UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
DC 20549




FORM
10-Q





(Mark
      One)ý
            
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the quarterly period ended March 31, 2009ORo
            
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
      1934For
      the transition period from  ____________
      to ____________




Commission
File Number: 1-12584





ADEONA
PHARMACEUTICALS, INC.


(Name
of small business issuer in its charter)





Delaware
            13-3808303(State
      or other jurisdiction of incorporation or organization)
            (IRS
      Employer Identification Number)3930
      Varsity Drive
              Ann
      Arbor, MI
            48108(Address
      of principal executive offices)
            (Zip
      Code)




Registrant’s
telephone number, including area code:


(734)
332-7800


Securities registered pursuant to
Section 12(b) of the Act:


Common
Stock, $0.001 par value per share




Securities
registered pursuant to Section 12(g) of the Act:


None.





(Title of
Class)







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




Large
      accelerated
      filer                               
       ̈
                Accelerated
      filer                               
       ̈Non-Accelerated
      filer                      
                 ̈
                Smaller
      reporting
      company             
      ý(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  ý





As of May
1, 2008, the registrant had 21,280,588 shares of common stock
outstanding.




1





ADEONA
PHARMACEUTICALS, INC.




FORM
10-Q


TABLE
OF CONTENTS





PagePART
      I.—FINANCIAL INFORMATIONItem
      1.
                
                Financial
      StatementsConsolidated
      Balance Sheets (Unaudited)
                
                
                3Consolidated
      Statements of Operations (Unaudited)
                
                
                4Consolidated
      Statements of Cash Flows (Unaudited)
                
                
                5Notes
      to Consolidated Financial Statements (Unaudited)
                
                
                6Item
      2.
                
                Management’s
      Discussion and Analysis of Financial Information and Results of
      Operations
                
                
                22Item
      3.
                
                Quantitative
      and Qualitative Disclosures About Market Risks
                
                
                28Item
      4T.
                
                Controls
      and Procedures
                
                
                28PART
      II—OTHER INFORMATIONItem
      1A.
                
                Risk
      Factors
                
                
                29Item
      2.
                
                Unregistered
      Sales of Equity Securities and Use of Proceeds
                
                
                45Item
      6.
                
                Exhibits
                
                
                46SIGNATURE
                
                
                47






2




PART
I.—FINANCIAL INFORMATION




ITEM
1. FINANCIAL STATEMENTS




Adeona
Pharmaceuticals, Inc. and Subsidiaries


(A
Development Stage Company)




Consolidated Balance
Sheets


Assets
                              
                              March
      31,
                                2009
                              
                              
                              December
      31,
                                2008(Unaudited)
                              
                              
                              (Audited)Current
      AssetsCash
                              
                              $
                              5,289,042
                              
                              
                              $
                              5,856,384Other
      receivables
                              
                              
                              45,241
                              
                              
                              
                              55,419Prepaid
      expenses
                              
                              
                              22,720
                              
                              
                              
                              15,109Total
      Current Assets
                              
                              
                              5,357,003
                              
                              
                              
                              5,926,912Property
      and Equipment, net of accumulated depreciation of $681,595 and
      $591,876
                              
                              
                              1,327,298
                              
                              
                              
                              1,446,407Deposits
      and other assets
                              
                              
                              11,989
                              
                              
                              
                              11,989Total
      Assets
                              
                              $
                              6,696,290
                              
                              
                              $
                              7,385,308Liabilities and Stockholders'
      EquityCurrent
      Liabilities:Accounts
      payable
                              
                              $
                              522,605
                              
                              
                              $
                              574,896Accrued
      liabilities
                              
                              
                              124,490
                              
                              
                              
                              45,820Total
      Current Liabilities
                              
                              
                              647,095
                              
                              
                              
                              620,716Long
      Term Liabilities:Accounts
      payable
                              
                              
                              137,335
                              
                              
                              
                              -Total
      Liabilities
                              
                              
                              784,430
                              
                              
                              
                              620,716Stockholders'
      EquityPreferred
      stock,  $0.001 par value; 10,000,000 shares
      authorized,none
      issued and outstanding
                              
                              
                              -
                              
                              
                              
                              -Common
      stock,  $0.001 par value; 100,000,000 shares
      authorized,21,280,587
      and 20,882,839 shares issued and outstanding
                              
                              
                              21,281
                              
                              
                              
                              20,883Additional
      paid-in capital
                              
                              
                              45,285,531
                              
                              
                              
                              45,025,385Deficit
      accumulated during the development stage
                              
                              
                              (39,394,951
                              )
                              
                              
                              (38,281,676
                              )Total
      Stockholders' Equity
                              
                              
                              5,911,860
                              
                              
                              
                              6,764,592Total
      Liabilities and Stockholders' Equity
                              
                              $
                              6,696,290
                              
                              
                              $
                              7,385,308







See
accompanying notes to unaudited consolidated financial statements






3




Adeona
Pharmaceuticals, Inc. and Subsidiaries


(A
Development Stage Company)




Consolidated Statements of
Operations


(Unaudited)




For
      the periodfrom
      January 8, 2001For
      the three months ended March 31,
                            
                            
                            (Inception)
      to2009
                            
                            
                            2008
                            
                            
                            March
      31, 2009Operating
      Expenses:Research
      and development
                            
                            $
                            495,994
                            
                            
                            $
                            2,124,620
                            
                            
                            $
                            16,300,359General
      and administrative
                            
                            
                            593,444
                            
                            
                            
                            1,002,582
                            
                            
                            
                            10,114,291Total
      Operating Expenses
                            
                            
                            1,089,438
                            
                            
                            
                            3,127,202
                            
                            
                            
                            26,414,650Loss
      from Operations
                            
                            
                            (1,089,438
                            )
                            
                            
                            (3,127,202
                            )
                            
                            
                            (26,414,650
                            )Other
      Income (Expense):Interest
      income
                            
                            
                            2,622
                            
                            
                            
                            51,577
                            
                            
                            
                            474,247Loss
      on sale of equipment
                            
                            
                            (26,459
                            )
                            
                            
                            -
                            
                            
                            
                            (26,816
                            )Interest
      expense
                            
                            
                            -
                            
                            
                            
                            (13,831
                            )
                            
                            
                            (66,760
                            )Total
      Other Income (Expense), net
                            
                            
                            (23,837
                            )
                            
                            
                            37,746
                            
                            
                            
                            380,671Net
      Loss
                            
                            $
                            (1,113,275
                            )
                            
                            $
                            (3,089,456
                            )
                            
                            $
                            (26,033,979
                            )Less:
      Preferred stock dividend - subsidiary
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (951,250
                            )Less:
      Merger dividend
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (12,409,722
                            )Net
      Loss Applicable to Common Shareholders
                            
                            $
                            (1,113,275
                            )
                            
                            $
                            (3,089,456
                            )
                            
                            $
                            (39,394,951
                            )Net
      Loss Per Share  - Basic and Diluted
                            
                            $
                            (0.05
                            )
                            
                            $
                            (0.15
                            )
                            
                            $
                            (5.90
                            )Weighted
      average number of shares outstandingduring
      the period - basic and diluted
                            
                            
                            20,852,935
                            
                            
                            
                            20,454,980
                            
                            
                            
                            6,680,576






See
accompanying notes to unaudited consolidated financial statements






4





Adeona
Pharmaceuticals, Inc. and Subsidiaries


(A
Development Stage Company)





Consolidated Statements of
Cash Flows


(Unaudited)




For
      the periodfrom
      January 8, 2001For
      the three months ended March 31,
                                            
                                            
                                            (Inception)
      to2009
                                            
                                            
                                            2008
                                            
                                            
                                            March
      31, 2009Cash
      Flows From Operating Activities:Net
      loss
                                            
                                            $
                                            (1,113,275
                                            )
                                            
                                            $
                                            (3,089,456
                                            )
                                            
                                            $
                                            (26,033,979
                                            )Adjustments
      to reconcile net loss to net cashused
      in operating activities:Recognition
      of stock-based consulting
                                            
                                            
                                            21,072
                                            
                                            
                                            
                                            226,145
                                            
                                            
                                            
                                            1,548,742Recognition
      of stock-based compensation
                                            
                                            
                                            70,472
                                            
                                            
                                            
                                            380,644
                                            
                                            
                                            
                                            3,232,093Stock
      issued as compensation
                                            
                                            
                                            -
                                            
                                            
                                            
                                            21,858
                                            
                                            
                                            
                                            55,385Stock
      issued as compensation in acquisition of subsidiary
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            601,712Stock
      issued for consulting fees
                                            
                                            
                                            27,750
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            131,792Stock
      issued for milestone payment
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            75,000Stock
      issued for license fee
                                            
                                            
                                            41,250
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            594,941Contributed
      services - related party
                                            
                                            
                                            100,000
                                            
                                            
                                            
                                            36,875
                                            
                                            
                                            
                                            449,395Depreciation
                                            
                                            
                                            94,510
                                            
                                            
                                            
                                            101,850
                                            
                                            
                                            
                                            731,697Provision
      for uncollectible receivable
                                            
                                            
                                            7,785
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            7,785Loss
      on exchange of equipment to settle accounts payable
                                            
                                            
                                            18,674
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            19,031Changes
      in operating assets and liabilities:Prepaid
      expenses and other current assets
                                            
                                            
                                            (5,218
                                            )
                                            
                                            
                                            (20,240
                                            )
                                            
                                            
                                            (67,061
                                            )Deposits
      and other assets
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (11,989
                                            )Accounts
      payable
                                            
                                            
                                            90,968
                                            
                                            
                                            
                                            278,952
                                            
                                            
                                            
                                            758,158Accrued
      liabilities
                                            
                                            
                                            78,670
                                            
                                            
                                            
                                            251,052
                                            
                                            
                                            
                                            127,509Net
      Cash Used In Operating Activities
                                            
                                            
                                            (567,342
                                            )
                                            
                                            
                                            (1,812,320
                                            )
                                            
                                            
                                            (17,779,789
                                            )Cash
      Flows From Investing Activities:Purchases
      of property and equipment
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (21,398
                                            )
                                            
                                            
                                            (2,032,805
                                            )Proceeds
      from the sale of equipment
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            132,265Cash
      paid to acquire shell in reverse acquisition
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (665,000
                                            )Net
      Cash Used In Investing Activities
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (21,398
                                            )
                                            
                                            
                                            (2,565,540
                                            )Cash
      Flows From Financing Activities:Proceeds
      from loans payable - related party
                                            
                                            
                                            -
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            3,210,338Repayments
      of loans payable - related party
                                            
                                            
                                            -
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            (220,000
                                            )Proceeds
      from notes payable
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            1,100,000Repayments
      of notes payable
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (900,000
                                            )
                                            
                                            
                                            (1,100,000
                                            )Proceeds
      from issuance of common stock for stock option exercises
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            4,390Proceeds
      from issuance of preferred and common stock
                                            
                                            
                                            -
                                            
                                            
                                            
                                            2,439
                                            
                                            
                                            
                                            1,150,590Proceeds
      from sale of common stock and warrants in private
    placements
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            13,926,362Proceeds
      from sale of common stock in connection with warrant
    exercise
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            7,552,378Cash
      paid as direct offering costs in private placements and warrant
      call
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (1,739,987
                                            )Proceeds
      from issuance of Series B, convertible preferred stock -
      subsidiary
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            1,902,500Direct
      offering costs in connection with issuance ofseries
      B, convertible preferred stock - subsidiary
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (152,200
                                            )Net
      Cash Provided By (Used In) Financing Activities
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (897,561
                                            )
                                            
                                            
                                            25,634,371Net
      increase (decrease) in cash and cash equivalents
                                            
                                            
                                            (567,342
                                            )
                                            
                                            
                                            (2,731,279
                                            )
                                            
                                            
                                            5,289,042Cash
      and cash equivalents at beginning of period
                                            
                                            
                                            5,856,384
                                            
                                            
                                            
                                            11,492,802
                                            
                                            
                                            
                                            -Cash
      and cash equivalents at end of period
                                            
                                            $
                                            5,289,042
                                            
                                            
                                            $
                                            8,761,523
                                            
                                            
                                            $
                                            5,289,042Supplemental disclosures of cash flow
      information:Cash
      paid for interest
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            13,831
                                            
                                            
                                            $
                                            66,760Cash
      paid for taxes
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            -Supplemental disclosure of non-cash investing and
      financing activities:Loss
      on exchange of equipment to settle accounts payable
                                            
                                            $
                                            5,925
                                            
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            98,219Sale
      of equipment in exchange for other receivables
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            8,685Exchange
      of EPI preferred stock into Pipex common stock in
    acquisition
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            12,409,722Pipex
      acquired equipment in exchange for a loan with a related
    party
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            284,390EPI
      declared a 10% and 30% in-kind dividend on its Series B,convertible
      preferred stock.
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            951,250The
      Company issued shares and warrants in connection with theconversion
      of certain related party debt.
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            3,274,728Conversion
      of accrued liabilities to contributed capital - former  related
      party
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            3,017






See
accompanying notes to unaudited consolidated financial statements




5





Adeona
Pharmaceuticals, Inc. and Subsidiaries


(A
Development Stage Company)




Notes
to Consolidated Financial Statements


(Unaudited)




Note 1 Organization and
Nature of Operations and Basis of Presentation




(A)
Description of the Business





Adeona
Pharmaceuticals, Inc. (“Adeona”) is a company dedicated to the awareness,
diagnosis, prevention and treatment of subclinical zinc deficiency and chronic
copper toxicity in the mature population. Adeona believes that such conditions
may contribute to the progression of debilitating degenerative diseases,
including, Dry Age-Related Macular Degeneration (Dry AMD), Alzheimer's disease
(AD) and mild cognitive impairment (MCI) in susceptible persons. Adeona is also
developing a number of late-stage clinical drug candidates for the treatment of
rheumatoid arthritis and multiple sclerosis.





(B)
Corporate Name Change





On
October 16, 2008, the Company completed a corporate name change to Adeona
Pharmaceuticals, Inc. from Pipex Pharmaceuticals, Inc.





(C)
Basis of Presentation





The
accompanying unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly they do not include all of the information and footnotes
necessary for a fair presentation of financial condition, results of operations
and cash flows in conformity with generally accepted accounting principles. In
the opinion of management of Adeona, the interim consolidated financial
statements included herewith contain all adjustments (consisting of normal
recurring accruals and adjustments) necessary for their fair
presentation.




The
unaudited interim consolidated financial statements should be read in
conjunction with the Company’s Annual Report on Form 10-K, which contains the
audited financial statements and notes thereto, together with the Management’s
Discussion and Analysis, for the year ended December 31, 2008. The interim
results for the period ended March 31, 2009 are not necessarily indicative
of results for the full fiscal year.





(D)
Corporate Structure, Basis of Presentation and Non-Controlling
Interest




The
Company has seven subsidiaries, Pipex Therapeutics, Inc. (“Pipex Therapeutics”),
Effective Pharmaceuticals, Inc. (“EPI”), Solovax, Inc. (“Solovax”), CD4
Biosciences, Inc. (“CD4”), Epitope Pharmaceuticals, Inc. (“Epitope”),
Healthmine, Inc. (“Healthmine”) and Putney Drug Corp. (“Putney”) which were
previously under common control.  As of March 31, 2009, EPI,
Healthmine and Putney are wholly owned and Pipex Therapeutics, Solovax, CD4 and
Epitope are majority owned.  The combinations of these entities prior
to 2006 were accounted for in a manner similar to a pooling of
interests.




For
financial reporting purposes, the outstanding preferred stock and common stock
of the Company is that of Adeona, the legal registrant. All statements of
operations, stockholders’ equity (deficit) and cash flows for each of the
entities are presented as consolidated since January 8, 2001 (inception) due to
the existence of common control since that date. All subsidiaries were
incorporated on January 8, 2001, except for EPI, which was incorporated on
December 12, 2000, Epitope which was incorporated in January of 2002, Putney
which was incorporated in November of 2006 and Healthmine which was incorporated
in December 2007.  All of the subsidiaries were incorporated under the
laws of the State of Delaware.




For
financial accounting purposes, the Company’s date of inception is deemed January
8, 2001. The activity of EPI for the period from December 12, 2000 to January 7,
2001 was nominal. Therefore, there is no financial information presented for
this period.




6





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.
Sheffield did not have any operations at the time of the merger, and 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, the
guidance in SFAS No. 141 does not apply for purposes of presenting
pro-forma financial information.




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).




7





Adeona
Pharmaceuticals, Inc. and Subsidiaries


(A
Development Stage Company)




Notes
to Consolidated Financial Statements


(Unaudited)





(G) Contribution Agreements —
Consolidation of Entities under Common Control





1. 
EPI’s Acquisition of CD4




On
December 31, 2004, EPI acquired 91.61% of the issued and outstanding common
stock of CD4 in exchange for 825,000 shares of common stock having a fair value
of $825. EPI assumed certain outstanding accounts payable and loans of CD4 of
approximately $664,000. The fair value of the exchange was equivalent to the par
value of the common stock issued. CD4 shareholders retained 119,000 shares
(8.39%) of the issued and outstanding common stock of CD4; these shareholders
comprise the non-controlling shareholder base of CD4.





