UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
DC 20549




FORM
10-Q





(Mark
One)


x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For the quarterly
period ended September 30, 2010





OR




 ̈
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
      1934





For the transition
period from  ____________ to ____________




Commission
File Number: 1-12584




ADEONA
PHARMACEUTICALS, INC.


(Name
of small business issuer in its charter)





Nevada
            13-3808303(State
      or other jurisdiction of incorporation or organization)
            (IRS
      Employer Identification Number)3930
      Varsity DriveAnn
      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   x
       No  o





Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files).  Yes   o
      No  o





Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated 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             
      x(Do
      not check if a smaller reporting company





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).   Yes   ̈
      No  x





As of
November 11, 2010, the registrant had 23,155,966 shares of common stock
outstanding.








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
      Statement of Cash Flows (Unaudited)
                  
                  5Notes
      to Consolidated Financial Statements (Unaudited)
                  
                  6Item
      2.
                  Management’s
      Discussion and Analysis of Financial Conditions and Results of
      Operations
                  
                  14Item
      3.
                  Quantitative
      and Qualitative Disclosures About Market Risks
                  
                  21Item
      4.
                  Controls
      and Procedures
                  
                  21PART
      II—OTHER INFORMATIONItem
      1.
                  Legal
      Proceedings
                  
                  22Item
      1A.
                  Risk
      Factors
                  
                  22Item
      2.
                  Unregistered
      Sales of Equity Securities and Use of Proceeds
                  
                  38Item
      3.
                  Defaults
      Upon Senior Securities
                  
                  38Item
      4.
                  Reserved
      and Removed
                  
                  38Item
      5.
                  Other
      Information
                  
                  39Item
      6.
                  Exhibits
                  
                  39SIGNATURE
                  
                  40




2





PART
I.—FINANCIAL INFORMATION




ITEM
1. FINANCIAL STATEMENTS




Adeona
Pharmaceuticals, Inc. and Subsidiaries


Consolidated Balance
Sheets


(Unaudited)




September 30, 2010
                          
                          
                          December 31, 2009(Unaudited)AssetsCurrent
      AssetsCash
                          
                          $
                          3,305,370
                          
                          
                          $
                          2,715,044Accounts
      receivable - net of allowance of $271,908 and $21,481
                          
                          
                          387,370
                          
                          
                          
                          30,572Other
                          
                          
                          8,804
                          
                          
                          
                          8,967Total
      Current Assets
                          
                          
                          3,701,544
                          
                          
                          
                          2,754,583Property
      and equipment
                          
                          
                          709,882
                          
                          
                          
                          1,051,958Goodwill
                          
                          
                          178,229
                          
                          
                          
                          178,229Deposits
      and other assets
                          
                          
                          90,848
                          
                          
                          
                          90,848Total
      Assets
                          
                          $
                          4,680,503
                          
                          
                          $
                          4,075,618Liabilities and Stockholders'
      EquityCurrent
      Liabilities:Accounts
      payable
                          
                          $
                          307,106
                          
                          
                          $
                          400,475Accrued
      liabilities
                          
                          
                          7,729
                          
                          
                          
                          8,163Current
      portion of capital lease
                          
                          
                          17,006
                          
                          
                          
                          17,006Total
      Current Liabilities
                          
                          
                          331,841
                          
                          
                          
                          425,644Long
      Term Liabilities:Accounts
      payable
                          
                          
                          107,335
                          
                          
                          
                          93,000Capital
      lease
                          
                          
                          1,910
                          
                          
                          
                          12,788Total
      Liabilities
                          
                          
                          441,086
                          
                          
                          
                          531,432Stockholders'
      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,23,152,068
      issued and 23,070,586 outstandingand
      21,530,834 issued and 21,449,352 outstanding
                          
                          
                          23,071
                          
                          
                          
                          21,449Additional
      paid-in capital
                          
                          
                          47,070,002
                          
                          
                          
                          45,552,918Accumulated
      deficit
                          
                          
                          (42,853,656
                          )
                          
                          
                          (42,013,081
                          )Subscription
      receivable
                          
                          
                          -
                          
                          
                          
                          (17,100
                          )Total
      Stockholders' Equity
                          
                          
                          4,239,417
                          
                          
                          
                          3,544,186Total
      Liabilities and Stockholders' Equity
                          
                          $
                          4,680,503
                          
                          
                          $
                          4,075,618





See
accompanying notes to unaudited consolidated financial
statements


3




Adeona
Pharmaceuticals, Inc. and Subsidiaries


Consolidated Statements of
Operations


(Unaudited)





Three months ended
                    September 30,
                  
                  
                  Nine months ended
                    September 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Revenues:License
      revenue, net
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  2,125,000
                  
                  
                  $
                  -Laboratory  revenues,
      net
                  
                  
                  289,898
                  
                  
                  
                  51,085
                  
                  
                  
                  419,825
                  
                  
                  
                  51,085Total
      revenues, net
                  
                  
                  289,898
                  
                  
                  
                  51,085
                  
                  
                  
                  2,544,825
                  
                  
                  
                  51,085Operating
      Expenses:Research
      and development
                  
                  
                  424,573
                  
                  
                  
                  325,662
                  
                  
                  
                  1,406,264
                  
                  
                  
                  1,219,135General
      and administrative
                  
                  
                  598,453
                  
                  
                  
                  351,646
                  
                  
                  
                  1,986,765
                  
                  
                  
                  1,452,384Total
      Operating Expenses
                  
                  
                  1,023,026
                  
                  
                  
                  677,308
                  
                  
                  
                  3,393,029
                  
                  
                  
                  2,671,519Loss
      from Operations
                  
                  
                  (733,128
                  )
                  
                  
                  (626,223
                  )
                  
                  
                  (848,204
                  )
                  
                  
                  (2,620,434
                  )Other
      Income (Expense):Interest
      income
                  
                  
                  111
                  
                  
                  
                  148
                  
                  
                  
                  330
                  
                  
                  
                  2,826Interest
      expense
                  
                  
                  (615
                  )
                  
                  
                  -
                  
                  
                  
                  (2,784
                  )
                  
                  
                  -Other
      income
                  
                  
                  797
                  
                  
                  
                  -
                  
                  
                  
                  10,083
                  
                  
                  
                  -Total Other Income,
      net
                  
                  
                  293
                  
                  
                  
                  148
                  
                  
                  
                  7,629
                  
                  
                  
                  2,826Net
      Loss
                  
                  $
                  (732,835
                  )
                  
                  $
                  (626,075
                  )
                  
                  $
                  (840,575
                  )
                  
                  $
                  (2,617,608
                  )Net
      Loss Per Share – Basic and Dilutive
                  
                  $
                  (0.03
                  )
                  
                  $
                  (0.03
                  )
                  
                  $
                  (0.04
                  )
                  
                  $
                  (0.12
                  )Weighted
      average number of common shares outstanding during the period – Basic and
      Dilutive
                  
                  
                  23,003,033
                  
                  
                  
                  21,437,701
                  
                  
                  
                  22,095,349
                  
                  
                  
                  21,276,912




See
accompanying notes to unaudited consolidated financial
statements


4




Adeona
Pharmaceuticals, Inc. and Subsidiaries


Consolidated Statements of
Cash Flows


(Unaudited)




Nine months ended September 30,2010
                              
                              
                              
                              2009Cash
      Flows From Operating Activities:Net
      loss
                              
                              $
                              (840,575
                              )
                              
                              $
                              (2,617,608
                              )Adjustments
      to reconcile net loss to net cash used
      in operating activities:Recognition
      of stock-based compensation
                              
                              
                              324,885
                              
                              
                              
                              244,540Stock
      issued for consulting fees
                              
                              
                              157,706
                              
                              
                              
                              64,586Stock
      issued as compensation
                              
                              
                              46,613
                              
                              
                              
                              -Stock
      issued for license fee
                              
                              
                              -
                              
                              
                              
                              41,250Contributed
      services - related party
                              
                              
                              -
                              
                              
                              
                              100,000Depreciation
                              
                              
                              271,076
                              
                              
                              
                              272,485Provision
      for uncollectible accounts receivable
                              
                              
                              250,427
                              
                              
                              
                              7,785(Gain)
      loss on sale of equipment
                              
                              
                              (3,390
                              )
                              
                              
                              15,725Loss
      on exchange of equipment to settle accounts payable
                              
                              
                              -
                              
                              
                              
                              18,674Changes
      in operating assets and liabilities:Accounts
      receivable
                              
                              
                              (607,225
                              )
                              
                              
                              (18,548
                              )Other
      receivables
                              
                              
                              -
                              
                              
                              
                              -Prepaid
      expenses and other current assets
                              
                              
                              163
                              
                              
                              
                              35,168Deposits
      and other assets
                              
                              
                              -
                              
                              
                              
                              (78,859
                              )Accounts
      payable
                              
                              
                              (79,034
                              )
                              
                              
                              (364,033
                              )Current
      portion of  long term liabilities
                              
                              
                              
                              
                              
                              
                              17,006Accrued
      liabilities
                              
                              
                              (434
                              )
                              
                              
                              (44,770
                              )Long
      term payables
                              
                              
                              
                              
                              
                              
                              143,243Net
      Cash Used In Operating Activities
                              
                              
                              (479,788
                              )
                              
                              
                              (2,163,356
                              )Cash
      Flows From Investing Activities:Purchase
      of property and equipment
                              
                              
                              (2,070
                              )
                              
                              
                              -Proceeds
      from the sale of equipment
                              
                              
                              76,460
                              
                              
                              
                              25,200Cash
      paid to acquire Adeona Clinical Laboratory (formerly Hart
    Lab)
                              
                              
                              
                              
                              
                              
                              (201,141
                              )Cash
      received from the sale of Adeona Clinical Laboratory (formerly Hart
      Lab)
                              
                              
                              
                              
                              
                              
                              5,624Net
      Cash Provided By (Used In) Investing Activities
                              
                              
                              74,390
                              
                              
                              
                              (170,317
                              )Cash
      Flows From Financing Activities:Repayments
      under capital lease
                              
                              
                              (10,878
                              )
                              
                              
                              -Proceeds
      from issuance of common stock for stock option exercises
                              
                              
                              121,878
                              
                              
                              
                              9,758Proceeds
      from the issuance of common stock
                              
                              
                              884,724
                              
                              
                              
                              -Net
      Cash Provided By Financing Activities
                              
                              
                              995,724
                              
                              
                              
                              9,758Net
      increase (decrease) in cash
                              
                              
                              590,326
                              
                              
                              
                              (2,323,915
                              )Cash
      at beginning of period
                              
                              
                              2,715,044
                              
                              
                              
                              5,856,384Cash
      at end of period
                              
                              $
                              3,305,370
                              
                              
                              $
                              3,532,469Supplemental disclosures of cash flow
      information:Cash
      paid for interest
                              
                              $
                              2,784
                              
                              
                              $
                              -Cash
      paid for taxes
                              
                              $
                              -
                              
                              
                              $
                              -




See
accompanying notes to unaudited consolidated financial
statements


5


Adeona
Pharmaceuticals, Inc. and Subsidiaries


Notes
to Consolidated Financial Statements


(Unaudited)




1.   Organization




Adeona
Pharmaceuticals, Inc. (the “Company” or Adeona”), is a pharmaceutical company
developing innovative medicines for the treatment of serious central nervous
system diseases.  The Company’s strategy is to license product
candidates that have demonstrated a certain level of clinical efficacy and
develop them to a stage that results in a significant commercial
collaboration.  Currently, Adeona has the following product candidates
in development:  a prescription medical food for Alzheimer’s disease,
and four drugs for multiple sclerosis, fibromyalgia, rheumatoid arthritis and
dry age-related macular degeneration.





