any legislative or administrative efforts impacting the use of nuclear transfer
technology or human embryonic material. Our business is focused on human
cell therapy, which includes the production of human differentiated cells from
stem cells and involves the use of nuclear transfer technology, human oocytes,
and embryonic material as well as adult stem cells. Nuclear transfer technology,
commonly known as therapeutic cloning, and research utilizing embryonic stem
cells are controversial subjects, and are currently subject to intense scrutiny,
both in the United States, the United Nations and throughout the world,
particularly in the area of nuclear transfer of human cells and the use of human
embryonic material.
  57
  We cannot assure you that our
operations will not be harmed by any legislative or administrative efforts by
politicians or groups opposed to the development of nuclear transfer technology
generally or the use of nuclear transfer for therapeutic cloning of human cells
specifically. Further, we cannot assure you that legislative or administrative
restrictions directly or indirectly delaying, limiting or preventing the use of
nuclear transfer technology
or human embryonic material or the sale, manufacture or use of products or
services derived from nuclear transfer technology or human embryonic material
will not be adopted in the future.
  Restrictions on the use of human
embryonic stem cells, and the ethical, legal and social implications of that
research, could prevent us from developing or gaining acceptance for
commercially viable products in these areas. Some of our most important
programs involve the use of stem cells that are derived from human embryos. The
use of human embryonic stem cells gives rise to ethical, legal and social issues
regarding the appropriate use of these cells. In the event that our research
related to human embryonic stem cells becomes the subject of adverse commentary
or publicity, the market price for our common stock could be significantly
harmed. Some political and religious groups have voiced opposition to our
technology and practices. We use stem cells derived from human embryos that have
been created for in vitro fertilization procedures but are no longer desired or
suitable for that use and are donated with appropriate informed consent for
research use. Many research institutions, including some of our scientific
collaborators, have adopted policies regarding the ethical use of human
embryonic tissue. These policies may have the effect of limiting the scope of
research conducted using human embryonic stem cells, thereby impairing our
ability to conduct research in this field.
  Potential
and actual legislation and regulation at the federal or state level related to
our technology could limit our activities and ability to develop products for
commercial sales, depriving us of our anticipated source of future revenues.
Legislative bills could be introduced in the future aiming to prohibit the use
or commercialization of somatic cell nuclear transfer technology or of any
products resulting from it, including those related to human therapeutic cloning
and regenerative medicine. Such legislation could have a significant influence
on our ability to pursue our research, development and commercialization plans
in the United States.
  Any
future or additional government-imposed restrictions in these or other
jurisdictions with respect to use of embryos or human embryonic stem cells in
research and development could have a material adverse effect on us, by, among
other things:
  ·
                harming
      our ability to establish critical partnerships and
      collaborations,
 
 ·
                delaying
      or preventing progress in our research and
  development,
 
 ·
                limiting
      or preventing the development, sale or use of our products,
      and
 
 ·
                causing
      a decrease in the price of our
stock.
 