2. 
Pipex Therapeutics’ Acquisition of Solovax




On July
31, 2005, Pipex Therapeutics acquired 96.9% of the aggregate voting preferred
and common stock of Solovax. Pipex Therapeutics assumed all outstanding
liabilities of approximately $310,000, the transfer of 1,000,000 shares of
Series A Convertible Preferred Stock owned by Solovax’s president and 250,000
shares of common stock owned by Solovax’s COO. The fair value of the exchange
was equivalent to the par value of the common stock received pursuant to the
terms of the contribution.





3. 
Pipex Therapeutics’ Acquisition of EPI/CD4




On
December 31, 2005, Pipex Therapeutics acquired 65.47% of the aggregate voting
preferred and common stock of EPI and EPI’s majority owned subsidiary CD4. In
addition, Pipex Therapeutics assumed $583,500 of outstanding liabilities of EPI.
The fair value of the exchange was equivalent to the par value of the common
stock received pursuant to the terms of the contribution.




In the
consolidated financial statements, each of these transactions described in Notes
1(G)(1), 1(G)(2) and 1(G)3, was analogous to a recapitalization with no net
change to equity since the entities were under common control at the date of the
transaction.





4.
Adeona’s Acquisition of EPI, Share Issuances and Paid-in Kind Merger
Dividend




On
January 5, 2007, EPI merged with and into a wholly owned subsidiary of Adeona,
Effective Acquisition Corp. In the transaction, Adeona issued an aggregate
795,248 shares of common stock having a fair value of $15,865,198 based upon the
quoted closing trading price of $19.95 per share. As consideration for the share
issuance, EPI exchanged 1,902,501 shares of Series B Convertible Preferred stock
and 75,000 shares of common stock into 765,087 and 30,161, shares of Adeona
common stock, respectively.





See
additional discussion below for the issuance of the 765,087 shares, the Company
recorded a paid-in kind/merger dividend.





In
connection with the issuance of the 30,161 shares, the Company recorded
additional compensation expense of $601,712 as the stock was issued to an
officer and director of the Company.





During
2006, EPI declared a 10% and 30% preferred stock dividend, respectively, on its
outstanding Series B, convertible preferred stock.  During 2005, EPI
declared a 10% preferred stock dividend on its outstanding Series B, convertible
preferred stock.  In total, 951,250 shares of additional Series B,
convertible preferred stock were issued to the holders of record at the
declaration date.  These 951,250 shares of outstanding Series B
preferred stock dividend were cancelled and retired and were not contemplated in
the exchange with Adeona. EPI also cancelled and retired all of the issued and
outstanding 3,000,000 shares of Series A Convertible Preferred stock as well as
750,000 shares of common stock.




8





Adeona
Pharmaceuticals, Inc. and Subsidiaries


(A
Development Stage Company)




Notes
to Consolidated Financial Statements


(Unaudited)




In
connection with this exchange and pursuant to Securities and Exchange Commission
Regulation S-X, Rule 11-01(d) and EITF 98-3, “Determining whether a Non-Monetary
Transaction involves the receipt of Productive Assets or of a Business”
EPI was classified as a development stage company and thus was not considered a
business. As a result, SFAS No. 141 purchase accounting rules did not apply.
Additionally, the Company applied the provisions of EITF 86-32, “Early Extinguishment of a
Subsidiary’s Mandatorily Redeemable Preferred Stock” and has determined
that even though the preferred stock of EPI was not mandatorily redeemable, this
transaction is analogous to a capital transaction, and there would be no
resulting gain or loss.





Finally,
in connection with EITF Topic D-42, “The Effect on the Calculation of
Earnings Per Share for the Redemption or Induced Conversion of Preferred
Stock” , The Company has determined that the fair value of the
consideration transferred to the holders of EPI Series B, convertible preferred
stock over the carrying amount of the preferred stock represents a return to the
preferred stockholders. The difference is $12,409,722, which is included as a
component of paid in-kind dividends. This amount is included as an additional
reduction in net loss applicable to common shareholders for purposes of
computing loss per share in the accompanying financial statements for the period
from January 8, 2001 (inception) to March 31, 2009.




As part
of the acquisition of EPI, the Company granted an aggregate 68,858 warrants and
34,685 options for the outstanding warrants and options held by the EPI warrant
and option holders. These new warrants and options will continue to vest
according to their original terms. Pursuant to SFAS No. 123R and fair value
accounting, the Company treated the exchange as a modification of an award of
equity instruments. As such, incremental compensation cost was measured as the
excess of the fair value of the replacement award over the fair value of the
cancelled award at the cancellation date. In substance, Adeona repurchased the
EPI instruments by issuing a new instrument of greater value.




The
Company used the following weighted average assumptions for the fair value of
the replacement award: expected dividend yield of 0%; expected volatility of
196.10%; risk-free interest rate of 4.65%, an expected life ranging from seven
to eight years and exercise prices ranging from $0.09 - $3.30.




The
Company has the following weighted average assumptions for the fair value of the
cancelled award at the cancellation date: expected dividend yield of 0%;
expected volatility of 200%; risk-free interest rate of 4.65%, an expected life
ranging from seven to eight years and exercise prices ranging from $0.09
-$3.30.




The fair
value of the replacement award required an increase in compensation expense of
approximately $352,734.






Note 2
Summary of Significant Accounting Policies




(A)
Principles of Consolidation




All
significant inter-company accounts and transactions have been eliminated in
consolidation.





(B)
Development Stage




The
Company’s consolidated financial statements are presented as statements of a
development stage enterprise. For the period from inception (January 8, 2001) to
date, the Company has been a development stage enterprise, and accordingly, the
Company’s operations have been directed primarily toward the acquisition and
creation of intellectual properties and certain research and development
activities to improve current technological concepts. As the Company is devoting
its efforts to research and development, there have been no sales, license fees
or royalties earned. Additionally, the Company continually seeks sources of debt
or equity based funding to further its intended research and development
activities. The Company has experienced net losses since its inception, and had
an accumulated deficit of $39,394,951 at March 31, 2009.





9




Adeona
Pharmaceuticals, Inc. and Subsidiaries


(A
Development Stage Company)




Notes
to Consolidated Financial Statements


(Unaudited)




(C)
Use of Estimates




In
preparing financial statements in conformity with generally accepted accounting
principles, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities, disclosure of contingent assets
and liabilities at the date of the financial statements, and revenues and
expenses during the periods presented. Actual results may differ from these
estimates.




Significant
estimates during 2009 include depreciable lives of property, valuation of
warrants and stock options granted for services or compensation pursuant to EITF
No. 96-18 and SFAS No. 123R, respectively, estimates of the probability and
potential magnitude of contingent liabilities and the valuation allowance for
deferred tax assets due to continuing operating losses.




(D)
Cash and Cash Equivalents




The
Company considers all highly liquid investments with original maturities of
three months or less at the time of purchase to be cash
equivalents.  At March 31, 2009 and December 31, 2008, respectively,
the Company had no cash equivalents.





The
Company minimizes credit risk associated with cash by periodically evaluating
the credit quality of its primary financial institution. The balance at times
may exceed federally insured limits. At March 31, 2009 and December 31, 2008,
the balance exceeded the federally insured limit by $0 and $5,653,635,
respectively.  During 2009, the Company moved its cash into a
non-interest bearing account which has unlimited insurance protection through
December 31, 2009.




(E)
Property and Equipment




Property
and equipment is stated at cost, less accumulated depreciation. Expenditures for
maintenance and repairs are charged to expense as incurred. Items of property
and equipment with costs greater than $1,000 are capitalized and depreciated on
a straight-line basis over the estimated useful lives, as follows:





Description
                    
                    Estimated
      Useful LifeOffice
      equipment and furniture
                    
                    5
      yearsLaboratory
      equipment
                    
                    10
      yearsManufacturing
      equipment
                    
                    10
      yearsLeasehold
      improvements and fixtures
                    
                    Lesser
      of estimated useful life or life of
lease






On March
17, 2009, the Company transferred manufacturing equipment with a net book value
of $24,599 to settle accounts payable of $5,925, resulting in a loss of
$18,674.





On
October 14, 2008, the Company sold manufacturing equipment with a net book value
of $154,787, for $140,000, resulting in a loss of $14,787.





On
September 19, 2008, the Company transferred certain manufacturing equipment with
a net book value of $77,710 and $30,000 in cash to settle accounts payable of
$122,140.  This transaction resulted in a gain on the sale of
$14,430.




10




Adeona
Pharmaceuticals, Inc. and Subsidiaries


(A
Development Stage Company)




Notes
to Consolidated Financial Statements


(Unaudited)




(F)
Long Lived Assets




Long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future undiscounted net cash flows expected to be
generated by the asset. If such assets are considered impaired, the impairment
to be recognized is measured by the amount by which the carrying amount of the
assets exceeds the fair value of the assets. There were no impairment charges
taken during the three month periods ended March 31, 2009 and 2008 and for the
period from January 8, 2001 (inception) to March 31, 2009.




(G)
Derivative Liabilities




In
connection with the reverse acquisition, all outstanding convertible preferred
stock of Adeona was cancelled and retired, as such, the provisions of EITF No.
00-19, “Accounting for
Derivative Financial Instruments Index to, and Potentially Settled in, a
Company’s Own Stock” do not apply. The Company’s majority owned
subsidiaries also contain issued convertible preferred stock; however, none of
these instruments currently contains any provisions that require the recording
of a derivative liability. In connection with the acquisition of EPI on January
5, 2007 (See Note 1(G)(4), all issued and outstanding shares of Series A and B,
convertible preferred stock were cancelled and retired. As such, no potential
derivative liabilities will exist pertaining to these instruments.




(H)
Net Loss per Share




Basic
earnings (loss) per share is computed by dividing the net income (loss) less
preferred dividends for the period by the weighted average number of common
shares outstanding. Diluted earnings (loss) per share is computed by dividing
net income (loss) less preferred dividends by the weighted average number of
common shares outstanding including the effect of share
equivalents.  The Company’s share equivalents consist of 2,131,488
stock options and 1,070,472 warrants.  Since the Company reported a
net loss for the three month periods ended March 31, 2009 and 2008 and for the
period from January 8, 2001 (inception) to March 31, 2009, respectively, all
common stock equivalents would be anti-dilutive; as such there is no separate
computation for diluted earnings per share.




The
Company’s net loss per share for the three month periods ended March 31, 2009
and 2008 and for the period from January 8, 2001 (inception) to March 31, 2009
was computed assuming the effect of the recapitalization associated with the
reverse acquisition, as such, all share and per share amounts have been
retroactively restated. Additionally, the numerator for computing net loss per
share was adjusted for preferred stock dividends recorded during the period from
January 8, 2001 (inception) to March 31, 2009, in connection with the
acquisition of EPI (See Note 1(G)(4)) as well as and certain provisions relating
to the sale of EPI’s Series B, convertible preferred stock.




(I)
Research and Development Costs




The
Company expenses all research and development costs as incurred for which there
is no alternative future use. Research and development expenses consist
primarily of license fees, manufacturing costs, salaries, stock based
compensation and related personnel costs, fees paid to consultants and outside
service providers for laboratory development, legal expenses resulting from
intellectual property prosecution and other expenses relating to the design,
development, testing and enhancement of the Company’s product candidates, as
well as an allocation of overhead expenses incurred by the Company.





(J)
Fair Value of Financial Instruments




The
carrying amounts of the Company’s short-term financial instruments, including
other receivable, prepaid expenses, accounts payable and accrued liabilities,
approximate fair value due to the relatively short period to maturity for these
instruments.




11





Adeona
Pharmaceuticals, Inc. and Subsidiaries


(A
Development Stage Company)




Notes
to Consolidated Financial Statements


(Unaudited)





(K)
Stock Based Compensation




All
share-based payments to employees since inception have been recorded and
expensed in the statements of operations as applicable under SFAS No. 123R
“Share-Based Payment”.




(L)
Non-Employee Stock Based Compensation




All s
tock-based compensation awards issued to non-employees for services have been
recorded at either the fair value of the services rendered or the instruments
issued in exchange for such services, whichever is more readily determinable,
using the measurement date guidelines enumerated in Emerging Issues Task Force
Issue EITF No. 96-18, “Accounting for Deficit Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services” (“EITF 96-18”).




(M)
Recent Accounting Pronouncements





In
December 2007, the FASB issued SFAS 141R, Business Combinations (“SFAS 141R”),
which replaces FASB SFAS 141, Business Combinations.  This Statement
retains the fundamental requirements in SFAS 141 that the acquisition method of
accounting be used for all business combinations and for an acquirer to be
identified for each business combination. SFAS 141R defines the acquirer as the
entity that obtains control of one or more businesses in the business
combination and establishes the acquisition date as the date that the acquirer
achieves control.  SFAS 141R will require an entity to record
separately from the business combination the direct costs, where previously
these costs were included in the total allocated cost of the
acquisition.  SFAS 141R will require an entity to recognize the assets
acquired, liabilities assumed, and any non-controlling interest in the acquired
at the acquisition date, at their fair values as of that date.  This
compares to the cost allocation method previously required by SFAS No.
141.  SFAS 141R will require an entity to recognize as an asset or
liability at fair value for certain contingencies, either contractual or
non-contractual, if certain criteria are met.  Finally, SFAS 141R will
require an entity to recognize contingent consideration at the date of
acquisition, based on the fair value at that date.  This Statement
will be effective for business combinations completed on or after the first
annual reporting period beginning on or after December 15,
2008.  Early adoption of this standard is not permitted and the
standards are to be applied prospectively only.  Upon adoption of this
standard, there would be no impact to the Company’s results of operations and
financial condition for acquisitions previously completed.  The
adoption of SFAS No. 141R is not expected to have a material effect on its
financial position, results of operations or cash flows.





In December 2007, the FASB
issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial
Statements, an amendment of Accounting Research Bulletin No 51” (“SFAS 160”).
SFAS 160 establishes accounting and reporting standards for ownership interests
in subsidiaries held by parties other than the parent, changes in a parent’s
ownership of a noncontrolling interest, calculation and disclosure of the
consolidated net income attributable to the parent and the noncontrolling
interest, changes in a parent’s ownership interest while the parent retains its
controlling financial interest and fair value measurement of any retained
noncontrolling equity investment. SFAS 160 is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and interim periods
within those fiscal years. Early adoption is prohibited. The adoption of SFAS
No. 160 is not expected to have a material effect on its financial position,
results of operations or cash flows.




12





Adeona
Pharmaceuticals, Inc. and Subsidiaries


(A
Development Stage Company)




Notes
to Consolidated Financial Statements


(Unaudited)




In March
2008, the FASB issued SFAS No. 161 “Disclosures about Derivative
Instruments and Hedging Activities—An Amendment of FASB Statement
No. 133.” (“ SFAS 161”). SFAS 161 establishes the disclosure
requirements for derivative instruments and for hedging activities with the
intent to provide financial statement users with an enhanced understanding of
the entity’s use of derivative instruments, the accounting of derivative
instruments and related hedged items under Statement 133 and its related
interpretations, and the effects of these instruments on the entity’s financial
position, financial performance, and cash flows. This statement is
effective for financial statements issued for fiscal years beginning after
November 15, 2008. The Company does not expect its adoption of SFAS 161 to
have a material impact on its financial position, results of operations or cash
flows.




In April
2008, the FASB issued FASB Staff Position (“FSP”) SFAS No. 142-3, “ Determination of the Useful Life of
Intangible Assets” . This FSP amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under FASB Statement No. 142,
“Goodwill and Other Intangible
Assets” (“SFAS 142”). The intent of this FSP is to improve the
consistency between the useful life of a recognized intangible asset under
SFAS 142 and the period of expected cash flows used to measure the fair
value of the asset under SFAS 141R, and other GAAP. This FSP is effective for
financial statements issued for fiscal years beginning after December 15,
2008, and interim periods within those fiscal years. Early adoption is
prohibited. The Company does not expect the adoption of SFAS FSP 142-3, to have
a material impact on its financial position, results of operations or cash
flows.




In May
2008, the FASB issued FSP Accounting Principles Board (“APB”) 14-1 “Accounting for Convertible Debt
instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement)” ( “FSP APB
14-1” ). FSP APB 14-1 requires the issuer of certain convertible debt
instruments that may be settled in cash (or other assets) on conversion to
separately account for the liability (debt) and equity (conversion option)
components of the instrument in a manner that reflects the issuer’s
non-convertible debt borrowing rate. FSP APB 14-1 is effective for fiscal years
beginning after December 15, 2008 on a retroactive basis. The Company does not
expect the adoption of FSP APB 14-1, to have a material impact on its financial
position, results of operations or cash flows.




