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Adeona Pharmaceuticals, Inc. and Subsidiaries

(A Development Stage Company)

 

Notes to Consolidated Financial Statements

(Unaudited)

The Company’s ownership in its subsidiaries requires the Company to account for the related non-controlling interest. Under generally accepted accounting principles, when losses applicable to the minority interest in a subsidiary exceed the minority interest in the equity capital of the subsidiary, the excess is not charged to the minority interest since there is no obligation of the minority interest to make good on such losses.  The Company, therefore, has included losses applicable to the minority interest against its interest.  Since the Company’s subsidiaries have never been profitable and present negative equity, there has been no establishment of a positive non-controlling interest. This value is not presented as a deficit balance in the accompanying consolidated balance sheet.

 

(E) Reverse Stock Split

 

In January 2007, the Company’s Board of Directors approved a 3 for 1 reverse stock split of all outstanding common stock, stock options and stock warrants of Adeona. The reverse split was effective on April 25, 2007 following shareholder approval.  All share and per share amounts have been retroactively restated to reflect this reverse stock split.

(F) Reverse Acquisition and Recapitalization

 

On October 31, 2006, Sheffield Pharmaceuticals, Inc. (“Sheffield”), a then shell corporation, entered into a Merger Agreement (“Merger”) with Pipex Therapeutics, a privately owned company, whereby Pipex Therapeutics was the surviving corporation. This transaction was accounted for as a reverse acquisition because Sheffield did not have any operations at the time of the merger, and therefore this was treated as a recapitalization of Pipex Therapeutics. Since Pipex Therapeutics acquired a controlling voting interest in a public shell corporation, it was deemed the accounting acquirer, while Sheffield was deemed the legal acquirer. The historical financial statements of the Company are those of Pipex Therapeutics, EPI, Solovax and CD4 since inception, and of the consolidated entities from the date of Merger and subsequent. On December 11, 2006, Sheffield changed its name to Pipex Pharmaceuticals, Inc.

 

Since the transaction is considered a reverse acquisition and recapitalization, pro-forma financial statements are not required.

 

Pursuant to the agreement, Sheffield issued 34,000,000 shares of common stock for all of the outstanding Series A, convertible preferred and common stock of Pipex Therapeutics, and Sheffield assumed all of Pipex Therapeutics’ outstanding options and warrants, but did not assume the options and warrants outstanding within any of Pipex Therapeutics’ subsidiaries (EPI, CD4 and Solovax). On October 31, 2006, concurrent with the Merger, Pipex Therapeutics executed a private stock purchase agreement to purchase an additional 2,426,300 shares of common stock held by Sheffield’s sole officer and director; these shares were immediately cancelled and retired. Aggregate consideration paid for Sheffield was $665,000. Upon the closing of the reverse acquisition, shareholders of Sheffield retained an aggregate 245,824 shares of common stock. As a result of these two stock purchase transactions, Pipex Therapeutics acquired approximately 99% ownership of the issued and outstanding common shares of Sheffield.

See Note 2(H) as it pertains to the retroactive effect of the share and per share amounts pursuant to the reverse acquisition and recapitalization discussed in this Note 1(F).

 

 

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Adeona Pharmaceuticals, Inc. and Subsidiaries

(A Development Stage Company)

 

Notes to Consolidated Financial Statements

(Unaudited)

 

 

In September 2009, the FASB issued Update No. 2009-13, “Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force” (ASU 2009-13). It updates the existing multiple-element revenue arrangements guidance currently included under ASC 605-25, which originated primarily from the guidance in EITF Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables” (EITF 00-21). The revised guidance primarily provides two significant changes: 1) eliminates the need for objective and reliable evidence of the fair value for the undelivered element in order for a delivered item to be treated as a separate unit of accounting, and 2) eliminates the residual method to allocate the arrangement consideration. In addition, the guidance also expands the disclosure requirements for revenue recognition. ASU 2009-13 will be effective for the first annual reporting period beginning on or after June 15, 2010, with early adoption permitted provided that the revised guidance is retroactively applied to the beginning of the year of adoption. The Company is currently assessing the future impact of this new accounting update to its financial statements.

