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 MARCH 31, 2010ORo

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o 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  x
Non-accelerated filer o
Smaller reporting company  o(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 May 7, 2010:Common Stock, $0.001 par value per share

897,668,053 shares




















ADVANCED CELL TECHNOLOGY, INC. AND SUBSIDIARY





INDEX





PART I. FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTS


3ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


24ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


28ITEM 4. CONTROLS AND PROCEDURES


29PART II. OTHER INFORMATION


29ITEM 1. LEGAL PROCEEDINGS


29ITEM 1A. RISK FACTORS


30ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS


42ITEM 3. DEFAULTS UPON SENIOR SECURITIES


43ITEM 4. [REMOVED AND RESERVED]


43ITEM 5. OTHER INFORMATION


43ITEM 6. EXHIBITS


44SIGNATURE


45














2








Part I – FINANCIAL INFORMATION


Item 1. Financial Statements


ADVANCED CELL TECHNOLOGY, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2010 AND DECEMBER 31, 2009


March 31,


December 31,2010


2009(unaudited)ASSETSCURRENT ASSETS:Cash and cash equivalents

$
5,177,685


$
2,538,838Prepaid expenses


-



9,054Deferred royalty fees, current portion


91,598



91,598Total current assets


5,269,283



2,639,490Property and equipment, net


145,676



113,904Deferred royalty fees, less current portion


363,789



386,689Deposits


14,766



2,170Deferred issuance costs, net of amortization of $3,748,709 and $3,535,245


1,732,291



1,945,755TOTAL ASSETS

$
7,525,805


$
5,088,008LIABILITIES AND STOCKHOLDERS' DEFICITCURRENT LIABILITIES:Accounts payable

$
6,064,419


$
6,172,881Accrued expenses


10,022,557



2,031,032Deferred revenue, current portion


820,632



805,926Amended and restated convertible debentures, net of discounts of $292,586 and $585,088, respectively


5,207,562



7,605,107Convertible promissory notes, current portion, net of discounts of $1,340,304 and $905,973, respectively


91,013



685,2332009 Convertible debentures, current portion, net of discounts of $1,136,517 and $1,599,073, respectively


699,006



246,893Embedded conversion option liabilities, current portion


5,511,772



6,772,200Deferred joint venture obligations, current portion


26,070



56,602Total current liabilities


28,443,031



24,375,874Convertible promissory notes, less current portion, net of discounts of $2,019,635 and $1,150,300, respectively


137,142



59,1842009 Convertible promissory notes, less current portion, net of disounts of $699,007 and $222,656, respectively


429,921



34,378Embedded conversion option liabilities, less current portion


2,993,086



1,837,604Warrant derivative liabilities


21,285,096



18,168,597Deferred joint venture obligations, less current portion


3,604



6,870Deferred revenue, less current portion


5,560,525



5,780,389Total liabilities


58,852,405



50,262,896Preferred stock, Series A-1 Redeemable; $0.001 par value; 50,000,000 shares authorized,113 and 92 shares issued and outstanding; aggregate liquidation value: $1,263,662 and $1,044,305, respectively


1,160,768



908,195Commitments and contingenciesSTOCKHOLDERS' DEFICIT:Preferred stock, Series B; $0.001 par value; 50,000,000 shares authorized,200 and 0 shares issued and outstanding


-



-Common stock, $0.001par value; 1,750,000,000 shares authorized,793,409,036 and 663,649,294 shares issued and outstanding


793,409



663,649Additional paid-in capital


93,153,560



79,829,080Promissory notes receivable, net of discount of $691,132 and $0, respectively


(2,008,868
)


-Accumulated deficit


(144,425,469
)


(126,575,812
)Total stockholders' deficit


(52,487,368
)


(46,083,083
)TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT

$
7,525,805


$
5,088,008





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







3








ADVANCED CELL TECHNOLOGY, INC. AND SUBSIDIARY


CONSOLIDATED STATEMENTS OF OPERATIONS


FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009


(UNAUDITED)


Three Months Ended March 31,2010


2009Revenue(License fees and royalties)

$
205,158


$
293,976Cost of Revenue


66,650



138,752Gross profit


138,508



155,224Operating expenses:Research and development


3,895,581



436,607Grant reimbursements


-



(136,840
)General and administrative expenses


11,218,243



747,078Loss on settlement of litigation


-



4,793,949Total operating expenses


15,113,824



5,840,794Loss from operations


(14,975,316
)


(5,685,570
)Non-operating income (expense):Interest income


3,043



1,621Interest expense and late fees


(3,352,774
)


(582,821
)Loss on extinguishment of debt


-



(1,796,368
)Adjustments to fair value of derivatives


1,584,704



(10,841,612
)Finance cost


(1,109,290
)


-Losses attributable to equity method investment


-



(95,126
)Total non-operating income (expense)


(2,874,317
)


(13,314,306
)Loss before income tax


(17,849,633
)


(18,999,876
)Income tax


-



-Net loss


(17,849,633
)


(18,999,876
)Weighted average shares outstanding :Basic


700,573,791



476,926,873Diluted


700,573,791



476,926,873Net loss per share attributed to common stockholders:Basic

$
(0.03
)

$
(0.04
)Diluted

$
(0.03
)

$
(0.04
)The accompanying notes are an integral part of these consolidated financial statements.


4





ADVANCED CELL TECHNOLOGY, INC. AND SUBSIDIARY


CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT FOR THE THREE MONTHS ENDED MARCH 31, 2010
 (UNAUDITED)
 Additional


Promissory





TotalSeries B Preferred Stock


Common Stock


Paid-in


Notes


Accumulated


Stockholders'Shares


Amount


Shares


Amount


Capital


Receivable, net


Deficit


DeficitBalance December 31, 2009


-


$
-



663,649,294


$
663,649


$
79,829,080


$
-


$
(126,575,812
)

$
(46,083,083
)Redemptions of convertible debentures


-



-



23,950,070



23,950



2,128,412



-



-



2,152,362Conversions of convertible debentures


-



-



17,607,935



17,608



1,735,076



-



-



1,752,684Conversions of Series A-1 preferred stock


-



-



6,206,961



6,207



614,489



-



-



620,696Conversions of amended convertible promissory notes


-



-



17,368,965



17,369



1,161,083



-



-



1,178,452Common stock issued on exercise of debenture warrants


-



-



37,000



37



3,663



-



-



3,700Common stock issued to executives for compensation


-



-



21,726,102



21,726



1,933,623



-



-



1,955,349Common stock issued to directors for board compensation


-



-



16,773,597



16,774



1,543,439



-



-



1,560,213Issuance of stock for financing costs


-



-



250,000



250



22,250



-



-



22,500Issuance of Series B preferred stock


200



-



-



-



2,000,000



-



-



2,000,000Common stock issued upon exercise of Series B preferred stock warrants


-



-



25,839,112



25,839



1,970,314



(1,996,153
)


-



-Dividends on Series B preferred stock


-



-



-



-



12,739



-



(12,739
)


-Accretion of note receivable discount


-



-



-



-



-



(12,715
)


12,715



-Option compensation charges


-



-



-



-



199,392



-



-



199,392Net loss for three months ended March 31, 2010


-



-



-



-



-



-



(17,849,633
)


(17,849,633
)Balance March 31, 2010


200


$
-



793,409,036


$
793,409


$
93,153,560


$
(2,008,868
)

$
(144,425,469
)

$
(52,487,368
)


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







5




ADVANCED CELL TECHNOLOGY, INC. AND SUBSIDIARY
 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
 (UNAUDITED)
 Three Months Ended March 31,2010


2009CASH FLOWS FROM OPERATING ACTIVITIES:Net loss

$
(17,849,633
)

$
(18,999,876
)Adjustments to reconcile net loss to net cashused in operating activities:Depreciation and amortization


45,580



126,520Amortization of deferred charges


22,900



76,252Amortization of deferred revenue


(205,158
)


(293,976
)Redeemable preferred stock dividend accrual


9,887



-Stock based compensation


199,392



92,833Amortization of deferred issuance costs


213,464



-Amortization of discounts


3,129,424



-Loss on extinguishment of debt


-



1,796,368Adjustments to fair value of derivatives


(1,584,704
)


10,841,612Shares of common stock issued for services


3,515,562



-Warrants issued for consulting services


50,232



-Non-cash financing costs


1,109,290



-Loss on settlement of litigation


-



4,793,949Loss attributable to investment in joint venture


-



95,126Amortization of deferred joint venture obligations


(33,798
)


(41,592
)(Increase) / decrease in assets:Accounts receivable


-



261,504Prepaid expenses


9,054



32,476Increase / (decrease) in current liabilities:Accounts payable and accrued expenses


8,438,438



(1,080,121
)Accrued interest


-



506,693Deferred revenue


-



1,500,000Net cash used in operating activities


(2,930,070
)


(292,232
)CASH FLOWS FROM INVESTING ACTIVITIESPurchases of property and equipment


(77,352
)


-Payments of deposits


(12,596
)


(2,170
)Net cash used in investing activities


(89,948
)


(2,170
)CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from exercise of warrants


3,700



-Proceeds from issuance of convertible debentures


1,685,000



-Proceeds from convertible promissory notes


1,650,000



-Proceeds from issuance of Series A-1 convertible preferred stock, net


830,165



-Proceeds from issuance of Series B preferred stock,  net


1,490,000



-Net cash provided by financing activities


5,658,865



-NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS


2,638,847



(294,402
)CASH AND CASH EQUIVALENTS, BEGINNING BALANCE


2,538,838



816,904CASH AND CASH EQUIVALENTS, ENDING BALANCE

$
5,177,685


$
522,502CASH PAID FOR:Interest

$
-


$
-Income taxes

$
6,185


$
499SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:Issuance of 23,950,070 and 0 shares of common stock in redemption of debt

$
2,152,362


$
-Issuance of 41,183,861 and 6,176,413 shares of common stock in conversion of debt and preferred stock

$
3,551,832


$
331,802Issuance of 24,900,000 and 0 shares of common stock in payment convertible preferred stock issuance costs

$
-


$
4,731,000Issuance of note receivable on exercise of warrants for 25,839,112 and 0 shares of common stock

$
2,700,000


$
-Issuance of 0 and 39,380,847 shares of common stock in settlement of litigation

$
-


$
5,299,148Issuance of 16,773,597 and 0 shares of common stock in payment of board fees

$
1,560,213


$
-Issuance of 21,726,102 and 0 shares of common stock in payment of executive compensation

$
1,955,349


$
-Issuance of 250,000 and 0 shares of common stock in payment of financing costs

$
22,500


$
-Series B preferred stock dividend

$
12,739


$
-Interest accreted on promissory notes receivable

$
12,715


$
-





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







6





ADVANCED CELL TECHNOLOGY, INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 March 31, 2010
 
 1.  ORGANIZATIONAL MATTERS
 
 Organization and Nature of Business
 
 Advanced Cell Technology, Inc. (the “Company”) is a biotechnology company, incorporated in the state of Delaware, focused on developing and commercializing human embryonic and adult stem cell technology in the emerging fields of regenerative medicine. Principal activities to date have included obtaining financing, securing operating facilities, and conducting research and development. The Company has no therapeutic products currently available for sale and does not expect to have any therapeutic products commercially available for sale for a period of years, if at all. These factors indicate that the Company’s ability to continue its research and development activities is dependent upon the ability of management to obtain additional financing as required.
 
 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Basis of Presentation —The Company follows accounting standards set by the Financial Accounting Standards Board (“FASB”). The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). References to GAAP issued by the FASB in these footnotes are to the FASB Accounting Standards Codification,TM sometimes referred to as the Codification or ASC.
 
 Principles of Consolidation — The accounts of the Company and its wholly-owned subsidiary Mytogen, Inc. (“Mytogen”) are included in the accompanying consolidated financial statements. All intercompany balances and transactions were eliminated in consolidation.
 