In
October 2008, the FASB issued FSP FAS 157-3, “ Determining the Fair Value of a
Financial Asset When the Market For That Asset Is Not Active” (“FSP FAS
157-3”), with an immediate effective date, including prior periods for which
financial statements have not been issued.  FSP FAS 157-3 amends FAS 157 to
clarify the application of fair value in inactive markets and allows for the use
of management’s internal assumptions about future cash flows with appropriately
risk-adjusted discount rates when relevant observable market data does not
exist.  The objective of FAS 157 has not changed and continues to be the
determination of the price that would be received in an orderly transaction that
is not a forced liquidation or distressed sale at the measurement date. 
The adoption of FSP FAS 157-3 is not expected to have a material effect on the
Company’s financial position, results of operations or cash flows.





In April
2009, the FASB issued FSP SFAS 157-4, “Determining Whether a Market Is Not
Active and a Transaction Is Not Distressed,” which further clarifies the
principles established by SFAS No. 157. The guidance is effective for the
periods ending after June 15, 2009 with early adoption permitted for the periods
ending after March 15, 2009. The adoption of FSP FAS 157-4 is not expected to
have a material effect on the Company’s financial position, results of
operations, or cash flows.




Other
accounting standards have been issued or proposed by the FASB or other
standards-setting bodies that do not require adoption until a future date and
are not expected to have a material impact on the financial statements upon
adoption.




13




Adeona
Pharmaceuticals, Inc. and Subsidiaries


(A
Development Stage Company)




Notes
to Consolidated Financial Statements


(Unaudited)










Note 3
Notes Payable




During
2007, the Company borrowed $1,100,000 and repaid $200,000 under notes
payable.  These notes were secured by all assets of the Company as
well as the stock certificates of Pipex Therapeutics, EPI, Solovax and CD4; the
notes bore interest of prime plus 2% and were due March 30, 2010.  On
March 6, 2008, all of the outstanding principal and accrued interest was
repaid.




Note 4 Stockholders’ Equity
and Non-Controlling Interest




(A)
Preferred Stock Issuances





1.
For the Year Ended December 31, 2005




On March
10, 2005, EPI’s board of directors and stockholders voted to authorize the
designation of a Series B Convertible Preferred Stock.  From March
through June 2005, EPI issued 1,902,500 shares of Series B Convertible Preferred
Stock, at $1 per share, for proceeds of $1,902,500. In connection with this
offering, EPI paid $152,200 of offering costs that were charged against
additional paid in capital. The Company also granted 171,225 warrants as
compensation in connection with this equity raise.




On
January 5, 2007, pursuant to the acquisition of EPI, the shares of Series B
Convertible Preferred Stock were converted into 765,087 shares of Adeona common
stock and the warrants were converted into 68,858 warrants of Adeona. (See Note
1(E)(4))





2.
For the Year Ended December 31, 2001





On
January 8, 2001, EPI issued 3,000,000 shares of Series A Convertible Preferred
Stock to the Founder serving as the CEO and Chairman of the Board of EPI in
exchange for $250,000 ($0.08 per share).  On January 5, 2007, pursuant
to the acquisition of EPI, these shares were cancelled and retired.





On
January 15, 2001, Pipex Therapeutics issued 5,421,554 shares of Series A
Convertible Preferred Stock to a founder serving as Chairman of the Board of
Pipex in exchange for $300,000 ($0.055 per share). On October 31, 2006, pursuant
to the reverse acquisition with Sheffield, these shares were cancelled and
retired.





On
January 31, 2001, Solovax issued 1,000,000 shares of Series A Convertible
Preferred Stock to the Founder of Solovax in exchange for $300,000 ($0.30 per
share).





On
February 7, 2001, CD4 issued 1,000,000 shares of Series A Convertible Preferred
Stock, to an affiliate of a founder in exchange for $300,000 ($0.30 per
share).




(B)
Common Stock Issuances of Issuer




For
the Three Months Ended March 31, 2009





During
the first quarter of 2009, the Company issued 139,935 shares of common stock for
consulting fees having a fair value of $27,750 ($0.20 per share) based on the
quoted closing trading price.





During
the first quarter of 2009, the Company issued an aggregate 257,813 shares of
common stock for license fees having a fair value of $41,250 ($0.16 per share)
based on the quoted closing trading price.




14


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 the Company’s founder, President and CEO 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 the former President. 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
Chairman and Chief Executive Officer. 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.




15





Adeona
Pharmaceuticals, Inc. and Subsidiaries


(A
Development Stage Company)




Notes
to Consolidated Financial Statements


(Unaudited)




(C)
Common Stock Issuances of Subsidiaries




During
the period from January 8, 2001 (inception) to September 30, 2008, the Company’s
majority owned subsidiaries; CD4, Solovax, EPI and Epitope issued 419,000,
419,000, 825,000 and 125,000 shares of common stock, respectively, for an
aggregate $1,788. Of the 825,000 shares of common stock issued by EPI, 75,000
were converted into 30,161 common shares of Adeona and the remaining 750,000
shares were cancelled and retired for no additional consideration in the
acquisition of EPI on January 5, 2007.




(D)
Stock Incentive Plan




During
2001, Pipex Therapeutics’ Board and stockholders adopted the 2001 Stock
Incentive Plan (the “2001 Stock Plan”). This plan was assumed by Pipex in the
merger, in October 2006. As of the date of the merger, there were 1,489,353
options issued and outstanding. The total number of shares of stock with respect
to which stock options and stock appreciation rights may be granted to any one
employee of the Company or a subsidiary during any one-year period shall not
exceed 1,250,000. All awards pursuant to the Plan shall terminate upon the
termination of the grantee’s employment for any reason. Awards include options,
restricted shares, stock appreciation rights, performance shares and cash-based
awards (the “Awards”). The Plan contains certain anti-dilution provisions in the
event of a stock split, stock dividend or other capital adjustment, as defined
in the Plan. The Plan provides for a Committee of the Board to grant awards and
to determine the exercise price, vesting term, expiration date and all other
terms and conditions of the awards, including acceleration of the vesting of an
award at any time. As of March 31, 2009, there are 1,229,987 options issued and
outstanding under the 2001 Stock Plan.





On March
20, 2007, the Company’s Board of Directors approved the Company’s 2007 Stock
Incentive Plan (the “2007 Stock Plan”) for the issuance of up to 2,500,000
shares of common stock to be granted through incentive stock options,
nonqualified stock options, stock appreciation rights, dividend equivalent
rights, restricted stock, restricted stock units and other stock-based awards to
officers, other employees, directors and consultants of the Company and its
subsidiaries. The exercise price of stock options under the plan is determined
by the compensation committee of the Board of Directors, and may be equal to or
greater than the fair market value of the Company’s common stock on the date the
option is granted. Options become exercisable over various periods from the date
of grant, and generally expire ten years after the grant date. This plan was
approved by stockholders on November 2, 2007. As of March 31, 2009, there are
1,021,676 options issued and outstanding under the 2007 Stock Plan.




Pursuant
to the provisions of SFAS No. 123R, in the event of termination, the Company
will cease to recognize compensation expense. There is no deferred compensation
recorded upon initial grant date, instead, the fair value of the share-based
payment is recognized ratably over the stated vesting period.




The
Company has applied fair value accounting and the related provisions of SFAS No.
123R for all share based payment awards since inception. The fair value of each
option or warrant granted is estimated on the date of grant using the
Black-Scholes option-pricing model. There were no options issued during the
three months ended March 31, 2009. The Black-Scholes assumptions used in the
three months ended March 31, 2008 are as follows:





Exercise
      price
              
              $1.22
      - $5.10Expected
      dividends
              
              0%Expected
      volatility
              
              201.11%
      – 221.66%Risk
      fee interest rate
              
              3.52%
      – 3.86%Expected
      life of option
              
              10
      years




16





Adeona
Pharmaceuticals, Inc. and Subsidiaries


(A
Development Stage Company)




Notes
to Consolidated Financial Statements


(Unaudited)




Pursuant to FAS 123R, the Company records stock
based compensation based upon the stated vested provisions in the related
agreements, with recognition of expense recorded on the straight line basis over
the term of the related agreement. The vesting provisions for these agreements
have various terms as follows: immediate vesting, half vesting immediately and
the remainder over three years, quarterly over three years, annually over three
years, one-third immediate vesting and remaining annually over two years, one
half immediate vesting with remaining vesting over six months and one quarter
immediate vesting with the remaining over three years.  All option
grants are expensed in the appropriate period based upon each award vesting
terms, in each case with an offsetting credit to additional paid in capital. The
stock-based compensation expense recorded by the Company for the periods ended
March 31, 2009 and 2008 and the period from January 8, 2001 (inception) to March
31, 2009 with respect to awards under the Plan and awards issued under warrants
is as follows:





Three
      Months Ended March 31,
              
              
              Inception
      to March 31, 20092009
              
              
              2008Research
      and development:employees
              
              $
              35,246
              
              
              $
              306,025
              
              
              $
              2,324,734non-employees
              
              
              21,071
              
              
              
              194,892
              
              
              
              561,235General
      and administrative:employees
              
              
              35,227
              
              
              
              74,619
              
              
              
              1,490,926non-employees
              
              
              -
              
              
              
              -
              
              
              
              970,890Total
              
              $
              91,544
              
              
              $
              575,536
              
              
              $
              5,347,785




A summary
of stock option activity for Adeona for the three months ended March 31, 2009
(unaudited) and for the year ended December 31, 2008 is as follows:




Number
      of
                              Shares
                            
                            Weighted
                              Average
                              Exercise
      PriceBalance
      at December 31, 2007
                            
                            
                            2,297,364
                            
                            
                            $
                            2.72Granted
                            
                            
                            1,180,666
                            
                            
                            $
                            1.00Exercised
                            
                            
                            (37,948)
                            
                            
                            $
                            0.12Forfeited
                            
                            
                            (688,419
                            )
                            
                            $
                            5.07Balance
      at December 31, 2008
                            
                            
                            2,751,663
                            
                            
                            $
                            1.43Granted
                            
                            
                            -
                            
                            
                            $
                            -Exercised
                            
                            
                            -
                            
                            
                            $
                            -Forfeited
                            
                            
                            (500,000
                            )
                            
                            $
                            0.72Balance
      at March 31, 2009 (unaudited)
                            
                            
                            2,251,663
                            
                            
                            $
                            1.59




The
weighted average remaining contractual term for options outstanding at March 31,
2009 was 7.08 years. At March 31, 2009, the Company had 479,083 stock options
outstanding and exercisable that had an exercise price less than the market
price on that date for an aggregate intrinsic value of $43,117.





Of the
total options granted, 2,101,488 are fully vested, exercisable and
non-forfeitable and have a weighted average exercise price of
$1.52.  The weighted average remaining contractual term for options
that are exercisable was 7.04 years.




Of the
total 2,251,663 options outstanding, 899,829 options are held by related parties
of which all are fully vested, exercisable and non-forfeitable.




17




Adeona
Pharmaceuticals, Inc. and Subsidiaries


(A
Development Stage Company)




Notes
to Consolidated Financial Statements


(Unaudited)




(E)
Stock Warrants




On
November 18, 2008, the Company issued warrants to purchase 5,000 shares of
common stock pursuant to a settlement agreement.  The warrants have an
exercise price of $0.41. The fair value of the warrants totals $1,265 and was
determined by using the Black-Scholes model with the following assumptions:
expected dividend yield of 0%; expected volatility of 179.13%; risk-free
interest rate of 1.15% and an expected life of two and one-half
years.





During
October and November 2007, the Company issued 3,274,566 shares of common stock
in connection with the exercise of common stock warrants, pursuant to a warrant
call for $2.22/share.  The warrant call had occurred due to the terms
by which the Company sold its common stock and warrants in private placement
offerings.  The net proceeds from the warrant call were $6,972,809,
which included cash paid as direct offering costs of $579,569.





In
connection with this warrant call, the Company entered into a warrant
solicitation agreement with Noble International Investments, Inc. (“Noble”). As
compensation for Noble’s services, the Company paid Noble a cash fee of $579,569
which totals 8% of the gross proceeds from the Holder’s exercise of warrants. In
addition, the Company issued Noble 327,456 common stock warrants. The warrants
have a term of five years, will contain customary anti-dilution provisions,
piggyback registration rights, and will be exercisable at a purchase price of
$6.36 per share.  The Company may, at its option, call the warrants if
the average daily trading price of the Company’s common stock exceeds, for at
least 20 of 30 consecutive trading days, a price per share that is equal to or
greater than 250% of the warrant’s exercise price of $6.36 per share, and there
is an effective registration statement registering the shares of the Company’s
common stock underlying the warrant. Noble will have the right at any time
during the five-year term of the warrants to exercise the warrants at its option
on a “cashless” basis, only if the Company fails to maintain an effective
registration statement registering the shares of the Company’s common stock
underlying the warrants. Since these warrants were granted as compensation in
connection with an equity raise, the Company has treated these warrants as a
direct offering cost. The result of the warrant grant has a $0 net effect to
equity. These warrants are fully vested and non-forfeitable.





During
May through August 2007, the Company issued 127,406 shares of common stock in
exchange for common stock warrants for $2.22/share.  The net proceeds
totaled $282,841.




On February 15, 2007, the Company executed an
agreement with a third party to provide certain consulting services. Pursuant to
the terms of the agreement, the Company will issue warrants to purchase 100,000
shares of common stock upon the achievement of various milestones as well as
over the life of the contract. The warrants have an exercise price of $3.75. The
fair value of the warrants totals $374,760 and was determined by using the
Black-Scholes model with the following assumptions: expected dividend yield of
0%; expected volatility of 187.22%; risk-free interest rate of 4.68% and an
expected life of five years. As of December 31, 2008, 50,000 warrants have been
issued for which the Company has recognized stock based consulting expense for
$187,380.




On
January 5, 2007, the Company issued warrants to purchase 68,858 shares of common
stock as part of the acquisition of EPI. (See Note (1)(G)(4))




In
October and November 2006, the Company issued warrants to purchase 3,451,524
shares of common stock as part of the private placement offering. The warrants
have an exercise price of $2.22 and each warrant has a life of 5
years.





In
addition, as part of the private placements, the Company issued warrants to
purchase 958,277 shares of common stock to the placement agent, that is a
company that is controlled by the Company’s Chairman and Chief Executive
Officer with the majority of these warrants being reissued to the Company's
former CEO. The warrants have an exercise price of $2.22. Since these warrants
were granted as compensation in connection with an equity raise, the Company has
treated these warrants as a direct offering cost. The result of the transaction
has a $0 net effect to equity. The warrants are fully vested and
non-forfeitable.  On January 14, 2009, 381,020 of these warrants
representing all of the warrants held by an affiliate of the Company's Chairman
and Chief Executive Officer were cancelled.





On
October 31, 2006, the loans payable to the Company’s founder, President and CEO
were converted into 1,665,211 shares of common stock and 832,606 warrants to
purchase common stock. The warrants had an exercise price of $2.22 and a life of
5 years. The warrants were forfeited on January 14, 2009.




18





Adeona
Pharmaceuticals, Inc. and Subsidiaries


(A
Development Stage Company)




Notes
to Consolidated Financial Statements


(Unaudited)





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





Number
      of
                            SharesBalance
      as December 31, 2007
                          
                          
                          2,278,416Granted
                          
                          
                          13,333Exercised
                          
                          
                          —Forfeited
                          
                          
                          —Balance
      at December 31, 2008
                          
                          
                          2,291,749Granted
                          
                          
                          —Exercised
                          
                          
                          —Forfeited
                          
                          
                          (1,221,277)Balance
      as March 31, 2009 (unaudited)
                          
                          
                          1,070,472





All
outstanding warrants are fully vested and exercisable.




Warrants
      Outstanding and ExercisableRange
      of
                        Exercise
                        Price
                      
                      Number
                        Outstanding
                      
                      Weighted
                        Average
                        Remaining
                        Contractual
                        Life$
                      0.41
                      
                      5,000
                      
                      2.13
      Years$
                      2.22
                      
                      626,809
                      
                      3.82
      Years$
                      3.30
                      
                      61,207
                      
                      6.17
      Years$
                      3.75
                      
                      50,000
                      
                      6.88
      Years$
                      6.36
                      
                      327,456
                      
                      3.61
      Years1,070,472
                      
                      4.85
      Years







(F)
Options of Subsidiary




CD4 has
30,000 options outstanding and exercisable which were granted during 2004 and
2007, with an exercise price of $0.20 and a remaining contractual life of 1.74
years as of March 31, 2009.





Epitope
has 50,000 options outstanding and none exercisable, with an exercise price of
$.001 and a remaining contractual life of 9.25 years as of March 31,
2009.  These options were granted during 2008, vest annually over 5
years and have a fair value of $50 which 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 2.47% and an expected life of 10
years.




(G)
Non-Controlling Interest




Since the
Company’s majority owned subsidiaries have never been profitable and present
negative equity, there has been no establishment of a positive non-controlling
interest. Since this value cannot be presented as a deficit balance, the
accompanying consolidated balance sheet does not reflect any
notation.




19




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.