 

Effective July 1, 2009, the Company adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 105-10, Generally Accepted Accounting Principles – Overall (“ASC 105-10”). ASC 105-10 establishes the FASB Accounting Standards Codification (the “Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. All guidance contained in the Codification carries an equal level of authority. The Codification superseded all existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the Codification is non-authoritative. The FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates (“ASUs”). The FASB will not consider ASUs as authoritative in their own right. ASUs will serve only to update the Codification, provide background information about the guidance and provide the bases for conclusions on the change(s) in the Codification. References made to FASB guidance throughout this document have been updated for the Codification.

 

Effective July 1, 2009, the Company adopted FASB ASU No. 2009-05, Fair Value Measurements and Disclosures (Topic 820) (“ASU 2009-05”). ASU 2009-05 provided amendments to ASC 820-10, Fair Value Measurements and Disclosures – Overall, for the fair value measurement of liabilities. ASU 2009-05 provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using certain techniques. ASU 2009-05 also clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of a liability. ASU 2009-05 also clarifies that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements. Adoption of ASU 2009-05 did not have a material impact on the Company’s results of operations or financial condition.

 

 

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Adeona Pharmaceuticals, Inc. and Subsidiaries

(A Development Stage Company)

 

Notes to Consolidated Financial Statements

(Unaudited)

 

For the Year Ended 2008

In 2008, the Company issued 61,392 shares of common stock having a fair value of $55,385 ($0.90 per share) based on the quoted closing trading prices for payment of salaries to employees.

 

In 2008, the Company issued 172,157 shares of common stock having a fair value of $104,042 ($0.60 per share) based on the quoted closing trading prices for consulting fees.

 

In 2008, the Company issued 39,370 shares of common stock having a fair value of $50,000 ($1.27 per share) based on the quoted closing trading price for a milestone payment.

 

In 2008, the Company issued an aggregate 138,505 shares of common stock having a fair value of $145,000 ($1.05 per share) based on the quoted closing trading prices for license fees.

 

In 2008, the Company issued 37,948 shares of common stock in connection with the exercise of stock options for net proceeds of $4,390.  The related exercise prices were $0.09 and $0.18 per share.

For the Year Ended 2007

In 2007, the Company issued an aggregate 2,920 shares of common stock having a fair value of $20,000 ($6.85 per share) based on the quoted closing trading price for license fees.

In 2007, the Company issued 5,102 shares of common stock having a fair value of $25,000 ($4.90 per share) based on the quoted closing trading price for a milestone payment.

 

During 2007, the Company issued 3,401,972 shares of common stock in connection with the exercise of warrants for net proceeds of $6,972,809 ($2.22 per share).

For the Year Ended 2006

During 2006, the loans payable to Steve Kanzer the Company’s co-founder, and current Chairman were converted into 1,665,211 shares of common stock and 832,606 warrants.  There were no gain or loss on this transaction since it was with a related party.

During 2006, the Company completed private placements of its stock, which resulted in the issuance of 6,900,931 shares of common stock and 3,451,524 warrants. The net proceeds from the private placements were $12,765,945, which included cash paid as direct offering costs of $1,160,418.  As part of the October 2006 private placement, the Company sold 99,104 shares of its common stock and 49,552 warrants to purchase common stock for total proceeds of $200,000 to entities controlled by its then President Charles Bisgaier. As part of the same private placement, Adeona sold 49,552 shares of its common stock and 24,776 warrants to purchase common stock for total proceeds of $100,000 to a related family member of the Company’s current Chairman. The terms on which their purchases were made were identical to the terms in which the other investors in these offerings purchased shares.

During 2006, the Company issued 422,314 shares of common stock to an unrelated third party in connection with the terms of a license agreement. The fair value was $388,691 based upon the recent cash offering price at that time and was charged to research and development expense.

During 2006, the Company converted all of its 5,421,554 shares of Series A, convertible preferred stock in exchange for equivalent common shares. The fair value of the exchange was based upon par value with a net effect of $0 to the statement of equity.

 

 

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Adeona Pharmaceuticals, Inc. and Subsidiaries

(A Development Stage Company)

 

Notes to Consolidated Financial Statements

(Unaudited)

A summary of warrant activity for Adeona for the nine months ended September 30, 2009 (unaudited) and for the year ended December 31, 2008 is as follows:

 

Adeona Pharmaceuticals, Inc. and Subsidiaries

(A Development Stage Company)

 

Notes to Consolidated Financial Statements

(Unaudited)

Note 5 Commitments

 

(A) License Agreements

 

Since inception, the Company has entered into various option and license agreements for the use of patents and their corresponding applications. These agreements have been entered into with various educational institutions and hospitals. These agreements contain payment schedules or stated amounts due for (a) option and license fees, (b) expense reimbursements, and (c) achievement of success milestones. All expenses related to these agreements have been recorded as research and development.