Program
            
            Medical Indication
            
            Stage of DevelopmentTrimesta
      (estriol)
            
            Treatment
      of relapsing remitting multiple sclerosis in women
            
            10-patient,
      22-month, single-agent, crossover clinical trial completed, and a
      150-patient, 15-center, randomized, double-blind, placebo-controlled
      clinical trial underwayEffirma
      (flupirtine)
            
            Treatment
      of fibromyalgia
            
            Partnered
      with Meda ABZinthionein
      (zinc cysteine)
            
            Dietary
      management of Alzheimer’s disease and mild cognitive impairment with a
      prescription medical food
            
            60-patient,
      randomized, double-blind, placebo-controlled clinical study
      underwaydnaJP1
      (hsp peptide)
            
            Treatment
      of  rheumatoid arthritis
            
            160-patient,
      multi-center, randomized, double-blind, placebo-controlled clinical trial
      completedZincMonoCysteine
              (zinc-monocysteine)
            
            Treatment
      of dry age-related macular degeneration
            
            80-patient,
      randomized, double-blind, placebo-controlled clinical trial
      completed




2.   Basis
of Presentation




The
accompanying unaudited condensed interim financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America and the rules and regulations of the United States Securities and
Exchange Commission for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X.




The
financial information as of December 31, 2009, is derived from the audited
financial statements presented in the Company’s Annual Report on Form 10-K for
the year ended December 31, 2009.  The unaudited condensed interim
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, 2009.




Certain
information or footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted, pursuant to the rules
and regulations of the Securities and Exchange Commission for interim financial
reporting. Accordingly, they do not include all the information and footnotes
necessary for a comprehensive presentation of financial position, results of
operations, or cash flows. It is management's opinion, however, that all
material adjustments (consisting of normal recurring adjustments) have been made
which are necessary for a fair financial statement presentation. The interim
results for the period ended September 30, 2010, are not necessarily indicative
of results for the full year.





3.   Summary
of Significant Accounting Policies




Principles
of Consolidation




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


6





Development
Stage




As of
June 30, 2010, the Company emerged from the development
stage.   According to FASB ASC915-10 a development-stage
enterprise is one in which planned principle operations have not commenced or if
its operations have commenced, there has been no significant
revenue.   The Company’s strategy is to license product candidates
that have demonstrated a certain level of clinical efficacy and develop them to
a stage that results in a significant commercial collaboration.  On
May 6, 2010, the Company entered into a Sublicense Agreement (the “Meda
Agreement”) with Meda AB of Sweden (“Meda”). As consideration for such
sublicense, the Company received an up-front payment of $2.5 million upon
execution of the Meda Agreement. The Company considers the Meda Agreement to be
an indication that it has commenced its principal operations and therefore it is
not required to report as a development-stage entity.





Use
of Estimates




The
preparation of consolidated financial statements in conformity with United
States generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Such estimates and assumptions
impact, among others, the following: the amount allocated to goodwill and other
intangible assets, the estimated useful lives for amortizable intangible assets
and property, plant and equipment, the fair value of warrants and stock options
granted for services or compensation, respectively, estimates of the probability
and potential magnitude of contingent liabilities and the valuation allowance
for deferred tax assets due to continuing operating losses.





Making
estimates requires management to exercise significant judgment. It is at least
reasonably possible that the estimate of the effect of a condition, situation or
set of circumstances that existed at the date of the consolidated financial
statements, which management considered in formulating its estimate could change
in the near term due to one or more future confirming events. Accordingly, the
actual results could differ significantly from our estimates.





Accounts
Receivable and Allowance for Doubtful Accounts




Accounts
receivable are reported at realizable value, net of allowances for doubtful
accounts, which is estimated and recorded in the period the related revenue is
recorded. The Company has a standardized approach to estimate and review the
collectability of its receivables based on a number of factors, including the
period they have been outstanding. Historical collection and payer reimbursement
experience is an integral part of the estimation process related to allowances
for doubtful accounts. In addition, the Company regularly assesses the state of
its billing operations in order to identify issues, which may impact the
collectability of these receivables or reserve estimates. Revisions to the
allowances for doubtful accounts estimates are recorded as an adjustment to bad
debt expense within general and administrative expenses. Receivables deemed
uncollectible are charged against the allowance for doubtful accounts at the
time such receivables are written-off. Recoveries of receivables previously
written-off are recorded as credits to the allowance for doubtful accounts.
There were no recoveries during the nine months ended September 30,
2010.





Revenue
Recognition





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





License
Revenue





On May 6,
2010, the Company entered into a Sublicense Agreement (the “Meda Agreement”)
with Meda AB of Sweden (“Meda”) for the development and commercialization
of Effirma (flupirtine) for fibromyalgia.  As consideration for the
sublicense, the Company received an up-front payment of $2.5 million upon
execution of the Meda Agreement. This payment was recorded as license revenue in
June 2010. Pursuant to the Company’s license agreement with McLean Hospital, the
Company paid 15% of the $2.5 million payment ($375,000) to McLean
Hospital.  The payment to McLean Hospital was netted against the
revenues received from Meda AB for financial statement purposes.  The
Company is also entitled to additional milestone payments of $5 million upon
filing of a New Drug Application with the United States Food and Drug
Administration for flupirtine for fibromyalgia and $10 million upon marketing
approval. The Meda Agreement also provides that the Company is entitled to
receive net royalties of 7% of net sales of flupirtine approved for the
treatment of fibromyalgia covered by issued patent claims in the United States
and Japan.  The Meda Agreement provides that Meda AB will assume all
future development costs for the commercialization of flupirtine for
fibromyalgia. Pursuant to the terms of the Company’s agreement with McLean
Hospital, the Company is obligated to pay them half of the royalties the Company
receives.


7





Laboratory
Revenues





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





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




Risks
and Uncertainties





The
Company's operations are subject to significant risk and uncertainties including
financial, operational, regulatory and other risks, including the potential risk
of business failure. The recent global economic crisis has caused a general
tightening in the credit markets, lower levels of liquidity, increases in the
rates of default and bankruptcy, and extreme volatility in credit, equity and
fixed income markets. These conditions not only limit the
Company’s access to capital, but also make it difficult for the Company’s
customers, the Company’s vendors and the Company to accurately forecast and plan
future business activities.




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.  As of September 30, 2010, and December 31, 2009,
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 the federally insured limit of $250,000 per depositor, per
bank.





Net Income
(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 common share
equivalents.   Since the Company reported a net loss for the
three and nine months ended September 30, 2010 and 2009, all common equivalent
shares would be anti-dilutive; as such there is no separate computation for
diluted earnings per share. The number of options and warrants for the purchase
of common stock, that were excluded from the computations of net loss per common
share for the period ended September 30, 2010 were 2,455,759 and 1,131,078,
respectively and for the period ended September 30, 2009 were 2,392,451 and
1,070,472, respectively.





Research
and Development Costs




The
Company expenses research and development costs as incurred. Research and
development expenses consist primarily of license fees, manufacturing costs,
salaries, share-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.





Fair
Value of Financial Instruments




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


8


Share-Based
Payment Arrangements





Generally,
all forms of share-based payments, including stock option grants, warrants,
restricted stock grants and stock appreciation rights are measured at their fair
value on the awards’ grant date, based on the estimated number of awards that
are ultimately expected to vest. Share-based compensation awards issued to
non-employees for services rendered are recorded at either the fair value of the
services rendered or the fair value of the share-based payment, whichever is
more readily determinable. The expense resulting from share-based payments are
recorded in cost of goods sold, research and development or general and
administrative expenses in the consolidated statement of operations, depending
on the nature of the services provided.





Recent
Accounting Pronouncements





In
January 2010, FASB issued updated guidance to amend the disclosure requirements
related to recurring and nonrecurring fair value measurements. This update
requires new disclosures on significant transfers of assets and liabilities
between Level 1 and Level 2 of the fair value hierarchy (including the
reasons for these transfers) and the reasons for any transfers in or out of
Level 3. This update also requires a reconciliation of recurring
Level 3 measurements about purchases, sales, issuances and settlements on a
gross basis. In addition to these new disclosure requirements, this update
clarifies certain existing disclosure requirements. For example, this update
clarifies that reporting entities are required to provide fair value measurement
disclosures for each class of assets and liabilities rather than each major
category of assets and liabilities. This update also clarifies the requirement
for entities to disclose information about both the valuation techniques and
inputs used in estimating Level 2 and Level 3 fair value measurements.
This update became effective for the interim and annual reporting period
beginning January 1, 2010, except for the requirement to provide the
Level 3 activity of purchases, sales, issuances, and settlements on a gross
basis, which will become effective for the interim and annual reporting period
beginning January 1, 2011. The Company will not be required to provide the
amended disclosures for any previous periods presented for comparative purposes.
Other than requiring additional disclosures, adoption of this update did
not have a material effect on the Company’s consolidated financial
statements.





In
April 2010, FASB issued ASU No. 2010-17, Revenue Recognition —
Milestone Method (Topic 605): Milestone Method of Revenue Recognition. ASU
No. 2010-17 codifies the consensus reached in Emerging Issues Task Force
Issue No. 08-9, “Milestone Method of Revenue Recognition.” ASU No. 2010-17
provides guidance on defining a milestone and determining when it may be
appropriate to apply the milestone method of revenue recognition for research or
development transactions. Consideration that is contingent on achievement of a
milestone in its entirety may be recognized as revenue in the period in which
the milestone is achieved only if the milestone is judged to meet certain
criteria to be considered substantive. Milestones should be considered
substantive in their entirety and may not be bifurcated. An arrangement may
contain both substantive and non-substantive milestones, and each milestone
should be evaluated individually to determine if it is substantive. ASU
No. 2010-17 is effective on a prospective basis for milestones achieved in
fiscal years, and interim periods within those years, beginning on or after
June 15, 2010. Early adoption is permitted. The Company does not expect the
adoption of this ASU did not have a material impact on its
consolidated results of operations or financial condition.