 Because we or our collaborators must
obtain regulatory approval to market our products in the United States and other
countries, we cannot predict whether or when we will be permitted to
commercialize our products. Federal, state and local governments in the
United States and governments in other countries have significant regulations in
place that govern many of our activities. We are or may become subject to
various federal, state and local laws, regulations and recommendations relating
to safe working conditions, laboratory and manufacturing practices, the
experimental use of animals and the use and disposal of hazardous or potentially
hazardous substances used in connection with our research and development work.
The preclinical testing and clinical trials of the products that we or our
collaborators develop are subject to extensive government regulation that may
prevent us from creating commercially viable products from our discoveries. In
addition, the sale by us or our collaborators of any commercially viable product
will be subject to government regulation from several standpoints, including
manufacturing, advertising and promoting, selling and marketing, labeling, and
distributing.
  If, and to the extent that, we are
unable to comply with these regulations, our ability to earn revenues will be
materially and negatively impacted. The regulatory process, particularly in the
biotechnology field, is uncertain, can take many years and requires the
expenditure of substantial resources. Biological drugs and non-biological drugs
are rigorously regulated. In particular, proposed human pharmaceutical
therapeutic product candidates are subject to rigorous preclinical and clinical
testing and other requirements by the FDA in the United States and similar
health authorities in other countries in order to demonstrate safety and
efficacy. We may never obtain regulatory approval to market our proposed
products. For additional information about governmental regulations that will
affect our planned
and intended business operations, see “DESCRIPTION OF BUSINESS—Government Regulation” set
forth in the Company’s Annual report on Form 10-KSB for the period ended
December 31, 2007.
  58
  Our
products may not receive FDA approval, which would prevent us from commercially
marketing our products and producing revenues. The FDA and comparable government
agencies in foreign countries impose substantial regulations on the manufacture
and marketing of pharmaceutical products through lengthy and detailed
laboratory, pre-clinical and clinical testing procedures, sampling activities
and other costly and time-consuming procedures. Satisfaction of these
regulations typically takes several years or more and varies substantially based
upon the type, complexity and novelty of the proposed product. We cannot assure
you that FDA approvals for any products developed by us will be granted on a
timely basis, if at all. Any such delay in obtaining, or failure to obtain, such
approvals could have a material adverse effect on the marketing of our products
and our ability to generate product revenue. For additional information about
governmental regulations that will affect our planned and intended business
operations, see “DESCRIPTION OF BUSINESS—Government Regulation” set
forth in the Company’s Annual report on Form 10-KSB for the period ended
December 31, 2007.
  For-profit entities may be prohibited
from benefiting from grant funding. There has been much publicity about
grant resources for stem cell research, including Proposition 71 in
California, which is described more fully under the heading “DESCRIPTION OF
BUSINESS—California
Proposition 71” set forth in the Company’s Annual report on
Form 10-KSB for the period ended December 31, 2007. Rules and
regulations related to any funding that may ultimately be provided, the type of
entity that will be eligible for funding, the science to be funded, and funding
details have not been finalized. As a result of these uncertainties regarding
Proposition 71, we cannot assure you that funding, if any, will be
available to us, or any for-profit entity.
  The government maintains certain
rights in technology that we develop using government grant money and we may
lose the revenues from such technology if we do not commercialize and utilize
the technology pursuant to established government guidelines. Certain of
our and our licensors’ research has been or is being funded in part by
government grants. In connection with certain grants, the U.S. government
retains rights in the technology developed with the grant. These rights could
restrict our ability to fully capitalize upon the value of this
research.
  Risks
Relating to Our Reliance on Third Parties
  We depend on our collaborators to
help us develop and test our proposed products, and our ability to develop and
commercialize products may be impaired or delayed if collaborations are
unsuccessful. Our strategy for the development, clinical testing and
commercialization of our proposed products requires that we enter into
collaborations with corporate partners, licensors, licensees and others. We are
dependent upon the subsequent success of these other parties in performing their
respective responsibilities and the continued cooperation of our partners. Our
collaborators may not cooperate with us or perform their obligations under our
agreements with them. We cannot control the amount and timing of our
collaborators’ resources that will be devoted to our research and development
activities related to our collaborative agreements with them. Our collaborators
may choose to pursue existing or alternative technologies in preference to those
being developed in collaboration with us.
  Under
agreements with collaborators, we may rely significantly on such collaborators
to, among other things:
  ·
                design
      and conduct advanced clinical trials in the event that we reach clinical
      trials,
 