(B) Research Agreement

In September 2005, the Company entered into a three-year sponsored research agreement with the University of Michigan. Pursuant to that agreement, the Company sponsored approximately $460,000 per year, payable in monthly installments. This agreement can be extended for an additional two-year period.  The Company can terminate the agreement by giving 90 days prior written notice.  On March 20, 2008, the Company provided the University with written notice of termination of the agreement.  On March 24, 2009 the Company entered into a repayment plan with the University to pay the outstanding amount owed under the original agreement in the amount of $197,335.  The Company will pay $5,000 per month until the payable is paid in full.

(C) Employment Agreements

 

In January 2005, the Company entered into a four-year employment agreement with Steve H. Kanzer, the Company’s then Chairman and Chief Executive Officer. Pursuant to that agreement, Mr. Kanzer was entitled to receive an annual base salary of $297,000 and annual bonuses equal to 30% of his base salary, plus a ten-year option to acquire 271,058 shares of common stock at the completion of the Company’s private placement that occurred on October 31, 2006. However, Mr. Kanzer did not take any of the salary or bonuses he was entitled to under this agreement, but did exercise his stock options, which had vested on or before December 31, 2008.  The fair value of the options totaled $544,827 and was determined using the Black-Scholes model with the following assumptions: expected dividend yield of 0%, expected volatility of 200%, risk free interest rate of 4.61% and an expected life of 10 years.

Adeona Pharmaceuticals, Inc. and Subsidiaries

(A Development Stage Company)

 

Notes to Consolidated Financial Statements

(Unaudited)

 (D) Litigation

On January 13, 2009, EPI was served with legal action from an individual regarding payment of past consulting services and associated expenses from 2005.  The Company believes the lawsuit is without merit.  The Company has engaged legal counsel to represent the Company in this matter.

 

 

Our results include non-cash compensation expense as a result of the issuance of stock and stock option grants. Compensation expense for options granted to employees represents the fair value of the award at the date of grant as amortized in the period of recognition. All share-based payments to employees since inception have been recorded and expensed in the statements of operations.

 

This amount is being recorded over the respective vesting periods of the individual stock options. The expense is included in the respective categories of expense in the statement of operations. We expect to record additional non-cash compensation expense in the future, which may be significant. However, because some of the options are milestone-based, the total expense is uncertain.

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates.

Accounts Receivable and Allowance for Doubtful Accounts

 

Accounts receivable are reported at realizable value, net of allowances for doubtful accounts, which is estimated and recorded in the period the related revenue is recorded. The Company has a standardized approach to estimate and review the collectability of its receivables based on a number of factors, including the period they have been outstanding. historical collection and payer reimbursement experience is an integral part of the estimation process related to allowances for doubtful accounts. In addition, the Company regularly assesses the state of its billing operations in order to identify issues, which may impact the collectability of these receivables or reserve estimates. Revisions to the allowances for doubtful accounts estimates are recorded as an adjustment to bad debt expense within general and administrative expenses. Receivables deemed uncollectible are charged against the allowance for doubtful accounts at the time such receivables are written-off. Recoveries of receivables previously written-off are recorded as credits to the allowance for doubtful accounts. There were no recoveries during the nine months ended September 30, 2009.

 

Revenue Recognition

 

The Company records revenue when all of the following have occurred: (1) persuasive evidence of an arrangement exists, (2) the service is completed without further obligation, (3) the sales price to the customer is fixed or determinable, and (4) collectability is reasonably assured. 

 

The Company primarily recognizes revenue for services rendered upon completion of the testing process. Billing for services reimbursed by third-party payers, including Medicare and Medicaid, are recorded as revenues net of allowances for differences between amounts billed and the estimated receipts from such payers.

 

The Company maintains a sales allowance to compensate for the difference in its billing practices and insurance company reimbursements. In determining this allowance the company looks at several factors, the most significant of which is the average difference between the amount charged and the amount reimbursed by insurance carriers over the prior two years, otherwise known as the yearly average adjustment amount. The allowance taken is the averaged yearly average adjustment amount for these prior periods and multiplied by each period’s actual gross sales to determine the actual sales allowance for each period.