4.   Property
and Equipment





Property
and Equipment consisted of the following at September 30, 2010, and December 31,
2009.





September 30,
                  2010
                
                
                December 31,
                  2009Leasehold
      improvements
                
                $
                864,429
                
                
                $
                862,359Manufacturing
      equipment
                
                
                585,915
                
                
                
                697,854Computer
      and office equipment
                
                
                206,912
                
                
                
                234,419Laboratory
      equipment
                
                
                243,442
                
                
                
                243,289Total
                
                
                1,900,698
                
                
                
                2,037,921Less
      accumulated depreciation
                
                
                (1,190,816
                )
                
                
                (985,963
                )Property
      and equipment, net
                
                $
                709,882
                
                
                $
                1,051,958





During
the nine months ended September 30, 2010, the Company sold equipment, with a net
book value of $73,071, for $76,461, resulting in a gain of $3,390.





5.   Stockholders’
Equity




Common
Stock Issuances





During
the nine months ended September 30, 2010, the Company issued 245,954 shares of
common stock, in connection with the exercise of stock options, for proceeds of
$121,878. The Company also issued 60,521 shares of common stock for employment
service, having a fair value of $46,613 ($0.77 per share) and 184,120 shares of
common stock for consulting services, having a fair value of $157,706 ($0.86 per
share), based on the quoted closing trading prices.


9





On July
2, 2010, the Company entered into a Common Stock Purchase Agreement with a
single investor, relating to the offering and sale (the “Offering”) of 1,212,121
shares of the Company’s common stock at a closing price of
$0.825.  The Company received gross proceeds of $1,000,000, before
estimated offering expenses of approximately $115,000, which included placement
agent fees that have been treated as a direct offering cost.   In
addition, at the closing, the Company issued to  the placement agent,
or its permitted assigns, a five-year warrant to purchase the number of shares
of common stock of the Company equal to 5% of the number of Shares issued to
Seaside 88 at such closing, or up to 60,606 shares of Common Stock.  The
warrants provide for cashless exercise in the event there is no registration
statement covering the underlying warrant shares.  The exercise price per
share is equal to $1.32. The fair value of these warrants based on the
Black-Scholes option-pricing model is approximately
$64,000.





Stock
Incentive Plan




During
2001, Pipex Therapeutics’ board of directors and stockholders adopted the 2001
Stock Incentive Plan (the “2001 Stock Plan”). This plan was assumed by Pipex in
the October 2006 merger with Sheffield. As of the date of the merger, there were
1,489,353 options issued and outstanding under the 2001 plan. 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 under the 2001 plan shall not exceed 250,000. All awards
pursuant to the 2001 Stock 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 2001 Stock 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 2001 Stock 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 September 30, 2010, there were 1,320,354
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. This plan was approved by stockholders on November 2, 2007. The
exercise price of stock options under the 2007 Stock 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. 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 under the 2001 plan shall not
exceed 250,000. Options become exercisable over various periods from the date of
grant, and generally expire ten years after the grant date. As of September 30,
2010, there are 1,135,405 options issued and outstanding under the 2007 Stock
Plan.




nd
stockholders adopted the 2010 Stock Incentive Plan (“2010 Stock Plan”) for the
issuance of up to 3,000,000 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
2010 Stock 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 period from the date of grant, and generally expire ten
years after the grant date.




In the
event of an employee’s termination, the Company will cease to recognize
compensation expense for that employee. 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 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. The
Black-Scholes assumptions used in the three and the nine months ended September
30, 2010 and 2009 are as follows:




Three Months Ended September 30,
                  
                  Nine Months Ended September 30,2010
                  
                  2009
                  
                  2010
                  
                  2009Exercise
      price
                  
                  $0.80
                  
                  $0.37
      - $0.80
                  
                  $0.80
      - $0.87
                  
                  $0.37
      - $0.80Expected
      dividends
                  
                  0%
                  
                  0%
                  
                  0%
                  
                  0%Expected
      volatility
                  
                  192%
                  
                  198%
      - 209%
                  
                  192%
      - 204%
                  
                  198%
      - 209%Risk
      free interest rates
                  
                  2.54%
                  
                  1.56%
      - 3.52%
                  
                  2.54%
      - 3.63%
                  
                  1.56%
      - 3.52%Expected
      life options
                  
                  10
      years
                  
                  10
      years
                  
                  10
      years
                  
                  10
      yearsExpected
      forfeitures
                  
                  0%
                  
                  0%
                  
                  0%
                  
                  0%





The
Company records share-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,


10


·
            one-third immediate vesting and
      remaining annually over two
years,


·
            one half immediate vesting with
      remaining vesting over nine months;
and


·
            one quarter immediate vesting
      with the remaining over three
  years.





During
the nine months ended September 30, 2010, the Company granted 630,000 options to
employees and consultants having a fair value of $513,750 based upon the
Black-Scholes option pricing model.  During the same period of 2009, the
Company granted 585,000 options to employees having a fair value of $256,080
based upon the Black-Scholes option pricing model.





A summary
of stock option activities as of September 30, 2010, and for the year ended
December 31, 2009, is as follows:





Options
                    
                    
                    Weighted
                      Average Exercise
                      Price
                    
                    Weighted
                      Average
                      Remaining
                      Contractual
                      Life
                    
                    Aggregate
                      Intrinsic
                      ValueBalance
      – December 31, 2008
                    
                    
                    2,751,663
                    
                    
                    $
                    1.43Granted
                    
                    
                    979,999
                    
                    
                    
                    0.50Exercised
                    
                    
                    (
      104,633
                    )
                    
                    
                    0.27Forfeited
      or expired
                    
                    
                    (1,065,697
                    )
                    
                    
                    1.09Balance
      – December 31, 2009
                    
                    
                    2,561,332
                    
                    
                    
                    1.26Granted
                    
                    
                    630,000
                    
                    
                    
                    0.82Forfeited
      or expired
                    
                    
                    (489,619
                    )
                    
                    
                    0.69Exercised
                    
                    
                    (245,954
                    )
                    
                    
                    0.43Balance
      – September 30, 2010 - outstanding
                    
                    
                    2,455,759
                    
                    
                    $
                    1.35
                    
                    6.55
      years
                    
                    $
                    371,225Balance
      – September 30, 2010 – exercisable
                    
                    
                    1,898,779
                    
                    
                    $
                    1.52
                    
                    5.72
      years
                    
                    $
                    341,274




All
forfeited and expired options in 2010 relate to employees whose employment has
terminated .





The
options outstanding and exercisable as of September 30, 2010, are as
follows:




Options Outstanding
                      
                      
                      Options ExercisableRange of
                        Exercise
                        Price
                      
                      Number
                        outstanding
                      
                      Weighted
                        Average
                        Remaining
                        Contractual Life
                      
                      Weighted
                        Average
                        Exercise
                        Price
                      
                      
                      Number
                        Exercisable
                      
                      
                      Weighted
                        Average
                        Exercise
                        Price
                      
                      Weighted
                        Average
                        Remaining
                        Contractual Life$
                      0.09
      - 4.57
                      
                      
                      2,365,760
                      
                      6.65
      years
                      
                      $
                      1.17
                      
                      
                      
                      1,809,717
                      
                      
                      $
                      1.30
                      
                      5.80
      years$
                      4.58
      - 9.05
                      
                      
                      89,999
                      
                      4.01 years
                      
                      
                      5.93
                      
                      
                      
                      89,062
                      
                      
                      
                      5.93
                      
                      3.97 years2,455,759
                      
                      6.55 years
                      
                      $
                      1.35
                      
                      
                      
                      1,898,779
                      
                      
                      $
                      1.52
                      
                      5.72
years





The
options outstanding and exercisable as of September 30, 2009, are as
follows:




Options Outstanding
                      
                      
                      Options ExercisableRange of
                        Exercise
                        Price
                      
                      Number
                        outstanding
                      
                      Weighted
                        Average
                        Remaining
                        Contractual Life
                      
                      Weighted
                        Average
                        Exercise
                        Price
                      
                      
                      Number
                        Exercisable
                      
                      
                      Weighted
                        Average
                        Exercise
                        Price
                      
                      Weighted
                        Average
                        Remaining
                        Contractual Life$
                      0.09
      - 4.57
                      
                      
                      2,275,786
                      
                      7.07
      years
                      
                      $
                      1.19
                      
                      
                      
                      1,807,661
                      
                      
                      $
                      1.37
                      
                      6.43
      years$
                      4.57
      - 9.05
                      
                      
                      113,332
                      
                      5.64
      years
                      
                      
                      5.92
                      
                      
                      
                      95,625
                      
                      
                      
                      5.92
                      
                      5.67
      years$
                      22.50
                      
                      
                      3,333
                      
                      7.28 years
                      
                      
                      22.50
                      
                      
                      
                      2,222
                      
                      
                      
                      22.50
                      
                      7.28 years2,392,451
                      
                      7.01 years
                      
                      $
                      1.45
                      
                      
                      
                      1,905,508
                      
                      
                      $
                      1.62
                      
                      6.39
years




11




Warrants





On July
2, 2010, the Company entered into a Common Stock Purchase Agreement with a
single investor. As part of this agreement, the Company issued warrants to
purchase 60,606 shares of common stock to the placement agent, or its permitted
assigns.  The warrants have an exercise price $1.32 and a life of 5
years. The warrants vest on January 1, 2011 and expire December 31,
2015.   Since these warrants were granted as part of an equity
raise, the Company has treated them as a direct offering cost.  The
result of the transaction has a $0 net effect to equity.





A summary
of warrant activities as of September 30, 2010, and for the year ended December
31, 2009, is as follows:





Options
                              
                              
                              Weighted
                                Average Exercise
                                PriceBalance
      – December 31, 2008
                              
                              
                              2,291,749
                              
                              
                              $
                              2.87Granted
                              
                              
                              -
                              
                              
                              
                              -Exercised
                              
                              
                              -
                              
                              
                              
                              -Forfeited
      or expired
                              
                              
                              (1,221,277
                              )
                              
                              
                              2.23Balance
      – December 31, 2009
                              
                              
                              1,070,472
                              
                              
                              
                              3.27Granted
                              
                              
                              60,606
                              
                              
                              
                              1.32Forfeited
      or expired
                              
                              
                              -
                              
                              
                              
                              -Exercised
                              
                              
                              -
                              
                              
                              
                              -Balance
      – September 30, 2010 - outstanding
                              
                              
                              1,131,078
                              
                              
                              $
                              3.17Balance
      – September 30, 2010 – exercisable
                              
                              
                              1,070,472
                              
                              
                              $
                              3.17





The
warrants outstanding as of September 30, 2009, are as follows:




Range of
                              Exercise Price
                            
                            
                            Number
                              outstanding
                            
                            Weighted
                              Average
                              Remaining
                              Contractual Life$
                            0.41
                            
                            
                            
                            5,000
                            
                            0.63
      years$
                            1.32
                            
                            
                            
                            60,606
                            
                            5.25
      years$
                            2.22
                            
                            
                            
                            626,809
                            
                            2.32
      years$
                            3.30
                            
                            
                            
                            61,207
                            
                            4.67
      years$
                            3.75
                            
                            
                            
                            50,000
                            
                            5.38
      years$
                            6.36
                            
                            
                            
                            327,456
                            
                            2.11 years1.131.078
                            
                            3.34
years





Options
of Subsidiary




During
2004 and 2007, CD4 granted 30,000 options. On August 5, 2009, 10,000 of these
options expired. As of September 30, 2010, a total of 20,000 options were
outstanding and exercisable with an exercise price of $0.20 and a remaining
contractual life of 1.62 years.