 ·
                fund
      research and development activities with
us,
 
 ·
                pay
      us fees upon the achievement of milestones,
and
 
 ·
                market
      with us any commercial products that result from our
      collaborations.
  59
  The
development and commercialization of potential products will be delayed if
collaborators fail to conduct these activities in a timely manner or at all. In
addition, our collaborators could terminate their agreements with us and we may
not receive any development or milestone payments. If we do not achieve
milestones set forth in the agreements, or if our collaborators breach or
terminate their collaborative agreements with us, our business may be materially
harmed.
  Our reliance on the activities of our
non-employee consultants, research institutions, and scientific contractors,
whose activities are not wholly within our control, may lead to delays in
development of our proposed products. We rely extensively upon and have
relationships with scientific consultants at academic and other institutions,
some of whom conduct research at our request, and other consultants with
expertise in clinical development strategy or other matters. These consultants
are not our employees and may have commitments to, or consulting or advisory
contracts with, other entities that may limit their availability to us. We have
limited control over the activities of these consultants and, except as
otherwise required by our collaboration and consulting agreements to the extent
they exist, can expect only limited amounts of their time to be dedicated to our
activities.
  In
addition, we have formed research collaborations with academic and other
research institutions throughout the world. These research facilities may have
commitments to other commercial and non-commercial entities. We have limited
control over the operations of these laboratories and can expect only limited
amounts of time to be dedicated to our research goals.
  We also
rely on other companies for certain process development or other technical
scientific work. We have contracts with these companies that specify the work to
be done and results to be achieved, but we do not have direct control over their
personnel or operations. If any of these third parties are unable or refuse to
contribute to projects on which we need their help, our ability to generate
advances in our technologies and develop our products could be significantly
harmed.
  General
Risks Relating to Our Business
  We may be subject to litigation that
will be costly to defend or pursue and uncertain in its outcome. Our
business may bring us into conflict with our licensees, licensors, or others
with whom we have contractual or other business relationships, or with our
competitors or others whose interests differ from ours. If we are unable to
resolve those conflicts on terms that are satisfactory to all parties, we may
become involved in litigation brought by or against us. That litigation is
likely to be expensive and may require a significant amount of management’s time
and attention, at the expense of other aspects of our business. The outcome of
litigation is always uncertain, and in some cases could include judgments
against us that require us to pay damages, enjoin us from certain activities, or
otherwise affect our legal or contractual rights, which could have a significant
adverse effect on our business. See “LEGAL PROCEEDINGS” set forth in
Part II, Item 1 of this Quarterly Report for a more complete
discussion of currently pending litigation against the Company.
  We may not be able to obtain
third-party patient reimbursement or favorable product pricing, which would
reduce our ability to operate profitably. Our ability to successfully
commercialize certain of our proposed products in the human therapeutic field
may depend to a significant degree on patient reimbursement of the costs of such
products and related treatments at acceptable levels from government
authorities, private health insurers and other organizations, such as health
maintenance organizations. We cannot assure you that reimbursement in the United
States or foreign countries will be available for any products we may develop
or, if available, will not be decreased in the future, or that reimbursement
amounts will not reduce the demand for, or the price of, our products with a
consequent harm to our business. We cannot predict what additional regulation or
legislation relating to the health care industry or third-party coverage and
reimbursement may be enacted in the future or what effect such regulation or
legislation may have on our business. If additional regulations are overly
onerous or expensive, or if health care related legislation makes our business
more expensive or burdensome than originally anticipated, we may be forced to
significantly downsize our business plans or completely abandon our business
model.
  60
  Our products are
likely to be expensive to manufacture, and they may not be profitable if we are
unable to control the costs to manufacture them.Our products are likely to be
significantly more expensive to manufacture than most other drugs currently on
the market today. Our present manufacturing processes produce modest quantities
of product intended for use in our ongoing research activities, and we have not
developed processes, procedures and capability to produce commercial volumes of
product. We hope to substantially reduce manufacturing costs through process
improvements, development of new science, increases in manufacturing scale and
outsourcing to experienced manufacturers. If we are not able to make these or
other improvements, and depending on the pricing of the product, our profit
margins may be significantly less than that of most drugs on the market today.
In addition, we may not be able to charge a high enough price for any cell
therapy product we develop, even if they are safe and effective, to make a
profit. If we are unable to realize significant profits from our potential
product candidates, our business would be materially harmed.
  To be successful, our proposed
products must be accepted by the health care community, which can be very slow
to adopt or unreceptive to new technologies and products. Our proposed
products and those developed by our collaborative partners, if approved for
marketing, may not achieve market acceptance since hospitals, physicians,
patients or the medical community in general may decide not to accept and
utilize these products. The products that we are attempting to develop represent
substantial departures from established treatment methods and will compete with
a number of more conventional drugs and therapies manufactured and marketed by
major pharmaceutical companies. The degree of market acceptance of any of our
developed products will depend on a number of factors, including:
  ·
                our
      establishment and demonstration to the medical community of the clinical
      efficacy and safety of our proposed
products,
 
 ·
                our
      ability to create products that are superior to alternatives currently on
      the market,
 
 ·
                our
      ability to establish in the medical community the potential advantage of
      our treatments over alternative treatment methods,
  and
 
 ·
                reimbursement
      policies of government and third-party
payors.
 
