UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


WASHINGTON,
D.C.  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 June 30, 2010





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





For
the transition period from _______________ to _______________





001-16695


Commission
File Number




Radient
Pharmaceuticals Corporation


(Exact
name of registrant as specified in its charter)





Delaware(State
      or other jurisdiction
            33-0413161of
      incorporation or organization)
            (IRS
      Employer Identification No.)





2492
Walnut Avenue, Suite 100


Tustin, California 92780-7039


(714)
505-4460


(Address,
including zip code, and telephone number,


including
area code, of Registrant’s principal executive offices)





Indicate
by check mark whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act of 1934 during the past 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
 ̈





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 (Sec. 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).


Yes x No
 ̈





Indicate
by check mark whether the registrant is a larger accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act





Large accelerated filer o
            
            Accelerated filer o
            
            Non-accelerated filer o
            
            Smaller reporting company þ(Do not check if a smaller
              reporting company)





Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).


Yes
o
      No þ





As of
August 13, 2010, the Company
had 31,383,649 of common shares issued and
outstanding.





Radient
Pharmaceuticals Corporation





FORM
10-Q





FOR
THE QUARTERLY PERIOD ENDED MARCH 31, 2010


INDEX





TABLE
OF CONTENTS





PART
      I -  FINANCIAL INFORMATION
                                                      3Item
      1.  Financial Statements
                                                      3Condensed
      Consolidated Balance Sheets at June 30, 2010 (Unaudited) and December 31,
      2009 (Audited)
                                                      3Unaudited
      Condensed Consolidated Statements of Operations and Comprehensive Loss for
      the three and six months ended June 30, 2010 and 2009
                                                      4Unaudited
      Condensed Consolidated Statements of Cash Flows for the six months ended
      June 30, 2010 and 2009
                                                      5Notes
      to Unaudited Condensed Consolidated Financial Statements
                                                      6Item
      2.  Management’s Discussion and Analysis of Financial Condition
      & Results of Operation
                                                      28Item
      3. Quantitative and Qualitative Disclosure About Market
    Risks
                                                      40Item
      4.  Controls and Procedures
                                                      40PART
      II – OTHER INFORMATION
                                                      42Item
      1.  Legal Proceedings
                                                      42Item
      2.  Unregistered Sales of Equity Securities And Use Of
      Proceeds
                                                      42Item
      3.  Defaults Upon Senior Securities
                                                      42Item
      4.  Removed and Reserved
                                                      42Item
      5.  Other Information
                                                      42Item
      6.  Exhibits
                                                      43Signatures:
                                                      44EX
      - 31.1EX
      - 31.2EX
      - 32.1EX
      - 32.2




2





PART
I – FINANCIAL INFORMATION





Item
1. Financial Statements




Radient
Pharmaceuticals Corporation


CONDENSED
CONSOLIDATED BALANCE SHEETS





June
      30,
                        
                        
                        December 31,2010
                        
                        
                        2009(Unaudited)
                        
                        
                        AuditedASSETSCurrent
      assets:Cash
                        
                        $
                        2,522,135
                        
                        
                        $
                        12,145Inventories
                        
                        
                        74,367
                        
                        
                        
                        79,255Debt
      issuance costs
                        
                        
                        1,528,750
                        
                        
                        
                        1,288,910Prepaid
      expenses and other current assets
                        
                        
                        10,094
                        
                        
                        
                        57,778Prepaid
      consulting
                        
                        
                        835,767
                        
                        
                        
                        358,667Total current
      assets
                        
                        
                        4,971,113
                        
                        
                        
                        507,845Property
      and equipment, net
                        
                        
                        81,670
                        
                        
                        
                        83,547Intangible
      assets, net
                        
                        
                        1,108,333
                        
                        
                        
                        1,158,333Receivable
      from JPI, net of allowance
                        
                        
                        2,675,000
                        
                        
                        
                        2,675,000Investment
      in JPI
                        
                        
                        18,200,295
                        
                        
                        
                        20,500,000Other
      assets
                        
                        
                        22,409
                        
                        
                        