As of
September 30, 2010, Epitope has 50,000 options outstanding and 20,000 options
exercisable with an exercise price of $0.001 and a remaining contractual life of
7.75 years.  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.


12





6.   Commitments




Employment
& Consulting Agreements




On
February 6, 2010, James S. Kuo, M.D., M.B.A., was appointed Chairman, Chief
Executive Officer and President of Adeona. In connection with his appointment,
Dr. Kuo entered into a three-year employment agreement with Adeona (the
“Employment Agreement”).  Pursuant to the Employment Agreement, Dr.
Kuo will be entitled to an annual base salary of $199,000 and will be eligible
for discretionary performance and transactional bonus
payments.  Additionally, Dr. Kuo was granted options to purchase
400,000 shares of the Company’s common stock with an exercise price equal to the
Company’s per share market price on the date of issue. Of these options, 100,000
vested immediately upon grant and the remainder will vest pro rata, on a monthly
basis, over the following thirty-six months. The fair value of the options
totaled $327,680 and was determined using the Black-Scholes model with the
following assumptions: expected dividend yield of 0%, expected volatility of
204.5%; risk free interest rate of 3.59% and an expected life of 10
years.




7.   Subsequent
Event
 
 On
November 4, 2010, the Company announced that it was awarded two grants totaling
$488,959 under the Qualifying Therapeutic Discovery Project (QTDP) Program to
support the Company’s Alzheimer’s disease and multiple sclerosis programs
currently in clinical testing.




13




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, 2009, 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 this 10-Q and as applicable in Part I, Item 1A of
our Annual Report on Form 10K.





Overview





Adeona
Pharmaceuticals, Inc. (the “Company” or Adeona”), is a pharmaceutical company
developing innovative medicines for the treatment of serious central nervous
system diseases.  The Company’s strategy is to license product
candidates that have demonstrated a certain level of clinical efficacy and
develop them to a stage that results in a significant commercial
collaboration.  Currently, Adeona has the following product candidates
in development:  a prescription medical food for Alzheimer’s disease,
and four drugs for multiple sclerosis, fibromyalgia, rheumatoid arthritis and
dry age-related macular degeneration.


·
            Trimesta
      (estriol) is a drug being developed for the treatment of
      relapsing-remitting multiple sclerosis in women. A randomized,
      double-blind, placebo-controlled clinical trial is currently underway at
      15 centers in the United States. As of November 1, 2010, 115 out
      of 150 patients have been enrolled.


·
            Effirma
      (flupirtine) is a drug being developed for the treatment of fibromyalgia.
      On May 6, 2010, we entered into a sublicense agreement with Meda AB of
      Sweden covering all of our patents rights on the use of flupirtine for
      fibromyalgia.


·
            Zinthionein
      ZC (zinc cysteine) is a prescription medical food being developed for the
      dietary management of patients with Alzheimer’s disease and mild cognitive
      impairment. A randomized, double-blind, placebo-controlled clinical study
      is underway at 3 centers in the United States. All 60 patients have been
      enrolled, and we expect completion of this clinical study in the first
      quarter of 2011.


·
            dnaJP1
      (hsp peptide) is a drug being developed for the treatment of rheumatoid
      arthritis. A 160-patient, multi-center, randomized, double-blind,
      placebo-controlled clinical trial has been
  completed.


·
            ZincMonoCysteine
      (zinc-monocysteine) is a drug being developed for the treatment of dry
      age-related macular degeneration. An 80 patient, randomized, double-blind,
      placebo-controlled clinical trial has been
  completed.




Our
secondary strategy is to advance our core competency in measuring metabolic
serum zinc and copper levels. To further this effort, we purchased HartLab, LLC,
on July 13, 2009.  Recently renamed Adeona Clinical Laboratory, the
wholly-owned CLIA-certified clinical testing facility provides a broad array of
chemistry and microbiology diagnostic tests in the Greater Chicago area. At
Adeona Clinical Laboratory, we developed and offer the CopperProof panel, a
series of diagnostic tests for accurately measuring the metabolic serum zinc and
copper levels of patients with Alzheimer's disease and mild cognitive
impairment. Adeona Clinical Laboratory is a licensed Medicare and Medicaid
provider. For the three months ended September 30, 2010, we generated
$289,898 of net revenues a 567% increase over the same period in 2009, all of
which was derived from clinical and microbiology testing services.





Our
source of liquidity as of September 30, 2010, is cash of $3,305,370. Our
projected uses of cash include cash used to fund further clinical development of
our drug and medical food candidates, working capital and other general
corporate activities.  We may also use our cash for the acquisition of
businesses, technologies and products that will complement our existing
assets.





Effective
as June 30, 2010, we emerged from a “Development-Stage Entity” as defined by
FASB ASC 915-10. On May 6, 2010, we entered into a sublicense agreement with
Meda AB of Sweden. This agreement provides that Meda AB will assume all
future development costs for the commercialization of flupirtine for
fibromyalgia. As consideration for such sublicense, we received an up-front
payment of $2.5 million and are entitled to milestone payments of $5 million
upon filing of a New Drug Application with the United States Food and Drug
Administration of flupirtine for fibromyalgia and $10 million upon marketing
approval, plus royalties. We consider the agreement with Meda AB to be an
indication that we have commenced our principal operations and therefore are not
required to report as a development-stage entity.





On July
2, 2010, we entered into a Common Stock Purchase Agreement with a single
investor, relating to the offering and sale of 1,212,121 shares of common stock,
par value $0.001 per share. We raised gross proceeds of $1,000,000, before
estimated offering expenses of approximately $115,000, which includes placement
agent fees. The Offering was made pursuant to the Company’s shelf
registration statement on Form S-3 (File No. 333-166750), which was declared
effective by the Securities and Exchange Commission on June 14,
2010.





We
believe that our cash will be sufficient to fund our operations for at least the
next 12 months.  Therefore, we will need additional capital to
continue the development of our product candidates and clinical programs beyond
12 months. The sale of any equity or debt securities may result in additional
dilution to our stockholders, and we cannot be certain that additional financing
will be available in amounts or on terms acceptable to us, if at all. If we are
unable to obtain financing, we may be required to reduce the scope and timing of
the planned clinical and preclinical programs, which could harm our financial
condition and operating results.


14




Clinical
Development Programs





Relapsing-Remitting
Multiple Scelerosis in Women


Trimesta
(estriol)





Our
first product candidate is Trimesta (estriol) for the treatment of
relapsing-remitting multiple sclerosis. Estriol is a hormone that is produced by
the placenta during pregnancy. Maternal levels of estriol increase in a linear
fashion throughout the third trimester of pregnancy until birth, whereupon they
abruptly fall to near zero. It has been scientifically documented that pregnant
women with certain autoimmune diseases experience a spontaneous reduction of
disease symptoms during pregnancy, especially in the third trimester. The PRIMS
study (Pregnancy in Multiple Sclerosis), a landmark clinical study published in
the New England Journal of
Medicine , followed 254 women with multiple sclerosis during 269
pregnancies and for up to one year after delivery. The PRIMS study demonstrated
that relapse rates were significantly reduced by 71 percent (p < 0.001)
through the third trimester of pregnancy from pre-baseline levels and relapse
rates then increased by 120 percent (p < 0.001) during the first three months
after birth (post-partum) before returning to pre-pregnancy rates. Estriol has
been approved and marketed for over 40 years throughout Europe and Asia for the
treatment of post-menopausal hot flashes. It has never been approved by the Food
and Drug Administration (FDA) for any indication.





Multiple
sclerosis is a progressive neurological disease in which the body loses the
ability to transmit messages along central nervous system nerve cells, leading
to a loss of muscle control, paralysis, and in some cases, death. According to
the National Multiple Sclerosis Society, currently, more than 2.5 million
people worldwide (approximately 400,000 patients in the United States), have
been diagnosed with multiple sclerosis. Mainly young adults, ages 20 to 50, and
two to three times as many women than men are diagnosed with multiple
scelerosis. According to the National Multiple Sclerosis Society, approximately
85% of multiple sclerosis patients are initially diagnosed with the
relapsing-remitting form, compared to 10-15% with progressive forms. Despite the
availability of 7 FDA-approved therapies for the treatment of
relapsing-remitting multiple sclerosis, the disease is highly underserved and
exacts a heavy economic toll. Multiple sclerosis costs the United States more
than $9.5 billion annually in medical care and lost productivity according to
the Society for Neuroscience.





An
investigator-initiated, 10-patient, 22-month, single-agent, crossover clinical
trial was completed in the United States to study the therapeutic effects of 8
mg of oral Trimesta taken daily in nonpregnant female relapsing remitting
multiple sclerosis patients. The total volume and number of
gadolinium-enhancing lesions was measured by brain magnetic resonance imaging
(MRI, an established neuroimaging measurement of disease activity in multiple
sclerosis) and showed a statistically significant decrease, both in lesion
volumes and the number of lesions, during Trimesta treatment compared to
baseline and while on drug holiday. During this clinical trial, a
statistically significant14% improvement from baseline in Paced Auditory Serial
Addition Test (PASAT) cognitive testing scores (p = 0.04) was also observed in
the multiple sclerosis patients after six months of therapy. PASAT is a routine
cognitive test performed in patients with a wide variety of neuropsychological
disorders such as multiple sclerosis.




A
randomized, double-blind, placebo-controlled clinical trial is currently
underway at 15 centers in the United States. The purpose of this clinical trial
is to study whether 8 mg of oral Trimesta taken daily over a 2 year period
would reduce the rate of relapses in a large population of female patients with
relapsing remitting multiple sclerosis. Investigators are administering either
Trimesta along with glatimer acetate (Copaxone®) injections, a FDA-approved
therapy for multiple sclerosis, or a placebo plus glatimer acetate injections to
women between the ages of 18 to 50 who have been recently diagnosed with
relapsing remitting multiple sclerosis. The primary endpoint is relapse rates at
two years with a one year interim analysis using standard clinical measures of
multiple sclerosis disability. As of November 1, 2010, 115 out of 150
patients have been enrolled in this clinical trial. Tentatively,
we anticipate full enrollment by the second half of 2011; however, no assurances
can be given that such study enrollment will be completed in such time
period.