In
connection with these agreements, the Company may be obligated to make future
milestone payments up to an amount of $15,675,000. Some of these payments may be
fulfilled through the issuance of the Company’s common stock, at the Company’s
option. As of March 31, 2009, the Company has achieved two milestones which the
Company fulfilled by issuing common stock having a fair value of $75,000. See
Note (4(B)).  The Company can give no assurances that any other
milestones will be achieved. In addition to the milestone payments, the Company
may be obligated to make royalty payments on future sales pursuant to the
agreements.







(B)
Research Agreement





In
September 2005, the Company entered into a three-year sponsored research
agreement with a University. 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 the
Company’s Chairman and Chief Executive Officer. Pursuant to this agreement, the
Chairman was paid an annual base salary of $297,000, an annual bonus equal to
30% of base salary and 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. As of December 31, 2008, all of these stock options have
vested.  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.





On July
20, 2007, the Board of Directors approved an amended and restated employment
agreement with the Chairman and Chief Executive Officer. The amended employment
agreement provides that he be paid a base salary of $195,000 per year plus a
guaranteed bonus of $100,000 and may also be entitled to discretionary
transactional bonuses. In addition, the amended agreement provides that the
Chairman and Chief Executive Officer waived the receipt of any salary and bonus
payable under the original agreement, which amounted to $275,645, for no
additional consideration. This amount was treated as a capital contribution to
the Company in September 2007.





On July
1, 2008, the Chief Executive Officer resigned his position with the Company but
remained as Chairman.  On January 6, 2009, the Chairman entered into
an amended agreement with the Company which extends his employment agreement
through January 9, 2010 with an annual salary of $1.  Also, the
Chairman agreed to forego the $100,000 guaranteed bonus otherwise due to him on
January 1, 2009.  The amount of $100,000 was recorded as a capital
contribution during the first quarter of 2009. On March 29, 2009, the Chairman
was appointed as our President and reappointed as our Chief Executive Officer
following the resignation of the Company’s then Chief Executive
Officer.




20




Adeona
Pharmaceuticals, Inc. and Subsidiaries


(A
Development Stage Company)




Notes
to Consolidated Financial Statements


(Unaudited)





On July
1, 2008, the Company's Board of Directors approved a compensation package with
its former Chief Executive Officer.  Under the terms of arrangement,
the former Chief Executive Officer was entitled to an annual salary of $195,000
and six months severance.  The former Chief Executive Officer was also
eligible for a bonus at the discretion of the Board of Directors.  The
Company also granted  a ten year option to purchase 800,000 shares of
the Company’s common stock, exercisable at $0.72 per share, with one-quarter of
the options vesting immediately, and the remainder vesting quarterly in equal
increments over three years.   The fair value of the options totaled
$576,000 and was determined using the Black-Scholes model with the following
assumptions: expected dividend yield of 0%, expected volatility of 225.79%, risk
free interest rate of 3.95% and an expected life of 10 years. Effective March
29, 2009, the Chief Executive Officer resigned, but remains a director of the
Company and will be paid severance of $97,500 over six months.  Per
the terms of the agreement, 500,000 unvested stock options were cancelled on
March 29, 2009, the remaining 300,000 vested options will be cancelled if they
are not exercised by June 28, 2009.





(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 respond to this
matter.








Note 6 Subsequent
Events




On April
3, 2009, the Company’s Board of Directors approved a Stock Repurchase Program
authorizing the Company to repurchase, from time-to-time of up to $1 million of
its common stock, up to a maximum of four (4) million shares at prices of up to
$5.00 per share. The Stock Repurchase Program is intended to remain in effect
until December 31, 2009. As of March 31, 2009, the Company has not repurchased
any stock.




On April
9, 2009, the Company’s wholly owned subsidiary, Healthmine entered into an
employment agreement with its President.  The Company paid a $10,000
signing bonus and will pay a base salary of $120,000 per year.  The
agreement also provided that the President was eligible for cash and non-cash
bonuses at the end of each of the Company’s fiscal years during the term of the
agreement at the discretion of the Company’s compensation
committee.  The Company has also granted  a ten year option
to purchase 120,000 shares of the Company’s common stock, exercisable at $0.56
per share, with 20,000 of the options vesting immediately, and the remainder
vesting quarterly in equal increments over three years.   The fair
value of the options totaled $67,200 and was determined using the Black-Scholes
model with the following assumptions: expected dividend yield of 0%, expected
volatility of 209.00%, risk free interest rate of 2.96% and an expected life of
10 years.





On April
10, 2009, the Company entered into a stock purchase agreement with the
shareholders of Colwell Clinical Laboratories, Inc., to acquire all of the
outstanding capital stock of that entity, a California corporation and
CLIA-certified clinical laboratory.  The purchase price for the stock
of Colwell Clinical Laboratories is $825,000.  The acquisition is
expected to close on or about May 31, 2009.  The closing of the
transaction is subject to the Company’s discretion.  In the event that
the Company elects to not move forward with the acquisition, it may
terminate the agreement and forfeit a $75,000 earnest money
deposit.  In connection with the closing of the stock purchase, the
Company will enter into a three month consulting agreement with the owner for a
monthly consulting fee of $10,000 and 200,000 options to acquire the Company’s
stock vesting monthly over 24 months.  In addition, the owner will be
prohibited from competing with the company for a period of five years after
closing.  The Company cannot at this time determine if the acquisition
is likely, thus no additional pro-forma financial information will be
provided.




21





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




The
following discussion should be read in conjunction with the attached unaudited
consolidated financial statements and notes thereto, and with our audited
consolidated financial statements and notes thereto for the fiscal year ended
December 31, 2008, found in our Annual Report on Form 10K. In addition to
historical information, the following discussion contains forward-looking
statements that involve risks, uncertainties and assumptions. Where possible, we
have tried to identify these forward looking statements by using words such as
“anticipate,” “believe,” “intends,” or similar expressions. Our actual results
could differ materially from those anticipated by the forward-looking statements
due to important factors and risks including, but not limited to, those set
forth under “Risk Factors” in Part I, Item 1A of our Annual Report on Form
10K.





Overview




Since our
inception during January 2001, our efforts and resources have been focused
primarily on acquiring and developing our pharmaceutical products, raising
capital and recruiting personnel. We are a development stage company and have
had no product sales to date. Our major sources of working capital have been
proceeds from equity financings from affiliates of our Chairman and Chief
Executive Officer and various private financings, primarily involving private
sales of our common stock and other equity securities.




Our
company’s current corporate structure resulted from the October 2006 merger of a
newly-created wholly owned subsidiary of Sheffield Pharmaceuticals, Inc.
(“Sheffield”), a Delaware corporation incorporated in September 1993, and Pipex
Therapeutics, Inc., a Delaware corporation (“Pipex Therapeutics”). In connection
with that transaction, a wholly owned subsidiary of Sheffield merged with and
into Pipex Therapeutics, with Pipex Therapeutics remaining as the surviving
corporation and a wholly-owned subsidiary of Sheffield. On December 11, 2006,
Sheffield changed its name to Pipex Pharmaceuticals, Inc. (“Pipex”) and on
October 16, 2008 the Company changed its name to Adeona Pharmaceuticals, Inc.
(“Adeona”). In exchange for their shares of capital stock in Pipex Therapeutics,
the former stockholders of Pipex Therapeutics received shares of capital stock
of Sheffield representing approximately 98 percent of the outstanding equity of
Sheffield on a primary diluted basis after giving effect to the transaction,
with Sheffield assuming Pipex’s outstanding options and warrants. In addition,
the board of directors of Sheffield was reconstituted shortly following the
effective time of the transaction such that the directors of Sheffield were
replaced by our current directors, all of whom were previously directors of
Pipex Therapeutics. Further, upon the effective time of the merger, the business
of Sheffield was abandoned and the business plan of Pipex Therapeutics was
adopted. The transaction was therefore accounted for as a reverse acquisition
with Pipex Therapeutics as the acquiring party and Sheffield as the acquired
party. Accordingly, when we refer to our business and financial information
relating to periods prior to the merger, we are referring to the business and
financial information of Pipex Therapeutics, unless the context indicates
otherwise.




Critical
Accounting Policies




In
December 2001, the SEC requested that all registrants discuss their most
“critical accounting policies” in management’s discussion and analysis of
financial condition and results of operations. The SEC indicated that a
“critical accounting policy” is one which is both important to the portrayal of
the company’s financial condition and results and requires management’s most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain. We
believe that the following discussion regarding research and development
expenses, general and administrative expenses and non-cash compensation expense
involve our most critical accounting policies.




Research
and development expenses consist primarily of manufacturing costs, license fees,
salaries and related personnel costs, fees paid to consultants and outside
service providers for laboratory development, legal expenses resulting from
intellectual property prosecution and organizational affairs and other expenses
relating to the design, development, testing, and enhancement of our product
candidates, as well as an allocation of overhead expenses incurred by the
Company. We expense our research and development costs as they are
incurred.




22




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
as applicable under SFAS No. 123R “Share-Based Payment”.




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.




Results
of Operations




Three
Months Ended March 31, 2009 and 2008.




Research
and Development Expenses. For the three months ended March 31, 2009, research
and development expense was $495,994 as compared to $2,124,620 for the three
months ended March 31, 2008. The decrease of $1,628,626 is due primarily to a
decrease of  approximately $837,000 associated with payments related
the development of our licensed clinical drug candidates, a decrease of
approximately $445,000 in stock based compensation charges, a decrease in
salaries and related taxes of approximately $296,000 and a decrease in allocated
overhead expenses of approximately $46,000.




General
and Administrative Expenses. For the three months ended March 31, 2009, general
and administrative expense was $593,444 as compared to $1,002,582 for the three
months ended March 31, 2008. The decrease of $409,138 is due primarily to a
decrease in salaries and payroll taxes of approximately $100,000, a decrease in
allocated overhead of approximately $96,000, a decrease in stock based
compensation charge of approximately $71,000 and a decrease in professional fees
of approximately $43,000.




Other
Income (Expense), net. For the three months ended March 31, 2009, other expense
was $23,837 compared to other income-net of $37,746 for the three months ended
March 31, 2008. For the three months ended March 31, 2009, interest income was
$2,622 as compared to $51,577 for the three months ended March 31, 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. For the three months ended March 31, 2009, loss on sale of equipment
was $26,459 as compared to $0 for the three months ended March 31,
2008.  For the three months ended March 31, 2009, interest expense was
$0 as compared to $13,831 for the three months ended March 31, 2008. Interest
expense for the period in 2008 relates to interest paid on the notes payable
which were repaid in March 2008.




Net Loss.
Net loss for the three months ended March 31, 2009, was $1,113,275 as compared
to $3,089,456 for the three months ended March 31, 2008. This decrease in net
loss of $1,976,181 is attributable primarily to a decrease in research and
development expense of $1,628,626, a decrease in general and administrative
expenses of $409,138 and an increase in other income (loss)-net of $61,583 as
discussed above.




Liquidity
and Capital Resources




During
the three months ended March 31, 2009, we had a net decrease in cash of
$567,342. Total cash resources as of March 31, 2009 was $5,289,042. During the
three months ended March 31, 2009 and 2008, net cash used in operating
activities was $567,342 and $1,812,320 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 $0 for the three months ended March 31, 2009
compared to $21,398 net cash used in investing activities for the three months
ended March 31, 2008.  The net cash used in investing activities for
the three months ended March 31, 2008 resulted from the purchase of property and
equipment in the amount of $21,398.





Net cash
used in financing activities was $0 for the three months ended March 31, 2009
compared to $897,561 of net cash used in financing activities for the three
months ended March 31, 2008. The net cash used in financing activities for the
three months ended March 31, 2008 resulted from $900,000 for the repayment on
notes payable, less proceeds of $2,439 from the issuance of  preferred
and common stock.




Our
continued operations will depend on whether we are able to generate revenues and
profits through our planned introduction of diagnostic clinical laboratory
services and zinc-based products or raise additional funds through various
potential sources, such as license fees from a potential corporate partner,
equity and debt financing. Such additional funds may not become available on
acceptable terms and there can be no assurance that any additional funding that
we do obtain will be sufficient to meet our needs in the long term. We will
continue to fund operations from cash on hand and through the similar sources of
capital previously described. We can give no assurances that any additional
capital that we are able to obtain will be sufficient to meet our
needs.




23




Current
and Future Financing Needs




We have
incurred an accumulated deficit of $39,394,951 through March 31, 2009. We have
incurred negative cash flow from operations since we started our business. We
have spent, and expect to continue to spend, substantial amounts in connection
with implementing our business strategy, including our planned product
development efforts, our clinical trials, and our research and discovery
efforts. Based on our current plans, we believe that our cash will be sufficient
to enable us to meet our planned operating needs at least for the next 16
months.




However,
the actual amount of funds we will need to operate is subject to many factors,
some of which are beyond our control. These factors include the
following:




• the
progress of our research activities;


• the
number and scope of our research programs;


• the
progress of our pre-clinical and clinical development
activities;


• the
progress of the development efforts of parties with whom we have entered into
research and development agreements;


• our
ability to maintain current research and development programs and to establish
new research and development and licensing


arrangements;


• our
ability to achieve our milestones under licensing arrangements;


• the
costs involved in prosecuting and enforcing patent claims and other intellectual
property rights; and


• the
costs and timing of regulatory approvals;


• our
pending acquisition of Colwell Clinical Laboratories, Inc.;


• our
potential stock repurchases under our Stock Repurchase Program, and


• the
success, timing, and profitability of our planned clinical laboratory services
and zinc-based product launches.







We have
based our estimate on assumptions that may prove to be wrong. We may need to
obtain additional funds sooner or in greater amounts than we currently
anticipate. Potential sources of financing include strategic relationships,
public or private sales of our shares or debt and other sources. We may seek to
access the public or private equity markets when conditions are favorable due to
our long-term capital requirements. We do not have any committed sources of
financing at this time, and it is uncertain whether additional funding will be
available when we need it on terms that will be acceptable to us, or at all. If
we raise funds by selling additional shares of common stock or other securities
convertible into common stock, the ownership interest of our existing
stockholders will be diluted. If we are not able to obtain financing when
needed, we may be unable to carry out our business plan. As a result, we may
have to significantly limit our operations and our business, financial condition
and results of operations would be materially harmed.




24




Product
Candidates




Metal
Dyshomeostasis 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 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. We currently intend to
announce these results in the first half of July and launch a panel of metal
dyshomeostasis clinical diagnostics based upon our findings.  There
are 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 April
17, 2009 we announced our potential acquisition of Colwell Clinical
Laboratories, Inc. (“Colwell Labs”) a Southern California CLIA-certified
clinical laboratory through which we intend to launch and market our intended
panel of metal dyshomeostasis clinical diagnostic products and
services.  Our acquisition of Colwell Labs is subject to our
evaluation which we expect to complete by May 31, 2009.





During
the first quarter 2009, we incurred no costs associated with our metal
dyshomeostasis clinical diagnostics products and services.





Products
for Subclinical Zinc Deficiency and Chronic Copper Toxicity





Our
leading product candidate brands, ZinthioneinTM and EyeDailyTM with ZinthioneinTM,
are expected to be products that contain proprietary ingredients (such as, zinc
monocysteine complex), proprietary combinations of ingredients, proprietary
modified-release zinc-containing formulations 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 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.





Our sales
and marketing plans include promoting prevention through public awareness,
physician and patient education including current research,  the
research and development of potential proprietary diagnostic products to aid in
the identification of individuals who may be at increased risk as well as the
commercialization of our proprietary zinc-based products intended for the
treatment and/or nutritional support of conditions characterized by subclinical
zinc deficiency and chronic copper toxicity.  Through our HealthMine
subsidiary, we launched copperproof.com, a website intended to increase
public awareness aimed at the prevention of chronic copper
toxicity.  Our EyeDailyTM 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.





Through
March 31, 2009, we have incurred approximately $443,500 of costs related to our
development of Zinthionein of which $154,000 was incurred during 2007, $256,000
which was incurred in 2008 and $33,500 which was incurred during the first
quarter of 2009.




25




Oral
dnaJP1




In June
2008, we in-licensed Oral dnaJP1, an oral, candidate for the treatment of
rheumatoid arthritis (RA) which has completed a 160 patient, multi-center,
double-blind, randomized, placebo-controlled Phase II clinical trial for the
treatment of RA. Rheumatoid arthritis is an autoimmune disease which affects
approximately 20 million people worldwide.  Oral dnaJP1 is a epitope
specific immunotherapy for RA patients. Oral dnaJP1 is a heat shock protein
(hsp)-derived peptide which was previously identified as a contributor of T cell
mediated inflammation in RA. Immune responses to hsp are often found at sites of
inflammation and have an initially amplifying effect that needs to be
downregulated to prevent tissue damage. The mechanisms for this regulation
involve T cells with regulatory function that are specific for hsp-derived
antigens. This regulatory function is one of the key components of a "molecular
dimmer" whose physiologic function is to modulate inflammation independently
from its trigger. This function is impaired in autoimmunity and could be
restored for therapeutic purposes. Through March 31, 2009, we have incurred
approximately $297,500 of costs related to our development of Oral dnaJP1 all of
which $219,000 has been incurred in 2008 and $78,500 was incurred during the
first quarter of 2009.  We are seeking potential U.S. and
international corporate partners for the manufacturing, testing and further
development of oral dnaJP1.