                        105,451Total
      assets
                        
                        
                        27,058,820
                        
                        
                        $
                        26,319,086LIABILITIES
      AND STOCKHOLDERS’ DEFICIT (EQUITY)Current
      liabilities:Accounts
      payable and accrued expenses
                        
                        $
                        1,291,315
                        
                        
                        $
                        1,542,974Accrued
      salaries and wages
                        
                        
                        340,910
                        
                        
                        
                        738,331Accrued
      interest expense
                        
                        
                        777,240
                        
                        
                        
                        432,337Derivative
      liabilities
                        
                        
                        22,119,563
                        
                        
                        
                        354,758Deferred
      revenue
                        
                        
                        103,128
                        
                        
                        
                        103,128Convertible
      notes, net of discount
                        
                        
                        5,351,316
                        
                        
                        
                        240,482Current
      portion of notes payable, net of discount
                        
                        
                        2,312,578
                        
                        
                        
                        1,316,667Total current
      liabilities
                        
                        
                        32,296,050
                        
                        
                        
                        4,728,677Other
      long-term liabilities
                        
                        
                        -
                        
                        
                        
                        295,830Notes
      payable, net of current portion and debt discount
                        
                        
                        -
                        
                        
                        
                        601,819Total
      liabilities
                        
                        
                        32,296,050
                        
                        
                        
                        5,626,326Commitments
      and contingenciesStockholders’
      deficit:Preferred
      stock, $0.001 par value; 25,000,000 shares authorized; none issued and
      outstanding
                        
                        
                        -
                        
                        
                        
                        -Common
      stock, $0.001 par value; 100,000,000 shares authorized; 31,380,278 and
      22,682,116 shares issued at June 30, 2010 and December 31, 2009,
      respectively; 31,140,804 and 22,265,441 shares outstanding at June 30,
      2010 and December 31, 2009, respectively
                        
                        
                        31,141
                        
                        
                        
                        22,265Additional
      paid-in capital
                        
                        
                        79,057,478
                        
                        
                        
                        73,109,048Accumulated
      deficit
                        
                        
                        (84,325,849
                        )
                        
                        
                        (52,438,553
                        )Total
      stockholders’ (deficit) equity
                        
                        
                        (5,237,230
                        )
                        
                        
                        20,692,760Total
      liabilities and stockholders’ (deficit) equity
                        
                        $
                        27,058,820
                        
                        
                        $
                        26,319,086





See
Accompanying Notes to Unaudited Condensed Consolidated Financial
Statements


3





Radient
Pharmaceuticals Corporation


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS


(Unaudited)





Three Months Ended June 30,
                                  
                                  
                                  Six Months Ended June 30,2010
                                  
                                  
                                  2009
                                  
                                  
                                  2010
                                  
                                  
                                  2009Net
      revenues
                                  
                                  $
                                  45,552
                                  
                                  
                                  $
                                  3,181,043
                                  
                                  
                                  $
                                  82,394
                                  
                                  
                                  $
                                  5,892,780Cost
      of sales
                                  
                                  
                                  8,178
                                  
                                  
                                  
                                  2,150,405
                                  
                                  
                                  
                                  30,113
                                  
                                  
                                  
                                  3,735,978Gross
      profit
                                  
                                  
                                  37,374
                                  
                                  
                                  
                                  1,030,638
                                  
                                  
                                  
                                  52,281
                                  
                                  
                                  
                                  2,156,802Operating
      expenses:Research
      and development
                                  
                                  $
                                  243,779
                                  
                                  
                                  
                                  332,779
                                  
                                  
                                  
                                  294,815
                                  
                                  
                                  
                                  425,463Selling,
      general and administrative
                                  
                                  
                                  2,768,978
                                  
                                  
                                  
                                  3,784,801
                                  
                                  
                                  
                                  4,124,160
                                  
                                  
                                  
                                  6,375,5703,012,757
                                  
                                  
                                  
                                  4,117,580
                                  
                                  
                                  
                                  4,418,975
                                  
                                  
                                  
                                  6,801,033Loss
      from operations
                                  
                                  
                                  (2,975,383
                                  )
                                  
                                  
                                  (3,086,942
                                  )
                                  