The
preclinical and clinical development of Trimesta has been primarily financed by
a $5 million grant from the National Multiple Sclerosis Society in partnership
with the National Multiple Sclerosis Society’s Southern California chapter, with
support from the National Institutes of Health. In January of 2010, it was
announced that an additional $860,440 in grant funding had been received through
the American Recovery and Reinvestment Act allowing the number of clinical sites
currently enrolling patients in the clinical study to increase from 7 clinical
sites to 15.





Fibromyalgia


Effirma
(flurpirtine)





Our
second product candidate is Effirma (flupirtine) for the treatment of
fibromyalgia. Effirma is a selective neuronal potassium channel opener that also
has NMDA receptor antagonist properties. Effirma is a non-opioid, non-NSAID,
non-steroidal, analgesic. Preclinical data and clinical experience suggest that
Effirma should also be effective for neuropathic pain since it acts in the
central nervous system via a mechanism of action distinguishable from most
marketed analgesics. Effirma is especially attractive because it operates
through non-opiate pain pathways, exhibits no known abuse potential, and lacks
withdrawal effects. In addition, no tolerance to its antinocioceptive effects
has been observed. One common link between neuroprotection, nocioception, and
Effirma may be the N-methyl-D-aspartic acid glutamate system, a major receptor
subtype for the excitotoxic neurotransmitter, glutamate. Effirma has strong
inhibitory actions on N-methyl-D-aspartic acid-mediated neurotransmission.
Flupirtine was originally developed by Asta Medica and has been approved in
Europe since 1984 for the treatment of pain, although it has never beenapproved
by the Food and Drug Administration for any indication.


15




Fibromyalgia
is a chronic and debilitating condition characterized by widespread pain and
stiffness throughout the body, accompanied by severe fatigue, insomnia and mood
symptoms. Fibromyalgia affects an estimated 2-4% of the population worldwide,
including an estimated 4 million patients in the United States. There are
presently three products approved for this indication in the United States –
Lyrica, Cymbalta and Savella. Flupirtine is differentiated from these products
in that it employs a unique mode of action. Meda AB of Sweden estimates the
United States market for fibromyalgia to be near $1 billion at the time of
potential launch of flupirtine.





On May 6,
2010, we entered into a sublicense agreement with Meda AB that provides
that they will assume all future development costs for the commercialization of
flupirtine for fibromyalgia. As consideration for such sublicense, we received
an up-front payment of $2.5 million and are entitled to milestone payments of $5
million upon filing of a New Drug Application with the United States Food and
Drug Administration of flupirtine for fibromyalgia and $10 million upon
marketing approval, plus royalties.





In
November 2010, we were awarded a grant in the amount of $244,480 under the
Qualifying Therapeutic Discovery Project Program to support our multiple
sclerosis program currently in clinical testing.





Alzheimer’s
Disease and Mild Cognitive Impairment


Zinthionein
(zinc cysteine)





Our third
product candidate is Zinthionein (zinc cysteine) for the dietary management of
Alzheimer’s disease and mild cognitive impairment being developed as a
prescription medical food. Zinthionein is a once-daily, gastroretentive,
sustained-release, proprietary, oral tablet formulation of zinc and cysteine.
All of Zinthionein’s constituents have Generally Regarded as Safe (GRAS) status
according to FDA standards. Zinthionein was invented and developed by us to
achieve the convenience of once-daily dosing, high bioavailability (the quantity
or fraction of the ingested does that is absorbed) and to minimize
gastrointestinal side effects of oral zinc therapy.





CopperProof-2
is a controlled, randomized, double-blind, placebo-controlled clinical study
testing Zinthionein.  The study is divided into two parts. Part 1 is a
13-subject, three-arm, single-dose, comparator study in Alzheimer's disease and
mild cognitive impairment subjects that compared the tolerability and
bioavailability of oral Zinthionein to Galzin®, the only FDA-approved zinc
preparation and to placebo. Results from Part 1 of the study demonstrated a
superior serum zinc bioavailability and a substantially lower incidence of
adverse effects in Alzheimer's disease and mild cognitive impairment subjects in
favor of Zinthionein compared to Galzin®.





Part 2 of
the CopperProof 2 study, underway at 3 centers in the United States, has
enrolled all 60 Alzheimer's disease and mild cognitive impairment subjects and
randomized them to receive either once-daily oral Zinthionein or matching
placebo for six months. Subjects will be assessed at 3 and 6 months for serum
parameters of zinc and copper as well as changes in cognitive function using
standard clinical tests used in Alzheimer's disease and mild cognitive
impairment. As of October 15, 2010, all 60 patients have been enrolled and we
expect completion of this clinical study in the first quarter of 2011, however
no assurances can be given that such study will be completed in such time
period.





In
November 2010, we were awarded a grant in the amount of $244,480 under the
Qualifying Therapeutic Discovery Project Program to support our Alzheimer’s
disease program currently in clinical testing.




Rheumatoid
Arthritis


dnaJP1(hsp
peptide)





Our
fourth product candidate is dnaJP1 (hsp peptide) for the treatment of rheumatoid
arthritis. dnaJP1 is an epitope-specific immunotherapy for rheumatoid arthritis
patients. dnaJP1 is an oral 15-mer heat shock protein-derived peptide that was
previously identified as a contributor of T cell-mediated inflammation in
rheumatoid arthritis. Immune responses to heat shock protein are often found at
sites of inflammation and have an initially amplifying effect that needs to be
down regulated to prevent tissue damage. The mechanisms for this regulation
involve T cells with regulatory function that are specific for heat shock
protein-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.





Rheumatoid
arthritis is an autoimmune disease that afflicts approximately 20 million people
worldwide. It is a chronic inflammatory disease that leads to pain,
stiffness, swelling and limitation in the motion and function of multiple
joints. If left untreated, rheumatoid arthritis can produce serious destruction
of joints that frequently leads to permanent disability. Though the joints are
the principal body part affected by rheumatoid arthritis, inflammation can
develop in other organs as well. The disease currently affects over two million
Americans, almost 1% of the population, and is two to three times more prevalent
in women than men. Onset can occur at any point in life but is most frequent in
the fourth and fifth decades of life, with most patients developing the disease
between the ages of 35 and 50.   The global market is estimated at $12
billion in annual sales and disease-modifying antirheumatic drugs, including
biologics, accounted for nearly $5 billion of that figure.


16




In
November of 2009, we announced publication of the results of an
investigator-initiated, 160-patient clinical trial of dnaJP1 for the treatment
of rheumatoid arthritis conducted at 11clinical centers in the United
States. The publication, entitled "Epitope-Specific Immunotherapy of
Rheumatoid Arthritis: Clinical Responsiveness Occurs With Immune Deviation and
Relies on the Expression of a Cluster of Molecules Associated with T Cell
Tolerance in a Double-Blind, Placebo-Controlled, Pilot Phase II Trial", can be
found in Arthritis &
Rheumatism , Vol. 60(11), pages 3207-3216, with related editorial at page
A21.  The clinical trial sought to test 2 hypotheses 1) whether mucosal
induction of immune tolerate to dnaJP1 would lead to a qualitative change from a
proinflammatory phenotype to a more tolerogenic functional phenotype and 2)
whether immune deviation of responses to an inflammatory epitope might translate
into clinical improvement. One hundred sixty patients with active rheumatoid
arthritis were randomized to receive oral doses of 25 mg of dnaJP1 or placebo
daily for 6 months. This clinical trial was funded by a $5 million grant from
the National Institutes of Health and demonstrated the following
results:





1. dnaJP1
appeared to be safe and well-tolerated;





2. There
was a significant reduction in the percentage of T cells producing the
proinflammatory cytokine tumor necrosis factor alpha (TNF-alpha) (p <
0.0007);




3. The
primary efficacy end point (meeting the American College of Rheumatology 20%
improvement criteria at least once on day 112, 140, or 168) showed a difference
between treatment groups (p = 0.09) that became significant in post hoc analysis
using generalized estimating equations (GEE) (p = 0.04).





4.
Differences in clinical responses were also found between treatment groups on
day 140 and at followup, indicative of a durable response following
discontinuation of therapy.





5. Post
hoc analysis showed that the combination of dnaJP1 and the commercially
available rheumatoid arthritis agent, hydroxychloroquine, was superior to the
combination of hydroxychloroquine and placebo, demonstrating potential
synergistic effect of dnaJP1 with hydroxychloroquine.





Currently,
we are conducting further preclinical activities on dnaJP1 and planning the
clinical development strategy.





Dry
Age-Related Macular Degeneration


ZincMonoCysteine
(zinc-monocysteine)





Our fifth
product candidate is ZincMonoCysteine (zinc-monocysteine) for the treatment of
dry age-related macular degeneration. ZincMonoCysteine is an oral complex of
zinc and the amino acid cysteine that we believe may have improved therapeutic
properties compared to currently marketed zinc–based nutritional
products. ZincMonoCysteine was invented and developed by David A. Newsome,
M.D., former Chief of the Retinal Disease Section of the National Eye Institute
and our Senior Vice President of Research and Development. Dr. Newsome was
the first to pioneer and demonstrate the benefits of oral high dose zinc therapy
in dry age-related macular degeneration. Oral high dose zinc containing
nutritional products now represent the standard of care for dry age-related
macular degeneration affecting over 10 million Americans and have annual sales
of approximately $300 million.





ZincMonoCysteine
has completed an 80-patient, randomized, double-blind, placebo-controlled
clinical trial in dry age-related macular degeneration and demonstrated highly
statistically significant improvements in central retinal function. These
results were published in a peer-reviewed journal in 2008.  Currently, we
are conducting further preclinical activities on ZincMonoCysteine and planning
the clinical development strategy.


.


Critical
Accounting Policies




In
December of 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.




17





Research
and Development Expenses





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. We expense our research and development costs as they are
incurred.





Stock
Compensation





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




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





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





Accounts
Receivable and Allowance for Doubtful Accounts





Accounts
receivable are reported at realizable value, net of allowances for doubtful
accounts, which is estimated and recorded in the period the related revenue is
recorded. We have a standardized approach to estimate and review the
collectability of our receivables based on a number of factors, including the
period they have been outstanding. Historical collection and payer reimbursement
experience is an integral part of the estimation process related to allowances
for doubtful accounts. In addition, we regularly assess the state of our billing
operations in order to identify issues, which may impact the collectability of
these receivables or reserve estimates. Revisions to the allowances for doubtful
accounts estimates are recorded as an adjustment to bad debt expense within
general and administrative expenses. Receivables deemed uncollectible are
charged against the allowance for doubtful accounts at the time such receivables
are written-off. Recoveries of receivables previously written-off are recorded
as credits to the allowance for doubtful accounts. There were no recoveries
during the nine months ended September 30, 2010.