TRIMESTATM(oral
estriol)




In June
2007, a two year seven U.S. center, placebo controlled 150 patient phase IIb
clinical trial using TRIMESTATM for the treatment of relapsing-remitting Multiple
Sclerosis (MS) was initiated under a $5 million grant from the Southern
California Chapter of the National Multiple Sclerosis Society and NIH. This
phase IIb clinical trial builds upon our encouraging results from an earlier
phase IIa clinical trial. The primary purpose of this study is to evaluate the
safety and efficacy of TRIMESTATM in a larger MS patient population with a one
year blinded interim analysis. The preclinical and clinical development of
TRIMESTATM has been primary financed by grants from the NIH and various
non-profit foundations. Through March 31, 2009, we have incurred approximately
$703,000 of costs related to our development of TRIMESTATM of which approximately
$49,500, $185,500, 194,000 and $256,000 was incurred in fiscal years 2005, 2006,
2007 and 2008 respectively, and approximately $18,000 was incurred in
2009.  During 2009, this clinical trial was expanded to include 16
total clinical trial sites and currently approximately 40 of 150 patients have
been enrolled in this Phase IIb study.





Oral
flupirtine




A
scientific collaborator of ours has filed and received an IND with the FDA to
conduct a phase II clinical trial with flupirtine in fibromyalgia
patients.  Our scientific collaborator also received institutional
review board (IRB) approval to conduct this study.  Through March 31,
2009, we have incurred approximately $112,000 of costs related to our
development of flupirtine, of which $85,000 was incurred during 2007 and $27,000
was incurred during 2008.  During 2008, we obtained an option to
license issued and pending patent applications relating to flupirtines use in
the treatment of ophthalmic indications.  We are seeking
potential U.S. and international corporate partners for the further development
of flupirtine for various indications.




Oral TTM (oral
tetrathiomolybate)




Through
December 31, 2009, we have incurred approximately $3,628,500 of costs related to
our development of oral TTM, of which approximately $150,000, $1,061,000,
$1,676,000 and $725,000 was incurred in fiscal years 2005, 2006, 2007 and 2008,
respectively, and approximately $16,500 was incurred during 2009.




We are
seeking potential U.S. and international corporate partners for the further
development of Oral TTM for Wilson's Disease, idiopathic pulmonary fibrosis
(IPF), Alzheimer’s disease and Huntington’s Disease.





Anti-CD4
802-2




Through
March 31, 2009, we have incurred $1,532,000 of costs related to our development
of anti-CD4 802-2 of which $58,000, $332,000, $303,000, $295,000, $113,000,
$161,000, $121,000 and $82,000 was incurred in fiscal years 2001, 2002, 2003,
2004, 2005, 2006, 2007 and 2008 respectively and approximately $67,000 has been
incurred in 2009.  We are seeking potential U.S. and international
corporate partners for the further development of anti-CD4 802-2 for various
indications.




26




Based on
our current capital expenditures, we believe we currently have sufficient
capital to fund development activities of our principal products for at
least the next 16 months. However, if our business does not generate any cash
flow through clinical diagnostic services and/or zinc-based product sales or
corporate partnering transactions, we will need to raise additional capital to
continue operations beyond the second half of 2010. To the extent additional
capital is not available when we need it, we may be forced to sublicense our
rights to our product candidates, abandon our development efforts altogether, or
lose our licenses to our product candidates, any of which would have a material
adverse effect on the prospects of our business. See also the risks identified
under the section entitled “Risk Factors” in this report.





Additional
Licenses




We may
enter into additional license agreements relating to new drug
candidates.




27





ITEM
3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.





Not
applicable because the Company is a smaller reporting company.








ITEM
4T. CONTROLS AND PROCEDURES




Pursuant
to Rule 13a-15(b) under the Securities Exchange Act of 1934 (“Exchange Act”),
the Company carried out an evaluation, with the participation of the Company’s
management, including the Company’s Chief Executive Officer (“CEO”), who also
serves as our principal financial and accounting officer, of the effectiveness
of the Company’s disclosure controls and procedures (as defined under Rule
13a-15(e) under the Exchange Act) as of the end of the period covered by this
report. Based upon that evaluation, the Company’s CEO concluded that the
Company’s disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in the reports that the
Company files or submits under the Exchange Act, is recorded, processed,
summarized and reported, within the time periods specified in the SEC’s rules
and forms, and that such information is accumulated and communicated to the
Company’s management, including the Company’s CEO, as appropriate, to allow
timely decisions regarding required disclosure.







Changes
in Internal Control over Financial Reporting




There has
been no change in our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during our
fiscal quarter ended March 31, 2009 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.




28


PART
II—OTHER INFORMATION






ITEM
1A. RISK FACTORS




An
investment in our securities is highly speculative and involves a high degree of
risk. Therefore, in evaluating us and our business you should carefully consider
the risks set forth below, which are only a few of the risks associated with our
business and our common stock. You should be in a position to risk the loss of
your entire investment.





RISKS RELATING TO OUR BUSINESS




We are a
development stage company. We currently have no product revenues and will need
to raise additional capital to operate our business.




We are a
development stage company that has experienced significant losses since
inception and has a significant accumulated deficit. We expect to incur
additional operating losses in the future and expect our cumulative losses to
increase. To date, we have generated no product revenues. As of March 31, 2009,
we have expended approximately $23.7 million on a consolidated basis acquiring
and developing our current product candidates. Until such time as we receive
approval from the FDA and other regulatory authorities for our product
candidates, we will not be permitted to sell our drugs and will not have product
revenues. Therefore, for the foreseeable future we will have to fund all of our
operations and capital expenditures from equity and debt offerings, cash on
hand, licensing fees, and grants. We will need to seek additional sources of
financing and such additional financing may not be available on favorable terms,
if at all. If we do not succeed in raising additional funds on acceptable terms,
we may be unable to complete planned pre-clinical and clinical trials or obtain
approval of our product candidates from the FDA and other regulatory
authorities. In addition, we could be forced to discontinue product development,
reduce or forego sales and marketing efforts, and forego attractive business
opportunities. Any additional sources of financing will likely involve the
issuance of our equity or debt securities, which will have a dilutive effect on
our stockholders.




We
are not currently profitable and may never become profitable.




We have a
history of losses and expect to incur substantial losses and negative operating
cash flow for the foreseeable future. Even if we succeed in developing and
commercializing one or more of our product candidates, we expect to incur
substantial losses for the foreseeable future and may never become profitable.
We also expect to continue to incur significant operating and capital
expenditures and anticipate that our expenses will increase substantially in the
foreseeable future as we do the following:




●
            continue
      to undertake pre-clinical development and clinical trials for our product
      candidates;●
            seek
      regulatory approvals for our product candidates;●
            implement
      additional internal systems and infrastructure;●
            lease
      additional or alternative office facilities; and●
            hire
      additional personnel, including members of our management
      team.




29


We also
expect to experience negative cash flow for the foreseeable future as we fund
our technology development with capital expenditures. As a result, we will need
to generate significant revenues in order to achieve and maintain profitability.
We may not be able to generate these revenues or achieve profitability in the
future. Our failure to achieve or maintain profitability could negatively impact
the value of our common stock and underlying securities.




We
have a limited operating history on which investors can base an investment
decision.




We are a
development-stage company and have not demonstrated our ability to perform the
functions necessary for the successful commercialization of any of our product
candidates. The successful commercialization of our product candidates will
require us to perform a variety of functions, including:




●
            continuing
      to undertake pre-clinical development and clinical
  trials;●
            participating
      in regulatory approval processes;●
            formulating
      and manufacturing products; and●
            conducting
      sales and marketing activities.






Our
operations have been limited to organizing and staffing our company, acquiring,
developing, and securing our proprietary technology, and undertaking
pre-clinical trials and Phase I/II, and Phase II and Phase III clinical trials
of our principal product candidates. These operations provide a limited basis
for you to assess our ability to commercialize our product candidates and the
advisability of investing in our securities.




We
have experienced several management changes.




We have
had significant changes in management in the past two
years.  Effective July 1, 2008, Charles L. Bisgaier resigned as our
President and Corporate Secretary and as a director of our
Company.  Also effective on July 1, 2008, Steve H. Kanzer resigned as
our Chief Executive Officer (although he did remain as our Chairman of the
Board).  Effective July 1, 2008, Nicholas Stergis was appointed our
Chief Executive Officer. Effective March 29, 2009, Nicholas Stergis resigned as
our Chief Executive Officer. Mr. Stergis remains a director of the Company and
Steve H. Kanzer was appointed our Chief Executive Officer and President. Changes
in key positions in our Company, as well as additions of new personnel and
departures of existing personnel, can be disruptive, might lead to additional
departures of existing personnel and could have a material adverse effect on our
business, operating results, financial results and internal controls over
financial reporting.




We
may not obtain the necessary U.S. or worldwide regulatory approvals to
commercialize any other of our product(s).




We will
need FDA approval to commercialize our product candidates in the U.S. and
approvals from equivalent regulatory authorities in foreign jurisdictions to
commercialize our product candidates in those jurisdictions. In order to obtain
FDA approval for any of our product candidates, we must submit to the FDA
an NDA, demonstrating that the product candidate is safe for humans and
effective for its intended use and that the product candidate can be
consistently manufactured and is stable. This demonstration requires significant
research and animal tests, which are referred to as “pre-clinical studies,”
human tests, which are referred to as “clinical trials” as well as the ability
to manufacture the product candidate, referred to as “chemistry
manufacturing control” or “CMC.” We will also need to file additional
investigative new drug applications and protocols in order to initiate clinical
testing of our drug candidates in new therapeutic indications and delays in
obtaining required FDA and institutional review board approvals
to  commence such studies may delay our initiation of such planned
additional studies.




Satisfying
the FDA’s regulatory requirements typically takes many years, depending on the
type, complexity, and novelty of the product candidate, and requires substantial
resources for research development, and testing. We cannot predict whether our
research and clinical approaches will result in drugs that the FDA considers
safe for humans and effective for indicated uses. The FDA has substantial
discretion in the drug approval process and may require us to conduct additional
pre-clinical and clinical testing or to perform post-marketing
studies.




30




The
approval process may also be delayed by changes in government regulation, future
legislation or administrative action, or changes in FDA policy that occur prior
to or during our regulatory review. Delays in obtaining regulatory approvals may
do the following:




●
            delay
      commercialization of, and our ability to derive product revenues from, our
      product candidates;●
            impose
      costly procedures on us; and●
            diminish
      any competitive advantages that we may otherwise
  enjoy.






Even if
we comply with all FDA requests, the FDA may ultimately reject one or more of
our NDAs. We cannot be sure that we will ever obtain regulatory clearance for
our product candidates. Failure to obtain FDA approval of any of our product
candidates will severely undermine our business by reducing our number of
salable products and, therefore, corresponding product revenues.




In
foreign jurisdictions, we must receive approval from the appropriate regulatory
authorities before we can commercialize our drugs. Foreign regulatory approval
processes generally include all of the risks associated with the FDA approval
procedures described above. We cannot assure you that we will receive the
approvals necessary to commercialize our product candidate for sale outside the
United States.




We
may not be able to retain rights licensed to us by others to commercialize key
products and may not be able to establish or maintain the relationships we need
to develop, manufacture, and market our products.




In
addition to our own patent applications, we also currently rely on licensing
agreements with third party patent holders/licensors for our
products.  We have an exclusive license agreement with the McLean
Hospital relating to the use of flupirtine to  treat fibromyalgia
syndrome; an exclusive license agreement with Thomas Jefferson University
relating to our CD4 inhibitor program; an exclusive  license agreement
with the Regents of the University of California relating to our TRIMESTATM
technology; an exclusive license to our oral immunotherapeutic tolerance
program, named dnaJP1 from UCSD and an exclusive license agreement with Dr.
Newsome and Mr. Tate relating to our Zinthionein program. Each of these
agreements requires us to use our best efforts to commercialize each of the
technologies as well as meet certain diligence requirements and timelines in
order to keep the license agreement in effect. In the event we are not able to
meet our diligence requirements, we may not be able to retain the rights granted
under our agreements or renegotiate our arrangement with these institutions on
reasonable terms, or at all.




Furthermore,
we currently have very limited product development capabilities, and limited
marketing or sales capabilities. For us to research, develop, and test our
product candidates, we would need to contract with outside researchers, in most
cases those parties that did the original research and from whom we have
licensed the technologies.




We can
give no assurances that any of our issued patents licensed to us or any of our
other patent applications will provide us with significant proprietary
protection or be of commercial benefit to us. Furthermore, the issuance of a
patent is not conclusive as to its validity or enforceability, nor does the
issuance of a patent provide the patent holder with freedom to operate without
infringing the patent rights of others.




Developments
by competitors may render our products or technologies obsolete or
non-competitive.




Companies
that currently sell or are developing both generic and proprietary
pharmaceutical compounds to treat central-nervous-system and autoimmune diseases
include: Pfizer, Inc., Rigil Pharmaceuticals, Incyte Pharmaceuticals, Chelsea
Therapeutics International, Inc., Aton Pharma, GlaxoSmithKline Pharmaceuticals,
Alcon, Inc., Shire Pharmaceuticals, Plc., Schering-Plough, Organon NV, Merck
& Co., Eli  Lilly & Co., Serono, SA, Biogen Idec, Inc.,
Achillion, Ltd., Active Biotech, Inc., Panteri Biosciences, Meda, Merrimack
Pharmaceuticals, Inc.,  Merch-Schering AG, Forest Laboratories, Inc.,
Attenuon, LLC, Cypress Biosciences, Inc., Genentech, Neurotech, Amgen, Inc.,
Centocor/Johnson and Johnson, UCB Group, Abbott, Wyeth, OM Pharma, Cel-Sci
Pharmaceuticals, Novartis, Axcan Pharma, Inc., Teva Pharmaceuticals, Inc.,
Intermune, Inc.  Fibrogen, Inc., Active Biotech, CNSBio, Pty., Rare
Disease Therapeutics, Inc., Prana Biotechnology, Inc., Merz & Co.,
AstraZeneca Pharmaceuticals, Inc., Chiesi Pharmaceuticals,  Inc.,
Alcon, Inc., Bausch and Lomb, Inc., Targacept, Inc., and Johnson & Johnson,
Inc. Alternative technologies or alternative delivery or dosages of already
approved therapies are being  developed to treat dry AMD, autoimmune
inflammatory, rheumatoid arthritis, psoriasis, Fibromyalgia, MS, Huntington’s,
Alzheimer’s and Wilson’s diseases, several of which may be approved or are in
early and  advanced clinical trials, such as zinc based combinations,
Syk inhibitors, Jak inhibitors, connective tissue growth factors (CTGF),
FTY-720, Laquinimod, pirfenidone, milnacipram, Lyrica, anti-depressant
combinations, Rituxan, Enbrel, Cimzia, Humira, Remicade, Cymbalta, Effexor,
Actimmune and other interferon preparations. Unlike us, many of our competitors
have significant financial and human resources. In addition, academic research
centers may develop technologies that compete with our TRIMESTA, Zinthionein,
dnaJP1, CD4 inhibitors and flupirtine technologies. Should clinicians or
regulatory authorities view these therapeutic regiments as more effective than
our products, this might delay or prevent us from obtaining regulatory approval
for our products, or it might prevent us from obtaining favorable reimbursement
rates from payers, such as Medicare, Medicaid and private insurers.




31




Competitors
could develop and gain FDA approval of our products for a different
indication.




Since we
do not have composition of matter patent claims for, flupirtine and TRIMESTA,
others may obtain approvals for other uses of these products which are not
covered by our issued or pending patents. For example, the active ingredients in
both flupirtine and TRIMESTA have been approved for marketing in overseas
countries for different uses. Other companies, including the original developers
or licensees or affiliates may seek to develop flupirtine or TRIMESTA or their
respective active ingredient(s) for other  uses in the US or any
country we are seeking approval for. We cannot provide any assurances that any
other company may obtain FDA approval for products that contain flupirtine or
TRIMESTA in various formulations or delivery systems that might adversely affect
our ability to develop and market these products in the US.  We are
aware that other companies have intellectual property protection using the
active ingredients and have conducted clinical trials of flupirtine, and
TRIMESTA for different applications that what we are developing.  Many
of these companies may have more resources than us.  Should a
competitor obtain FDA approval for their product for any indication prior to us,
we might be precluded under the Waxman-Hatch Act to obtain approval for our
product candidates for a period of five years.  We cannot provide any
assurances that our products will be FDA approved prior to our
competitors.