                                  
                                  (4,366,694
                                  )
                                  
                                  
                                  (4,644,231
                                  )Other
      income (expense):Interest
      expense
                                  
                                  $
                                  (33,149,910
                                  )
                                  
                                  
                                  (332,034
                                  )
                                  
                                  
                                  (34,312,584
                                  )
                                  
                                  
                                  (566,251
                                  )Gain
      on change in fair value of derivative instruments
                                  
                                  
                                  9,136,558
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  9,093,564
                                  
                                  
                                  
                                  -Impairment
      on investment in JPI
                                  
                                  
                                  (2,299,705
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (2,299,705
                                  )
                                  
                                  
                                  -Other
      expense, net
                                  
                                  
                                  (1,614
                                  )
                                  
                                  
                                  (36,721
                                  )
                                  
                                  
                                  (1,877
                                  )
                                  
                                  
                                  (72,830
                                  )Total
      other expense, net
                                  
                                  
                                  (26,314,671
                                  )
                                  
                                  
                                  (368,755
                                  )
                                  
                                  
                                  (27,520,602
                                  )
                                  
                                  
                                  (639,081
                                  )Loss
      before provision for income taxes and discontinued
    operations
                                  
                                  
                                  (29,290,054
                                  )
                                  
                                  
                                  (3,455,697
                                  )
                                  
                                  
                                  (31,887,296
                                  )
                                  
                                  
                                  (5,283,312
                                  )Provision
      for income taxes
                                  
                                  
                                  -
                                  
                                  
                                  
                                  417,165
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  527,667Loss
      from continuing operations
                                  
                                  
                                  (29,290,054
                                  )
                                  
                                  
                                  (3,872,862
                                  )
                                  
                                  
                                  (31,887,296
                                  )
                                  
                                  
                                  (5,810,979
                                  )Loss
      from discontinued operations, net
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (4,222,696
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (3,975,670
                                  )Net
      loss
                                  
                                  $
                                  (29,290,054
                                  )
                                  
                                  $
                                  (8,095,558
                                  )
                                  
                                  $
                                  (31,887,296
                                  )
                                  
                                  $
                                  (9,786,649
                                  )Other
      comprehensive loss:Foreign
      currency translation loss
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (54
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (42,485
                                  )Comprehensive
      loss
                                  
                                  $
                                  (29,290,054
                                  )
                                  
                                  $
                                  (8,095,612
                                  )
                                  
                                  $
                                  (31,887,296
                                  )
                                  
                                  $
                                  (9,829,134
                                  )Basic
      and diluted loss per common share:Loss
      from continuing operations
                                  
                                  $
                                  (1.00
                                  )
                                  
                                  $
                                  (0.24
                                  )
                                  
                                  $
                                  (1.19
                                  )
                                  
                                  $
                                  (0.37
                                  )Loss
      from discontinued operations
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  (0.27
                                  )
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  (0.25
                                  )Net
      loss
                                  
                                  $
                                  (1.00
                                  )
                                  
                                  $
                                  (0.51
                                  )
                                  
                                  $
                                  (1.19
                                  )
                                  
                                  $
                                  (0.61
                                  )Weighted
      average common shares outstanding — basic and diluted
                                  
                                  
                                  29,245,417
                                  
                                  
                                  
                                  15,851,815
                                  
                                  
                                  
                                  26,729,016
                                  
                                  
                                  
                                  15,916,133





See
Accompanying Notes to Unaudited Condensed Consolidated Financial
Statements


4





Radient
Pharmaceuticals Corporation


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)





Six Months Ended June 30,2010
                  
                  
                  2009Cash
      flows from operating activities:Net
      loss
                  
                  $
                  (31,887,296
                  )
                  
                  $
                  (9,786,648
                  )Less:
      income from discontinued operations
                  
                  
                  -
                  
                  
                  
                  (3,975,670
                  )(31,887,296
                  )
                  
                  
                  (5,810,978
                  )Adjustments
      to reconcile net loss before discontinued operations to net cash provided
      by (used in) operating activities:Depreciation
      and amortization
                  
                  
                  67,000
                  
                  
                  