 If the
health care community does not accept our products for any of the foregoing
reasons, or for any other reason, our business would be materially
harmed.
  Our current source of revenues
depends on the stability and performance of our sublicensees. Our ability
to collect royalties on product sales from our sublicensees will depend on the
financial and operational success of the companies operating under a sublicense.
Revenues from those licensees will depend upon the financial and operational
success of those third parties. We cannot assure you that these licensees will
be successful in obtaining requisite financing or in developing and successfully
marketing their products. These licensees may experience unanticipated obstacles
including regulatory hurdles, and scientific or technical challenges, which
could have the effect of reducing their ability to generate revenues and pay us
royalties.
  We depend on key personnel for our
continued operations and future success, and a loss of certain key personnel
could significantly hinder our ability to move forward with our business
plan. Because of the specialized nature of our business, we are highly
dependent on our ability to identify, hire, train and retain highly qualified
scientific and technical personnel for the research and development activities
we conduct or sponsor. The loss of one or more certain key executive officers,
or scientific officers, would be significantly detrimental to us. In addition,
recruiting and retaining qualified scientific personnel to perform research and
development work is critical to our success. Our anticipated growth and
expansion into areas and activities requiring additional expertise, such as
clinical testing, regulatory compliance, manufacturing and marketing, will
require the addition of new management personnel and the development of
additional expertise by existing management personnel. There is intense
competition for qualified personnel in the areas of our present and planned
activities, and there can be no assurance that we will be able to continue to
attract and retain the qualified personnel necessary for the development of our
business. The failure to attract and retain such personnel or to develop such
expertise would adversely affect our business.
  61
  Our credibility as a business
operating in the field of human embryonic stem cells is largely dependent upon
the support of our Ethics Advisory Board. Because the use of human
embryonic stem cells gives rise to ethical, legal and social issues, we have
instituted an Ethics Advisory Board. Our Ethics Advisory Board is made up of
highly qualified individuals with expertise in the field of human embryonic stem
cells. We cannot assure you that these members will continue to serve on our
Ethics Advisory Board, and the loss of any such member may affect the
credibility and effectiveness of the Board. As a result, our business may be
materially harmed in the event of any such loss.
  Our insurance policies may be
inadequate and potentially expose us to unrecoverable risks. We have
limited director and officer insurance and commercial insurance policies. Any
significant insurance claims would have a material adverse effect on our
business, financial condition and results of operations. Insurance availability,
coverage terms and pricing continue to vary with market conditions. We endeavor
to obtain appropriate insurance coverage for insurable risks that we identify,
however, we may fail to correctly anticipate or quantify insurable risks, we may
not be able to obtain appropriate insurance coverage, and insurers may not
respond as we intend to cover insurable events that may occur. We have observed
rapidly changing conditions in the insurance markets relating to nearly all
areas of traditional corporate insurance. Such conditions have resulted in
higher premium costs, higher policy deductibles, and lower coverage limits. For
some risks, we may not have or maintain insurance coverage because of cost or
availability.
  We have no product liability
insurance, which may leave us vulnerable to future claims we will be unable to
satisfy. The testing, manufacturing, marketing and sale of human
therapeutic products entail an inherent risk of product liability claims, and we
cannot assure you that substantial product liability claims will not be asserted
against us. We have no product liability insurance. In the event we are forced
to expend significant funds on defending product liability actions, and in the
event those funds come from operating capital, we will be required to reduce our
business activities, which could lead to significant losses.
  We cannot
assure you that adequate insurance coverage will be available in the future on
acceptable terms, if at all, or that, if available, we will be able to maintain
any such insurance at sufficient levels of coverage or that any such insurance
will provide adequate protection against potential liabilities. Whether or not a
product liability insurance policy is obtained or maintained in the future, any
product liability claim could harm our business or financial
condition.
  We presently have members of
management and other key employees located in various locations throughout the
country which adds complexities to the operation of the business.
Presently, we have members of management and other key employees located in both
California and Massachusetts, which adds complexities to the operation of our
business. We intend to maintain our research facilities in Massachusetts and we
currently maintain a small corporate office in Los Angeles,
California.
  We face risks related to compliance
with corporate governance laws and financial reporting standards. The
Sarbanes-Oxley Act of 2002, as well as related new rules and regulations
implemented by the Securities and Exchange Commission and the Public Company
Accounting Oversight Board, require changes in the corporate governance
practices and financial reporting standards for public companies. These new
laws, rules and regulations, including compliance with Section 404 of
the Sarbanes-Oxley Act of 2002 relating to internal control over financial
reporting, referred to as Section 404, have materially increased our legal
and financial compliance costs and made some activities more time-consuming and
more burdensome. Section 404 requires that our management assess our
internal control over financial reporting annually and, commencing with the
filing of the Annual Report for the year ended December 31, 2007, include a
report on its assessment. In 2009 our independent registered public accounting
firm may be required to audit both the design and operating effectiveness of our
internal controls and management’s assessment of the design and the operating
effectiveness of our internal control over financial reporting.
  62
  Risks
Relating to Our Common Stock
  Stock prices for biotechnology
companies have historically tended to be very volatile.  Stock
prices and trading volumes for many biotechnology companies fluctuate widely for
a number of reasons, including but not limited to the following factors, some of
which may be unrelated to their businesses or results of
operations:
  ·
                clinical
      trial results,
 