Other
companies could manufacture and develop oral TTM and its active ingredient,
tetrathiomolybdate, and secure approvals for different indications. We are aware
that a potential competitor has an exclusive license from the University of
Michigan (UM) to an issued U.S. patent that relates to the use of
tetrathiomolybdate to treat angiogenic  diseases (the “Angiogenic
Patent”) and is currently in phase I and phase II clinical trials for the
treatment of various forms of cancer. To our knowledge, this competitor and UM
have filed additional patent applications claiming various analog structures and
formulations of tetrathiomolybdate to treat various diseases. Further, we cannot
predict whether our competitor might obtain approval in the U.S. or Europe to
market tetrathiomolybdate for cancer or another indication ahead of us. We also
cannot predict whether, if issued, any patent corresponding to the Angiogenic
Patent may prevent us from conducting our business or result in lengthy and
costly litigation or the need for a license. Furthermore, if we need to obtain a
license to these or other patents in order to conduct our business, we may find
that it is not available to us on commercially reasonable  terms, or
is not available to us at all.




If
the FDA approves other products containing our active ingredients to treat
indications other than those covered by our issued or pending patent
applications, physicians may elect to prescribe a competitor’s products to treat
the  diseases for which we are developing—this is commonly referred to
as “off-label” use. While under FDA regulations a competitor is not allowed to
promote off-label uses of its product, the FDA does not regulate the practice of
medicine and, as a result, cannot direct physicians as to which source it should
use for these products they prescribe to their patients. Consequently, we might
be limited in our ability to prevent off-label use of a competitor’s product to
treat the diseases we are developing, even if we have  issued patents
for that indication. If we are not able to obtain and enforce these patents, a
competitor could use our products for a treatment or use not covered by any of
our patents.  We cannot provide any assurances that a competitor will
not obtain FDA approval for a product that contains the same active ingredients
as our products.




We
rely primarily on method patents and patent applications and various regulatory
exclusivities to protect the development of our technologies, and our ability to
compete may decrease or be eliminated if we are not able to protect our
proprietary technology.




Our
competitiveness may be adversely affected if we are unable to protect our
proprietary technologies. Other than our CD4 inhibitor, oral dnaJP1 and
Zinthionein program, we do not have composition of matter patents for TRIMESTA,
flupirtine, oral TTM or their respective active ingredients estriol, flupirtine,
and ammonium tetrathiomolybdate.  We also expect to rely on patent
protection from an issued U.S. Patent for the use of oral TTM and related
compounds to treat inflammatory and fibrotic diseases (U.S. Patent No
6,855,340). These patents have been exclusively licensed to us. We have also
filed various pending patent applications which cover various formulations,
packaging, distribution & monitoring methods for oral TTM. We rely on issued
patent and pending patent applications for use of TRIMESTA to treat MS (issued
U.S. Patent No. 6,936,599) and various other therapeutic indications which have
been exclusively licensed to us. We have exclusively licensed issued U.S. Patent
No. 5,773,570, 6,153,200, 6,946,132, 6,989,146, 7,094,597, 7,301,005, including
foreign equivalents  along with several patent applications which
cover dnaJP1, methods and its uses, We have also exclusively licensed an issued
patent for the treatment of fibromyalgia with flupirtine.




Our
Zinthionein product candidate is exclusively licensed from its inventors, David
A. Newsome, M.D. and David Tate, Jr.  Zinthionein is the subject of
two issued U.S. patents, 7,164,035 and 6,586,611 and pending U.S. patent
application ser. no. 11/621,380 which cover composition of matter
claims. In our annual Form 10-KSB for the year ending December 31, 2007
filed March 31, 2008 (page 23), we described our receipt in March 2008 (and
potential impact on claim 1 of our exclusively licensed issued U.S. patent
7,164,035) of an English translation of a Russian disclosure, Zegzhda et. al.
Chemical Abstracts Vol. 85 Abstract No. 186052 (1976) that was cited by the U.S.
patent examiner during our


32




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
March 31, 2009, we have 2 full-time employees and 3 part-time employees. We have
also engaged regulatory consultants to advise us on our dealings with the FDA
and other foreign regulatory authorities. We intend to recruit certain key
executive officers, including a Vice President of Sales and Marketing and Vice
President of Business Development during 2009. 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.




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.




33




We can
give no assurances that any such other companies will not have interests that
are in conflict with our interests.




Losing
key personnel or failing to recruit necessary additional personnel would impede
our ability to attain our development objectives. There is intense competition
for qualified personnel in the drug-development field, and we may not be able to
attract and retain the qualified personnel we would need to develop our
business.




We rely
on independent organizations, advisors, and consultants to perform certain
services for us, including handling substantially all aspects of regulatory
approval, clinical management, manufacturing, marketing, and sales. We expect
that this will continue to be the case. Such services may not always be
available to us on a timely basis when we need them.




We
may experience difficulties in obtaining sufficient quantities of our products
or other compounds.




In order
to successfully commercialize our product candidates, we must be able to
manufacture our products in commercial quantities, in compliance with regulatory
requirements, at acceptable costs, and in a timely manner. Manufacture of the
types of biopharmaceutical products that we propose to develop present various
risks. For example, manufacture of the active ingredient in oral TTM and
Zinthionein is a complex process that can be difficult to scale up for purposes
of producing large quantities. This process can also be subject to delays,
inefficiencies, and poor or low yields of quality products. Furthermore, the
active ingredient of Zinthionein has been difficult to scale up at larger
quantities.  As such, we can give no assurances that we will be able
to scale up the manufacturing of Zinthionein.  Oral TTM is also known
to be subject to a loss of potency as a result of prolonged exposure to moisture
and other normal atmospheric conditions. The active ingredient of our dnaJP1
program is a peptide.  Traditionally, peptide manufacturing is costly,
time consuming, resulting in low yields and poor stability. We cannot give any
assurances that we will not encounter this issues when scaling up manufacturing
for dnaJP1.  We are developing proprietary formulations and specialty
packaging solutions to overcome this stability issue, but we can give no
assurances that we will be successful in meeting the stability requirements
required for approval by regulatory authorities such as the FDA or the
requirements that our new proprietary formulations and drug product will
demonstrate satisfactory comparability to less stable formulations utilized in
prior clinical trials. We may experience delays in demonstrating satisfactory
stability requirements and drug product comparability requirements that could
delay our planned clinical trials of for any of our products.




For
manufacturing and nonclinical information for TRIMESTA, we rely upon an
agreement with Organon, a division of Schering-Plough for access to clinical,
nonclinical, stability and drug supply relating to estriol, the active
ingredient in TRIMESTA which is currently in a phase IIb clinical trial for MS.
Should Organon terminate our agreement or be unable or unwilling to
continue to supply TRIMESTA to us, this might delay enrollment and
commercialization plans for our TRIMESTA clinical trial program. Organon has
manufactured estriol the active ingredient of TRIMESTA for the European and
Asian market for approximately 40 years but has never been approved in the
US.




Historically,
our manufacturing has been handled by contract manufacturers and compounding
pharmacies. We can give no assurances that we will be able to continue to use
our current manufacturer or be able to establish another relationship with a
manufacturer quickly enough so as not to disrupt commercialization of any of our
products, or that commercial quantities of any of our products, if approved for
marketing, will be available from contract manufacturers at acceptable
costs.




In
addition, any contract manufacturer that we select to manufacture our product
candidates might fail to maintain a current “good manufacturing practices”
(cGMP) manufacturing facility. During February 2007, we established a
manufacturing facility in Ann Arbor, MI and we are currently seeking to
sublease some or all of our excess office, laboratory and manufacturing
space.  In March 2009, our building control systems for cleanrooms and
associated air handling equipment were removed and sold which might affect our
ability to reachieve cGMP status for our facility.




The cost
of manufacturing certain product candidates may make them prohibitively
expensive. In order to successfully commercialize our product candidates we may
be required to reduce the costs of production, and we may find that we are
unable to do so. We may be unable to obtain, or may be required to pay high
prices for compounds manufactured or sold by others that we need for comparison
purposes in clinical trials and studies for our product candidates.




The
manufacture of our products is a highly exacting process, and if we or one of
our materials suppliers encounter problems manufacturing our products, our
business could suffer.





The FDA
and foreign regulators require manufacturers to register manufacturing
facilities. The FDA and foreign regulators also inspect these facilities to
confirm compliance with cGMP or similar requirements that the FDA or foreign
regulators establish. We or our materials suppliers may face manufacturing or
quality control problems causing product production and shipment delays or a
situation where we or the supplier may not be able to maintain compliance with
the FDA’s cGMP requirements, or those of foreign regulators, necessary to
continue manufacturing our drug substance. Any failure to comply with cGMP
requirements or other FDA or foreign regulatory requirements could adversely
affect our clinical research activities and our ability to market and develop
our products.




34




If
the parties we depend on for supplying our drug substance raw materials and
certain manufacturing-related services do not timely supply these products and
services, it may delay or impair our ability to develop, manufacture and market
our products.





We rely
on suppliers for our drug substance raw materials and third parties for certain
manufacturing-related services to produce material that meets appropriate
content, quality and stability standards and use in clinical trials of our
products and, after approval, for commercial distribution. To succeed, clinical
trials require adequate supplies of drug substance and drug product, which may
be difficult or uneconomical to procure or manufacture. We and our suppliers and
vendors may not be able to (i) produce our drug substance or drug product to
appropriate standards for use in clinical studies, (ii) perform under any
definitive manufacturing, supply or service agreements with us or (iii) remain
in business for a sufficient time to successfully produce and market our product
candidates. If we do not maintain important manufacturing and service
relationships, we may fail to find a replacement supplier or required vendor or
develop our own manufacturing capabilities which could delay or impair our
ability to obtain regulatory approval for our products and substantially
increase our costs or deplete profit margins, if any. If we do find replacement
manufacturers and vendors, we may not be able to enter into agreements with them
on terms and conditions favorable to us and, there could be a substantial delay
before a new facility could be qualified and registered with the FDA and foreign
regulatory authorities.





Clinical
trials are very expensive, time-consuming, and difficult to design and
implement.




Human
clinical trials are very expensive and difficult to design and implement, in
part because they are subject to rigorous regulatory requirements. The clinical
trial process is also time-consuming. We estimate that clinical trials of our
product candidates would take at least several years to complete. Furthermore,
failure can occur at any stage of the trials, and we could encounter problems
that cause us to abandon or repeat clinical trials. Commencement and completion
of clinical trials may be delayed by several factors,
including:




●
            unforeseen
      safety issues;●
            determination
      of dosing;●
            lack
      of effectiveness during clinical trials;●
            slower
      than expected rates of patient recruitment;●
            inability
      to monitor patients adequately during or after treatment;
    and●
            inability
      or unwillingness of medical investigators to follow our clinical
      protocols.






In
addition, we or the FDA may suspend our clinical trials at any time if it
appears that we are exposing participants to unacceptable health risks or if the
FDA finds deficiencies in our submissions or conduct of our trials.




The
results of our clinical trials may not support our product candidate
claims.




Even if
our clinical trials are initiated and completed as planned, we cannot be certain
that the results will support our product-candidate claims. Success in
pre-clinical testing and phase II clinical trials does not ensure that later
phase II or phase III clinical trials will be successful. We cannot be sure that
the results of later clinical trials would replicate the results of prior
clinical trials and pre-clinical testing. Clinical trials may fail to
demonstrate that our product candidates are safe for humans and effective for
indicated uses. Any such failure could cause us to abandon a product candidate
and might delay development of other product candidates. Any delay in, or
termination of, our clinical trials would delay our obtaining FDA approval for
the affected product candidate and, ultimately, our ability to commercialize
that product candidate.




Physicians
and patients may not accept and use our technologies.




Even if
the FDA approves our product candidates, physicians and patients may not accept
and use them. Acceptance and use of our product will depend upon a number of
factors, including the following:




●
            the
      perception of members of the health care community, including physicians,
      regarding the safety and effectiveness of our drugs;●
            the
      cost-effectiveness of our product relative to competing
      products;●
            availability
      of reimbursement for our products from government or other healthcare
      payers; and●
            the
      effectiveness of marketing and distribution efforts by us and our
      licensees and distributors, if any.






Because
we expect sales of our current product candidates, if approved, to generate
substantially all of our product revenues for the foreseeable future, the
failure of any of these drugs to find market acceptance would harm our business
and could require us to seek additional financing.




35




We depend on
researchers who are not under our control.




Since we
have in-licensed some of  our product candidates, we depend upon
independent investigators and scientific collaborators, such as universities and
medical institutions or private physician scientists, to conduct our
pre-clinical and clinical trials under agreements with us. These collaborators
are not our employees and we cannot control the amount or timing of resources
that they devote to our programs or the timing of their procurement of
clinical-trial data or their compliance with applicable regulatory guidelines.
 Should any of these scientific inventors/advisors become disabled or die
unexpectedly, or should they fail to comply with applicable regulatory
guidelines, we may be forced to scale back or terminate development of that
program.  They may not assign as great a priority to our programs or
pursue them as diligently as we would if we were undertaking those programs
ourselves. Failing to devote sufficient time and resources to our
drug-development programs, or substandard performance and failure to comply with
regulatory guidelines, could result in delay of any FDA applications and our
commercialization of the drug candidate involved.




These
collaborators may also have relationships with other commercial entities, some
of which may compete with us. Our collaborators assisting our competitors at our
expense could harm our competitive position. For example, we are highly
dependent on scientific collaborators for our dnaJP1, TRIMESTA,
Zinthionein, CD4 Inhibitor 802-2 and flupirtine development programs.
Specifically, all of the clinical trials have been conducted under
physician-sponsored investigational new drug applications (INDs), not
corporate-sponsored INDs. Generally, we have experienced difficulty in
collecting data generated from these physician sponsored clinical trials or
physician sponsored INDs for our programs.  We cannot provide any
assurances that we will not experience any additional delays in the
future.  For example, the clinical trials for oral TTM have been
conducted and completed prior to us licensing this technology from the
University of Michigan. Due to various patient privacy regulations
and other administrative matters, we have experienced delays and/or an
inability to obtain clinical trial data relating to oral TTM.  We have also
experienced similar difficulties with our Zinthionein program.  George
J. Brewer, M.D., our initial clinical collaborator for oral TTM for Wilson’s
disease, has retired from University of Michigan, will no longer participate as
a clinical investigator and no longer has an IND for oral TTM.  We do
not plan to conduct any further clinical studies of oral TTM.  Should
we or a future sublicensee elect to seek to conduct additional clinical trials
of oral TTM, we or such sublicensee as the ase may be would be expected to be
required to file a new IND with the FDA for oral TTM and gain FDA approval for
such IND prior to initiating any clinical studies and would be subject to the
risks and potential delays associated with obtaining such
approval.  Any delay or inability to obtain any data, and any such
regulatory issues, might result our inability to advance our products through
the regulatory process or obtain pharmaceutical partners for them.




We are
also highly dependent on government and private grants to fund certain of our
clinical trials for our product candidates. For example, TRIMESTA has received a
$5 million grant from the Southern California Chapter of the National Multiple
Sclerosis Society and the National Institutes of Health (NIH) which funds a
majority of our ongoing 150 patient phase IIb clinical trial in relapsing
remitting  multiple sclerosis. If our scientific collaborator is
unable to maintain these grants, we might be forced to scale back or terminate
the development of this product candidate.




We
have no experience selling, marketing, or distributing products and do not have
the capability to do so.




We
currently have no sales, marketing, or distribution capabilities. We do not
anticipate having resources in the foreseeable future to allocate to selling and
marketing our proposed products. Our success will depend, in part, on whether we
are able to enter into and maintain collaborative relationships with a
pharmaceutical or a biotechnology company charged with marketing one or more of
our products. We may not be able to establish or maintain such collaborative
arrangements or to commercialize our products in foreign territories, and even
if we do, our collaborators may not have effective sales forces.




If we do
not, or are unable to, enter into collaborative arrangements to sell and market
our proposed products, we will need to devote significant capital, management
resources, and time to establishing and developing an in-house marketing and
sales force with technical expertise. We may be unsuccessful in doing
so.




If
we fail to maintain positive relationships with particular individuals, we may
be unable to successfully develop our product candidates, conduct clinical
trials, and obtain financing.




If we
fail to maintain positive relationships with members of our management team or
if these individuals decrease their contributions to our company, our business
could be adversely impacted. We do not carry key employee insurance policies for
any of our key employees.







We also
rely greatly on employing and retaining other highly trained and experienced
senior management and scientific personnel. The competition for these and other
qualified personnel in the biotechnology field is intense. If we are not able to
attract and retain qualified scientific, technical, and managerial personnel, we
probably will be unable to achieve our business objectives.




36




We
may not be able to compete successfully for market share against other drug
companies.


The
markets for our product candidates are characterized by intense competition and
rapid technological advances. If our product candidates receive FDA approval,
they will compete with existing and future drugs and therapies developed,
manufactured, and marketed by others. Competing products may provide greater
therapeutic convenience or clinical or other benefits for a specific indication
than our products, or may offer comparable performance at a lower cost. If our
products fail to capture and maintain market share, we may not achieve
sufficient product revenues and our business will suffer.