 

Goodwill

 

 

Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition or sale or disposition of a significant portion of a reporting unit. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. The fair value of each reporting unit is estimated using a discounted cash flow methodology. This requires significant judgments including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term growth rate for our business, the useful life over which cash flows will occur, and determination of our weighted average cost of capital. Changes in these estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment charge for each reporting unit.

 

We will continue to evaluate goodwill for impairment, at least annually.  During the nine months ended September 30, 2009, we did not identify any indication of goodwill impairment.

 

 

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Results of Operations

 

Three Months Ended September 30, 2009 and 2008.

 

Research and Development Expenses. For the three months ended September 30, 2009, research and development expense was $325,662 as compared to $863,272 for the three months ended September 30, 2008. The decrease of $537,610 is due primarily to a substantial decrease in stock based compensation charges, a decrease associated with payments related the development of our licensed clinical drug candidates, a decrease in salaries and related taxes and a decrease in allocated overhead expenses.

 

General and Administrative Expenses. For the three months ended September 30, 2009, general and administrative expense was $351,646 as compared to $606,685 for the three months ended September 30, 2008. The decrease of $255,039 is due primarily to a decrease in salaries and payroll taxes and a decrease in stock based compensation charge offset by higher general and administrative expenses associated with the cost of services and marketing activities associated with our acquisition of CLIA-certified HartLab on July 10, 2009.

 

Other Income (Expense), net. For the three months ended September 30, 2009, interest income was $148 as compared to $41,118 for the three months ended September 30, 2008. Interest income was lower for the period in 2009 as compared to the same period in 2008 due to lower interest rates and lower levels of cash kept in interest bearing accounts to ensure FDIC insurance coverage.

 

Net Loss. Net loss for the three months ended September 30, 2009, was $626,075 as compared to $1,428,839 for the three months ended June 30, 2008. This decrease in net loss of $802,764 is attributable primarily to a decrease in research and development expense of 537,610, a decrease in general and administrative expenses of 255,039 and an increase in other income (loss) net of $41,118 as discussed above.

Nine months Ended September 30, 2009 and 2008.

Research and Development Expenses. For the nine months ended September 30, 2009, research and development expense was $1,219,135 as compared to $4,156,255 for the nine months ended September 30, 2008. The decrease of $2,937,120 is due primarily to a substantial decrease associated with payments related to the development of our licensed clinical drug candidates, a decrease in stock based compensation charges, a decrease in salaries and related taxes and a decrease in allocated overhead expenses.

 

General and Administrative Expenses. For the nine months ended September 30, 2009, general and administrative expense was $1,410,200 as compared to $2,242,855 for the nine months ended September 30, 2008. The decrease of $832,417 is due primarily to a decrease in salaries and payroll taxes, a decrease in stock based compensation charge, a decrease in allocated overhead and a decrease in professional fees all brought about by corporate restructuring, offset by higher general and administrative expenses associated with the cost of services and marketing activities associated with our acquisition of HartLab on July 10, 2009.

 

Other Income (Expense), net. For the nine months ended September 30, 2009, other expense was $39,358 compared to other income-net of $109,102 for the nine months ended September 30, 2008. For the nine months ended September 30, 2009, interest income was $2,826 as compared to $108,503 for the nine months ended June 30, 2008. Interest income was lower for the period in 2009 as compared to the same period in 2008 due to lower interest rates and lower levels of cash in interest bearing accounts.

 

Net Loss. Net loss for the nine months ended September 30, 2009, was $2,617,608 as compared to $6,290,008 for the nine months ended September 30, 2008. This decrease in net loss of $3,672,400 is attributable primarily to a decrease in research and development expense of $2,937,120, a decrease in general and administrative expenses of $832,417 and an increase in other income (loss)-net of $148,460 as discussed above.

 Liquidity and Capital Resources

 

During the nine months ended September 30, 2009, we had a net decrease in cash of $2,323,915. Total cash resources as of September 30, 2009 was $3,532,469. During the nine months ended September 30, 2009 and 2008, net cash used in operating activities was $2,163,356 and $4,140,225 respectively. This cash was used to fund our operations for the periods, adjusted for non-cash expenses and changes in operating assets and liabilities.