                  1,300,413Amortization
      of debt discount and debt issuance costs
                  
                  
                  5,344,166
                  
                  
                  
                  194,291Impairment
      on investment in JPI
                  
                  
                  2,299,705
                  
                  
                  
                  -Interest
      expense related to fair value of derivative instruments
      granted
                  
                  
                  24,053,345
                  
                  
                  
                  -Incremental
      value of shares and warrants issued to former note holders
                  
                  
                  81,780
                  
                  
                  
                  -Additional
      principal added for triggering events
                  
                  
                  2,877,295
                  
                  
                  
                  -Share-based
      compensation related to options granted to employees and directors for
      services
                  
                  
                  173,758
                  
                  
                  
                  154,056Share-based
      compensation related to common stock and  warrants expensed for
      services
                  
                  
                  1,620,789
                  
                  
                  
                  314,310Provision
      for bad debts
                  
                  
                  -
                  
                  
                  
                  1,932,384Change
      in fair value of derivative instruments
                  
                  
                  (9,093,564
                  )
                  
                  
                  35,557Changes
      in operating assets and liabilities:Accounts
      receivable
                  
                  
                  -
                  
                  
                  
                  5,116,069Inventories
                  
                  
                  4,888
                  
                  
                  
                  275,284Prepaid
      expenses and other assets
                  
                  
                  130,726
                  
                  
                  
                  (5,674,930
                  )Accounts
      payable and accrued expenses, salaries and wages
                  
                  
                  (273,967
                  )
                  
                  
                  539,155Income
      taxes payable
                  
                  
                  -
                  
                  
                  
                  (412,035
                  )Deferred
      revenue
                  
                  
                  -
                  
                  
                  
                  (87,720
                  )Net
      cash used in operating activities of continuing operations
                  
                  
                  (4,601,375
                  )
                  
                  
                  (2,124,145
                  )Net
      cash provided by operating activities of discontinued
      operations
                  
                  
                  -
                  
                  
                  
                  1,853,502Net
      cash used in operating activities
                  
                  
                  (4,601,375
                  )
                  
                  
                  (270,643
                  )Cash
      flows from investing activities:Purchase
      of property and equipment
                  
                  
                  (15,123
                  )
                  
                  
                  (2,034,324
                  )Net
      cash used in investing activities of continuing operations
                  
                  
                  (15,123
                  )
                  
                  
                  (2,034,324
                  )Net
      cash used in investing activities
                  
                  
                  (15,123
                  )
                  
                  
                  (2,034,324
                  )Cash
      flows from financing activities:Proceeds
      from issuance of Senior Notes, net of cash issuance costs of
      $656,426
                  
                  
                  -
                  
                  
                  
                  2,088,593Proceeds
      from issuance of convertible debt, net of cash offering costs of
      $4,748,565
                  
                  
                  6,308,000
                  
                  
                  
                  -Proceeds
      from the exercise of warrants
                  
                  
                  818,488
                  
                  
                  
                  -Net
      cash provided by financing activities
                  
                  
                  7,126,488
                  
                  
                  
                  2,088,593Effect
      of exchange rates on cash
                  
                  
                  -
                  
                  
                  
                  1,996Net
      change in cash
                  
                  
                  2,509,990
                  
                  
                  
                  (214,379
                  )Cash,
      beginning of period
                  
                  
                  12,145
                  
                  
                  
                  2,287,283Cash,
      end of period
                  
                  $
                  2,522,135
                  
                  
                  $
                  2,072,904





See
Accompanying Notes to Unaudited Condensed Consolidated Financial
Statements


5


Radient
Pharmaceuticals Corporation


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





For
the Six Months Ended June 30, 2010 and 2009





NOTE
1 — MANAGEMENT’S REPRESENTATION





The
accompanying condensed consolidated financial statements of Radient
Pharmaceuticals Corporation (the “Company”, “Radient”, “We”, or “Our”),
(formerly AMDL, Inc.), have been prepared in accordance with accounting
principles generally accepted in the United States, or “GAAP”. In the opinion of
the Company’s management, the unaudited condensed consolidated financial
statements have been prepared on the same basis as the audited consolidated
financial statements in the Annual Report on Form 10-K/A for the year ended
December 31, 2009 and include all normal recurring adjustments necessary for the
fair presentation of the Company’s statement of financial position as of June
30, 2010, and its results of operations for the three and six months ended June
30, 2010 and 2009 and cash flows for the six months ended June 30, 2010 and
2009. The condensed consolidated balance sheet as of December 31, 2009 has been
derived from the December 31, 2009 audited financial statements. The interim
financial information contained in this quarterly report is not necessarily
indicative of the results to be expected for any other interim period or for the
entire year.