We will
compete against fully integrated pharmaceutical companies and smaller companies
that are collaborating with larger pharmaceutical companies, academic
institutions, government agencies, or other public and private research
organizations. Many of these competitors have therapies to treat autoimmune
fibrotic and central nervous system diseases already approved or in development.
In addition, many of these competitors, either alone or together with their
collaborative partners, operate larger research-and-development programs than we
do, have substantially greater financial resources than we do, and have
significantly greater experience in the following areas:




●
            developing
      drugs;●
            undertaking
      pre-clinical testing and human clinical trials;●
            obtaining
      FDA and other regulatory approvals of drugs;●
            formulating
      and manufacturing drugs; and●
            launching,
      marketing and selling drugs.





We
may incur substantial costs as a result of litigation or other proceedings
relating to patent and other intellectual property rights, as well as costs
associated with frivolous lawsuits.




If any
other person files patent applications, or is issued patents, claiming
technology also claimed by us in pending applications, we may be required to
participate in interference proceedings in the U.S. Patent and Trademark Office
to determine priority of invention. We, or our licensors, may also need to
participate in interference proceedings involving our issued patents and pending
applications of another entity.




We cannot
guarantee that the practice of our technologies will not conflict with the
rights of others. In some foreign jurisdictions, we could become involved in
opposition proceedings, either by opposing the validity of another’s foreign
patent or by persons opposing the validity of our foreign patents.




We may
also face frivolous litigation or lawsuits from various competitors or from
litigious securities attorneys. The cost to us of any litigation or other
proceeding relating to these areas, even if resolved in our favor, could be
substantial and could distract management from our business. Uncertainties
resulting from initiation and continuation of any litigation could have a
material adverse effect on our ability to continue our operations.




If we infringe the rights of others
we could be prevented from selling products or forced to pay damages.




If our
products, methods, processes, and other technologies are found to infringe the
proprietary rights of other parties, we could be required to pay damages, or we
may be required to cease using the technology or to license rights from the
prevailing party. Any prevailing party may be unwilling to offer us a license on
commercially acceptable terms.




Our
products, if approved, may not be commercially viable due to change in health
care practice and third party reimbursement limitations.





Recent
initiatives to reduce the federal deficit and to change health care delivery are
increasing cost-containment efforts. We anticipate that Congress, state
legislatures and the private sector will continue to review and assess
alternative benefits, controls on health care spending through limitations on
the growth of private health insurance premiums and Medicare and Medicaid
spending, price controls on pharmaceuticals, and other fundamental changes to
the health care delivery system. Any changes of this type could negatively
impact the commercial viability of our products, if approved. Our ability to
successfully commercialize our product candidates, if they are approved, will
depend in part on the extent to which appropriate reimbursement codes and
authorized cost reimbursement levels of these products and related treatment are
obtained from governmental authorities, private health insurers and other
organizations, such as health maintenance organizations. In the absence of
national Medicare coverage determination, local contractors that administer the
Medicare program may make their own coverage decisions. Any of our product
candidates, if approved and when commercially available, may not be included
within the then current Medicare coverage determination or the coverage
determination of state Medicaid programs, private insurance companies or other health care providers.  In addition, third-party
payers are increasingly challenging the necessity and prices charged for medical
products, treatments and services.




37




We
may not be able to obtain adequate insurance coverage against product liability
claims.




Our
business exposes us to the product liability risks inherent in the testing,
manufacturing, marketing, and sale of human therapeutic technologies and
products. Even if it is available, product liability insurance for the
pharmaceutical and biotechnology industry generally is expensive. Adequate
insurance coverage may not be available at a reasonable cost.




RISKS
RELATING TO OUR STOCK





We
will seek to raise additional funds in the future, which may be dilutive to
stockholders or impose operational restrictions.




We expect
to seek to raise additional capital in the future to help fund development of
our proposed products. If we raise additional capital through the issuance of
equity or debt securities, the percentage ownership of our current stockholders
will be reduced. We may also enter into strategic transactions, issue equity as
part of license issue fees to our licensors, compensate consultants or settle
outstanding payables using equity that may be dilutive. Our stockholders may
experience additional dilution in net book value per share and any additional
equity securities may have rights, preferences and privileges senior to those of
the holders of our common stock. If we cannot raise additional funds, we will
have to delay development activities of our products candidates.




We
are controlled by our current officers, directors, and principal
stockholders.




Currently,
our directors, executive officers, and principal stockholders beneficially own a
majority of our common stock. As a result, they will be able to exert
substantial influence over the election of our board of directors and the vote
on issues submitted to our stockholders.  In January 2009, we
registered for sale under the Securities Act of 1933, as amended, 8,816,918
shares of our outstanding common stock held by our officers, directors and
principal stockholders and 1,148,753 shares of common stock issuable upon the
exercise of warrants held by our officers, directors and principal
stockholders.  Because our common stock has from time to time been
“thinly traded”, the sale of these shares by our officers, directors and
principal stockholders could have an adverse effect on the market for our stock
and our share price.




Our
shares of common stock are from time to time thinly traded, so stockholders may
be unable to sell at or near ask prices or at all if they need to sell shares to
raise money or otherwise desire to liquidate their shares.




Our
common stock has from time to time been “thinly-traded,” meaning that the number
of persons interested in purchasing our common stock at or near ask prices at
any given time may be relatively small or non-existent. This situation is
attributable to a number of factors, including the fact that we are a small
company that is relatively unknown to stock analysts, stock brokers,
institutional investors and others in the investment community that generate or
influence sales volume, and that even if we came to the attention of such
persons, they tend to be risk-averse and would be reluctant to follow an
unproven company such as ours or purchase or recommend the purchase of our
shares until such time as we became more seasoned and viable. As a consequence,
there may be periods of several days or more when trading activity in our shares
is minimal or non­existent, as compared to a seasoned issuer which has a
large and steady volume of trading activity that will generally support
continuous sales without an adverse effect on share price. We cannot give
stockholders any assurance that a broader or more active public trading market
for our common shares will develop or be sustained, or that current trading
levels will be sustained.




Our
compliance with the Sarbanes-Oxley Act and SEC rules concerning internal
controls may be time consuming, difficult and costly.




Although
individual members of our management team have experience as officers of
publicly traded companies, much of that experience came prior to the adoption of
the Sarbanes-Oxley Act of 2002. It may be time consuming, difficult and costly
for us to develop and implement the internal controls and reporting procedures
required by Sarbanes-Oxley. We may need to hire additional financial reporting,
internal controls and other finance staff in order to develop and implement
appropriate internal controls and reporting procedures. If we are unable to
comply with Sarbanes-Oxley’s internal controls requirements, we may not be able
to obtain the independent accountant certifications that Sarbanes-Oxley Act
requires publicly-traded companies to obtain.




38




We
cannot assure you that the common stock will be liquid or that it will remain
listed on a securities exchange.





We cannot
assure you that we will be able to maintain the listing standards of the
NYSEAmex formerly the American Stock Exchange or NYSE Alternext US. The NYSEAmex
requires companies to meet certain continued listing criteria including certain
minimum stockholders' equity and equity prices per share as outlined
in the Exchange Company Guide. We may not be able to maintain such minimum
stockholders' equity or prices per share or may be required to effect a reverse
stock split to maintain such minimum prices and/or issue additional equity
securities in exchange for cash or other assets, if available, to maintain
certain minimum stockholders' equity required by the NYSEAmex. If we are
delisted from the Exchange then our common stock will trade, if at all, only on
the over-the-counter market, such as the OTC Bulletin Board securities market,
and then only if one or more registered broker-dealer market makers comply with
quotation requirements. In addition, delisting of our common stock could further
depress our stock price, substantially limit liquidity of our common stock and
materially adversely affect our ability to raise capital on terms acceptable to
us, or at all. Delisting from the Exchange could also have other negative
results, including the potential loss of confidence by suppliers and employees,
the loss of institutional investor interest and fewer business development
opportunities.  During 2009, in order to remain listed on NYSEAmex, we
are required to maintain a minimum stockholders’ equity of $4 million and this
requirement will likely increase to $6 million in 2010.




There
may be issuances of shares of preferred stock in the future.





Although
we currently do not have preferred shares outstanding, the board of directors
could authorize the issuance of a series of preferred stock that would grant
holders preferred rights to our assets upon liquidation, the right to receive
dividends before dividends would be declared to common stockholders, and the
right to the redemption of such shares, possibly together with a premium, prior
to the redemption of the common stock. To the extent that we do issue preferred
stock, the rights of holders of common stock could be impaired thereby,
including without limitation, with respect to liquidation.




Our
board has approved a plan to re-incorporate the Company from the State of
Delaware to the State of Nevada




During
the Company’s annual shareholder meeting held during June 2008, the Company
received authorization to re-incorporate from the State of Delaware to the State
of Nevada.  The Company intends to complete this re-incorporation
during the second quarter of 2009.




We
have never paid dividends.




We have
never paid cash dividends on our common stock and do not anticipate paying any
for the foreseeable future.





We
may not complete our acquisition of Colwell Labs.





Our
acquisition of Colwell Clinical Laboratories Inc., is subject to our evaluation
that we expect to complete on or before May 31, 2009.  We may elect to
not proceed or to delay such acquisition.  Should we elect to not
proceed with or to delay such acquisition, our intended launch and sales of
metal dyshomeostasis clinical diagnostic products and services may also be
delayed.




RISKS
RELATED TO OUR INDUSTRY




Government
Regulation




In the
United States, the formulation, manufacturing, packaging, storing, labeling,
promotion, advertising, distribution and sale of our products are subject to
regulation by various governmental agencies, including (1) the Food and
Drug Administration, or FDA, (2) the Federal Trade Commission, or FTC,
(3) the Consumer Product Safety Commission, or CPSC, (4) the United
States Department of Agriculture, or USDA. Our proposed activities may also be
regulated by various agencies of the states, localities and foreign countries in
which our proposed products may be manufactured, distributed and sold. The FDA,
in particular, regulates the formulation, manufacture and labeling of
over-the-counter, or OTC, drugs, conventional foods, dietary supplements, and
cosmetics such as those that we intend to distribute.  FDA regulations
require us and our suppliers to meet relevant current good manufacturing
practice, or cGMP, regulations for the preparation, packing and storage of foods
and OTC drugs. On June 25, 2007, the FDA published its final rule
regulating cGMPs for dietary supplements. The final rule became effective
August 24, 2007 and small companies with less than 20 employees, such as
us, have until June 2010 to achieve compliance.  As a result of
inactivity and the removal and sale of certain equipment, our facility in Ann
Arbor, Michigan is no longer currently cGMP compliant.




The
U.S. Dietary Supplement Health and Education Act of 1994, or DSHEA, revised
the provisions of the Federal Food, Drug and Cosmetic Act, or FFDCA, concerning
the composition and labeling of dietary supplements and, we believe, the
revisions are generally favorable to the dietary supplement industry. The
legislation created a new statutory class of dietary supplements. This new class
includes vitamins, minerals, herbs, amino acids and other dietary substances for
human use to supplement the diet, and the legislation grandfathers, with some
limitations, dietary ingredients that were on the market before October 15,
1994. A dietary supplement that contains a dietary ingredient that was not on
the market before October 15, 1994 will require evidence of a history of
use or other evidence of safety establishing that it is reasonably expected to
be safe. Manufacturers or marketers of dietary supplements in the United States
and certain other jurisdictions that make product


39





performance
claims, including structure or function claims, must have substantiation in
their possession that the statements are truthful and not misleading. The
majority of the products marketed by us in the United States are classified as
conventional foods or dietary supplements under the FFDCA. Internationally, the
majority of products marketed by us are classified as foods or food
supplements.





In
January 2000, the FDA issued a regulation that defines the types of statements
that can be made concerning the effect of a dietary supplement on the structure
or function of the body pursuant to DSHEA. Under DSHEA, dietary supplement
labeling may bear structure or function claims, which are claims that the
products affect the structure or function of the body, without prior FDA
approval, but with notification to the FDA. They may not bear a claim that they
can prevent, treat, cure, mitigate or diagnose disease (a disease claim). The
regulation describes how the FDA distinguishes disease claims from structure or
function claims. During 2004, the FDA issued a guidance, paralleling an earlier
guidance from the FTC, defining a manufacturers obligations to substantiate
structure/function claims. The FDA also issued a Structure/Function Claims Small
Entity Compliance Guide. In addition, the agency permits companies to use
FDA-approved full and qualified health claims for products containing specific
ingredients that meet stated requirements.





In order
to make disease claims, we may seek to market some our proposed products as
medical foods for the dietary management of certain diseases.  Medical
foods are defined in section 5(b) of the Orphan Drug Act (21 U.S.C. 360ee (b)
(3)) is "a food which is formulated to be consumed or administered enterally
under the supervision of a physician and which is intended for the specific
dietary management of a disease or condition for which distinctive nutritional
requirements, based on recognized scientific principles, are established by
medical evaluation."  Although we believe our products may qualify as
medical foods provided we are able to generate, and have published, sufficient
clinical data to support such claims.  Medical foods are required to
be utilized under a medical doctor’s supervision and as such, our distribution
channels may be limited and/or complicated.





Should we
seek to make disease claims beyond those permitted for medical foods, we may
seek to conduct necessary clinical trials to support such claims and file one or
more New Drug Applications with respect to such products which would be the
subject of the time, expense and uncertainty associated with achieving approval
of such NDA by the FDA.




On
December 22, 2007, a new law went into effect in the United States
mandating the reporting of all serious adverse events occurring within the
United States which involve dietary supplements or OTC drugs. We believe that in
order to be in compliance with this law we will be required to implement a
worldwide procedure governing adverse event identification, investigation and
reporting. As a result of our receipt of adverse event reports, we may from time
to time elect, or be required, to remove a product from a market, either
temporarily or permanently.




Some of
the products marketed by us are considered conventional foods and are currently
labeled as such. Within the United States, this category of products is subject
to the Nutrition, Labeling and Education Act, or NLEA, and regulations
promulgated under the NLEA. The NLEA regulates health claims, ingredient
labeling and nutrient content claims characterizing the level of a nutrient in
the product. The ingredients added to conventional foods must either be
generally recognized as safe by experts, or GRAS, or be approved as food
additives under FDA regulations.  Our zinc-monocysteine complexes are
comprised of zinc (a GRAS ingredient) and cysteine (an amino acid that also has
GRAS status).  While many chelated zinc products are currently on the
market and are generally not considered new dietary ingredients, we cannot
provide any assurance that zinc-monocysteine will be similarly considered by the
FDA.





The FTC,
which exercises jurisdiction over the advertising of all of our proposed
products, has in the past several years instituted enforcement actions against
several dietary supplement companies and against manufacturers of products
generally for false and misleading advertising of some of their products. These
enforcement actions have often resulted in consent decrees and monetary payments
by the companies involved. In addition, the FTC has increased its scrutiny of
the use of testimonials, which we also utilize, as well as the role of expert
endorsers and product clinical studies. It is unclear whether the FTC will
subject our advertisements to increased surveillance to ensure compliance with
the principles set forth in its published advertising guidance.  The
copper industry has supported  research studies that conclude that
copper has no effect in Alzheimer’s disease.  In February 2007, the
State of California issued its public health goal for copper in drinking water
and considered the research studies mentioned above as well as those of our
scientific collaborators and concluded that at the present time, the data with
respect to copper in drinking water’s role in Alzheimer’s disease were to be
“equivocal” .  We cannot provide assurance that the FTC will allow is
to publically advertise or promote our products to the American
public.




The FDA,
comparable foreign regulators and state and local pharmacy regulators impose
substantial requirements upon clinical development, manufacture and marketing of
pharmaceutical products. These and other entities regulate research and
development and the testing, manufacture, quality control, safety,
effectiveness, labeling, storage, record keeping, approval, advertising, and
promotion of our products. The drug approval process required by the FDA under
the Food, Drug, and Cosmetic Act generally involves:




●
            Preclinical
      laboratory and animal tests;●
            Submission
      of an IND, prior to commencing human clinical trials;●
            Adequate
      and well-controlled human clinical trials to establish safety and efficacy
      for intended use;●
            Submission
      to the FDA of a NDA; and●
            FDA
      review and approval of a NDA.




40




The
testing and approval process requires substantial time, effort, and financial
resources, and we cannot be certain that any approval will be granted on a
timely basis, if at all.




Preclinical
tests include laboratory evaluation of the product candidate, its chemistry,
formulation and stability, and animal studies to assess potential safety and
efficacy. Certain preclinical tests must be conducted in compliance with good
laboratory practice regulations. Violations of these regulations can, in some
cases, lead to invalidation of the studies, requiring them to be replicated. In
some cases, long-term preclinical studies are conducted concurrently with
clinical studies.




We will submit the preclinical test
results, together with manufacturing information and analytical data, to the FDA
as part of an IND, which must become effective before we begin human clinical
trials. The IND automatically becomes effective 30 days after filing, unless the
FDA raises questions about
conduct of the trials outlined in the IND and imposes a clinical hold, as
occurred with oral TTM, in which case, the IND sponsor and FDA must resolve the
matters before clinical trials can begin. It is possible that our submission may
not result in FDA authorization to commence clinical trials.




Clinical
trials must be supervised by a qualified investigator in accordance with good
clinical practice regulations, which include informed consent requirements. An
independent Institutional Review Board (“IRB”) at each medical center reviews
and approves and monitors the study, and is periodically informed of the study’s
progress, adverse events and changes in research. Progress reports are submitted
annually to the FDA and more frequently if adverse events occur.