 

Net cash used in investing activities was $170,317 for the nine months ended September 30, 2009 compared to $21,398 for the nine months ended September 30, 2008.  The net cash used in investing activities for the nine months ended September 30, 2009 were used in our acquisition of HartLab, offset by $25,200 received from the sale of equipment.  The net cash used in investing activities for the nine months ended September 30, 2008 resulted from the purchase of property and equipment in the amount of $21,398.  

 

Product Candidates

 

Copper and Zinc Metabolism Clinical Diagnostic Products and Services

 

During the first quarter of 2009, we analyzed patient samples from an IRB-approved, prospective, observational, blinded clinical trial that we sponsored and conducted during 2007 and 2008.  Such study enrolled 90 subjects, 30 with Alzheimer's disease (AD), 30 with Parkinson's disease (PD) and 30 age-matched normal subjects. The purpose of the study was to evaluate serum markers of copper status and compare these results across the three groups of patients. The results of such study indicate highly statistically significant differences in serum markers of copper status between AD and normal subjects. We believe that the differences observed suggest that Alzheimer's patients have impaired metabolic functioning that decreases their protection from chronic copper toxicity, which may contribute to the progression of their disease. The results from this study also appear to indicate a subclinical zinc deficiency in AD subjects.  On July 16, 2009 we announced the presentation of our findings from this study at the 2009 International Conference on Alzheimer’s disease (ICAD). There is an estimated 5.8 million, 1.5 million and 15 million persons in the U.S. with Alzheimer’s disease, Parkinson’s disease and mild cognitive impairment (MCI), respectively, that may benefit from our planned panel of clinical diagnostic products and services.

 

On July 10, 2009 we acquired Hart Lab, LLC, an Illinois limited liability company and CLIA-certified clinical laboratory through which we intend to launch and market our intended panel of copper and zinc metabolism clinical diagnostic products and services.

On September 8, 2009 we announced the creation of our initial sales and marketing team to launch the CopperProofTM Test Panel to neurologists, gerontologists and other physicians that care for Alzheimer’s disease and cognitive impairment patients. . On November 9, 2009, we announced that we had initiated the U.S. launch of our HartLab subsidiary’s high precision diagnostic test panel for the comprehensive evaluation of zinc and copper status in patients with Alzheimer's disease (AD) and mild cognitive impairment (MCI). The CopperProofTM test panel provides a comprehensive analysis at the metabolic serum copper and zinc status of AD and MCI patients, which status has been shown to be impaired in this patient population. Defects in copper metabolism and high free copper levels are increasingly being recognized as significant factors in the progression of neurodegenerative diseases, including AD and MCI.  This panel will allow physicians to determine the copper and zinc metabolic status of these patients as an aid in their continued treatment program.

Products for Subclinical Zinc Deficiency and Chronic Copper Toxicity

Our leading therapeutic product candidate brands, Zinthionein™ and EyeDaily™ with Zinthionein™, are expected to be products that contain proprietary ingredients (such as, zinc monocysteine complex), proprietary combinations of ingredients, proprietary modified-release zinc-containing formulations, such as Zinthionein™ ZC GS-150 (containing 150mg elemental zinc and the amino acid cysteine) and proprietary product packaging.  We believe that our technologies and expertise may provide physicians and aging patients with the most timely, convenient, well tolerated, “best-in-class” product solutions we consider to be an under-recognized, potential multi-billion dollar market to address for the prevention and treatment of degenerative conditions that we believe involve subclinical zinc deficiency and/or chronic copper toxicity.

Zinc-monocysteine is a complex of zinc and the amino acid cysteine that we believe may have improved properties compared to currently marketed zinc–based products.  Zinc-monocysteine was invented and developed by David A. Newsome, M.D., President of the Company's subsidiary Healthmine and former Chief of the Retinal Disease Section of the National Eye Institute (NEI).  Dr. Newsome was the first to pioneer and demonstrate the benefits of oral high dose zinc therapy in Dry Age-Related Macular Degeneration (“Dry AMD”).  Oral high dose zinc containing products now represent the standard of care for Dry AMD affecting over 10 million Americans and have annual sales of approximately $300 million.  Zinc monocysteine has completed an 80-patient, randomized, double-masked, placebo controlled clinical trial in dry AMD and demonstrated highly statistically significant improvements in central retinal function the results of which were published in a peer-reviewed journal in 2008.  In addition, we believe that our patent pending modified-release formulations of zinc-monocysteine and other zinc moieties may offer the significant advantages of convenient once-a-day dosing and improved gastrointestinal tolerability compared to currently-marketed oral high dose zinc-containing products.  During the third quarter of 2009 we made continued progress in the manufacture and scale up of zinc-monocysteine to support the further nonclinical testing and cGMP manufacturing required to support our planned Generally Regarded as Safe affirmation process, which we consider to be among one of several prerequisites prior to the potential product launch of products containing zinc-monocysteine as an active ingredient and second generation product potentially replacing the active ingredients in  Zinthionein™ ZC GS-150, namely zinc and the amino acid cysteine.