It is
suggested that these condensed consolidated financial statements be read in
conjunction with the audited consolidated financial statements and notes thereto
for the year ended December 31, 2009 included in the Company’s Annual Report on
Form 10-K/A. The report of the Company’s independent registered public
accounting firm on the consolidated financial statements included in Form 10-K/A
contains a qualification regarding the substantial doubt about the Company’s
ability to continue as a going concern.





The
Company has evaluated subsequent events through the filing date of this Form
10-Q, and determined that no subsequent events have occurred that would require
recognition in the condensed consolidated financial statements or disclosure in
the notes thereto, other than as disclosed in the accompanying
notes.





NOTE
2 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Nature
of Business





On
September 25, 2009, the Company changed our name from “AMDL, Inc.” to “Radient
Pharmaceuticals Corporation.” The Company believes “Radient Pharmaceuticals” as
a brand name has considerable market appeal and reflects our new corporate
direction and branding statements.





Until
September 2009, the Company were focused on the production and distribution of
pharmaceutical products through our subsidiaries located in the People’s
Republic of China. The Company have recently refocused our business on the
development, manufacture and marketing of advanced, pioneering medical
diagnostic products, including our Onko-SureTM a proprietary In-Vitro Diagnostic
(“IVD”) Cancer Test. During the third and fourth quarter of 2009, the Company
repositioned various business segments in order to monetize the value of certain
assets through either new partnership, separate IPO’s or that could be
positioned to be sold. These special assets include: (i) our 98% ownership in
China-based pharmaceuticals business, Jade Pharmaceuticals Inc. (“JPI”); (ii)
our 100% Ownership of a proprietary cancer vaccine therapy technology, Combined
Immunogene Therapy (“CIT”); and (iii) 100% ownership of the Elleuxe brand of
advanced skin care products with proprietary formulations that include human
placenta extract ingredients sourced from our deconsolidated Chinese
subsidiary’s operations of JPI. The Company currently employ approximately 7
people, all located in California at our corporate headquarters.





The
Company are now actively engaged in the research, development, manufacturing,
sale and marketing of our Onko-SureTM a proprietary IVD Cancer Test in the United
States, Canada, China, Chile, Europe, India, Korea, Taiwan, Vietnam and other
markets throughout the world. The Company manufacture and distribute our
proprietary ONKO-SURETM cancer test kits at our licensed manufacturing facility
locatsed at 2492 Walnut Avenue, Suite 100, in Tustin, California. The Company
are a United States Food and Drug Administration (“USFDA”), GMP approved
manufacturing facility. The Company maintain a current Device Manufacturing
License issued by the State of California, Department of Health Services, Food
and Drug Branch.





Deconsolidation





Prior to
September 2009, the Company manufactured and distributed generic and homeopathic
pharmaceutical products and supplements as well as cosmetic products in China
through a wholly owned subsidiary, JPI and JPI’s two wholly owned subsidiaries,
Jiangxi Jiezhong Bio-Chemical Pharmacy Company Limited (“JJB”) and Yangbian
Yiqiao Bio-Chemical Pharmacy Company Limited (“YYB”).


6





Due to
several factors, including deterioration in its relationship with local
management of JPI, the Company relinquished control over JPI. Effective
September 29, 2009, the Company agreed to exchange its shares of JPI for
28,000,000 non-voting shares of preferred stock, which represents 100% of the
outstanding preferred shares, relinquished all rights to past and future
profits, surrendered our management positions and agreed to a non-authoritative
minority role on its board of directors. Because of loss in control in JPI,
effective September 29, 2009, the Company change its accounting for its
investment in JPI from consolidation to the cost method of accounting. The
Company recorded a loss on deconsolidation of $1,953,516 in connection with the
transaction.