 Segment Reporting—ASC 280, “Segment Reporting” requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company’s management organizes segments within the company for making operating decisions and assessing performance. The Company determined it has one operating segment. Disaggregation of the Company’s operating results is impracticable, because the Company’s research and development activities and its assets overlap, and management reviews its business as a single operating segment. Thus, discrete financial information is not available by more than one operating segment.
 
 Use of Estimates — These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and, accordingly, require management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Specifically, the Company’s management has estimated variables used to calculate the Black-Scholes option pricing model used to value derivative instruments as discussed below under “Fair Value Measurements”. In addition, management has estimated the expected economic life and value of the Company’s licensed technology, the Company’s net operating loss for tax purposes, share-based payments for compensation to employees, directors, consultants and investment banks, and the useful lives of the Company’s fixed assets. Actual results could differ from those estimates.
 
 Reclassifications — Certain prior year financial statement balances have been reclassified to conform to the current year presentation. These reclassifications had no effect on the recorded net loss.
 
 Cash and Cash Equivalents — Cash equivalents are comprised of certain highly liquid investments with maturities of three months or less when purchased. The Company maintains its cash in bank deposit accounts, which at times, may exceed federally insured limits. The Company has not experienced any losses related to this concentration of risk. As of March 31, 2010 and December 31, 2009, the Company had deposits in excess of federally-insured limits totaling $4,441,847 and $2,028,195, respectively. The Company has not experienced any losses in such accounts.
  7
 
 Property and Equipment — The Company records its property and equipment at historical cost. The Company expenses maintenance and repairs as incurred. Upon disposition of property and equipment, the gross cost and accumulated depreciation are written off and the difference between the proceeds and the net book value is recorded as a gain or loss on sale of assets. In the case of certain assets acquired under capital leases, the assets are recorded net of imputed interest, based upon the net present value of future payments. Assets under capital lease are pledged as collateral for the related lease.
 
 The Company provides for depreciation over the assets’ estimated useful lives as follows:
 
 Machinery & equipment

4 yearsComputer equipment

3 yearsOffice furniture

4 yearsLeasehold improvements

Lesser of lease life or economic lifeCapital leases

Lesser of lease life or economic life
 
 Equity Method Investment — The Company follows ASC 323 “Investments-Equity Method and Joint Ventures”in accounting for its investment in the joint venture. In the event the Company’s share of the joint venture’s net losses reduces the Company’s investment to zero, the Company will discontinue applying the equity method and will not provide for additional losses unless the Company has guaranteed obligations of the joint venture or is otherwise committed to provide further financial support for the joint venture. If the joint venture subsequently reports net income, the Company will resume applying the equity method only after its share of that net income equals the share of net losses not recognized during the period the equity method was suspended.
 
 Deferred Issuance Costs — Payments, either in cash or share-based payments, made in connection with the sale of debentures are recorded as deferred debt issuance costs and amortized using the effective interest method over the lives of the related debentures. The weighted average amortization period for deferred debt issuance costs is 48 months.
 
 Long-Lived Assets — The Company follows ASC 360-10, “Property, Plant, and Equipment,”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. Through March 31, 2010, the Company had not experienced impairment losses on its long-lived assets.
 
 Fair Value Measurements — For certain financial instruments, including accounts payable, accrued expenses, interest payable, convertible debt and convertible preferred stock, the carrying amounts approximate fair value due to their relatively short maturities.
 
 On January 1, 2008, the Company adopted ASC 820-10, “Fair Value Measurements and Disclosures.” ASC 820-10 defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The carrying amounts reported in the consolidated balance sheets for receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The three levels of valuation hierarchy are defined as follows:
  8
  
 ·
Level 1 inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets.
 
 ·
Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
 
 ·
Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.
 
 The Company analyzes all financial instruments with features of both liabilities and equity under ASC 480, “Distinguishing Liabilities From Equity”and ASC 815, “Derivatives and Hedging.” 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.
 
 The Company’s warrant and non-employee option derivative liabilities are carried at fair value totaling $21,285,096 and $18,168,597, as of March 31, 2010 and December 31, 2009, respectively.  The Company’s embedded conversion option liabilities associated with their convertible debt and Series A-1 preferred stock are carried at fair value totaling $8,504,858 and $8,609,804 as of March 31, 2010 and December 31, 2009, respectively.  The Company used Level 2 inputs for its valuation methodology for the warrant derivative liabilities and embedded conversion option liabilities as their fair values were determined by using the Black-Scholes option pricing model based on various assumptions. The Company’s 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.
 
 At March 31, 2010, the Company identified the following assets and liabilities that are required to be presented on the balance sheet at fair value:
 
 Fair Value Measurements atFair Value

March 31, 2010As of


Using Fair Value HierarchyDerivative Liabilities

March 31, 2010

Level 1


Level 2


Level 3Warrant derivative liabilities

$
21,285,096


$
-



21,285,096



-Embedded conversion option liabilities


8,504,858



-



8,504,858



-$
29,789,954


$
-



29,789,954



-
 For the three months ended March 31, 2010 and 2009, the Company recognized a gain (loss) of $1,584,704 and ($10,841,612), 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 ASC 815.
 
 Revenue Recognition — The Company’s revenues are generated from license and research agreements with collaborators. Licensing revenue is recognized on a straight-line basis over the shorter of the life of the license or the estimated economic life of the patents related to the license. License fee revenue begins to be recognized in the first full month following the effective date of the license agreement. Deferred revenue represents the portion of the license and other payments received that has not been earned. Costs associated with the license revenue are deferred and recognized over the same term as the revenue. Reimbursements of research expense pursuant to grants are recorded in the period during which collection of the reimbursement becomes assured, because the reimbursements are subject to approval.
  9
  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 — The Company records stock-based compensation in accordance with ASC 718, “Compensation – Stock Compensation.”  ASC 718 requires companies to measure compensation cost for stock-based employee compensation at fair value at the grant date and recognize the expense over the employee’s requisite service period. The Company recognizes in the statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees and non-employees. There were 40,626,119 options outstanding as of March 31, 2010.
 
 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 sheets 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 statements of operations.
 
 Net Loss Per Share — Earnings per share is calculated in accordance with the ASC 260-10, “Earnings Per Share.” Basic earnings per share is based upon the weighted average number of common shares outstanding. Diluted earnings per share is based on the assumption that all dilutive convertible shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period.
 
 At March 31, 2010 and 2009, approximately 404,881,796 and 248,806,000 potentially dilutive shares, respectively, were excluded from the shares used to calculate diluted earnings per share as their inclusion would be anti-dilutive.
 
 Concentrations and Other Risks —Currently, the Company’s revenues are concentrated on a small number of customers. The following table shows the Company’s concentrations of its revenue for those customers comprising greater than 10% of total license revenue for the three months ended March 31, 2010 and 2009.
   10
 
 March 31,2010


2009Genzyme Transgenics Corporation


*



11
%Exeter Life Sciences, Inc.


15
%


10
%START Licensing, Inc.


12
%


*Terumo Corporation


*



26
%International Stem Cell Corporation


18
%


13
%Transition Holdings, Inc.


25
%


15
%CHA Biotech and SCRMI


16
%


*
 *License revenue earned during the period was less than 10% of total license revenue.
 
 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 October 2009, the FASB issued Accounting Standards Update 2009-15 ("ASU 2009-15") regarding accounting for own-share lending arrangements in contemplation of convertible debt issuance or other financing.  This ASU requires that at the date of issuance of the shares in a share-lending arrangement entered into in contemplation of a convertible debt offering or other financing, the shares issued shall be measured at fair value and be recognized as an issuance cost, with an offset to additional paid-in capital. Further, loaned shares are excluded from basic and diluted earnings per share unless default of the share-lending arrangement occurs, at which time the loaned shares would be included in the basic and diluted earnings-per-share calculation.  This ASU is effective for fiscal years beginning on or after December 15, 2009, and interim periods within those fiscal years for arrangements outstanding as of the beginning of those fiscal years. The adoption of this ASU did not have a significant impact on the Company’s consolidated financial statements.
 
 On December 15, 2009, the FASB issued ASU No. 2010-06 Fair Value Measurements and Disclosures Topic 820 “Improving Disclosures about Fair Value Measurements”.  This ASU requires some new disclosures and clarifies some existing disclosure requirements about fair value measurement as set forth in Codification Subtopic 820-10. The FASB’s objective is to improve these disclosures and, thus, increase the transparency in financial reporting.  The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.
 
 On February 25, 2010, the FASB issued ASU 2010-09 Subsequent Events Topic 855 “Amendments to Certain Recognition and Disclosure Requirements,” effective immediately. The amendments in the ASU remove the requirement for an SEC filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of U.S. GAAP. The FASB believes these amendments remove potential conflicts with the SEC’s literature. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.
 
 On March 5, 2010, the FASB issued ASU No. 2010-11 Derivatives and Hedging Topic 815 “Scope Exception Related to Embedded Credit Derivatives.” This ASU clarifies the guidance within the derivative literature that exempts certain credit related features from analysis as potential embedded derivatives requiring separate accounting. The ASU specifies that an embedded credit derivative feature related to the transfer of credit risk that is only in the form of subordination of one financial instrument to another is not subject to bifurcation from a host contract under ASC 815-15-25, Derivatives and Hedging — Embedded Derivatives — Recognition. All other embedded credit derivative features should be analyzed to determine whether their economic characteristics and risks are “clearly and closely related” to the economic characteristics and risks of the host contract and whether bifurcation is required. The ASU is effective for the Company on July 1, 2010. Early adoption is permitted. The adoption of this ASU will not have a material impact on the Company’s consolidated financial statements.
  11
  
 
 3. LICENSE REVENUE
 
 On March 30, 2009, the Company entered into a second license agreement with CHA under which the Company will license its RPE technology, for the treatment of diseases of the eye, to CHA for development and commercialization exclusively in Korea. The Company is eligible to receive up to a total of $1.9 million in fees based upon the parties achieving certain milestones, including the Company making an IND submission to the US FDA to commence clinical trials in humans using the technology. The Company received an up-front fee under the license in the amount of $1,100,000 during the second quarter of 2009. Under the agreement, CHA will incur all of the costs associated with the RPA clinical trials in Korea. The Company recognized $16,176 and $0 in license fee revenue for the three months ended March 31, 2010 and 2009, respectively, in its accompanying consolidated statements of operations. The full $1,100,000 license fee was included in accounts receivable and accrued in deferred revenue at March 31, 2009. The Company is recognizing revenue from this agreement over its 17-year patent useful life.
 
 4. INVESTMENT IN JOINT VENTURE
 
 On December 1, 2008, the Company and CHA Bio & Diostech Co., Ltd. formed an international joint venture. The new company, Stem Cell & Regenerative Medicine International, Inc. (“SCRMI”), will develop human blood cells and other clinical therapies based on the Company’s hemangioblast program, one of the Company’s core technologies. Under the terms of the agreement, the Company purchased upfront a 33% interest in the joint venture, and will receive another 7% interest upon fulfilling certain obligations under the agreement through April 30, 2010. The Company’s contribution includes (a) the uninterrupted use of a portion of its leased facility at the Company’s expense, (b) the uninterrupted use of certain equipment in the leased facility, and (c) the release of certain of the Company’s research and science personnel to be employed by the joint venture. In return, for a 67% interest, CHA has agreed to contribute $150,000 cash and to fund all operational costs in order to conduct the hemangioblast program. Effective May 1, 2010, the Company holds a 40% interest in the joint venture and CHA Bio & Diostech, Ltd. owns a 60% interest.
 
 The Company has agreed to collaborate with the joint venture in securing grants to further research and development of its technology. Additionally, SCRMI has agreed to pay the Company a fee of $500,000 for an exclusive, worldwide license to the Hemangioblast Program. The Company has recorded $7,353 and $7,353 in license fee revenue for the three months ended March 31, 2010 and 2009, respectively, in its accompanying consolidated statements of operations, and the balance of unamortized license fee of $462,010 and $491,422 has been accrued in deferred revenue in the accompanying consolidated balance sheets at March 31, 2010 and 2009, respectively.
 