 ·
                the
      amount of cash resources and ability to obtain additional
      funding,
  ·
                announcements
      of research activities, business developments, technological innovations
      or new products by companies or their
  competitors,
 
 ·
                entering
      into or terminating strategic
relationships,
 
 ·
                changes
      in government regulation,
 
 ·
                disputes
      concerning patents or proprietary
rights,
 
 ·
                changes
      in revenues or expense
levels,
 
 ·
                public
      concern regarding the safety, efficacy or other aspects of the products or
      methodologies being
developed,
 
 ·
                reports
      by securities analysts,
 
 ·
                activities
      of various interest groups or
organizations,
 
 ·
                media
      coverage, and
 
 ·
                status
      of the investment markets.
 
 This
market volatility, as well as general domestic or international economic, market
and political conditions, could materially and adversely affect the market price
of our common stock and the return on your investment.
  A significant number of shares of our
common stock have become available for sale and their sale could depress the
price of our common stock.  On March 1, 2008, a significant
number of our outstanding securities (including the 2007 Debentures and the 2007
Warrants and the shares of common stock underlying such securities) that were
previously restricted became eligible for sale under Rule 144 of the
Securities Act, and their sale will not be subject to any volume
limitations.
  Not
including the shares of common stock underlying the Debentures and Warrants
issued in connection with the 2005, 2006, 2007, and 2008 financings, as of
May 15, 2008, there are presently approximately 22,103,785 outstanding
options, warrants and other securities convertible or exercisable into shares of
our common stock.
  We may
also sell a substantial number of additional shares of our common stock in
connection with a private placement or public offering of shares of our common
stock (or other series or class of capital stock to be designated in the
future). The terms of any such private placement would likely require us to
register the resale of any shares of capital stock issued or issuable in the
transaction. We have also issued common stock to certain parties, such as
vendors and service providers, as payment for products and services. Under these
arrangements, we may agree to register the shares for resale soon after their
issuance. We may also continue to pay for certain goods and services with
equity, which would dilute your interest in the company.
  63
  Sales of
a substantial number of shares of our common stock under any of the
circumstances described above could adversely affect the market price for our
common stock and make it more difficult for you to sell shares of our common
stock at times and prices that you feel are appropriate.
  We do not intend to pay cash
dividends on our common stock in the foreseeable future.  Any
payment of cash dividends will depend upon our financial condition, results of
operations, capital requirements and other factors and will be at the discretion
of our board of directors. We do not anticipate paying cash dividends on our
common stock in the foreseeable future. Furthermore, we may incur additional
indebtedness that may severely restrict or prohibit the payment of
dividends.
  Our securities are quoted on the OTC
Bulletin Board, which may limit the liquidity and price of our securities more
than if our securities were quoted or listed on the Nasdaq Stock Market or a
national exchange.  Our securities are currently quoted on the OTC
Bulletin Board, an NASD-sponsored and operated inter-dealer automated quotation
system for equity securities not included in the Nasdaq Stock Market. Quotation
of our securities on the OTC Bulletin Board may limit the liquidity and price of
our securities more than if our securities were quoted or listed on The Nasdaq
Stock Market or a national exchange. Some investors may perceive our securities
to be less attractive because they are traded in the over-the-counter market. In
addition, as an OTC Bulletin Board listed company, we do not attract the
extensive analyst coverage that accompanies companies listed on Nasdaq or any
other regional or national exchange. Further, institutional and other investors
may have investment guidelines that restrict or prohibit investing in securities
traded in the over-the-counter market. These factors may have an adverse impact
on the trading and price of our securities.
  Our common stock is subject to “penny
stock” regulations and restrictions on initial and secondary broker-dealer
sales.  The Securities and Exchange Commission has adopted
regulations which generally define “penny stock” to be any listed, trading
equity security that has a market price less than $5.00 per share or an exercise
price of less than $5.00 per share, subject to certain exemptions. Penny stocks
are subject to certain additional oversight and regulatory requirements. Brokers
and dealers affecting transactions in our common stock in many circumstances
must obtain the written consent of a customer prior to purchasing our common
stock, must obtain information from the customer and must provide disclosures to
the customer. These requirements may restrict the ability of broker-dealers to
sell our common stock and may affect your ability to sell your shares of our
common stock in the secondary market.
  ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
 Not
applicable.
  ITEM
4. CONTROLS AND PROCEDURES
 