Because
the deconsolidation did not occurred until September 29, 2009, the Company’s
results of operations included in the accompanying statements of operations and
comprehensive loss for the three and six months ended June 30, 2009 included the
operations of JPI. For the six months ended June 30, 2009, the net revenues,
gross profit, operating expenses and net loss of JPI were $5,841,360,
$2,320,704, $2,814,155 and $5,271,561, respectively. JPI’s subsidiary YYB was
sold by JPI on June 26, 2009. Accordingly, the results of YYB are presented as
discontinued operations in our results of operations for six months ended June
30, 2009, and a loss of $4,386,063 was recorded from the sale of YYB. For the
three months ended June 30, 2009, the net revenues, gross profit, operating
expenses and net loss of JPI were $3,152,693, $1,111,719, $2,169,953 and
$5,917,151, respectively. The Company’s results of operations for the three and
six months ended June 30, 2010 do not include any participation in the results
of JPI.





Based
on management’s evaluation of the current and projected operations of JPI as of
June 30, 2010, the Company determined that an impairment charge of approximately
$2,300,000 was necessary.  The primary factors considered in our
determination are the financial condition, operating performance, projections of
future operations and the general economic environment.





The
significant terms of the deconsolidation of the Company’s operations in China
are described in the notes to the Company’s Annual Report on Form 10-K/A for the
year ended December 31, 2009.





Going
Concern





The
condensed consolidated financial statements have been prepared assuming the
Company will continue as a going concern, which contemplates, the realization of
assets and satisfaction of liabilities in the normal course of business. The
Company incurred losses from continuing operations of $31,887,296 and $5,810,979
for the six months ended June 30, 2010 and 2009, respectively, and had an
accumulated deficit of $84,325,849 at June 30, 2010. In addition, the Company
used cash in operating activities of continuing operations of $4,601,375 and had
a working capital deficit of approximately $38.9 million, based on the face
amount of the current portion of debt. These factors raise substantial doubt
about the Company’s ability to continue as a going concern.





The
monthly cash requirement of $300,000 does not include any extraordinary items or
expenditures, including payments to the Mayo Clinic on clinical trials for our
ONKO-SUREtm
kit, research conducted through CLIA Laboratories or expenditures related to
further development of the CIT technology, as no significant expenditures are
anticipated other than recurring legal fees incurred in furtherance of patent
protection for the CIT technology.





The
Company raised gross proceeds of approximately $6.5 million in a series of four
closings of convertible note and warrant purchase agreements during the six
months ended June 30, 2010 (see note 6).





Management’s
plans include seeking financing, conversion of certain existing notes payable to
common stock, alliances or other partnership agreements with entities interested
in the Company’s technologies, or other business transactions that would
generate sufficient resources to assure continuation of the Company’s operations
and research and development programs.





There are
significant risks and uncertainties which could negatively affect our
operations. These are principally related to (i) the absence of substantive
distribution network for our ONKO-SUREtm
kits, (ii) the early stage of development of our CIT technology and the need to
enter into additional strategic relationships with larger companies capable of
completing the development of any ultimate product line including the subsequent
marketing of such product, (iii) the absence of any commitments or firm orders
from our distributors, (iv) possible defaults in existing indebtedness and (v)
failure to meet operational covenants in existing financing agreements which
would trigger additional defaults or penalties. Our limited sales to date for
the ONKO-SUREtm
kit and the lack of any purchase requirements in the existing distribution
agreements make it impossible to identify any trends in our business prospects.
Moreover, if either AcuVector and/or the University of Alberta is successful in
their outstanding claims against us, the Company may be liable for substantial
damages, our rights to the CIT technology will be adversely affected, and our
future prospects for licensing the CIT technology will be significantly impaired
(see Note 9).