 ASC 323 “Investments-Equity Method and Joint Ventures” requires that the difference between the cost of an investment and the amount of underlying equity in net assets of an investee should be accounted for as if the investee were a consolidated subsidiary. The Company has calculated the difference between the cost of the investment and the amount of underlying equity in net assets of the joint venture to be $196,130, based on the Company’s initial cost basis in the investment of $246,130, less its 33.3% of the initial equity in net assets of the joint venture of $50,000.  The Company is amortizing the $196,130 over the term of the shorter of the equipment usage or lease term (through April 2010, or 17 months from December 1, 2008). The amortization will be applied against the value of the Company’s investment. Amortization expense for the three months ending March 31, 2010 and 2009 was $0 and $46,149, respectively.
 
 The following table is a summary of key financial data for the joint venture as of and for the three months ended March 31, 2010:
  12
 
 Current assets

$
766,420Noncurrent assets

$
605,597Current liabilities

$
909,851Noncurrent liabilities

$
481,604Net revenue

$
6,693Net loss

$
(482,110
)
 5. PROPERTY AND EQUIPMENT
 
 Property and equipment consisted of the following at March 31, 2010 and December 31, 2009:
 
 March 31,


December 31,2010


2009Machinery & equipment

$
1,470,306


$
1,470,306Computer equipment


457,545



441,744Office furniture


76,201



76,201Leasehold improvements


188,748



127,197Capital leases


51,235



51,235Accumulated depreciation


(2,098,359
)


(2,052,779
)Property and equipment, net

$
145,676


$
113,904
 Depreciation expense for the three months ended March 31, 2010 and 2009 amounted to $45,580 and $126,520, respectively.
 
 6. AMENDED AND RESTATED CONVERTIBLE DEBENTURES
  In connection with the amended and restated convertible debentures, the Company issued a total of 192,172,519 warrants to the holders. The terms of the amended and restated warrants include a reduced exercise price of $0.10, subject to certain customary anti-dilution adjustments. The termination date under the amended and restated warrants was extended until June 30, 2014. The warrants were valued at $17,636,386 and $16,072,842 at March 31, 2010 and December 31, 2009, respectively, at fair value using the Black-Scholes model. The increase in the fair value of this warrant liability was $1,563,544 and $5,919,896 during the three months ended March 31, 2010 and 2009, respectively, which was recorded through the results of operations as an adjustment to fair value of derivatives. The assumptions used in the Black-Scholes option pricing model at March 31, 2010 are as follows: (1) dividend yield of 0%; (2) expected volatility of 175%, (3) risk-free interest rate of 2.55%, and (4) expected life of 4.25 years.
 
 The Company has complied with the provisions of ASC 815 “Derivatives and Hedging”, and recorded the fair value of the embedded conversion option liability associated with the amended and restated convertible debentures. As of March 31, 2010 and December 31, 2009, the convertible debentures were convertible at the option of the holders into a total of 55,001,500 and 81,901,980 shares, respectively, subject to anti-dilution and other customary adjustments. The fair value of the embedded conversion option was $3,042,338 and $4,519,815 at March 31, 2010 and December 31, 2009, respectively. The decrease in the fair value of this liability was $1,477,477 and $2,766,546 during the three months ended March 31, 2010 and 2009, respectively, which was recorded through the results of operations as an adjustment to fair value of derivatives. The assumptions used in the Black-Scholes option pricing model at March 31, 2010 are as follows: (1) dividend yield of 0%; (2) expected volatility of 175%, (3) risk-free interest rate of 0.41%, and (4) expected life of 0.75 years. Additionally, $1,796,368 was recorded in loss on extinguishment of the 2008 convertible debenture during the three months ended March 31, 2009, as a result of a settlement with a debenture holder in March 2009. See Note 12.
 
 Interest expense from amortization of debt discounts for the three months ended March 31, 2010 and 2009 was $292,502 and $0, respectively.
  13
   The Company issued 29,408,005 and 7,282,667 shares of common stock upon redemption and conversion of these debentures during the three months ended March 31, 2010 and 2009, respectively.
 
 The following table summarizes the amended and restated convertible debentures outstanding at March 31, 2010:
  Convertible promissory notes, principal

$
5,500,150Debt discounts


(292,588
)Net convertible promissory notes

$
5,207,562Less current portion


(5,207,562
)Convertible promissory notes, long term

$
-
 7. AMENDED CONVERTIBLE PROMISSORY NOTES
 
 During the three months ended March 31, 2010, the Company received from JMJ Financial a total of $1,500,000, which equates to a principal amount of $1,767,857, including a $267,857 original issue discount. On the draw dates, this principal was convertible into 22,916,667 shares of the Company’s common stock.
 
 During the three months ended March 31, 2010, the Company also issued three additional convertible promissory notes to JMJ Financial, for a total of $3,000,000 available to receive in cash, for a principal sum of $3,850,000, which includes an original issue discount of $850,000. During the three months ended March 31, 2010, the Company received a total of $150,000 on these additional notes, which equates to a principal amount of $198,000, including a $48,000 original issue discount. Upon initial draws of the notes during the three months ended March 31, 2010, the outstanding principal balance on these notes was convertible into 2,329,412 shares of the Company’s commons stock. The notes mature on March 30, 2013.
 
 The initial fair value of the embedded conversion option liability associated with the funds received during the three months ended March 31, 2010 was valued using the Black-Scholes model, resulting in an initial fair value of $2,195,554. The assumptions used in the Black-Scholes option pricing model at the dates the funds were received are as follows: (1) dividend yield of 0%; (2) expected volatility of 175-180%, (3) risk-free interest rate of 1.34 – 1.60%, and (4) expected life of 2.58 – 3.00 years.
 
 As of March 31, 2010 and 2009, respectively, the convertible promissory notes were convertible at the option of the holders into a total of 44,705,592 and 10,384,615 shares, subject to anti-dilution and other customary adjustments. The fair value of the embedded conversion option was $3,847,300 and $2,471,727 at March 31, 2010 and December 31, 2009, respectively. The increase (decrease) in the fair value of this liability was $819,983 and ($226,987) during the three months ended March 31, 2010 and 2009, respectively, which was recorded through the results of operations as an adjustment to fair value of derivatives. The assumptions used in the Black-Scholes option pricing model at March 31, 2010 are as follows: (1) dividend yield of 0%; (2) expected volatility of 175%, (3) risk-free interest rate of 1.60%, and (4) expected life of 2.51 – 3.00 years.
 
 Interest expense from amortization of debt discounts for the three months ended March 31, 2010 and 2009 was $662,188 and $0, respectively.
 
 The following table summarizes the JMJ Financial convertible promissory notes outstanding at March 31, 2010:
  14
 
 Convertible promissory notes, principal

$
3,588,094Debt discounts


(3,359,939
)Net convertible promissory notes

$
228,155Less current portion


(91,013
)Convertible promissory notes, long term

$
137,142
 
 The Company issued 17,368,965 and 0 shares of common stock upon redemption and conversion of these promissory notes during the three months ended March 31, 2010 and 2009, respectively. During the three months ended March 31, 2010, the Company issued 17,368,965 shares of its common stock in conversion of $1,178,452 of its amended convertible promissory notes.
 
 8. 2009 CONVERTIBLE DEBENTURES
 
 On February 18, 2010, the Company completed the second closing, issuing additional debentures, under the same terms of the initial closing, in the principal amount of up to $2,076,451 for a purchase price of $1,730,375 (including $45,375 previously owed to a subscriber for legal services), in a closing that was to occur within 90 days of the initial closing. Pursuant to the initial closing under the Subscription Agreement, the Company also issued an aggregate of (i) 13,808,400 Class A Warrants.
 
 The term of the 13,808,400 warrants is five years from the initial close and is subject to anti-dilution and other customary adjustments. The initial fair value of the warrants was estimated at $1,175,007 using the Black-Scholes pricing model. The assumptions used in the Black-Scholes option pricing model at February 18, 2010 for all warrants issued in connection with these promissory notes are as follows: (1) dividend yield of 0%; (2) expected volatility of 180%, (3) risk-free interest rate of 0.34%, and (4) expected life of 4.73 years.
 
 The fair value of the embedded conversion option liability was valued using the Black-Scholes model, resulting in an initial fair value of $1,001,140 at February 18, 2010. The convertible debenture is convertible at the option of the holders into a total of 20,764,510 shares of common stock at a conversion price of $0.10 per share, subject to anti-dilution and other customary adjustments. The assumptions used in the Black-Scholes option pricing model at February 18, 2010 are as follows: (1) dividend yield of 0%; (2) expected volatility of 180%, (3) risk-free interest rate of 0.34%, and (4) expected life of 0.73 years.
 
 The fair value of the embedded conversion option liability was again valued using the Black-Scholes model, resulting in a fair value of $1,509,613 and $1,092,273 at March 31, 2010 and December 31, 2009, respectively. The convertible debenture was convertible at the option of the holders into a total of 29,644,510 and 0 shares of common stock at March 31, 2010 and 2009, respectively, at a conversion price of $0.10 per share, subject to anti-dilution and other customary adjustments. The assumptions used in the Black-Scholes option pricing model at March 31, 2010 are as follows: (1) dividend yield of 0%; (2) expected volatility of 175%, (3) risk-free interest rate of 0.24%, and (4) expected life of 0.62 years. The decrease in fair value of the embedded conversion option of $583,800 was recorded through the results of operations as an adjustment to the fair value of derivatives for the three months ended March 31, 2010.
 
 The total of 27,793,350 warrants was valued at $2,616,021 and $1,200,151 at March 31, 2010 and December 31, 2009, respectively, at fair value using the Black-Scholes model. The assumptions used in the Black-Scholes option pricing model at March 31, 2010 for all warrants issued in connection with these convertible debentures are as follows: (1) dividend yield of 0%; (2) expected volatility of 175%, (3) risk-free interest rate of 0.24%, and (4) expected life of 0.62 years. The increase in fair value of the embedded conversion option of $240,863 was recorded through the results of operations as an adjustment to the fair value of derivatives for the three months ended March 31, 2010.
  15
  
 Interest expense associated with amortization of debt discounts from this debenture for the three months ended March 31, 2010 and 2009 was $2,062,656 and $0, respectively.
 
 The Company is required to redeem the Notes monthly commencing in May 2010, in the amount of 14.28% of the initial principal amount of the Notes, in cash or common stock at the Company’s option (subject to the conditions set forth in the Notes), until the Notes are paid in full. During the three months ended March 31, 2010, the Company issued 12,150,000 shares of its common stock upon conversion of $1,215,000 of its 2009 convertible debentures.
 
 The following table summarizes the 2009 convertible promissory notes outstanding at March 31, 2010:
 
 Convertible debentures, principal

$
2,964,451Debt discounts


(1,835,524
)Net convertible debentures

$
1,128,927Less current portion


(699,006
)Convertible debentures, long term

$
429,921
 9. SERIES A-1 REDEEMABLE CONVERTIBLE PREFERRED STOCK
 
 The following table summarizes the Series A-1 redeemable convertible preferred stock and embedded derivative outstanding at March 31, 2010:
 
 March 31,2010Principal due

$
1,130,165Accrued dividend


133,497Debt discount


(102,894
)1,160,768Less current portion


-Non-current portion

$
1,160,768Aggregate liquidation value*


1,263,662
 *Represents the sum of principal due and accrued dividends.
 
 The outstanding balance at March 31, 2010 of $1,130,165 is convertible into 1,506,887 shares of the Company’s common stock. The Company values the conversion option initially when each draw takes place. The embedded conversion option was initially valued at $78,860 during the three months ended March 31, 2010 at fair value using the Black-Scholes model. The assumptions used in the Black-Scholes model to value the embedded conversion option at each draw date during the three months ended March 31, 2010 were as follows: (1) dividend yield of 0%; (2) expected volatility of 175 - 180%, (3) risk-free interest rate of 1.34 – 1.65%, and (4) expected life of 3.02 – 3.10 years.
 