 

Our sales and marketing plans include direct sales to physicians through a specialty sales force, promoting the understanding of chronic copper toxicity and zinc deficiency and patient education regarding the potential risks of chronic free copper exposure, and Through our Hart Lab CLIA-certified clinical reference laboratory, we are commercializing serum based diagnostic tests to assist physicians in identifying patients with zinc deficiency and patients at increased risk chronic copper toxicity due to impaired serum copper binding.  Through our specialty sales force, we currently intend to launch Zinthionein™ ZC GS-150, our patent pending proposed once-daily gastro-retentive sustained release oral zinc preparation containing 150mg elemental zinc and the amino acid cysteine in the first quarter of 2010 as a prescription medical food for the dietary management of patients having conditions characterized by zinc deficiency and chronic copper toxicity, such as, Alzheimer’s disease and mild cognitive impairment (MCI).  Through our Healthmine subsidiary, we launched copperproof.com, a website intended to increase public awareness aimed at the prevention of chronic copper toxicity.  Our EyeDaily™ brand of oral zinc-based therapies is expected to utilize patent-pending product packaging that incorporates an eye-self test to improve compliance and convenience of patients with Dry AMD.

 

On November, 2, 2009 we announced that we received Institutional Review Board (IRB) approval to initiate a 60 patient, randomized, double-blind, placebo-controlled clinical trial of our patent pending Zinthionein™ ZC-GS150 in an Alzheimer's disease (AD) and mild cognitive impairment (MCI) patient group.  The clinical trial, titled "CopperProof 2," will test the effects of  Zinthionein™ ZC-GS150, a novel gastro-retentive, sustained release zinc/cysteine combination tablet on the amelioration of sub-clinical zinc deficiency, and elevated percentage serum free copper, associated with Alzheimer's Disease and Mild Cognitive Impairment (MCI). Zinthionein™ ZC-GS150 is our patent pending, first generation modified release formulation of high dose zinc and other GRAS ingredients that does not include zinc-monocysteine, that we believe is capable of delivering 150mg of elemental zinc in a convenient once-a-day dose with superior gastrointestinal tolerability compared currently marketed zinc preparations required to be taken two to three times a day and that are associated with nausea in up 90% of patients and gastric irritation in 30% of patients.  The first part of the CopperProof-2 study will compare the tolerability and bioavailability of Zinthionein™ ZC-GS150 to a currently marketed high dose zinc preparation and is expected to yield results within the next several months.  The second part of the CopperProof-2 study will compare once-daily Zinthionein™ ZC-GS150 versus placebo for six months in a double-blind, randomized fashion in 60 patients with Alzheimer’s disease and Mild Cognitive Impairment to determine whether dietary management of such diseases with Zinthionein™ ZC-GS150 will demonstrate improvements in cognition (ADAS-Cog and Mini Mental State Exam scores) compared to placebo as well as improvement in serum parameters of copper/zinc dysfunction.  Assuming successful results of Part 1 of the CopperProof-2 study, we currently plan to launch once-daily Zinthionein™ ZC-GS150 in the first quarter of 2010 for the dietary management of zinc deficiency in AD and MCI patients.

Through September 30, 2009, we have incurred approximately $515,000 of costs related to our development of Zinthionein of zinc-monocysteine, our modified release oral zinc candidates, such as Zinthionein™ ZC GS-150, which $154,000 was incurred during 2007, $256,000 which was incurred in 2008 and $105,000 which was incurred during the first half of 2009.