Revenue
Recognition




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




License
Revenue




On May 6,
2010, we entered into a Sublicense Agreement (the "Meda Agreement") with Meda AB
of Sweden ("Meda") for the development and commercialization of Effirma
(flupirtine) for fibromyalgia. As consideration for the sublicense, we received
an up-front payment of $2.5 million upon execution of the Meda Agreement. 
This payment was recorded as license revenue for the three months ended June 30,
2010.  Pursuant to our license agreement with McLean Hospital, we paid 15%
of the $2.5 million payment ($375,000) to McLean Hospital. We are also
entitled to additional milestone payments of $5 million upon filing of a New
Drug Application with the United States Food and Drug Administration for
flupirtine for fibromyalgia and $10 million upon marketing approval.  The
Meda Agreement also provides that we are entitled to receive net royalties of 7%
of net sales of flupirtine approved for the treatment of fibromyalgia covered by
issued patent claims in the United States and Japan.  The Meda Agreement
provides that Meda AB will assume all future development costs for the
commercialization of flupirtine for fibromyalgia.  Pursuant to the terms of
our agreement with McLean Hospital, we are obligated to pay them half of the
royalties we receive.




Laboratory
Revenue




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


18


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





Results
of Operations




Three
Months Ended September 30, 2010 and 2009




Revenues, net . Total
revenues, consisting solely of laboratory revenues, were $289,898 compared to
$51,085 for the three months ended September 30, 2010 and 2009,
respectively. The increase in total revenues for the three months ended
September 30, 2010, reflects a 567% increase in laboratory revenues from the
three months ended September 30, 2009. Laboratory revenues have increased
due to expanded client services provided by Adeona Clinical
Laboratory.





Research and Development
Expenses . Research and development expenses increased to $424,573 for
the three months ended September 30 30, 2010, from $325,662 for the three months
ended September 30, 2009. This increase of 30% is primarily the result of
increased costs associated with the expansion of the client base at Adeona
Clinical Laboratory, including salary and supply costs. Research and development
expenses also include a non-cash charge relating to share-based compensation
expense of $19,817 for the three months ended September 30, 2010, compared to
$33,421 for the three months ended September 30, 2009.





General and Administrative
Expenses. General and administrative expenses increased to $598,453 for
the three months ended September 30, 2010, from $351,646 for the three
months ended September 30, 2009. This increase of 70% is primarily the result of
increased legal fees, salary expense and consultant fees. General and
administrative expenses also include a non-cash charge relating to share-based
compensation expense of $68,493 for the three months ended September 30, 2010,
compared to $20,875 for the three months ended September 30, 2009.





Net Loss. Our net
loss was $732,835, or $0.03 per common share for the three months ended
September 30, 2010, compared to a net loss of $626,075, or $0.03 per common
share for the three months ended September 30, 2009.




Nine
Months Ended September 30, 2010 and 2009




Revenues, net.
   Total revenues for the nine months ended September 30, 2010 were
$2,544,825.  Revenues consisted of $2,125,000 from the flupurtine
sublicense fee with Meda AB, which is net of the $375,000 payment to McLean
Hospital and $419,825 of laboratory revenues from Adeona Clinical
Laboratory.   Revenues for nine months ended September 30, 2009
consisted of $51,085 of laboratory revenues from Adeona Clinical Laboratory.
Since purchasing Adeona Clinical Laboratory in July 2009, the client base has
increased from 5 to 9 health service providers and the in-house diagnostic
testing services have been expanded to include a full array of microbiology
testing.




Research and Development
Expenses.  Research and development expenses increased to
$1,406,264 for the nine months ended September 30, 2010, from $1,219,135 for the
nine months ended September 30, 2009.  This increase of 15% is
primarily the result of increased monthly costs from Adeona Clinical Laboratory,
offset by decreased allocation of overhead expenses.  Research and
development expenses also include a non-cash charge relating to share-based
compensation expense of $72,785 for the nine months ended September 30, 2010,
compared to $153,031 for the nine months ended September 30,
2009.





General and Administrative
Expenses.  General and administrative expenses increased to
$1,986,765 for the nine months ended September 30, 2010, from $1,452,384 for the
nine months ended September 30, 2009.  This increase of 37% is
primarily the result of increased salary expense, legal fees and consultant
fees.  General and administrative expenses also include a non-cash
charge relating to share-based compensation expense of $252,100 for the nine
months ended September 30, 2010, compared to $91,509 for the nine months ended
September 30, 2009.




Other Income (Expense),
net.   Other income was $7,629 compared to $2,826 for the nine
months ended September 30, 2010 and 2009, respectively. Other income for the
nine months ended September 30, 2010, included interest income of $330, and
$10,083 of other income relating to the sales of miscellaneous non-capital
equipment, offset by interest expense of $2,784.  Other income for the
nine months ended September 30, 2009, consisted of $2,826 in interest
income.





Net
Loss.  Our net loss was $840,575, or $0.04 per common share for
the nine months ended September 30, 2010, compared to a net loss of $2,617,608,
or $0.12 per common share for the nine months ended September 30,
2009.





Liquidity
and Capital Resources




We have
financed our operations since inception primarily through proceeds from equity
financings and various private financings, primarily involving private sales of
our common stock and other equity securities, corporate partnering license fee’s
 and to a lesser extent from the  proceeds from the sale of our
common stock under our registration statement on Form S-3, laboratory testing
revenues, miscellaneous equipment sales, all of which, from inception through
September 30, 2010, have totaled in the aggregate approximately
$43million.


19





Our cash
totaled $3,305,370 at September 30, 2010, an increase of $590,326 from December
31, 2009.   During the nine months ended September 30, 2010, the
primary sources of cash were $2,125,000 from the sublicense fee relating to the
Meda Agreement and proceeds from the issuance of common stock to a single
investor of $884,724 and stock option exercises of $127,878.  The
primary uses of cash during the nine months ended September 30, 2010 included
working capital requirements and $2,070 in capital equipment additions. Our cash
at October 31, 2010 was approximately $3.1 million.




Our
continued operations will primarily depend on whether we are able to
generate revenues and profits through partnerships, joint ventures or sales of
diagnostic clinical laboratory services and/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.




Current
and Future Financing Needs




We have
incurred an accumulated deficit of approximately $42.9 million through September
30, 2010. With the exception of the quarter ended June 30, 2010, 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 for at least the next 12 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 preclinical
      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 licensing arrangements 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; and


·
            profitability of our clinical
      laboratory diagnostic and microbiology services
      business.




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.


20





ITEM
3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.





Not
applicable.





ITEM
4. CONTROLS AND PROCEDURES





(a)   Evaluation of disclosure 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 as of September 30,
2010 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.




(b) 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 September 30, 2010, that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.


21




PART
II—OTHER INFORMATION




ITEM
1.  LEGAL PROCEEDINGS





In
September 2010, a Stipulation of Settlement was entered into with regard to
a claim by an individual for the payment by a subsidiary of the Company of
past consulting services and associated expenses. In accordance with the
Stipulation of Settlement, the Company issued $92,000 worth of shares of its
common stock to the individual in full settlement of all claims of the
individual against the subsidiary.




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 currently have
very minimal revenues and will need to raise additional capital to operate our
business.




With the
exception of the quarter ended June 30, 2010, we have experienced significant
losses since inception and have a significant accumulated deficit. We expect to
incur additional operating losses in the future and therefore our cumulative
losses to increase. To date, other than the licensing fee we received form Meda
AB for the development of and commercialization of Effirma (flupirtine) for
fibromyalgia and laboratory revenues from Adeona Clinical Laboratory, we have
generated very minimal revenues. As of September 30, 2010, our operating
expenses  totaled approximately $32.5 million on a consolidated basis.
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 or prescription medical food and therefore will not have product revenues.
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.  If the upfront licensing fee we recently received
is not sufficient to sustain our operations, 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 preclinical 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
have only recently achieved profitability and may never be able to sustain
profitability.




Other
than with respect to the quarter ended June 30, 2010, we have a history of
losses and we had incurred substantial losses and negative operating cash flow.
Even if we succeed in developing and commercializing one or more of our product
candidates, we may still incur substantial losses for the foreseeable future and
may not sustain profitability. 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 preclinical 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.




We may
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 have
not yet 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
      preclinical development and clinical
  trials;


·
            participating in regulatory
      approval processes;


·
            formulating and manufacturing
      products; and


·
            conducting sales and marketing
      activities.





22


Our
operations have been limited to organizing and staffing our company, acquiring,
developing, and securing our proprietary technology, and undertaking preclinical
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 limited experience in commercializing diagnostic testing technologies and
therefore we may not be effective in developing and commercializing
products.




Many of
our technologies, particularly our copper and zinc diagnostic testing
technologies, are at an early stage of commercialization. We continue to develop
and commercialize new diagnostic products and create new applications for our
products through our Adeona Clinical Laboratory subsidiary. We are also
researching, developing and pursuing the commercialization of various diagnostic
tests for copper and zinc status through Adeona Clinical Laboratory. We have
limited or no experience in these applications as well as operating in these
markets. You should evaluate us in the context of the uncertainties and
complexities affecting an early stage company developing products and
applications for the life science industries and experiencing the challenges
associated with entering into new markets that are highly competitive. We need
to make significant investments to ensure our diagnostic and therapeutic
products and applications perform properly and are cost-effective and can be
reimbursed by Medicare and other healthcare insurers. There is no assurance that
either of these events will occur. Even if we develop products for commercial
use, we may not be able to develop products that are accepted in the Alzheimer’s
disease or other markets that include patients with neurodegenerative
diseases.




We
may not generate additional revenue from our relationships with our
corporate collaborators.




On May 6,
2010 we entered into a sublicense agreement with Meda AB whereby we may receive
milestone payments totaling $17.5 million (including an upfront payment of $2.5
million that has already been received), plus royalties on our flupirtine
program. There can be no assurance that Meda AB will successfully develop
flupirtine for fibromyalgia that would allow us to receive such additional $15
million in milestone payments and royalties on sales in connection with such
agreement. The successful achievement of the various milestones set forth in the
agreement is not within our control and we will be dependent upon Meda AB for
achievement of such milestones.




We
may not be able to generate any significant revenue from copper and zinc status
tests or any other tests we may develop.




We have
committed significant research and development resources to the development of
copper and zinc status tests. Although there may be a large potential market for
such testing, there is no guarantee that we will successfully generate
significant revenues from this or any other tests for any use. We launched
through Adeona Clinical Laboratory, our CLIA certified laboratory, a copper and
zinc status test panel in November 2009.