 The embedded conversion option was again valued at $105,606 at March 31, 2010 at fair value using the Black-Scholes model. The decrease in the fair value of the embedded conversion option liability of $499,241 for the three months ended March 31, 2010 was recorded through the results of operations as an adjustment to fair value of derivatives. The assumptions used in the Black-Scholes model to value the embedded conversion option at March 31, 2010 were as follows: (1) dividend yield of 0%; (2) expected volatility of 175%, (3) risk-free interest rate of 1.60%, and (4) expected life of 3.02 years.
  16
  
 The Company recorded accrued dividends on the Series A-1 redeemable convertible preferred stock of $9,888 for the three months ended March 31, 2010. During the three months ended March 31, 2010, the Company issued 83 shares of its Series A-1 convertible preferred stock upon draws of $830,165 under the financing. During the same period, the Company issued 6,206,961 shares of its common stock in conversion of $620,696 of its Series A-1 preferred stock.
 
 Interest expense from amortization of the debt discount and deferred issuance costs for the three months ended March 31, 2010 was $315,615.
 
 10. SERIES B PREFERRED STOCK
 
 On November 2, 2009 (“Effective Date”), the Company entered into a preferred stock purchase agreement with Optimus Life Sciences Capital Partners, LLC (“Investor”). Pursuant to the purchase agreement, the Company agreed to sell, and the Investor agreed to purchase, in one or more purchases from time to time in the Company’s sole discretion, (i) up to 1,000 shares of Series B preferred stock at a purchase price of $10,000 per share, for an aggregate purchase price of up to $10,000,000, and (ii) five-year warrants to purchase shares of the Company’s common stock  with an aggregate exercise price equal to 135% of the purchase price paid by the Investor, at an exercise price per share equal to the closing bid price of the Company’s common stock on the date the Company provides notice of such tranche. The Warrants will be issued in replacement of a five-year warrant to purchase 119,469,027 shares of common stock with an exercise price per share of $0.113 the Company issued on the Effective Date.
 
 The Company agreed to pay to the Investor a commitment fee of $500,000, at the earlier of the closing of the first Tranche or the six month anniversary of the effective date, payable at the Company’s election in cash or common stock valued at 90% of the volume weighted average price of the Company’s common stock on the five trading days preceding the payment date. The $500,000 was applied towards the first tranche that was received on March 2, 2010. The commitment fee will amortize beginning from the initial issuance date of March 2, 2010 and will amortize over the four-year term.
 
 On November 3, 2009, the Company filed a certificate of designations for the Series B preferred stock (the “Certificate of Designations”). Pursuant to the Certificate of Designations, the preferred shares shall, with respect to dividend, rights upon liquidation, winding-up or dissolution, rank: (i) senior to the Company’s common stock, and any other class or series of preferred stock of the Company, except Series A-1 Convertible Preferred Stock which shall rank senior in right of liquidation and pari passu with respect to dividends; and (ii) junior to all existing and future indebtedness of the Company.
  Dividends
 
 Commencing on the date of the issuance of any shares of Series B preferred stock, Holders of Series B preferred stock will be entitled to receive dividends on each outstanding share of Series B preferred stock, which will accrue in shares of Series B preferred stock at a rate equal to 10% per annum from the issuance date. Accrued dividends will be payable upon redemption of the Series B preferred stock.
 
 Redemption Rights
 
 Upon or after the fourth anniversary of the initial issuance date, the Company will have the right, at the Company’s option, to redeem all or a portion of the shares of the Series B preferred stock, at a price per shares equal to 100% of the Series B liquidation value. The preferred stock may be redeemed at the Company’s option, commencing 4 years from the issuance date at a price per share of (a)  $10,000 per share plus accrued but unpaid dividends (the “Series B Liquidation Value”), or, at a price per share of : (x) 127% of the Series B Liquidation Value if redeemed on or after the first anniversary but prior to the second anniversary of the initial issuance date, (y) 118% of the Series B Liquidation Value if redeemed on or after the second anniversary but prior to the third anniversary of the initial issuance date, and (z) 109% of the Series B Liquidation Value if redeemed on or after the third anniversary but prior to the fourth anniversary of the initial issuance date.
  17
  Termination and Liquidation Rights
 
 If the Company determines to liquidate, dissolve or wind-up its business, it must redeem the Series B preferred stock at the prices set forth above. Upon any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, after payment of provision for payment of debts and other liabilities of the Company, before any distribution payment shall be made to the holders of any Junior Securities, the Holders of Series B preferred stock shall be first entitled to be paid out of the assets of the Company available for distribution to its stockholders an amount with respect to each share of Series B preferred stock equal to $10,000, plus any accrued and unpaid dividends. If, upon dissolution or winding up of the Company, the assets of the Company shall be insufficient to make payment in full to all holders, then such assets shall be distributed among the holders at the time outstanding, ratably in proportion to the full amounts to which they would otherwise be respectively entitled.
 
 On March 2, 2010, the Company delivered its first tranche notice to Optimus Life Sciences Capital Partners, LLC for delivery of 150 shares under the Series B preferred stock for funding in the amount of $1,500,000 ($990,000 in cash proceeds, $500,000 of commitment fee applied, and $10,000 in legal fees). On March 2, 2010, in connection with the funding, the Company issued 19,285,714 shares of its common stock upon exercise of the same number of warrants, which were granted simultaneously with the Company’s tranche notice. The Company received a secured promissory note in the amount of $2,025,000 to settle the warrant exercise. On March 8, 2010, the Company received another $500,000 in proceeds upon issuance of 50 shares of its Series B preferred stock. On the same date, simultaneously and connection with the funding, the Company issued 6,553,398 shares of its common stock upon exercise of the same number of warrants. The Company received a secured promissory note in the amount of $675,000 to settle the warrant exercise.
 
 Secured Promissory Notes
 
 In accordance with the terms of the Series B preferred stock agreement, Optimus issued to the Company a secured promissory note in consideration for receiving warrants under each tranche. The value of each secured promissory note equals the value of the warrants that Optimus received. Interest on the notes accrues at 2% per year, compounding annually if the interest remains unpaid at the end of each year. The note is secured by freely tradable marketable securities belonging to Optimus. Each promissory note matures on the fourth anniversary of its issuance. In the event the Company redeems all or a portion of any shares of Series B preferred stock held by Optimus, the Company will be permitted to offset the full amount of such proceeds against amounts outstanding under the promissory notes. Accordingly, the Company included the discounted value of the secured promissory notes as a separate component of stockholders’ deficit at March 31, 2010. The value of the secured promissory notes in the accompanying consolidated balance sheets was $2,008,868, net of discounts of $691,132 at March 31, 2010, reflecting a face value of $2,700,000. However, the Company determined that a 10% discount is appropriate, in order to consistently reflect the Company’s cost of borrowing under the terms of the underlying Series B preferred stock that permits offset. The Company recorded an initial discount on the promissory notes in the amount of $703,848 during the three months ended March 31, 2010. The Company accretes interest at 10% over the respective four-year terms of the promissory notes. During the three months ended March 31, 2010, the Company accreted interest on the promissory note in the amount of $12,715, which was recorded in retained earnings during the period then ended. The Company recorded $12,739 in dividends on its Series B preferred stock during the same period, which was also recorded against retained earnings, for a net change of $24 to retained earnings as a result of these offsets in interest and dividends.
 
 As of March 31, 2010 and December 31, 2009, 200 and 0 shares of Series B preferred stock were outstanding, respectively.
 
 11. WARRANT SUMMARY
 
 Warrant Activity
 
  18
  
 A summary of warrant activity for the three months ended March 31, 2010 is presented below:
 
 WeightedWeighted


Average


AggregateAverage


Remaining


IntrinsicNumber of


Exercise


Contractual


ValueWarrants


Price


Life (in years)



(000
)Outstanding, December 31, 2009


218,625,788


$
0.13



4.35


$
49Granted


40,647,512



0.10Exercised


(25,876,112
)


0.10Forfeited/Canceled


-



-Outstanding, March 31, 2010


233,397,188


$
0.13



4.13


$
61Vested and expected to vest


233,397,188


$
0.13



4.13



61at March 31, 2010Exercisable, March 31, 2010


233,397,188


$
0.13



4.13



61
 
 On January 22, 2010, the Company issued 1,000,000 warrants to an investor, to purchase the same number of shares of common stock. The term of these warrants is 4.92 years and is subject to anti-dilution and other customary adjustments. The initial fair value of the warrants was estimated at $95,464 using the Black-Scholes pricing model. The assumptions used in the Black-Scholes option pricing model at January 22, 2010 for all warrants issued in connection with these promissory notes are as follows: (1) dividend yield of 0%; (2) expected volatility of 180%, (3) risk-free interest rate of 2.37%, and (4) expected life of 4.92 years. The Company valued all warrants unrelated to its debentures at March 31, 2010 and December 31, 2009 at $849,455 and $765,065, respectively. The change in fair value of $11,075 during the three months ended March 31, 2010 was recorded through the results of operations as an adjustment to fair value of derivatives.
 
 During the three months ended March 31, 2010, the Company issued 25,839,112 warrants to Optimus in connection with its Series B preferred stock, which warrants were simultaneously exercised. See Note 10.
 
 The aggregate intrinsic value in the table above is before applicable income taxes and is calculated based on the difference between the exercise price of the warrants and the quoted price of the Company’s common stock as of the reporting date.
 
 The following table summarizes information about warrants outstanding and exercisable at March 31, 2010:
 
 Warrants Outstanding


Warrants ExercisableWeighted

Weighted





WeightedAverage


Average





AverageExercise


Number


Remaining

Exercise


Number


ExercisePrice


of Shares

Life (Years)

Price


of Shares

Price0.05



1,226,000



2.43


$
0.05



1,226,000


$
0.050.10 - 0.11



220,745,661



4.28



0.09



220,745,661



0.090.34



3,720,588



0.52



0.34



3,720,588



0.340.38 - 0.40



3,080,636



3.69



0.39



3,080,636



0.390.85 - 0.96



4,231,386



0.80



0.95



4,231,386



0.952.20



72,917



1.38



2.20



72,917



2.202.48 - 2.54



320,000



1.05



2.54



320,000



2.54233,397,188











233,397,188
  19
 
 12. STOCKHOLDERS’ EQUITY TRANSACTIONS
 
 On March 5, 2009, the Company settled a lawsuit originally brought by an investor in January 2009, who is an investor in the 2007 and 2008 debentures, and associated with the default on August 6, 2008 on all debentures. As a result of the lawsuit, the Company was required by court order to reduce the conversion price on convertible debentures held by this investor to $0.02 per share, effective immediately, so long as the Company has a sufficient number of authorized shares to honor the request for conversion. During the three months ended March 31, 2009, the Company issued 4,847,050 shares of its common stock to this investor in conversion of approximately $97,000 of its 2006 debenture at $0.02 per share, and 1,252,950 shares of its common stock to this investor in conversion of approximately $25,000 of its 2007 debenture at $0.02 per share. The Company has considered the impact on the accounting treatment of the change in conversion price of the 2007 and 2008 Convertible Debentures. Accounting standards state that a transaction resulting in a significant change in the nature of a debt instrument should be accounted for as an extinguishment of debt. The Company calculated the fair value of the conversion option for the 2007 and April 2008 debentures immediately prior to and after the change in the conversion price, and evaluated the impact of the change in conversion price. The Company concluded that the change in conversion price for this investor constitutes a substantial modification in the terms of the 2007 and 2008 debenture agreements. Based on the Company’s evaluation, the below table summarizes the impact relative to the Debentures’ face value on March 5, 2009.
 
 DebentureImpact on Debentures

Change


Face Value


% Change2007 Debenture

$
1,319,354


$
6,739,214



20
%April 2008 Debenture

$
477,014


$
4,038,880



12
%$
1,796,368


$
10,778,094
 The Company recorded a loss on modification of debentures in the amount of $1,796,368 during the three months ended March 31, 2009 as a result of this modification.
 