Human
clinical trials typically have three sequential phases that may
overlap:




Phase I:
The drug is initially tested in healthy human subjects or patients for safety,
dosage tolerance, absorption, metabolism, distribution, and
excretion.




Phase II:
The drug is studied in a limited patient population to identify possible adverse
effects and safety risks, determine efficacy for specific diseases and establish
dosage tolerance and optimal dosage.




Phase
III: When phase II evaluations demonstrate that a dosage range is effective with
an acceptable safety profile, phase III trials to further evaluate dosage,
clinical efficacy and safety, are undertaken in an expanded patient population,
often at geographically dispersed sites.




We cannot
be certain that we will successfully complete phase I, phase II, or phase III
testing of our product candidates within any specific time period, if at all.
Furthermore, the FDA, an IRB or the IND sponsor may suspend clinical trials at
any time on various grounds, including a finding that subjects or patients are
exposed to unacceptable health risk. Concurrent with these trials and studies,
we also develop chemistry and physical characteristics data and finalize a
manufacturing process in accordance with good manufacturing practice (“GMP”)
requirements. The manufacturing process must conform to consistency and quality
standards, and we must develop methods for testing the quality, purity, and
potency of the final products. Appropriate packaging is selected and tested, and
chemistry stability studies are conducted to demonstrate that the product does
not undergo unacceptable deterioration over its shelf-life. Results of the
foregoing are submitted to the FDA as part of a NDA for marketing and commercial
shipment approval. The FDA reviews each NDA submitted and may request additional
information.




Once the
FDA accepts the NDA for filing, it begins its in-depth review. The FDA has
substantial discretion in the approval process and may disagree with our
interpretation of the data submitted. The process may be significantly extended
by requests for additional information or clarification regarding information
already provided. As part of this review, the FDA may refer the application to
an appropriate advisory committee, typically a panel of clinicians.
Manufacturing establishments often are inspected prior to NDA approval to assure
compliance with GMPs and with manufacturing commitments made in the
application.




Submission
of a NDA with clinical data requires payment of a fee (for fiscal year 2008,
$1,178,500). In return, the FDA assigns a goal of ten months for issuing its
“complete response,” in which the FDA may approve or deny the NDA, or require
additional clinical data. Even if these data are submitted, the FDA may
ultimately decide the NDA does not satisfy approval criteria. If the FDA
approves the NDA, the product becomes available for physicians prescription.
Product approval may be withdrawn if regulatory compliance is not maintained or
safety problems occur. The FDA may require post-marketing studies, also known as
phase IV studies, as a condition of approval, and requires surveillance programs
to monitor approved products that have been commercialized. The agency has the
power to require changes in labeling or prohibit further marketing based on the
results of post-marketing surveillance.




Satisfaction
of these and other regulatory requirements typically takes several years, and
the actual time required may vary substantially based upon the type, complexity
and novelty of the product. Government regulation may delay or prevent marketing
of potential products for a considerable period of time and impose costly
procedures on our activities. We cannot be certain that the FDA or other
regulatory agencies will approve any of our products on a timely basis, if at
all. Success in preclinical or early-stage clinical trials does not assure
success in later-stage clinical trials. Data obtained from pre-clinical and
clinical activities are not always conclusive and may be susceptible to varying
interpretations that could delay, limit or prevent regulatory approval. Even if
a product receives regulatory approval, the approval may be significantly
limited to specific indications or uses.




41





Even
after regulatory approval is obtained, later discovery of previously unknown
problems with a product may result in restrictions on the product or even
complete withdrawal of the product from the market. Delays in obtaining, or
failures to obtain regulatory approvals would have a material adverse effect on
our business.




Any
products manufactured or distributed by us pursuant to FDA approvals are subject
to pervasive and continuing FDA regulation, including record-keeping
requirements, reporting of adverse experiences, submitting periodic reports,
drug sampling and distribution requirements, manufacturing or labeling changes,
record-keeping requirements, and compliance with FDA promotion and advertising
requirements. Drug manufacturers and their subcontractors are required to
register their facilities with the FDA and state agencies, and are subject to
periodic unannounced inspections for GMP compliance, imposing procedural and
documentation requirements upon us and third-party manufacturers. Failure to
comply with these regulations could result, among other things, in suspension of
regulatory approval, recalls, suspension of production or injunctions, seizures,
or civil or criminal sanctions. We cannot be certain that we or our present or
future subcontractors will be able to comply with these
regulations.




The FDA
regulates drug labeling and promotion activities. The FDA has actively enforced
regulations prohibiting the marketing of products for unapproved uses. The FDA
permits the promotion of drugs for unapproved uses in certain circumstances,
subject to stringent requirements. We and our product candidates are subject to
a variety of state laws and regulations which may hinder our ability to market
our products. Whether or not FDA approval has been obtained, approval by foreign
regulatory authorities must be obtained prior to commencing clinical trials, and
sales and marketing efforts in those countries. These approval procedures vary
in complexity from country to country, and the processes may be longer or
shorter than that required for FDA approval. We may incur significant costs to
comply with these laws and regulations now or in the future.




The FDA’s
policies may change, and additional government regulations may be enacted which
could prevent or delay regulatory approval of our potential products. Increased
attention to the containment of health care costs worldwide could result in new
government regulations materially adverse to our business. We cannot predict the
likelihood, nature or extent of adverse governmental regulation that might arise
from future legislative or administrative action, either in the U.S. or
abroad.




Other
Regulatory Requirements




The U.S.
Federal Trade Commission and the Office of the Inspector General of the U.S.
Department of Health and Human Services (“HHS”) also regulate certain
pharmaceutical marketing practices. Government reimbursement practices and
policies with respect to our products are important to our success.




We are
subject to numerous federal, state and local laws relating to safe working
conditions, manufacturing practices, environmental protection, fire hazard
control, and disposal of hazardous or potentially hazardous substances. We may
incur significant costs to comply with these laws and regulations. The
regulatory framework under which we operate will inevitably change in light of
scientific, economic, demographic and policy developments, and such changes may
have a material adverse effect on our business.





Clinical
laboratories in the United States are subject to regulation under the Clinical
Laboratory Improvements Act of 1988 (“CLIA”) as well as corresponding state
regulations.  Failure to adhere to the quality control and other
regulatory requirements of CLIA could result in the suspension of such
certification necessary to perform clinical testing and generate
revenues.




European
Product Approval




Prior
regulatory approval for human healthy volunteer studies (phase I studies) is
required in member states of the European Union (E.U.). Summary data from
successful phase I studies are submitted to regulatory authorities in member
states to support applications for phase II studies. E.U. authorities typically
have one to three months (which often may be extended in their discretion) to
raise objections to the proposed study. One or more independent ethics
committees (similar to U.S. IRBs) review relevant ethical issues.




For E.U.
marketing approval, we submit to the relevant authority for review a dossier, or
MAA (Market Authorization Application), providing information on the quality of
the chemistry, manufacturing and pharmaceutical aspects of the product as well
as non-clinical and clinical data.




Approval
can take several months to several years, and can be denied, depending on
whether additional studies or clinical trials are requested (which may delay
marketing approval and involve unbudgeted costs) or regulatory authorities
conduct facilities (including clinical investigation site) inspections and
review manufacturing procedures, operating systems and personnel qualifications.
In many cases, each drug manufacturing facility must be approved, and further
inspections may occur over the product’s life.




42




The
regulatory agency may require post-marketing surveillance to monitor for adverse
effects or other studies. Further clinical studies are usually necessary for
approval of additional indications. The terms of any approval, including
labeling content, may be more restrictive than expected and could affect the
marketability of a product.




Failure
to comply with these ongoing requirements can result in suspension of regulatory
approval and civil and criminal sanctions. European renewals may require
additional data, resulting in a license being withdrawn. E.U. regulators have
the authority to revoke, suspend or withdraw approvals, prevent companies and
individuals from participating in the drug approval process, request recalls,
seize violative products, obtain injunctions to close non-compliant
manufacturing plants and stop shipments of violative products.




Pricing
Controls




Pricing
for products under approval applications is also subject to regulation.
Requirements vary widely between countries and can be implemented disparately
intra-nationally. The E.U. generally provides options for member states to
control pricing of medicinal products for human use, ranging from specific
price-setting to systems of direct or indirect controls on the producer’s
profitability. U.K. regulation, for example, generally provides controls on
overall profits derived from sales to the U.K. National Health Service that are
based on profitability targets or a function of capital employed in servicing
the National Health Service market. Italy generally utilizes a price monitoring
system based on the European average price over the reference markets of France,
Spain, Germany and the U.K. Italy typically establishes price within a
therapeutic class based on the lowest price for a medicine belonging to that
category. Spain generally establishes selling price based on prime cost plus a
profit margin within a range established yearly by the Spanish Commission for
Economic Affairs.




There can
be no assurance that price controls or reimbursement limitations will result in
favorable arrangements for our products.




Third-Party
Reimbursements




In the
U.S., the E.U. and elsewhere, pharmaceutical sales are dependent in part on the
availability and adequacy of reimbursement from third party payers such as
governments and private insurance plans. Third party payers are increasingly
challenging established prices, and new products that are more expensive than
existing treatments may have difficulty finding ready acceptance unless there is
a clear therapeutic benefit.




In the
U.S., consumer willingness to choose a self-administered outpatient prescription
drug over a different drug or other form of treatment often depends on the
manufacturer’s success in placing the product on a health plan formulary or drug
list, which results in lower out-of-pocket costs. Favorable formulary placement
typically requires the product to be less expensive than what the health plan
determines to be therapeutically equivalent products, and often requires
manufacturers to offer rebates. Federal law also requires manufacturers to pay
rebates to state Medicaid programs in order to have their products reimbursed by
Medicaid. Medicare, which covers most Americans over age 65 and the disabled,
has adopted a new insurance regime that will offer eligible beneficiaries
limited coverage for outpatient prescription drugs effective January 1, 2006.
The prescription drugs that are covered under this insurance are specified on a
formulary published by Medicare. As part of these changes, Medicare is adopting
new payment formulas for prescription drugs administered by providers, such as
hospitals or physicians that are generally expected to lower
reimbursement.




The E.U.
generally provides options for member states to restrict the range of medicinal
products for which their national health insurance systems provide
reimbursement. Member states can opt for a “positive” or “negative” list, with
the former listing all covered medicinal products and the latter designating
those excluded from coverage. The E.U., the U.K. and Spain have negative lists,
while France uses a positive list. Canadian provinces establish their own
reimbursement measures. In some countries, products may also be subject to
clinical and cost effectiveness reviews by health technology assessment bodies.
Negative determinations in relation to our products could affect prescribing
practices. In the U.K., the National Institute for Clinical Excellence (“NICE”)
provides such guidance to the National Health Service, and doctors are expected
to take it into account when choosing drugs to prescribe. Health authorities may
withhold funding from drugs not given a positive recommendation by NICE. A
negative determination by NICE may mean fewer prescriptions. Although NICE
considers drugs with orphan status, there is a degree of tension on the
application of standard cost assessment for orphan drugs, which are often priced
higher to compensate for a limited market. It is unclear whether NICE will adopt
a more relaxed approach toward the assessment of orphan drugs.




We cannot
assure you that any of our products will be considered cost effective, or that
reimbursement will be available or sufficient to allow us to sell them
competitively and profitably.




43





Fraud
and Abuse Laws




The U.S.
federal Medicare/Medicaid anti-kickback law and similar state laws prohibit
remuneration intended to induce physicians or others either to refer patients,
or to acquire or arrange for or recommend the acquisition of health care
products or services. While the federal law applies only to referrals, products
or services receiving federal reimbursement, state laws often apply regardless
of whether federal funds are involved. Other federal and state laws prohibit
anyone from presenting or causing to be presented false or fraudulent payment
claims. Recent federal and state enforcement actions under these statutes have
targeted sales and marketing activities of prescription drug manufacturers. As
we begin to market our products to health care providers, the relationships we
form, such as compensating physicians for speaking or consulting services,
providing financial support for continuing medical education or research
programs, and assisting customers with third-party reimbursement claims, could
be challenged under these laws and lead to civil or criminal penalties,
including the exclusion of our products from federally-funded reimbursement.
Even an unsuccessful challenge could cause adverse publicity and be costly to
respond to, and thus could have a material adverse effect on our business,
results of operations and financial condition. We intend to consult counsel
concerning the potential application of these and other laws to our business and
to our sales, marketing and other activities to comply with them. Given their
broad reach and the increasing attention given them by law enforcement
authorities, however, we cannot assure you that some of our activities will not
be challenged.




Patent
Restoration and Marketing Exclusivity




The U.S.
Drug Price Competition and Patent Term Restoration Act of 1984 (Hatch-Waxman)
permits the FDA to approve Abbreviated New Drug Applications (“ANDAs”) for
generic versions of innovator drugs, as well as NDAs with less original clinical
data, and provides patent restoration and exclusivity protections to innovator
drug manufacturers. The ANDA process permits competitor companies to obtain
marketing approval for drugs with the same active ingredient and for the same
uses as innovator drugs, but does not require the conduct and submission of
clinical studies demonstrating safety and efficacy. As a result, a competitor
could copy any of our drugs and only need to submit data demonstrating that the
copy is bioequivalent to gain marketing approval from the FDA. Hatch-Waxman
requires a competitor that submits an ANDA, or otherwise relies on safety and
efficacy data for one of our drugs, to notify us and/or our business partners of
potential infringement of our patent rights. We and/or our business partners may
sue the company for patent infringement, which would result in a 30-month stay
of approval of the competitor’s application. The discovery, trial and appeals
process in such suits can take several years. If the litigation is resolved in
favor of the generic applicant or the challenged patent expires during the
30-month period, the stay is lifted and the FDA may approve the application.
Hatch-Waxman also allows competitors to market copies of innovator products by
submitting significantly less clinical data outside the ANDA context. Such
applications, known as “505(b)(2) NDAs” or “paper NDAs,” may rely on clinical
investigations not conducted by or for the applicant and for which the applicant
has not obtained a right of reference or use and are subject to the ANDA
notification procedures described above.




The law
also restores a portion of a product’s patent term that is lost during clinical
development and NDA review, and provides statutory protection, known as
exclusivity, against FDA approval or acceptance of certain competitor
applications. Restoration can return up to five years of patent term for a
patent covering a new product or its use to compensate for time lost during
product development and regulatory review. The restoration period is generally
one-half the time between the effective date of an IND and submission of an NDA,
plus the time between NDA submission and its approval (subject to the five-year
limit), and no extension can extend total patent life beyond 14 years after the
drug approval date. Applications for patent term extension are subject to U.S.
Patent and Trademark Office (“USPTO”) approval, in conjunction with FDA.
Approval of these applications takes at least six months, and there can be no
guarantee that it will be given at all.




Hatch-Waxman
also provides for differing periods of statutory protection for new drugs
approved under an NDA. Among the types of exclusivity are those for a “new
molecular entity” and those for a new formulation or indication for a
previously-approved drug. If granted, marketing exclusivity for the types of
products that we are developing, which include only drugs with innovative
changes to previously-approved products using the same active ingredient, would
prohibit the FDA from approving an ANDA or 505(b)(2) NDA relying on safety and
efficacy data for three years. This three-year exclusivity, however, covers only
the innovation associated with the original NDA. It does not prohibit the FDA
from approving applications for drugs with the same active ingredient but
without our new innovative change. These marketing exclusivity protections do
not prohibit FDA from approving a full NDA, even if it contains the innovative
change.




44




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





In
January, February and March 2009, the Company issued a total of 139,935 shares
of our common stock to 2 consultants for services rendered.  These
offerings and sales of shares qualified for exemption under Section 4(2) of the
Securities Act of 1933 since the issuances did not involve a public offering.
The offerings were not a public offering as defined in Section 4(2) because the
offer and sale was made to an insubstantial number of persons and because of the
manner of the offering. This offering was done with no general solicitation or
advertising by the Registrant. Based on an analysis of the above factors, the
Registrant has met the requirements to qualify for exemption under Section 4(2)
of the Securities Act of 1933 for these sales.





In
February 2009, we issued a total of 257,813 shares of our common stock to a
university for license fees. These offerings and sales of shares qualified for
exemption under Section 4(2) of the Securities Act of 1933 since the issuances
did not involve a public offering. The offerings were not a public offering as
defined in Section 4(2) because the offer and sale was made to an insubstantial
number of persons and because of the manner of the offering. The offerings were
done with no general solicitation or advertising by the Registrant. Based on an
analysis of the above factors, the Registrant has met the requirements to
qualify for exemption under Section 4(2) of the Securities Act of 1933 for these
sales.




45




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
    *





*Filed
herewith




46




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.









ADEONA
PHARMACEUTICALS, INC.


By:
  /s/ Steve H.
Kanzer


Steve H.
Kanzer


President
and Chief Executive Officer


(Principal
Executive Officer and Principal Financial Officer)


Date: May
15, 2009