However,
there is no guarantee that we will be able to successfully market this test
panel or other diagnostic tests. If we are not able to successfully market or
sell our diagnostic tests we may develop for any reason, we will not generate
any revenue from the sale of such tests. Even if we are able to develop
diagnostic or other tests for sale in the marketplace, a number of factors could
impact our ability to generate any significant revenue from the sale of such
tests, including the following:





·
            reliance on our Adeona Clinical
      Laboratory operations, which are subject to routine governmental oversight
      and inspections for continued operation pursuant to CLIA and other
      regulations;


·
            our ability to establish and
      maintain adequate infrastructure to support the commercial launch and sale
      of our diagnostic tests through our Adeona Clinical Laboratory subsidiary,
      including establishing adequate laboratory space, information technology
      infrastructure, sample collection and tracking systems and electronic
      ordering and reporting systems and other infrastructure and hiring
      adequate laboratory and other
personnel;


·
            the availability of adequate
      study samples for validation studies for any diagnostic tests we develop,
      the success of such validation studies and our ability to publish study
      results in peer-reviewed
journals;


·
            the availability of alternative
      and competing tests or products and technological innovations or other
      advances in medicine that cause our technologies to be less
      competitive;


·
            compliance with federal, state
      and foreign regulations governing laboratory testing and the sale and
      marketing of diagnostic or other tests, including copper and zinc; status
      tests;


·
            the accuracy rates of such tests,
      including rates of false-negatives and/or
      false-positives;


·
            concerns regarding the safety
      effectiveness or clinical utility of our
  tests;


·
            changes in the regulatory
      environment affecting health care and health care providers, including
      changes in laws regulating laboratory testing and/or device manufacturers
      and any laws regulating diagnostic
  testing;


·
            the extent and success of our
      sales and marketing efforts and ability to drive adoption of our
      diagnostic tests;


·
            coverage and reimbursement levels
      by government payers and private
  insurers;


·
            the level of physician and
      customer adoption of any diagnostic tests we
    develop;


·
            pricing pressures and changes in
      third-party payer reimbursement
policies;


23


·
            general changes or developments
      in the market for Alzheimer’s disease diagnostics or diagnostics in
      general;


·
            ethical and legal issues
      concerning the appropriate use of the information resulting from
      Alzheimer’s disease diagnostic tests or other
  tests;


·
            our ability to promote and
      protect our products and technology;
and


·
            intellectual property rights held
      by others or others infringing our intellectual property
      rights.




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; however effective March 29, 2009, Mr. Stergis resigned
his position, but remained a director of the Company until August 20, 2009. The
Board then appointed Steve H. Kanzer as our interim Chief Executive Officer and
President. Effective June 26, 2009, Max Lyon was appointed our Chief Executive
Officer and President, while Mr. Kanzer remained as Chairman of the Board of the
Company. Effective February 6, 2010, James S. Kuo, M.D., M.B.A., was appointed
our Chairman of the Board, Chief Executive Officer and President and Mr. Lyon
resigned from his position as Chief Executive Officer, President and
director.  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
only recently acquired our CLIA-certified laboratory and have limited experience
operating a diagnostic  and microbiology testing laboratory. Our
ability to successfully develop and commercialize diagnostic and microbioloby
tests will depend on our ability to successfully operate our CLIA-certified
laboratory and obtain and maintain required regulatory
certifications.




In
November 2009, we launched a panel of copper and zinc status tests
through Adeona Clinical Laboratory, our CLIA-licensed clinical reference
laboratory located in Bolingbrook, IL. We acquired Adeona Clinical Laboratory in
July 2009. Because there is substantial distance between Adeona Clinical
Laboratory and our corporate headquarters in Ann Arbor, Michigan, we may have
logistical and operational challenges in effectively managing and operating
Adeona Clinical Laboratory. If we are unable to successfully to commercialize
our serum based copper and zinc diagnostic test panels through Adeona Clinical
Laboratory, we may not be able to achieve significant revenues and profitability
with respect to such activities.  Our ability to successfully develop
and commercialize diagnostic tests and microbiology testing will depend on our
ability to successfully operate Adeona Clinical Laboratory and obtain and
maintain required regulatory approvals.




As a
clinical laboratory, Adeona Clinical Laboratory is subject to CLIA regulations,
which are designed to ensure the quality and reliability of clinical
laboratories by mandating specific standards in the areas of personnel
qualifications, administration and participation in proficiency testing, patient
test management, quality control, quality assurance and inspections. The
sanction for failure to comply with CLIA requirements may be suspension,
revocation or limitation of a laboratory’s CLIA certificate, which is necessary
to conduct business, as well as significant fines and/or criminal penalties.
Adeona Clinical Laboratory is also subject to regulation of laboratory
operations under state clinical laboratory laws. State clinical laboratory laws
may require that laboratories and/or laboratory personnel meet certain
qualifications, specify certain quality controls or require maintenance of
certain records. Certain states, including Maryland, New York, Pennsylvania and
Rhode Island, each require that you obtain licenses to test specimens from
patients residing in those states and additional states may require similar
licenses in the future. If we are unable to obtain licenses from these states or
there is delay in obtaining such licenses, we will not be able to process any
samples from patients located in those states until we have obtained the
requisite licenses. Potential sanctions for violation of these statutes and
regulations include significant fines and the suspension or loss of various
licenses, certificates and authorizations, which could adversely affect our
business and results of operations.





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




We will
need FDA approval to commercialize some of our product candidates in
the United States 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 “preclinical 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
preclinical and clinical testing or to perform post-marketing
studies.


24




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.





Our
diagnostic and microbiology tests are subject to changes in CLIA, FDA and other
regulatory requirements.




We
initially plan to develop assays and commercialize our tests in the form of
laboratory developed tests (LDTs) through Adeona Clinical Laboratory, our
CLIA-certified laboratory. Although LDT testing is currently solely under the
purview of CMS and state agencies who provide oversight of the safe and
effective use of LDTs, the FDA and the United States Department of Health and
Human Services have been reviewing their approach to regulation in the area of
LDTs, and the laws and regulations may undergo change in the near future.
Although we have no current plans to utilize in our LDT strategy analyte
specific reagents (ASRs) or In Vitro Diagnostic Multivariate Index Assay
(IVDMIAs), which have been the focus of recent reforms and enforcement actions
by the FDA, we cannot predict the extent of the FDA’s future regulation and
policies with respect to LDTs. Concurrently with our LDT commercialization
activities, we may conduct the development, validation, and other activities
necessary to file submissions with the FDA seeking approval for selected
diagnostic tests. If we are unable to successfully launch any diagnostic tests
as LDTs or if we are otherwise required to obtain FDA premarket clearance or
approval prior to commercializing any diagnostic tests or maintain Adeona
Clinical Laboratory’s CLIA-certified laboratory status, our ability to generate
revenue from the sale of such tests may be delayed and we may never be able to
generate significant revenues from sales of diagnostic products.





If
the medical relevance of copper and zinc status is not demonstrated or is not
recognized by others, we may have less demand for our products and services and
may have less opportunity to enter into diagnostic product development and
commercialization collaborations with others.




Some of
the products we have developed and additional products that we hope to develop
involve new and unproven approaches or involve applications in markets that we
are only beginning to explore. They are based on the assumption that information
about the roles of copper and zinc in the progression and development of
neurodegenerative diseases such as Alzheimer’s disease, dementia and mild
cognitive impairment may help scientists and clinicians better understand and
treat conditions or complex disease processes. We cannot be certain that this
type of information will play a key role in the development of diagnostics or
other products in the future, or that any of our findings would be accepted by
clinicians, researchers or by any other potential market or industry partner or
customer. If we are unable to generate additional valuable information and data
about the usefulness of copper and zinc status testing, the demand for our
products, applications, and services will be reduced and our business will be
harmed.




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 which was
recently sublicensed to Meda AB; an exclusive license agreement with the Regents
of the University of California relating to our Trimesta technology; an
exclusive license to our oral immunotherapeutic tolerance program, named dnaJP1
from University of California San Diego (UCSD) and an exclusive license
agreement with Dr. Newsome and Mr. Tate relating to zinc-monocysteine. Each of
these agreements requires us or our sublicensee 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 or our sublicensee 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.  In addition,  in order to maintain this license
agreement in effect our agreement with UCSD required our Epitope subsidiary to
expend at least $400,000 on the development of oral dnaJP1 for the period
comprising July 1, 2009, through June 30, 2010, and to secure access to $2.5
million in funds on or before June 30, 2010, which it did as well as to make
other payments.


25





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, Rigel Pharmaceuticals, Incyte Pharmaceuticals, Chelsea
Therapeutics International, Aton Pharma, GlaxoSmithKline Pharmaceuticals, Alcon,
Shire Pharmaceuticals, Schering-Plough, Organon, Merck & Co., Eli Lilly
& Co., Serono, Biogen Idec, Achillion, Active Biotech, Panteri Biosciences,
Meda AB, Merrimack Pharmaceuticals, Merch-Schering, Forest Laboratories,
Attenuon, Cypress Biosciences, Genentech, Neurotech, Amgen, Centocor/Johnson and
Johnson, UCB Group, Abbott, Wyeth, OM Pharma, Cel-Sci Pharmaceuticals, Novartis,
Axcan Pharma, Teva Pharmaceuticals, Intermune, Fibrogen, Active Biotech, CNSBio,
Rare Disease Therapeutics, Prana Biotechnology, Merz & Co., AstraZeneca
Pharmaceuticals, Chiesi Pharmaceuticals, Alcon, Bausch and Lomb, Targacept, and
Johnson & Johnson. Alternative technologies or alternative delivery or
dosages of already approved therapies are being developed to treat dry AMD,
autoimmune inflammatory, rheumatoid arthritis, psoriasis, fibromyalgia, multiple
sclerosis, 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,
ZincMonoCysteine, Zinthionein gastro-retentive sustained release oral high dose
zinc preparations, oral dnaJP1, 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. No assurance can be given that our current clinical trial of once
daily Zinthionein for the dietary management of Alzheimer’s and mild cognitive
impairment will prove to be safe and effective.




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




Since we
do not have composition of matter patent claims for flupirtine and estriol,
others may obtain approvals for other uses of these products that are not
covered by our issued or pending patents. For example, the active ingredients in
both Effirma(flurpirtine) and Trimesta(estriol) 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 Effirma or
Trimesta or their respective active ingredient(s) for other uses in the United
States 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 estriol in various formulations or delivery systems that
might adversely affect our ability or the ability of our sublicensee to develop
and market these products in the United States. We are aware that other
companies have intellectual property protection using the active ingredients and
have conducted clinical trials of flupirtine and estriol for different
applications than 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.




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.




Our oral
Zinthionein product candidate does not contain the patented ingredient
zinc-monocysteine and is instead the subject of pending United States and
international patent applications in initially filed in January 2006 (see. U.S.
Ser. No 11/621,962), which may not provide substantial protection from
competitive products until, if and when, such pending patents issue, if at all.
As a prescription medical food, no regulatory protection is afforded through FDA
regulations to prevent others from marketing similar products. No assurance can
be given that our current clinical trial of once daily Zinthionein for the
dietary management of Alzheimer’s and mild cognitive impairment will achieve
superior or sufficient safety and efficacy in order to achievea significant
sales. Similarly, the CopperProof Test Panel offered by our Adeona Clinical Labs
subsidiary is the subject of pending patent applications that are expected to
require a substantial amount of time to issue in order to provide protection
from potential competitors.