7





Principles
of Consolidation





As of
September 29, 2009 the Company deconsolidated JPI, but the operations of JPI
have been consolidated in the accompanying unaudited condensed consolidated
statements of operations and comprehensive loss for the three and six months
ended June 30, 2009 and for the unaudited condensed consolidated statements of
cash flows for the six months ended June 30, 2009. Intercompany transactions for
the three and six months ended June 30, 2009 have been eliminated in
consolidation. In addition, the Company consolidated the operations of YYB
through June 26, 2009 (the date of sale) which have been included as
discontinued operations.





Reclassification





Certain
amounts in the 2009 financial statements have been reclassified to conform with
the current year presentation.





Use
of Estimates





The
preparation of financial statements in conformity with GAAP requires management
to make certain estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Significant
estimates made by management are, realizability of inventories, recoverability
of long-lived assets, valuation and useful lives of intangible assets, valuation
of derivative liabilities, valuation of investment in JPI, receivable from JPI
and valuation of common stock, options, warrants and deferred tax assets. Actual
results could differ from those estimates.





Revenue
Recognition





Revenues
from the wholesale sales of over-the counter and prescription pharmaceuticals
are recognized when persuasive evidence of an arrangement exists, title and risk
of loss have passed to the buyer, the price is fixed or readily determinable and
collection is reasonably assured, as noted in the appropriate accounting
guidance.





The
Company has entered into several distribution agreements for various geographic
locations with third party distributors. Under the terms of one agreement, the
Company sell product to the distributor at a base price that is the greater of a
fixed amount (as defined in each agreement) or 50% of the distributor’s invoiced
Net Sales price (as defined) to its customers. The distributor is required to
provide quarterly reconciliations of the distributor’s actual invoiced prices at
which time the price becomes fixed and determinable by the Company. Until the
price is fixed and determinable, the Company defers the recognition of revenues
under this arrangement. As of June 30, 2010, the Company had $103,128 of
deferred revenue related to this arrangement recorded in its accompanying
consolidated balance sheet.





Any
provision for sales promotion discounts and estimated returns are accrued for as
a reduction on receivables for in the period the related sales are
recorded. Buyers generally have limited rights of return, and the Company
provides for estimated returns at the time of sale based on historical
experience. Returns from customers historically have not been material. Actual
returns and claims in any future period may differ from the Company’s estimates.
In accordance with FASB ASC 605-45-50, Taxes Collected from Customers and
Remitted to Governmental Authorities, JPI’s revenues are reported net of
value added taxes (“VAT”) collected.





Accounting
for Shipping and Handling Revenue, Fees and Costs





The
Company classifies amounts billed for shipping and handling as revenue in
accordance with FASB ASC 605-45-50-2, Shipping and Handling Fees and
Costs. Shipping and handling fees and costs are included in cost of
sales.





Research
and Development





Internal
research and development costs are expensed as incurred. Non-refundable third
party research and development costs are expensed when the contracted work has
been performed.





Inventories





Inventories
are valued at the lower of cost or net realizable value. Cost is determined on
an average cost basis which approximates actual cost on a first-in, first-out
basis and includes raw materials, labor and manufacturing overhead. At each
balance sheet date, the Company evaluates its ending inventories for excess
quantities and obsolescence. The Company considers historical demand and
forecast in relation to the inventory on hand, market conditions and product
life cycles when determining obsolescence and net realizable value. Provisions
are made to reduce excess or obsolete inventories to their estimated net
realizable values. Once established, write-downs are considered permanent
adjustments to the cost basis of the excess or obsolete
inventories.


8





Property
and Equipment





Property
and equipment is stated at cost. Depreciation is computed using the
straight-line method over estimated useful lives as follows:





Machinery
      and equipment, including lab equipment
              5
      to 15 yearsOffice
      equipment
              3
      to 5 years





Maintenance
and repairs are charged to expense as incurred. Renewals and improvements of a
major nature are capitalized. At the time of retirement or other disposition of
property and equipment, the cost and accumulated depreciation are removed from
the accounts and any resulting gains or losses are reflected in the consolidated
statement of operations and comprehensive loss.