 Disclosure
Controls and Procedures
  We
maintain disclosure controls and procedures designed to ensure that information
required to be disclosed in the reports we file pursuant to the Exchange Act are
recorded, processed, summarized and reported within the time periods specified
in the rules and forms of the Securities and Exchange Commission, and that
such information is accumulated and communicated to our Chief Executive Officer
(“CEO”), who also serves as the Company’s Principal Financial Officer (“PFO”),
to allow timely decisions regarding required disclosure. In designing and
evaluating the disclosure controls and procedures, management recognized that
any controls and procedures, no matter how well designed and operated, can only
provide a reasonable assurance of achieving the desired control objectives, and
in reaching a reasonable level of assurance, management necessarily was required
to apply its judgment in evaluating the cost-benefit relationship of possible
controls and procedures. Management designed the disclosure controls and
procedures to provide reasonable assurance of achieving the desired control
objectives.
  64
  We
carried out an evaluation, under the supervision and with the participation of
our management, including our CEO and PFO, of the effectiveness of the design
and operation of our disclosure controls and procedures as of the end of the
period covered by this Quarterly Report.  We have determined that the loss
of certain personnel in our legal, accounting and finance departments, when
considered collectively in light of the number and complexity of accounting
matters requiring consideration, created a possibility that a material
misstatement of our financial statements could occur and may not be prevented or
detected.  In addition, we have identified material weaknesses in internal
control over financial reporting as discussed in our most recent annual report
filed on Form 10-KSB.  As a result, our disclosure controls and
procedures were not effective as of June 30, 2008.  To address these
material weaknesses, we have retained an outside accounting consulting firm to
assist the Company in preparing and reviewing the restatements and preparing
this Quarterly Report on Form 10-Q.  We are also initiating an employment
search process to fill open positions.
 
 Nothwithstanding
any material weaknesses identified above, we believe our financial statements
fairly present in all material respects the financial position, results of
operations and cash flows for the interim periods presented in our quarterly
report on Form 10-Q.
  Changes
in Internal Control over Financial Reporting
  During
the quarter ended June 30, 2008, both our principal financial/accounting officer
and our general counsel resigned from their positions with the company. 
Our Chief Executive Officer has assumed the duties of our principal
financial/accounting officer and will continue to do so until a replacement is
hired.
  Except
as noted above, there have been no other significant changes in our internal
controls over financial reporting (as such term is defined in
Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act)
during the quarter ended June 30, 2008 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
 
 PART II.
OTHER INFORMATION
  ITEM
1. LEGAL PROCEEDINGS
  Gary D. Aronson v. Advanced Cell
Technology, Inc., Superior Court of California, County of Alameda, Case No.
RG07348990.John S.
Gorton v. Advanced Cell Technology, Inc, Superior Court of California, County of
Alameda Case No. RG07350437.  On October 1, 2007 Gary D. Aronson
brought suit against the Company with respect to a dispute over the
interpretation of the anti-dilution provisions of the Company’s warrants issued
to Mr. Aronson on or about September 14, 2005. John S. Gorton initiated a
similar suit on October 10, 2007.  The two cases have been consolidated.
The plaintiffs allege that the Company breached warrants to purchase securities
issued by the Company to these individuals by not timely issuing stock after the
warrants were exercised, failing to issue additional shares of stock in
accordance with the terms of the warrants and failing to provide proper notice
of certain events allegedly triggering Plaintiffs' purported rights to
additional shares.  Plaintiffs assert monetary damages in excess of
$14 million.  Plaintiffs may alternatively seek additional shares in the
Company with a value potentially in excess of $14 million, or may seek a
combination of monetary damages and shares in the Company.  Plaintiffs
also seek prejudgment interest and attorney fees.  Discovery is not
complete and no conclusions have been reached as to the potential exposure to
the Company or whether the Company has liability.
 