 Between September 29, 2008 and January 20, 2009, the Company was ordered by the Circuit Court of the Twelfth Judicial District Court for Sarasosa County, Florida to settle certain past due accounts payable, for previous professional services and other operating expenses incurred, by the issuance of shares of its common stock. In aggregate, through March 31, 2009, the Company settled $1,108,673 in accounts payable through the issuance of 260,116,283 shares of its common stock. During the three months ended March 31, 2009, the Company settled $505,199 in accounts payable through the issuance of 39,380,847 shares of its common stock. The Company recorded a loss on settlement of $4,793,949 in its accompanying statements of operations for the three months ended March 31, 2009. The losses were calculated as the difference between the amount of accounts payable relieved and the value of the shares (based on the closing share price on the settlement date) that were issued to relieve the accounts payable.
 
 For providing investor relations services in connection with the Series A-1 convertible preferred stock credit facility (see Note 9), the Company issued a consultant 24,900,000 shares of its common stock on February 9, 2009. The Company valued the issuance of these shares at $4,731,000 based on a closing price of $0.19 on February 9, 2009 and recorded the value of the shares as deferred financing costs associated with the financing on the date they were issued.
 
 On March 10, 2010, the Company issued 5,000,000 shares of its restricted common stock to each of its directors in connection with their services on the board of directors.
 
 During the three months ended March 31, 2010, the Company issued a total of 21,726,102 shares of its common stock to its chief executive officer and chief scientific officer. Further, the Company is to issue an additional 97,746,696 shares of its common stock to the same officers. The Company recorded $10,752,552 in officer compensation expense for the value of these shares.
  20
 
 During the three months ended March 31, 2010, the Company issued a total of 16,773,597 shares of its common stock to its directors as compensation for services provided as directors. The Company recorded $1,560,213 in board compensation expense for the value of these shares.
 
 On February 19, 2010, the Company issued 250,000 shares of its common stock in connection with its Series A-1 financing described in Note 9.
 
 On March 8, 2010 and March 30, 2010, the Company issued a total of 25,839,112 upon exercise of warrants issued in connection with its Series B preferred stock. On March 8, 2010 and March 30, 2010, the Company received promissory notes in the amount of $2,700,000 from Optimus, in consideration for warrants issued to Optimus. The promissory notes have been included as a separate component of stockholders’ deficit at March 31, 2010. See Note 10.
 
 13. STOCK-BASED COMPENSATION
 
 Stock Plans
 
 The following table summarizes the Company's stock incentive plans as of March 31, 2010:
  Options/SharesOptions/Shares


Options


AvailableStock Plan

Issued


Outstanding


For Grant2004 Stock Plan


2,492,000



820,000



370,0002004 Stock Plan II


1,301,161



1,071,161



230,0002005 Plan


41,745,484



38,734,958



112,880,89245,538,645



40,626,119



113,480,892
 Stock Option Activity
 
 A summary of option activity for the three months ended March 31, 2010 is presented below:
 
 WeightedWeighted


Average


AggregateAverage


Remaining


IntrinsicNumber of


Exercise


Contractual


ValueOptions


Price


Life (in years)



(000
)Outstanding, December 31, 2009


28,486,119


$
0.32



8.09


$
33Granted


12,140,000



-Exercised


-



-Forfeited/canceled


-



-Outstanding, March 31, 2010


40,626,119


$
0.25



8.45


$
179Vested and expected to vestat March 31, 2010


38,043,322



0.26



8.37



164Exercisable, March 31, 2010


20,758,449



0.39



7.40



55
 
 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.
 
 As of March 31, 2010, total unrecognized stock-based compensation expense related to nonvested stock options was approximately $1,524,000, which is expected to be recognized over a weighted average period of approximately 9.54 years.
 
 The following table summarizes information about stock options outstanding and exercisable at March 31, 2010.
   21
  
 Options Outstanding





Options ExercisableWeighted


Weighted





WeightedAverage


Average





AverageExercise


Number


Remaining


Exercise


Number


ExercisePrice


of Shares


Life (Years)


Price


of Shares


Price$
0.05



820,000



4.37


$
0.05



820,000


$
0.050.09



12,140,000



10.00



0.09



379,376



0.090.10



14,501,273



9.63



0.10



8,924,183



0.100.21



5,811,669



7.61



0.21



3,281,712



0.210.25 - 0.76



1,071,161



4.76



0.25



1,071,161



0.250.85



5,604,099



4.84



0.85



5,604,100



0.851.35 - 2.48



677,917



5.61



2.04



677,917



2.0440,626,119











20,758,449
 The assumptions used in calculating the fair value of options granted using the Black-Scholes option- pricing model for options granted during the three months ended March 31, 2010 and 2009 are as follows:
 
 2010


2009Risk-free interest rate


2.29 - 3.84
%


2.50
%Expected life of the options

5 - 10 years


4 yearsExpected volatility


175 - 180
%


148
%Expected dividend yield


0
%


0
%Expected forfeitures


13
%


13
%
 
 
 14. COMMITMENTS AND CONTINGENCIES
 
 On January 29, 2010, the Company signed a new lease to move from its Worcester facility to a new 10,607 square-foot facility in Marlboro, Massachusetts. The lease term is from April 1, 2010 through June 30, 2015. Monthly base rent in 2010 is $12,596.
 
 Rent expense recorded in the financial statements for the three months ended March 31, 2010 and 2009 was approximately $108,000 and $115,000, respectively.
 
 On March 5, 2009, the Company settled a lawsuit originally brought by an investor in January 2009, who is an investor in the 2007 and 2008 debentures, and associated with the default on August 6, 2008 on all debentures. As a result of the lawsuit, the Company was required by court order to reduce the conversion price on convertible debentures held by this investor to $0.02 per share, effective immediately, so long as the Company has a sufficient number of authorized shares to honor the request for conversion. See Note 12.
 
 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 our warrants issued to Mr. Aronson on or about September 14, 2005. John S. Gorton initiated a similar suit on October 10, 2007.  The two cases have been consolidated. The plaintiffs allege that we breached warrants to purchase securities issued by us to these individuals by not timely issuing stock after the warrants were exercised, failing to issue additional shares of stock in accordance with the terms of the warrants and failing to provide proper notice of certain events allegedly triggering Plaintiffs' purported rights to additional shares.  The Plaintiffs withdrew their case the day before the trial date. The Company is now seeking attorney fees relating the Company defending the case over the past 2.5 years.
  22
 
 The Company and its subsidiary Mytogen, Inc. are currently defending themselves against a civil action brought in Suffolk Superior Court, No. 09-442-B, by their former landlord at 79/96 Thirteenth Street, Charlestown, Massachusetts, a property vacated by us and Mytogen effective May 31, 2008. In that action, Alexandria Real Estate-79/96 Charlestown Navy Yard (“ARE”) is alleging that it has been unable to relet the premises and therefore seeking rent for the vacated premises since September 2008.  Alexandria is also seeking certain clean-up and storage expenses.  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. No conclusions have been reached as to the potential exposure to the Company or whether the Company has a liability.
 
 The Company has been named as a third party defendant in this action, filed September 16, 2009, in which the plaintiff alleges that Alexandria Real Estate (“Alexandria”) improperly charged a trustee holding approximately $146,000 of funds in a Company account that Bristol claimed as collateral. Alexandria brought a third party complaint against the Company for indemnification. No conclusions have been reached as to the potential exposure to the Company or whether the Company has a liability.
 
 On March 9, 2009, plaintiffs filed a complaint and summons in the Supreme Court of the State of New York, County of New York against the Company and its subsidiary Mytogen, Inc. Plaintiffs’ complaint alleges, among other things, that the Company has breached the terms of certain contracts with plaintiffs; namely, convertible debentures and a consulting agreement. Plaintiffs seek preliminary and permanent injunctive relief directing the Company to deliver to plaintiff Bristol Investment Fund, Ltd. (“Bristol”) 2.5 million shares of its common stock, declaring a conversion price of $0.02 for the convertible debentures held by plaintiffs, and directing the Company to honor plaintiff’s future conversion requests. Plaintiffs also seek compensatory damages in an amount to be determined at trial, but alleged in the complaint to exceed $1.5 million. On May 1, 2009, the Company filed an answer to plaintiffs’ complaint. On May 13, 2009, the Company filed a motion to stay the action and to compel arbitration of all claims by Bristol. The court has not yet ruled on the Company’s motion to stay the action and to compel arbitration. On or about September 16, 2009, plaintiffs filed an order to show cause, seeking the issuance of a preliminary injunction directing the Company to deliver to Bristol 2.5 shares of its common stock pursuant to a convertible debenture and 47.4 million shares of its common stock  pursuant to common stock purchase warrants, declaring a conversion price of $0.02 for the convertible debenture held by plaintiffs, and enjoining or restraining the Company from issuing shares of its common stock to any entity other than plaintiffs or the other holders of convertible debentures. On September 25, 2009, the Company submitted its response in opposition to plaintiffs’ motion and moved by cross-motion for dismissal of the complaint, based on the terms of the consent, waiver, amendment and exchange agreement entered into between the Company and the holders of over 95% of the outstanding principal amount of the Amended and Restated Debentures. The court has not yet ruled on the respective motions. The Company intends to continue to contest the case vigorously. Management believes the Company will prevail, and accordingly, the Company did not recognize a liability in its accompanying consolidated balance sheet at March 31, 2010.
 
 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 the Company terminates a contract without cause, along with the acceleration of certain unvested stock option grants.
 
 15. RELATED PARTY TRANSACTIONS
 
 During the three months ended March 31, 2010, the Company issued a total of 21,726,102 shares of its common stock to its chief executive officer and chief scientific officer. Further, the Company is to issue an additional 97,746,696 shares of its common stock to the same officers. See Note 12.
 
 During the three months ended March 31, 2010, the Company issued a total of 16,773,597 shares of its common stock to its directors as compensation for services provided as directors. See Note 12.
 
 16. SUBSEQUENT EVENTS
 
   On April 30, 2010, the Company was no longer under the obligation to provide laboratory space to SCRMI, the joint venture to which the Company is a party. See Note 4. The two partners to the joint venture are in negotiations on further funding of the joint venture, but there can be no assurances that an agreement will be reached. Any financial statement impact at this time is unclear should an agreement not be reached.





23


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 this quarterly report, and the exhibits hereto, regarding matters that are not historical facts and are forward-looking statements. Because these statements involve risks and uncertainties, as well as certain assumptions, actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to risks inherent in:  our early stage of development, including a lack of operating history, lack of profitable operations and the need for additional capital; the development and commercialization of largely novel and unproven technologies and products; our ability to protect, maintain and defend our intellectual property rights; uncertainties regarding our ability to obtain the capital resources needed to continue research and development operations and to conduct research, preclinical development and clinical trials necessary for regulatory approvals; uncertainty regarding the outcome of clinical trials and our overall ability to compete effectively in a highly complex, rapidly developing, capital intensive and competitive industry. See “RISK FACTORS THAT MAY AFFECT OUR BUSINESS” set forth herein for a more complete discussion of these factors. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date that they are made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.





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





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





OVERVIEW





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





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





CRITICAL ACCOUNTING POLICIES





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





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





On January 1, 2008, we adopted FASB ASC 820-10, “Fair Value Measurements and Disclosures.” FASB ASC 820-10 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.






24





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








Management analyzes all financial instruments with features of both liabilities and equity under ASC 480, “Distinguishing Liabilities From Equity”and ASC 815, “Derivatives and Hedging.”Derivative liabilities are adjusted to reflect fair value at each period end, with any increase or decrease in the fair value being recorded in results of operations as adjustments to fair value of derivatives. The effects of interactions between embedded derivatives are calculated and accounted for in arriving at the overall fair value of the financial instruments. In addition, the fair values of freestanding derivative instruments such as warrant and option derivatives are valued using the Black-Scholes model.





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





Stock Based Compensation— We record stock-based compensation in accordance with ASC 718, “Compensation – Stock Compensation.”  ASC 718 requires companies to measure compensation cost for stock-based employee compensation at fair value at the grant date and recognize the expense over the employee’s requisite service period. We recognize in the statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees and non-employees.