 

 

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prosecution of the pending divisional U.S. patent application Ser. No. 11/621,390. In April 2008, we analyzed the zinc-cysteine complex described by Zegzhda and concluded that such complex describes an insoluble zinc salt and does not describe a non-zinc salt zinc monocyteine complex and therefore believe that such disclosure should not affect the validity of any of our issued U.S. patent claims relating our zinc-monocysteine composition-of-matter claims.  We have filed a response and declaration describing the results of our analysis with the U.S. Patent and Trademark Office with respect to the Zegzhda reference with respect to U.S. patent application ser. no. 11/621,380.   In an office action dated August 20, 2008, the U.S. patent examiner did not accept our arguments filed May 23, 2008 in connection with the Zegzhda reference under pending divisional application ser. no. 11/621,390, to which we intend to respond. Public copies of relevant and future communications can be obtained using the electronic PAIR system of the U.S. Patent and Trademark Office.

 

The patent positions of pharmaceutical companies are uncertain and may involve complex legal and factual questions. We may incur significant expense in protecting our intellectual property and defending or assessing claims with respect to intellectual property owned by others. Any patent or other infringement litigation by or against us could cause us to incur significant expense and divert the attention of our management.

 

We may also rely on the United States Drug Price Competition and Patent Term Restoration Act, commonly known as the “Hatch-Waxman Amendments,” to protect some of our current product candidates, specifically oral TTM, dnaJP1, TRIMESTA, zinc-monocystine, CD4 inhibitor, flupirtine and other future product candidates we may develop. Once a drug containing a new molecule is approved by the FDA, the FDA cannot accept an abbreviated NDA for a generic drug containing that molecule for five years, although the FDA may accept and approve a drug containing the molecule pursuant to an NDA supported by independent clinical data. Recent amendments have been proposed that would narrow the scope of Hatch-Waxman exclusivity and permit generic drugs to compete with our drug.

 

Others may file patent applications or obtain patents on similar technologies or compounds that compete with our products. We cannot predict how broad the claims in any such patents or applications will be, and whether they will be allowed. Once claims have been issued, we cannot predict how they will be construed or enforced. We may infringe intellectual property rights of others without being aware of it. If another party claims we are infringing their technology, we could have to defend an expensive and time consuming lawsuit, pay a large sum if we are found to be infringing, or be prohibited from selling or licensing our products unless we obtain a license or redesign our product, which may not be possible.

 

We also rely on trade secrets and proprietary know-how to develop and maintain our competitive position. Some of our current or former employees, consultants, or scientific advisors, or current or prospective corporate collaborators, may unintentionally or willfully disclose our confidential information to competitors or use our proprietary technology for their own benefit. Furthermore, enforcing a claim alleging the infringement of our trade secrets would be expensive and difficult to prove, making the outcome uncertain. Our competitors may also independently develop similar knowledge, methods, and know-how or gain access to our proprietary information through some other means.

 

We may fail to retain or recruit necessary personnel, and we may be unable to secure the services of consultants.

 

As of November 13, 2009, we have 10 full-time employees. We have also engaged regulatory consultants to advise us on our dealings with the FDA and other foreign regulatory authorities. Our future performance will depend in part on our ability to successfully integrate newly hired executive officers into our management team and our ability to develop an effective working relationship among senior management.

 

Effective March 29, 2009, Nicholas Stergis resigned as our Chief Executive Officer. Mr. Stergis remains a director of the Company. Steve H. Kanzer was appointed our President and Chief Executive Officer.  Effective June 26, 2009, Steve H. Kanzer resigned as our President and Chief Executive Officer upon the appointment of Max Lyon as President and Chief Executive Officer.

 

Certain of our directors, (Jeffrey Kraws, a director and former VP of Business Development, Jeffrey Wolf, a director, Nicholas Stergis, a director, and Dr. Kuo, a director) scientific advisors, and consultants serve as officers, directors, scientific advisors, or consultants of other biopharmaceutical or biotechnology companies which might be developing competitive products to ours. Other than corporate opportunities, none of our directors are obligated under any agreement or understanding with us to make any additional products or technologies available to us. Similarly, we can give no assurances, and we do not expect and stockholders should not expect, that any biomedical or pharmaceutical product or technology identified by any of our directors or affiliates in the future would be made available to us other than corporate opportunities.

 

 

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ITEM 6. EXHIBITS

 

31.1	Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) *
31.2	Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) *
32.1	Certification pursuant to Section 1350 of the Sarbanes-Oxley Act of 2002 *