26




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 oral dnaJP1 and ZincMonoCysteine
program, we do not have composition of matter patents for Trimesta or Effirma,
or their respective active ingredients estriol and flupirtine. We rely on issued
patent and pending patent applications for use of Trimesta to treat multiple
sclerosis (issued United States Patent No. 6,936,599) and various other
therapeutic indications which have been exclusively licensed to us. We have
exclusively licensed issued United States 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, related compositions
methods and uses; we have also exclusively licensed an issued patent for the
treatment of fibromyalgia with flupirtine, which we have sublicensed to Meda
AB.





Our
ZincMonoCysteine product candidate is exclusively licensed from its inventors,
David A. Newsome, M.D., and David Tate, Jr. ZincMonoCysteine is the subject of
two issued United States patents, 7,164,035 and 6,586,611 and pending United
States patent application ser. no. 11/621,380 which covers composition of matter
claims. In our annual report on Form 10-KSB for the year ending December 31,
2007 that was filed March 31, 2008 (page 23), we described our receipt in March
2008 (and potential impact on claim 1 of our exclusively licensed issued United
States 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 United States patent examiner during our prosecution of the pending
divisional United States 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 United States 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 United
States Patent and Trademark Office with respect to the Zegzhda reference with
respect to United States patent application ser. no. 11/621,380. In an office
action dated August 20, 2008, the United States 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 United States Patent and Trademark
Office.





Our
Zinthionein (gastro-retentive sustained zinc and cysteine tablets) are the
subject of United States and international pending patent applications, such as
published United States patent application Ser. No. 11/621,962 and corresponding
international applications that claim priority to Jan. 10, 2006 as well as
additional unpublished patent applications. Such patent applications have not
yet been the subject of substantive review by the United States Patent and
Trademark Office or corresponding international patent offices. No assurance can
be given that such pending patent applications will issue or issue with claims
satisfactorily broad enough to prevent others from developing and marketing
competing products.




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 dnaJP1, Trimesta,
ZincMonoCysteine, 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.


27





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




As of
September 30, 2010, we have 14 employees. We have also engaged regulatory
consultants to advise us on our dealings with the FDA and other foreign
regulatory authorities. Our future performance will depend in part on our
ability to successfully integrate newly hired officers into our management team
and our ability to develop an effective working relationship among senior
management.




Certain
of our directors, (Jeffrey Kraws, a director and former VP of Business
Development, Jeffrey Wolf, a director, Mr. Kanzer, a director and former
Chairman and CEO, and Mr. Riley, a director) scientific advisors, and
consultants serve as officers, directors, scientific advisors, or consultants of
other biopharmaceutical or biotechnology companies that 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. 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 and our sublicensees
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, the manufacture of
zinc-monocysteine, dnaJP1, and flupirtine 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. As such, we can give no assurances that we will be able to
scale up the manufacturing of zinc-monocysteine.   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 issue
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 have relied 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 clinical trial for multiple
sclerosis. 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
United States. Organon has recently informed us of their decision to discontinue
supply of estriol tablets beyond that required to satisfy the planned future
needs of the ongoing clinical trial in relapse remitting multiple sclerosis.
Accordingly, prior to initiation of additional clinical studies and/or
commercial launch of oral estriol, we may need to identify and execute supply
agreement(s) on terms suitable to us with an alternate supplier of estriol
tablets.





Our plans
to launch oral Zinthionein as a prescription medical food for the dietary
management zinc deficiency in Alzheimer’s disease and mild cognitive
impairment will depend upon the successful cGMP manufacture, quality
control and acceptable results of stability studies to be performed for
Zinthionein for which we are utilizing and intend to engage third party contract
manufacturers and analytic testing services, as well as the successful
completion and results of the Part 2 of our CopperProof-2 clinical trial being
conducted at three centers in Florida.




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.


28





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.





If
our laboratory facilities are damaged, our business would be seriously
harmed.




Our only
laboratory facility for copper and zinc testing products and general reference
lab services is located in Bolingbrook, IL. Damage to our facilities due to war,
fire, natural disaster, power loss, communications failure, terrorism,
unauthorized entry, or other events could prevent us from conducting our
business for an indefinite period, could result in a loss of important data or
cause us to cease development and production of our products. We cannot be
certain that our limited insurance to protect against business interruption
would be adequate or would continue to be available to us on commercially
reasonable terms, or at all.





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.


29





The
results of our clinical trials may not support our product candidate claims and
the results of preclinical studies and completed clinical trials are not
necessarily predictive of future results.




To date,
long-term safety and efficacy have not yet been demonstrated in clinical trials
for any of our diagnostic product candidates. Favorable results in our early
studies or trials may not be repeated in later studies or trials. 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
preclinical 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 preclinical testing. In particular, the limited results that
we have obtained for our diagnostic tests may not predict results from studies
in larger numbers of subjects drawn from more diverse populations over a longer
period of time. 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 or our sublicensee to abandon a product candidate and
might delay development of other product candidates. Preclinical and clinical
results are frequently susceptible to varying interpretations that may delay,
limit or prevent regulatory approvals or commercialization. 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.





We
depend on third parties, including researchers and sublicensees, who are not
under our control.




Since we
have in-licensed some of our product candidates and have sublicensed a product
candidate, we depend upon our sublicensee and independent investigators and
scientific collaborators, such as universities and medical institutions or
private physician scientists, to conduct our preclinical 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 or those of our sublicensee become disabled or die
unexpectedly, or should they fail to comply with applicable regulatory
guidelines, we or our sublicensee 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 Trimesta,
zinc-monocysteine, 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 for our
programs.  We cannot provide any assurances that we will not
experience any additional delays in the future.   We have experienced
similar difficulties with our zinc-monocysteine and dnaJP1
programs.  With respect to our dnaJP1 program, we have recently
elected to pursue the filing of a new corporate IND through our Epitope
subsidiary, for the further clinical testing of our oral dnaJP1 and to eliminate
our reliance on the scientific inventor/IND holder for this
program.  Unless we are able to negotiate an agreement whereby such
inventor/IND holder agrees to allow us to cross-reference the IND held by such
inventor/IND holder, our planned corporate IND filing will most likely require
us to successfully perform necessary nonclinical studies prior to initiating
further human clinical trials. Such additional nonclinical studies may be
required even if we successfully conclude an IND cross-reference agreement with
such inventor/IND holder.  No assurance can be given that we will be
able to obtain necessary FDA authorization to initiate clinical trials pursuant
to any proposed corporate IND that may be filed. Our license agreement with
University of California for dnaJP1 requires that initiate patient dosing in a
phase II clinical trial before the end of 2010 in order to maintain the license
in effect.  We may not be able to achieve such milestone and our
license agreement may become subject to
termination.


We
are also highly dependent on government and private grants to fund certain of
our clinical trials for our product candidates. For example, Trimesta (estriol)
has received a $5 million grant from the Southern California Chapter of the
National Multiple Sclerosis Society and the National Institutes of Health which
funds a majority of our ongoing 150 patient 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 will also need to cross reference our
IND with the inventor/IND holder for this program should we elect to file our
own corporate IND for our Trimesta (estriol) program.


30




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 significant 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.





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 preclinical 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 United States 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.


31




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.




We
do not currently have product liability or malpractice insurance and may not be
able to obtain adequate insurance coverage against product liability
claims.




Our
business exposes us to potential product liability and other types of claims and
our exposure will increase as we prepare to commercialize our copper and zinc
status tests. We do not currently have any product liability or malpractice
insurance that would cover us against any product liability, or malpractice
claims. Any such claim would have to be paid out of our cash reserves, which
would have a detrimental effect on our financial condition.  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. We cannot assure you that we can or will
be able to obtain product liability or malpractice insurance policies on
commercially acceptable terms, or at all.





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 (as we recently did in connection with our sale of securities under our
registration statement on Form S-3) 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. As of September 30, 2010, our
officers, directors and principal stockholders beneficially owned approximately
8.4 million shares of our common stock, which number excludes 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.


32


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.




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 NYSE
Amex formerly the American Stock Exchange or NYSE Alternext US. The NYSE Amex
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 affect 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 NYSE Amex. 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.  In order to remain listed on NYSE Amex, we are
required to maintain a minimum stockholders’ equity of $4 million and this
requirement may increase to $6 million in 2011.





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.




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.




RISKS
RELATED TO OUR INDUSTRY




We
are subject to government regulation, compliance with which can be costly and
difficult.




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. 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.


33


The
United States 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 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 guidance, paralleling an earlier
guidance from the FTC, defining a manufacturer's 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 internally
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."   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 us
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;


34




·
            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.




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, 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. 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.


35


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 preclinical 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.




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 United States or
abroad.




Failure
to adhere to the quality control and other regulatory requirements could result
in the suspension of such certification necessary to perform clinical testing
and generate revenues.




The
United States Federal Trade Commission and the Office of the Inspector General
of the United States 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.




Failure
to comply with requirements of the European Union can be costly and time
consuming.




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 United States 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.


36




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.




We
are subject to pricing controls that may not result in favorable arrangements
for our products.




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.




If
we are not able to receive third-party reimbursements we may not be able to sell
products at competitive prices.




In the
United States, 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
United States , 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, adopted an insurance regime that offers eligible beneficiaries
limited coverage for outpatient prescription drugs that became 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 has adopted 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.




37




We
could be subject to challenges under fraud and abuse laws.


The United
States 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.





We do not
have a guarantee of patent restoration and marketing exclusivity of the
ingredients for our drugs even if we are granted FDA approval of our
products.




The United
States 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 United
States Patent and Trademark Office (“USPTO”) approval, in conjunction with FDA.
Approval of these applications takes at least nine 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 the FDA from approving a full NDA, even if it contains the
innovative change.





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





In July
2010, we issued warrants to the placement agent and its designees in connection
with our sale of shares of our common stock pursuant to our registration
statement on Form S-3.  The warrants are exercisable for 60,606 shares
of common stock at an exercise price of $1.32 for a period of five
years.  The sale of such shares was exempt from registration under the
Securities Act in reliance upon Section 4(2) thereof.





ITEM
3.  DEFAULTS UPON SENIOR SECURITIES




None.




ITEM
4.  RESERVED AND REMOVED




None.


38




ITEM
5.  OTHER INFORMATION




None.




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


39





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/ James S. KuoJames
      S. Kuo, M.D., M.B.A.President
      and Chief Executive Officer(Principal
      Executive Officer and Principal
              Financial
      Officer)Date:
      November 15, 2010


40