Recent Accounting Pronouncements





In October 2009, the FASB issued Accounting Standards Update 2009-15 ("ASU 2009-15") regarding accounting for own-share lending arrangements in contemplation of convertible debt issuance or other financing.  This ASU requires that at the date of issuance of the shares in a share-lending arrangement entered into in contemplation of a convertible debt offering or other financing, the shares issued shall be measured at fair value and be recognized as an issuance cost, with an offset to additional paid-in capital. Further, loaned shares are excluded from basic and diluted earnings per share unless default of the share-lending arrangement occurs, at which time the loaned shares would be included in the basic and diluted earnings-per-share calculation.  This ASU is effective for fiscal years beginning on or after December 15, 2009, and interim periods within those fiscal years for arrangements outstanding as of the beginning of those fiscal years. The adoption of this ASU did not have a significant impact on our consolidated financial statements.





On December 15, 2009, the FASB issued ASU No. 2010-06 Fair Value Measurements and Disclosures Topic 820 “Improving Disclosures about Fair Value Measurements”.  This ASU requires some new disclosures and clarifies some existing disclosure requirements about fair value measurement as set forth in Codification Subtopic 820-10. The FASB’s objective is to improve these disclosures and, thus, increase the transparency in financial reporting.  The adoption of this ASU did not have a material impact on our consolidated financial statements.





On February 25, 2010, the FASB issued ASU 2010-09 Subsequent Events Topic 855 “Amendments to Certain Recognition and Disclosure Requirements,” effective immediately. The amendments in the ASU remove the requirement for an SEC filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of U.S. GAAP. The FASB believes these amendments remove potential conflicts with the SEC’s literature. The adoption of this ASU did not have a material impact on our consolidated financial statements.





On March 5, 2010, the FASB issued ASU No. 2010-11 Derivatives and Hedging Topic 815 “Scope Exception Related to Embedded Credit Derivatives.” This ASU clarifies the guidance within the derivative literature that exempts certain credit related features from analysis as potential embedded derivatives requiring separate accounting. The ASU specifies that an embedded credit derivative feature related to the transfer of credit risk that is only in the form of subordination of one financial instrument to another is not subject to bifurcation from a host contract under ASC 815-15-25, Derivatives and Hedging — Embedded Derivatives — Recognition. All other embedded credit derivative features should be analyzed to determine whether their economic characteristics and risks are “clearly and closely related” to the economic characteristics and risks of the host contract and whether bifurcation is required. The ASU is effective for the Company on July 1, 2010. Early adoption is permitted. The adoption of this ASU will not have a material impact on our consolidated financial statements.





25





RESULTS OF OPERATIONS





Comparison of Three Months Ended March 31, 2010 and 2009





Three Months Ended March 31,


Three Months Ended March 31,2010





2009% of





% ofAmount


Revenue


Amount


RevenueRevenue

$
205,158



100.0
%

$
293,976



100.0
%Cost of Revenue


66,650



32.5
%


138,752



47.2
%Gross profit


138,508



67.5
%


155,224



52.8
%Research and development expenses andGrant reimbursements


3,895,581



1898.8
%


299,767



102.0
%General and administrative expenses


11,218,243



5468.1
%


747,078



254.1
%Loss on settlement of litigation


-



0.0
%


4,793,949



1630.7
%Non-operating income (expense)


(2,874,317
)


-1401.0
%


(13,314,306
)


-4529.0
%Net loss

$
(17,849,633
)


-8700.4
%

$
(18,999,876
)


-6463.1
%


Revenue





Revenue for the three months ended March 31, 2010 and 2009 was $205,158 and $293,976, respectively, which represents a decrease of $88,818.  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 March 31, 2010 was due to licenses being terminated during the fourth quarter 2009, while no new licenses were added during the three months ended March 31, 2010.





Of the revenue recognized during the three months ended March 31, 2010, we recognized $51,470 in license fee revenue from Transition Holdings, Inc. and another $37,500 from International Stem Cell Corporation.





Research and Development Expenses and Grant Reimbursements





Research and development expenses (“R&D”) for the three months ended March 31, 2010 and 2009 were $3,895,581 and $436,607, respectively, an increase of $3,458,974.  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 R&D expenditures during the three months ended March 31, 2010 as compared to the same period in 2009 is primarily due to 30,192,203 shares of common stock issued and to be issued to our chief scientific officer, valued at $2,717,298 during the three months ended March 31, 2010. Further, the Company hired new R&D employees, increased its R&D activity, and increased its patent legal costs during the three months ended March 31, 2010.





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





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





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





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




26





Grant reimbursements for the three months ended March 31, 2010 and 2009 were $0 and $136,840, respectively.  The Company received one grant during the three months ended March 31, 2009 from the National Institutes of Health.





General and Administrative Expenses





General and administrative expenses for the three months ended March 31, 2010 and 2009 were $11,218,243 and $747,078, respectively, an increase of $10,471,165.  This expense increase was primarily due to 89,280,595 shares of our common stock issued or to be issued to our chief executive officer, valued at $8,035,254, and another 16,773,597 shares of our common stock issued to our directors, valued at $1,533,513, during the three months ended March 31, 2010. Additionally, during the three months ended March 31, 2010, we experienced an increase in legal fees in our efforts to secure financing and in defending the Company in various legal matters.





Loss on Settlement





Loss on settlement for the three months ended March 31, 2010 and 2009 were $0 and $4,793,949, respectively. During the three months ended March 31, 2009, we entered into a settlement agreement pursuant to which we agreed to settle certain past due accounts payable, for previous professional services and other operating expenses incurred, by the issuance of shares of our common stock. During that quarter, we settled $505,199 in accounts payable through the issuance of 39,380,847 shares of our common stock with a value of $5,299,148. Accordingly, we recorded a loss on settlement of $4,793,949 for the three months ended March 31, 2009.





Non-operating income (expense)





Non-operating income (expense) for the three months ended March 31, 2010 and 2009 were ($2,874,317) and ($13,314,306), respectively, which represents an increase of $10,439,989 in non-operating income (expense). The change in non-operating income (expense) in the three months ended March 31, 2010, compared to that of the earlier period, relates primarily to the change in fair value of derivatives related to the debt financings, offset by the adjustments to loss on extinguishment of convertible debentures during the three months ended March 31, 2009 of $1,796,368.





Interest income was $3,043 and $1,621 during the three months ended March 31, 2010 and 2009, respectively. Interest income was higher in the three months ended March 31, 2010 than in the three months ended March 31, 2009 due to the higher cash balances held in interest-bearing deposits during the periods. Interest expense was $3,352,774 and $582,821 for the three months ended March 31, 2010 and 2009, respectively, which represents an increase of $2,769,953. The increase in interest expense in the three months ended March 31, 2010, compared to the earlier period primarily to amortization of debt discounts and deferred financing costs being recorded during 2010 for all debt and preferred stock outstanding.





The change in the fair value of derivatives was $1,584,704 and ($10,841,612) for the three months ended March 31, 2010 and 2009, respectively.  The significant reduction in our debt balances due to conversion s to common stock contributed most significantly to the change on the fair value of derivatives during the three months ended March 31, 2010.





Net Loss





Net loss for the three months ended March 31, 2010 and 2009 was $17,849,633 and $18,999,876, respectively. The change in loss in each period is the result of changes to the fair value of derivatives and interest charges related to convertible debentures, interest charges on our debt, and expenses during the three months ended March 31, 2010 relating to issuance of shares of our common stock to executives and directors.




27








LIQUIDITY AND CAPITAL RESOURCES





Cash Flows





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




Three Months Ended March 31,2010


2009Net cash used in operating activities

$
(2,930,070
)

$
(292,232
)Net cash used in investing activities


(89,948
)


(2,170
)Net cash provided by financing activities


5,658,865



-Net increase (decrease) in cash and cash equivalents


2,638,847



(294,402
)Cash and cash equivalents at the end of the period

$
5,177,685


$
522,502


Operating Activities





Our net cash used in operating activities during the three months ended March 31, 2010 and 2009 was $2,930,070 and $292,232, respectively. Cash used in operating activities increased during the current period primarily due to an increase in operating expenditures.





Cash Flows from Investing and Financing Activities





Cash used in investing activities during the three months ended March 31, 2010 and 2009 was $89,948 and $2,170, respectively. Our cash used in investing activities during the three months ended March 31, 2010 was attributed to payment of a deposit on our leased space in Massachusetts as well as a payment for the purchase of fixed assets for approximately $77,000. Cash flows provided by financing activities during the three months ended March 31, 2010 was $5,658,865. During the three months ended March 31, 2010, we received $830,165 from the issuance of Series A-1 convertible preferred stock, $1,490,000 from the issuance of Series B preferred stock, $1,685,000 from the issuance of convertible debentures and $1,650,000 from the issuance of convertible promissory notes.





We are financing our operations primarily from the following activities:





We plan to fund our operations for the next twelve months primarily from the following financings:





·
During 2009 and the first quarter of 2010, we issued $4,270,000 in convertible promissory note financings with JMJ Financial. As of March 31, 2010, $4,230,000 remains available to us.·
During 2009 and the first quarter of 2010, we received $3,349,250 from the 2009 convertible debenture. The convertible debenture contains an Additional Investment Right that allows the Company to receive an additional $3,483,000 in funding.


·
During 2009 and the first quarter 2010, we received $3,168,166 from the issuance of our Series A-1 convertible preferred stock credit facility. The facility allows for a maximum placement of $5,000,000.·
During the first quarter 2010, we received $1,490,000 from the issuance of Series B preferred stock. The agreement allows for a maximum placement of $10,000,000.


·
We continue to repay our debt financings in shares of common stock, enabling us to use our cash resources to fund our operations.





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.





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.





ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Our exposure to market risk is limited primarily to interest income sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because a significant portion of our investments are in short-term debt securities issued by the U.S. government and institutional money market funds. The primary objective of our investment activities is to preserve principal. Due to the nature of our marketable securities, we believe that we are not exposed to any material market risk.  We do not have any derivative financial instruments or foreign currency instruments. If interest rates had varied by 10% in the quarter ended March 31, 2010, it would not have had a material effect on our results of operations or cash flows for that period.










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ITEM 4. CONTROLS AND PROCEDURES
 
 Disclosure Controls and Procedures






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





We carried out an evaluation, under the supervision and with the participation of our management, including our CEO and PFO, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective.





Changes in Internal Control over Financial Reporting





There have been no 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 March 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.





PART II. OTHER INFORMATION





ITEM 1. LEGAL PROCEEDINGS





Gary D. Aronson v. Advanced Cell Technology, Inc., Superior Court of California, County of Alameda, Case No. RG07348990. John S. Gorton v. Advanced Cell Technology, Inc, Superior Court of California, County of Alameda Case No. RG07350437.  On October 1, 2007 Gary D. Aronson brought suit against us with respect to a dispute over the interpretation of the anti-dilution provisions of our warrants issued to Mr. Aronson on or about September 14, 2005. John S. Gorton initiated a similar suit on October 10, 2007.  The two cases have been consolidated. The plaintiffs allege that we breached warrants to purchase securities issued by us to these individuals by not timely issuing stock after the warrants were exercised, failing to issue additional shares of stock in accordance with the terms of the warrants and failing to provide proper notice of certain events allegedly triggering Plaintiffs' purported rights to additional shares.  The Plaintiffs withdrew their case the day before the trial date. We are now seeking attorney fees relating us defending the case over the past 2.5 years.





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





Bristol Investment Fund, Ltd. as Collateral Agent for the Holders of Certain Original Issue Discount Senior Convertible Debentures v. Alexandria Real Estate—79/96 Charlestown Navy Yard, LLC (Suffolk Superior Court). The Company has been named as a third party defendant in this action, filed September 16, 2009, in which the plaintiff alleges that Alexandria Real Estate (“Alexandria”) improperly charged a trustee holding approximately $146,000 of funds in a Company account that Bristol claimed as collateral. Alexandria brought a third party complaint against the Company for indemnification.