 Alexandria Real Estate-79/96
Charlestown Navy Yard v.
Advanced Cell Technology, Inc. and Mytogen, Inc. (Suffolk County,
Massachusetts):  The Company and its subsidiary Mytogen, Inc. are
currently defending themselves against a civil action brought in Suffolk
Superior Court, No. 09-442-B, by their former landlord at 79/96 Thirteenth
Street, Charlestown, Massachusetts, a property vacated by the Company and
Mytogen effective May 31, 2008. In that action, Alexandria Real Estate-79/96
Charlestown Navy Yard (“ARE”) is alleging that it has been unable to relet the
premises and therefore seeking rent for the vacated premises since September
2008.  Alexandria is also seeking certain clean-up and storage
expenses.  The Company is defending against the suit, claiming that ARE had
breached the covenant of quiet enjoyment as of when Mytogen vacated, and that
had ARE used reasonable diligence in its efforts to secure a new tenant, it
would have been more successful.  No trial date has been
set.
  65
  On May
31, 2008, the Company settled a dispute as a subtenant to its Alameda,
California office for nonpayment of rent to its sublandlord. The sublease
expired on May 31, 2008. As of that date, $445,000 of base rent, additional
rent, and equipment payments, plus late fees and costs due under the sublease
for a grand total of approximately $475,000 remained unpaid during the period
from January 1, 2008 through May 31, 2008. On the date of the lease expiration,
the Company vacated the premises but failed to remove the equipment that
belonged to the Company. Consequently, the Company has agreed to assign all
rights to the equipment to the sublandlord in partial settlement of amounts
owed. Further, the Company has agreed to assign the sublandlord 62.5% of the
Company’s right, title, and interest in all royalties and 65% of subtenant’s
right, title, and interest in all other consideration payable to the Company
under a license agreement with Embryome Sciences, Inc., dated July 10, 2008,
until such time as the sublandlord has received royalty and other payments equal
to $475,000, including the value of the equipment assigned to the
sublandlord.
 
 ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
 The
issuances of the equity securities described below were made in reliance upon
the exemption from registration under Section 4(2) of the Securities
Act of 1933, as amended, relating to sales by an issuer not involving a public
offering, and/or pursuant to the requirements of one or more of the safe harbors
provided in Regulation D under the Securities Act.
  We issued
and sold a $600,000 unsecured convertible note dated as of February 15, 2008
(“Note A”) to JMJ Financial, for a net purchase price of $500,000 (reflecting a
16.66% original issue discount) in a private placement. Note A bears interest at
the rate of 12% per annum, and is due by February 15, 2010. At any time after
the 180th day following the effective date of Note A, the holder may at its
election convert all or part of Note A plus accrued interest into shares of our
common stock at the conversion rate of the lesser of: (a) $0.38 per share, or
(b) 80% of the average of the three lowest trade prices in the 20 trading days
prior to the conversion. Pursuant to the Use of Proceeds Agreement entered into
in connection with the issuance of Note A, we are required to use the proceeds
from Note A solely for research and development dedicated to adult stem cell
research.
  Effective
February 15, 2008, in exchange for $1,000,000 in the form of a Secured &
Collateralized Promissory Note (the “JMJ Note”) issued by JMJ Financial to the
Company, we issued and sold an unsecured convertible note (“Note B”) to JMJ
Financial in the aggregate principal amount of $1,200,000 or so much as may be
paid towards the balance of the JMJ Note. Note B bears interest at the rate of
10% per annum, and is due by February 15, 2010. At any time following the
effective date of Note B, the holder may at its election convert all or part of
Note B plus accrued interest into shares of our common stock at the conversion
rate of the lesser of: (a) $0.38 per share, or (b) 80% of the average of the
three lowest trade prices in the 20 trading days prior to the conversion. In
connection with the issuance of Note B, we entered into a Collateral and
Security Agreement dated as of February 15, 2008 with JMJ Financial pursuant to
which we granted JMJ Financial a security interest in certain of our assets
securing the JMJ Note. As of June 30, 2008, we had drawn down and received the
following amounts under Note B:
  · On March 17, 2008 —
$60,000 for a net purchase price of $50,000 (reflecting a 16.66% original issue
discount).
 · On June 17, 2008 —
$60,000 for a net purchase price of $50,000 (reflecting a 16.66% original issue
discount).
  Pursuant
to the Use of Proceeds Agreement entered into in connection with the issuance of
Note B, we are required to use the proceeds from Note B solely for research and
development dedicated to adult stem cell research.
  66
  As
described in our Current Report on Form 8-K filed with the Securities and
Exchange Commission on April 1, 2008, as amended on April 9, 2008, we issued
senior secured convertible debentures dated March 31, 2008 in the aggregate
principal amount of $4,038,880 with an original issue discount of
20.3187%.  The closing escrow established in connection with the
transaction was released April 4, 2008. In connection with the closing of the
issuance and sale of convertible debentures, we received gross proceeds of
$2,332,431, excluding refinancing of bridge debt and in-kind payments incurred
in anticipation of the financing. The convertible debentures are due and payable
one year from the date of issuance, unless sooner converted into shares of our
common stock.   At any time from the closing date until the maturity
date of the debentures, the Purchasers have the right to convert the debentures,
in whole or in part, into common stock of the Company at the then effective
conversion price. The debentures are initially convertible into 26,925,867
shares of common stock at a price of $0.15 per share. In connection with the
closing of the 2008 financing, we also issued to the investors warrants to
purchase an aggregate of 26,925,867 shares of our common stock. The term of the
warrants is five years and the exercise price is $0.165 per share, subject to
anti-dilution and other customary adjustments.
  In
connection with the closing of the 2008 financing described above, we issued (i)
warrants to purchase an aggregate of 6,399,806 shares of common stock of the
Company at an exercise price of $0.165 to T.R. Winston & Company, LLC as
consideration for placement agent services provided in connection with the 2008
financing, (ii) a debenture in the principal amount of $250,000 to T.R. Winston
& Company, LLC in order to satisfy certain outstanding payables owed by the
Company, (iii) a debenture in the principal amount of $250,000 to Pierce Atwood
LLP in order to satisfy certain outstanding payables owed by the Company, and
(iv) a debenture in the principal amount of $61,000 to PDPI, LLC in order to
satisfy certain outstanding payables owed by the Company to one of their
partners (Green Mountain Finance LLC). The debentures and warrants described
above contained the same terms and conditions as those issued to the investors
in the 2008 financing.
  On
March 21, 2008, we issued and sold an aggregate of $130,000 in unsecured
convertible notes (the “Bridge Notes”) to PDPI LLC and The Shapiro Family Trust.
Dr. Shapiro, one of the Company’s directors, may be deemed the beneficial
owner of the securities owned by The Shapiro Family Trust. The net outstanding
amount of principal plus interest of the Notes was converted into common stock
of the Company in connection with the 2008 Financing described
above.
  Payments,
either in cash or share-based payments, made in connection with the sale of
debentures are recorded as deferred debt issuance costs and amortized using the
effective interest method over the lives of the related debentures. The weighted
average amortization period for deferred debt issuance costs is 36
months.
  ITEM
3. DEFAULTS UPON SENIOR SECURITIES
 
 None.
  ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
 None.
  ITEM
5. OTHER INFORMATION
 
 None.
  ITEM 6.
EXHIBITS
 Exhibit Description
  31.1
                  
                  Section 302
      Certification of Chief Executive Officer and Principal Financial
      Officer.*32.1
                  
                  Certification
      of Chief Executive Officer and Principal Financial Officer pursuant to 18
      U.S.C.
Section 1350.*
 
 *
                Filed
      herewith
  67
  SIGNATURE
  Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
  ADVANCED
      CELL TECHNOLOGY, INC.By:
                /s/
      William M. Caldwell, IVWilliam
      M. Caldwell, IVChief
      Executive Officer and Principle Financial OfficerDated:
      May 8, 2009
  68