Bristol Investment Fund, Ltd. and Bristol Capital, LLC v. Advanced Cell Technology, Inc. and Mytogen, Inc. (Supreme Court of the State of New York, County of New York): On March 9, 2009, plaintiffs filed a complaint and summons in the Supreme Court of the State of New York, County of New York against the Company and its subsidiary Mytogen, Inc. Plaintiffs’ complaint alleges, among other things, that the Company has breached the terms of certain contracts with plaintiffs; namely, convertible debentures and a consulting agreement. Plaintiffs seek preliminary and permanent injunctive relief directing the Company to deliver to plaintiff Bristol Investment Fund, Ltd. (“Bristol”) 2.5 million shares of its common stock, declaring a conversion price of $0.02 for the convertible debentures held by plaintiffs, and directing the Company to honor plaintiff’s future conversion requests. Plaintiffs also seek compensatory damages in an amount to be determined at trial, but alleged in the complaint to exceed $1.5 million. On May 1, 2009, the Company filed an answer to plaintiffs’ complaint. On May 13, 2009, the Company filed a motion to stay the action and to compel arbitration of all claims by Bristol. The court has not yet ruled on the Company’s motion to stay the action and to compel arbitration. On or about September 16, 2009, plaintiffs filed an order to show cause, seeking the issuance of a preliminary injunction directing the Company to deliver to Bristol 2.5 shares of its common stock pursuant to a convertible debenture and 47.4 million shares of its common stock  pursuant to common stock purchase warrants, declaring a conversion price of $0.02 for the convertible debenture held by plaintiffs, and enjoining or restraining the Company from issuing shares of its common stock to any entity other than plaintiffs or the other holders of convertible debentures. On September 25, 2009, the Company submitted its response in opposition to plaintiffs’ motion and moved by cross-motion for dismissal of the complaint, based on the terms of the consent, waiver, amendment and exchange agreement entered into between the Company and the holders of over 95% of the outstanding principal amount of the Amended and Restated Debentures. The court has not yet ruled on the respective motions. The Company intends to continue to contest the case vigorously.




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ITEM 1A. RISK FACTORS





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 the Company’s Early Stage Development





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





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





We have limited capital resources and we may not obtain the significant additional capital required to sustain our research and development efforts.We will need additional capital to conduct our operations and develop our products and our ability to obtain the necessary funding is uncertain. (see FINANCIAL RISKS) We have losses from operations, negative cash flows from operations and a substantial stockholders’ deficit and we do not believe that our cash from all sources (including cash, cash equivalents, anticipated revenues from licensing fees and sponsored research contracts) is sufficient for us to continue operations beyond March 16, 2011.





Management continues to evaluate alternatives and sources of additional funding. These may include public and private investors, strategic partners, and grant programs available through specific states, the federal government, or foundations. However, there is no assurance that such sources will result in raising additional capital.





Lack of necessary funding may require us to delay, scale back or eliminate some or all of our research and product development programs and/or capital expenditures, to license our potential products or technologies to third parties, to consider business combinations related to ongoing business operations, or to shut down some, or all, of our operations.





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





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





We are in the Early Stages of a Strategic Joint Venture which may slow, impede or result in the termination of potential therapeutic products whose development is now the responsibility of the partnership and not solely of the Company.In 2008, we entered into a new partnership (CHA) and as a result, we are subject to 3rd party interests (see RISKS RELATED TO THIRD PARTY RELIANCE) and control issues, not the least of which relates to certain of our employees no longer being exclusively managed by us. We therefore could be at risk for losing key employees. Additionally substantial operating and working capital will be required and there is no assurance that CHA Biotech Co. limited, partner in our joint venture, will be able to fund their requirements.




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We have a limited operating history on which investors may evaluate our operations and prospects for profitable operations.If we continue to suffer losses as we have in the past, investors may not receive any return on their investment and may their entire investment. Our prospects must be considered speculative in light of the risks, expenses and difficulties frequently encountered by companies in their early stages of development, particularly in light of the uncertainties relating to the new, competitive and rapidly evolving markets in which we anticipate we will operate. To attempt to address these risks, we must, among other things, further develop our technologies, products and services, successfully implement our research, development, marketing and commercialization strategies, respond to competitive developments and attract, retain and motivate qualified personnel. A substantial risk is involved in investing in us because, as an early stage company we have fewer resources than an established company, our management may be more likely to make mistakes at such an early stage, and we may be more vulnerable operationally and financially to any mistakes that may be made, as well as to external factors beyond our control.





Risks Relating to Technology





We are dependent on new and unproven technologies. Our risks as an early stage company are compounded by our heavy dependence on emerging and sometimes unproven technologies. If these technologies do not produce satisfactory results, our business may be harmed. Additionally some of our technologies and significant potential revenue sources involve ethically sensitive and controversial issues which could become the subject of legislation or regulations that could materially restrict our operations and, therefore, harm our financial condition, operating results and prospects for bringing our investors a return on their investment.





Over the last two years we have narrowed our potential product pool to focusing on our Retinal Program as well as our Hemangioblast and Blastomere programs, which will limit our revenue sources.Our human embryonic stem cell program is in the IND phase; our myoblast program has received FDA clearance to proceed to Phase II human clinical trials; our Hemangioblast program is in the preclinical development stage, and the Company doesn’t foresee having a commercial product until clinical trials are completed. We have identified the programs that we are working to get into the clinical testing phase. We have narrowed the scope of our developmental focus to our Retinal Program and those related therapies, our blastomere program and, as part of our recently established partnership with CHA, developing products in the hemangioblast/immunology arena.  As a result of our narrower product focus we have fewer revenue sources. Our emphasis on fewer programs may hinder our results if these programs are not successful.  Although our adult stem cell myoblast program has been approved for a Phase II clinical trial, we have suspended that program indefinitely due to a lack of funding. As a result of our emphasis on our retinal program, our hemangioblast program and our blastomere program, our ability to progress as a company is more significantly hinged on the success of fewer programs and thus, a setback or adverse development relating to any one of them could potentially have a significant impact on share price as well as an inhibitory effect on our ability to raise additional capital. Additionally, we partially rely on nuclear transfer and embryonic stem cell 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 cannot guarantee that we will be able to successfully develop our retinal, hemangioblast, blastomere, nuclear transfer technology, embryonic stem cell or myoblast technologies or that such development will result in products or services with any significant commercial utility. We anticipate that the commercial sale of such products or services, and royalty/licensing fees related to our technology, would be our primary sources of revenues. If we are unable to develop our technologies, investors will likely lose their entire investment in us.








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





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





Risks Related to Intellectual Property





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




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




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





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





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





-
we will succeed in obtaining any patents in a timely manner or at all, or that the breadth or degree of protection of any such patents will protect our interests,





-
the use of our technology will not infringe on the proprietary rights of others,





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





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





-
we will continue to have the financial resources necessary to prosecute our existing patent applications, pay maintenance fees on patents and patent applications, or file patent applications on new inventions.





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








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





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





We are not in full compliance with some of our license agreements.We are not in full compliance with some of our licenses  and due to limited financial resources we cannot guarantee that we will regain full compliance status. If we are unable to be in compliance with our license agreements, our business may be harmed.






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We may not be able to adequately defend against piracy of intellectual property in foreign jurisdictions.Considerable research in the areas of stem cells, cell therapeutics and regenerative medicine is being performed in countries outside of the United States, and a number of potential competitors are located in these countries. The laws protecting intellectual property in some of those countries may not provide adequate protection to prevent our competitors from misappropriating our intellectual property. Several of these potential competitors may be further along in the process of product development and also operate large, company-funded research and development programs. As a result, our competitors may develop more competitive or affordable products, or achieve earlier patent protection or product commercialization than we are able to achieve. Competitive products may render any products or product candidates that we develop obsolete.





Regulatory Risks





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




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





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





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





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





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





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




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





-
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,





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-
The availability of alternative treatments,





-
The labeling requirements imposed by the FDA and foreign regulatory agencies, including the scope of approved indications and any safety warnings,





-
Our ability to obtain sufficient third party insurance coverage or reimbursement for our products candidates,





-
The inclusion of our products on insurance company coverage policies,





-
The willingness and ability of patients and the healthcare community to adopt new technologies,





-
The procedure time associated with the use of our product candidates,





-
Our ability to manufacture or obtain from third party manufacturers sufficient quantities of our product candidates with acceptable quality and at an acceptable cost to meet demand, and





-
Marketing and distribution support for our products.





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





Risks Related to Domestic Governmental Regulation





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





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





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





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





Our products may not receive FDA approval, which would prevent us from commercially marketing our products and producing revenues. The FDA and comparable government agencies in foreign countries impose substantial regulations on the manufacture and marketing of pharmaceutical products through lengthy and detailed laboratory, pre-clinical and clinical testing procedures, sampling activities and other costly and time-consuming procedures. Satisfaction of these regulations typically takes several years or more and varies substantially based upon the type, complexity and novelty of the proposed product. We cannot assure you that FDA approvals for any products developed by us will be granted on a timely basis, if at all. Any such delay in obtaining, or failure to obtain, such approvals could have a material adverse effect on the marketing of our products and our ability to generate product revenue. For additional information about governmental regulations that will affect our planned and intended business operations, see "DESCRIPTION OF BUSINESS—Government Regulation" above.





For-profit entities may be prohibited from benefiting from grant funding. There has been much publicity about grant resources for stem cell research, including Proposition 71 in California, which is described more fully under the heading "DESCRIPTION OF BUSINESS—California Proposition 71" above. While the California Institute CIRM has provided grant funds to some for-profit entities, there is no guarantee that it will continue to do so, particularly given the state’s current budgetary conditions. As a result of these uncertainties regarding Proposition 71, we cannot assure you that funding, if any, will be available to us.





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





Risks Related to International Regulation





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





Financial Risks





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





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The continued progress and cost of our research and development programs,





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The progress with pre-clinical studies and clinical trials,





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The time and costs involved in obtaining regulatory clearance,





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The costs in preparing, filing, prosecuting, maintaining and enforcing patent claims,





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The costs of developing sales, marketing and distribution channels and our ability to sell the therapies/products if developed,





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The costs involved in establishing manufacturing capabilities for commercial quantities of our proposed products,





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Competing technological and market developments,





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Market acceptance of our proposed products,





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The costs for recruiting and retaining employees and consultants, and





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The costs for educating and training physicians about our proposed therapies/products.





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





Risks Relating to Our Debt Financings





If we are required for any reason to repay our outstanding debt financings 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 March 31, 2010, $13,182,860 aggregate original principal amount of debt, including redeemable preferred stock. We are required to repay on a monthly basis, by payment, at our option, with cash or with shares of our common stock.





There are a large number of shares underlying our debt in full, and warrants that are exercisable and the Company is liable to provide. The sale of these shares may depress the market price of our common stock. As of March 31, 2010, on an aggregated basis our debt and preferred stock financings may result in being converted into 130,858,489 shares of our common stock, and warrants and options that may be converted into approximately 274,023,307 shares of our common stock.





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





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





Our outstanding indebtedness on our 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:





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Except for certain permitted indebtedness, enter into, create, incur, assume, guarantee or suffer to exist any indebtedness for borrowed money of any kind, including but not limited to, a guarantee, on or with respect to any of its property or assets now owned or hereafter acquired or any interest therein or any income or profits therefrom,





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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,





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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,





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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,





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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),





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Pay cash dividends or distributions on any of our equity securities,





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Grant certain registration rights,





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Enter into any agreement with respect to any of the foregoing, or





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





Risks Related to Third Party Reliance





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





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




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Design and conduct advanced clinical trials in the event that we reach clinical trials;-
Fund research and development activities with us;


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Pay us fees upon the achievement of milestones; and-
Market with us any commercial products that result from our collaborations.





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





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





We are in a Strategic Joint Venture which may slow, impede or result in the termination of potential therapeutic products whose development is now the responsibility of the partnership and not solely of the Company.In 2008, the Company entered into a new partnership (CHA) and as a result, we are subject to 3rd party interests and control issues, not the least of which relates to certain of our employees no longer being exclusively managed by us. We therefore could be at risk for losing key employees. Additionally substantial operating and working capital will be required and there is no assurance that CHA Biotech Co. limited, partner in our joint venture, will be able to fund their requirements. Any failure on their part could negatively impact our product development, human capital and financial resources allocated to other of our programs.




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




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Preclinical & Clinical Product Development Risks





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





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





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





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





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





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





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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,


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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,


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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,


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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


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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.




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Any delay of regulatory approval will harm our business.





Risks Related to Competition





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





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





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





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





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





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





Our competition includes both public and private organizations and collaborations among academic institutions and large pharmaceutical companies, most of which have significantly greater experience and financial resources than we do. Private and public academic and research institutions also compete with us in the research and development of therapeutic products based on human embryonic and adult stem cell technologies. In the past several years, the pharmaceutical industry has selectively entered into collaborations with both public and private organizations to explore the possibilities that stem cell therapies may present for substantive breakthroughs in the fight against disease.





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The biotechnology and pharmaceutical industries are characterized by intense competition. We compete against numerous companies, both domestic and foreign, many of which have substantially greater experience and financial and other resources than we have. Several such enterprises have initiated cell therapy research programs and/or efforts to treat the same diseases targeted by us. Companies such as Geron Corporation, Genzyme Corporation, StemCells, Inc., Aastrom Biosciences, Inc. and Viacell, Inc., as well as others, many of which have substantially greater resources and experience in our fields than we do, are well situated to effectively compete with us. Any of the world's largest pharmaceutical companies represents a significant actual or potential competitor with vastly greater resources than ours. These companies hold licenses to genetic selection technologies and other technologies that are competitive with our technologies. These and other competitive enterprises have devoted, and will continue to devote, substantial resources to the development of technologies and products in competition with us.





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





General Risks Relating to Our Business





We are subject to litigation that will be costly to defend or pursue and uncertain in its outcome. Our business may bring us into conflict with our licensees, licensors, or others with whom we have contractual or other business relationships, or with our competitors or others whose interests differ from ours. If we are unable to resolve those conflicts on terms that are satisfactory to all parties, we may become involved in litigation brought by or against us. That litigation is likely to be expensive and may require a significant amount of management's time and attention, at the expense of other aspects of our business. The outcome of litigation is always uncertain, and in some cases could include judgments against us that require us to pay damages, enjoin us from certain activities, or otherwise affect our legal or contractual rights, which could have a significant adverse effect on our business..





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





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





Our current source of revenues depends on the stability and performance of our sub-licensees. Our ability to collect royalties on product sales from our sub-licensees will depend on the financial and operational success of the companies operating under a sublicense. Revenues from those licensees will depend upon the financial and operational success of those third parties. We cannot assure you that these licensees will be successful in obtaining requisite financing or in developing and successfully marketing their products. These licensees may experience unanticipated obstacles including regulatory hurdles, and scientific or technical challenges, which could have the effect of reducing their ability to generate revenues and pay us royalties.





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




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





Risks Relating to Our Common Stock





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








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Clinical trial results,





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The amount of cash resources and ability to obtain additional funding,





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Announcements of research activities, business developments, technological innovations or new products by companies or their competitors,





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Entering into or terminating strategic relationships,





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Changes in government regulation,





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Disputes concerning patents or proprietary rights,





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Changes in revenues or expense levels,





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Public concern regarding the safety, efficacy or other aspects of the products or methodologies being developed,





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Reports by securities analysts,





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Activities of various interest groups or organizations,





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Media coverage, and





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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. In 2008, a significant number of our outstanding 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.





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





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








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





Our common stock is subject to "penny stock" regulations and restrictions on initial and secondary broker-dealer sales.The Securities and Exchange Commission (SEC) 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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS





On January 19, 2010, the Company issued and sold a convertible promissory note (“JMJ Note 1”) in the principal amount of $1,200,000 for a purchase price of $1,000,000 to JMJ Financial (reflecting a 16.67% original issue discount) in a private placement.  The Company shall pay a one-time interest payment of 10% of the principal of JMJ Note 1 which is due on the maturity date of JMJ Note 1, which is January 19, 2013.  JMJ Note 1 is convertible into shares of the Company’s common stock at a conversion price of the lesser of (i) $.25 per share or (ii) eighty percent of the average of the three lowest trade prices in the 20 trading days prior to the conversion.





On March 30, 2010, the Company issued three convertible promissory notes to JMJ Financial, for a total of $3,000,000 in available consideration, for a principal sum of $3,850,000, which includes an original issue discount of $850,000. During the three months ended March 31, 2010, the Company received a total of $150,000 on these additional notes, which equates to a principal amount of $198,000, including a $48,000 original issue discount. The notes are convertible into shares of the Company’s common stock at a price equal to the lesser of $0.10 or 85% of the average of the three lowest trading prices in the previous twenty days to the conversion. The proceeds from the issuance of these notes are intended for use in the Company’s research and development activities.




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On February 18, 2010, the Company completed the second closing of its 2009 convertible debentures, issuing additional debentures, under the same terms of the initial closing, in the principal amount of up to $2,076,451 for a purchase price of $1,730,375. Pursuant to the initial closing under the Subscription Agreement, the Company also issued an aggregate of 13,808,400 Class A Warrants. The convertible debentures are convertible into shares of the Company’s common stock at $0.10, and the warrants are exercisable anytime and for up to five years after the initial closing at an exercise price of $0.10. The proceeds from the issuance of these notes is intended for use in the Company’s research and development activities.





On March 2, 2010, the Company delivered its first tranche notice to Optimus Life Sciences Capital Partners, LLC for delivery of 150 shares under the Series B redeemable preferred stock for funding in the amount of $1,500,000. On March 2, 2010, in connection with the funding, the Company issued 19,285,714 shares of its common stock upon exercise of the same number of warrants, which were granted simultaneously with the Company’s tranche notice. On March 8, 2010, the Company received another $500,000 in proceeds upon issuance of 50 shares of its Series B preferred stock. On the same date, simultaneously and connection with the funding, the Company issued 6,553,398 shares of its common stock upon exercise of the same number of warrants. The proceeds from the issuance of these notes is intended for use in the Company’s research and development activities.





In connection with the foregoing, the Company relied upon the exemption from securities registration afforded by Rule 506 of Regulation D as promulgated by the United States Securities and Exchange Commission under the Securities Act of 1933, as amended (the “Securities Act”) and/or Section 4(2) of the Securities Act. No advertising or general solicitation was employed in offering the securities. The offerings and sales were made to a limited number of persons, all of whom were accredited investors, and transfer was restricted by the Company in accordance with the requirements of the Securities Act of 1933.





ITEM 3. DEFAULTS UPON SENIOR SECURITIES





None.





ITEM 4. [REMOVED AND RESERVED]








ITEM 5. OTHER INFORMATION





On January 19, 2010, the Company issued and sold a convertible promissory note (“JMJ Note 1”) in the principal amount of $1,200,000 for a purchase price of $1,000,000 to JMJ Financial (reflecting a 16.67% original issue discount) in a private placement.  The Company shall pay a one-time interest payment of 10% of the principal of JMJ Note 1 which is due on the maturity date of JMJ Note 1, which is January 19, 2013.  JMJ Note 1 is convertible into shares of the Company’s common stock at a conversion price of the lesser of (i) $.25 per share or (ii) eighty percent of the average of the three lowest trade prices in the 20 trading days prior to the conversion.





On March 30, 2010, the Company issued and sold a $600,000 unsecured convertible note (“JMJ Note 2”) to JMJ Financial, for a purchase price of $500,000 (reflecting a 16.67% original issue discount) in a private placement. JMJ Financial shall pay the purchase price of JMJ Note 2 within 5 business days of the filing a registration statement covering the shares of common stock underlying JMJ Note 2. The Company shall pay a one-time interest payment of 10% of the principal of the promissory note which is due on the maturity date of the promissory note, which is March 30, 2013. JMJ Note 2 is convertible into shares of the Company’s common stock at a conversion price of the lesser of (i) $.10 per share or (ii) eighty five percent of the average of the three lowest trade prices in the 20 trading days prior to the conversion.





On March 30, 2010, the Company issued and sold a $1,200,000 unsecured convertible note (“JMJ Note 3”) to JMJ Financial, for a purchase price of $1,000,000 (reflecting a 16.67% original issue discount) in a private placement. JMJ Financial shall pay the purchase price of JMJ Note 3 within 5 business days of the filing a registration statement covering the shares of common stock underlying JMJ Note 3. The Company shall pay a one-time interest payment of 10% of the principal of JMJ Note 3 which is due on the maturity date of JMJ Note 3, which is March 30, 2013. JMJ Note 3 is convertible into shares of the Company’s common stock at a conversion price of the lesser of (i) $.10 per share or (ii) eighty five percent of the average of the three lowest trade prices in the 20 trading days prior to the conversion.





On March 30, 2010, the Company issued and sold a $1,700,000 unsecured convertible note (“JMJ Note 4”, and together with the JMJ Note 1, JMJ Note 2, JMJ Note 3, and JMJ Note 4, the “JMJ Notes”) to JMJ Financial, for a purchase price of $1,500,000 (reflecting a 11.76% original issue discount) in a private placement. JMJ Financial shall pay the purchase price of JMJ Note 4 within 5 business days of the filing a registration statement covering the shares of common stock underlying JMJ Note 4. The Company shall pay a one-time interest payment of 10% of the principal of JMJ Note 4 which is due on the maturity date of JMJ Note 4, which is March 30, 2013. JMJ Note 4 is convertible into shares of the Company’s common stock at a conversion price of the lesser of (i) $.10 per share or (ii) eighty five percent of the average of the three lowest trade prices in the 20 trading days prior to the conversion.





In connection with the issuance of the JMJ Notes, on March 30, 2010, the Company entered into a letter agreement (the “JMJ Letter Agreement”) with the JMJ Financial, pursuant to which, JMJ Financial agreed that, notwithstanding the terms of the JMJ Notes, any conversion JMJ Financial effects of the JMJ Notes will be at a conversion price of not lower than $0.10, and the Company agreed that, if JMJ Financial effects any conversion of the JMJ Notes at a conversion price of $0.10, the Company will add a “Make Whole Amount” to the balance of the applicable JMJ Note. Under the JMJ Letter Agreement, the Make Whole Amount is defined as the difference between $0.10 and the conversion price that would otherwise be applicable under the JMJ Notes, times the number of shares being converted.





In connection with the issuance of the JMJ Notes, on March 30, 2010, the Company entered into a registration rights agreement (the “Registration Rights Agreement”) with JMJ Financial. Pursuant to the Registration Rights Agreement, the Company agreed to file, no later than May 20, 2010, a registration statement covering the shares of common stock underlying the JMJ Notes.


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ITEM 6. EXHIBITS





Exhibit Description
 
 10.1

Promissory Note, dated January 19, 2010, issued to JMJ Financial *10.2

Promissory Note, dated March 30, 2010, in principal amount of $600,000, issued to JMJ Financial *10.3

Promissory Note, dated March 30, 2010, in principal amount of $1,200,000, issued to JMJ Financial *10.4

Promissory Note, dated March 30, 2010, in principal amount of $1,700,000, issued to JMJ Financial *10.5

Letter Agreement, dated March 30, 2010, between the Company and JMJ Financial *10.6

Registration Rights Agreement, dated March 30, 2010, between the Company and JMJ Financial *31.1

Section 302 Certification of Principal Executive Officer and Principal Financial Officer.*32.1

Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350.*
  *
Filed herewith










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SIGNATURE





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





ADVANCED CELL TECHNOLOGY, INC.By:
/s/ William M. Caldwell, IVWilliam M. Caldwell, IVChief Executive Officer (Principal Executive Officer and Principal Financial Officer)Dated: May 7, 2010