Intangible
Assets





The
Company owns intellectual property rights and an assignment of a United States
(“U.S.”) patent application for its CIT technology. The technology was purchased
from Dr. Lung-Ji Chang, who developed it while at the University of Alberta,
Edmonton, Canada. The purchase price is being amortized over the expected useful
life of the technology, which the Company determined to be 20 years, based upon
an estimate of three years to perfect the patent plus 17 years of patent
life.





Impairment
of Long-Lived Assets





In
accordance with FASB ASC 360-10-5, Accounting for the Impairment
or Disposal of
Long-Lived Assets, the Company evaluates the carrying value of its
long-lived assets for impairment whenever events or changes in circumstances
indicate that such carrying values may not be recoverable. The Company uses its
best judgment based on the current facts and circumstances relating to its
business when determining whether any significant impairment factors exist. The
Company considers the following factors or conditions, among others, that could
indicate the need for an impairment review:





•
              significant
      under performance relative to expected historical or projected future
      operating results;





•
              market
      projections for cancer research
technology;





•
              its
      ability to obtain patents, including continuation patents, on
      technology;





•
              significant
      changes in its strategic business objectives and utilization of the
      assets;





•
              significant
      negative industry or economic trends, including legal
    factors;





•
              potential
      for strategic partnerships for the development of its patented
      technology;





•
              changing
      or implementation of rules regarding manufacture or sale of
      pharmaceuticals in China; and





•
              ability
      to maintain Good Manufacturing Process (“GMP”)
    certifications.





If the
Company determines that the carrying values of long-lived assets may not be
recoverable based upon the existence of one or more of the above indicators of
impairment, the Company’s management performs an undiscounted cash flow analysis
to determine if impairment exists. If impairment exists, the Company measures
the impairment based on the difference between the asset’s carrying amount and
its fair value, and the impairment is charged to operations in the period in
which the long-lived asset impairment is determined by management. Based on its
analysis, the Company believes that no indicators of impairment of the carrying
value of its long-lived assets existed at June 30, 2010 except the impairment of
the investment in JPI as noted above. There can be no assurance, however,
that market conditions will not change or demand for the Company’s products will
continue or allow the Company to realize the value of its long-lived assets and
prevent future impairment.





The
carrying value of the Company’s investment in JPI represents its ownership
interest in JPI, accounted for under the cost method. The ownership interest is
not adjusted to fair value on a recurring basis. Each reporting period the
Company assess the fair value of the Company’s  ownership interest in
JPI in accordance with FASB ASC 325-20-35 paragraphs 1A and 2. Each year the
Company conduct an impairment analysis in accordance with the provisions within
FASB ASC 320-10-35 paragraphs 25 through 32.


9





Derivative
Financial Instruments





The
Company applies the provisions of FASB ASC 815-10, Derivatives and Hedging(“ASC
815-10”). Derivatives within the scope of ASC 815-10 must be recorded on the
balance sheet at fair value. During the six months ended June 30, 2010, the
Company  issued convertible debt with warrants and recorded derivative
liabilities related to the embedded conversion feature of the convertible debt
and a reset provision associated with the exercise price of the warrants. The
fair value of these derivative liabilities on the grant date was $28,349,790 as
computed using the Black-Scholes option pricing model.





In
November 2009, the Company granted 1,664,643 warrants in connection with a
common stock financing transaction to two individuals. The exercise prices of
the warrants have a reset provision which are accounted for as derivative
instruments in accordance with relevant accounting guidance. At the date of
grant, the warrants were valued at $509,839, which represents the fair value as
computed using the Black-Scholes option pricing model.





During
the six months ended June 30, 2010, a holder of the  Company’s
convertible debt  converted 100% of its notes and accrued interest
into shares of the Company’s common stock. This resulted in a decrease of the
derivative liability of $259,975, representing the embedded conversion features
of the converted debt. In addition, during the six months ended June 30, 2010,
this holder of the Company`s convertible debt exercised 500,000 warrants. This
resulted in a decrease of $83,872, representing the value of the warrants prior
to the exercise.





In May
2010, the Company also recorded additional derivative liability of $2,852,427 as
a result of a trigger event related to the First, Second and Third 2010 closings
(see Note 6).





The
Company re-measured the fair values of all of its derivative liabilities as of
each period end and recorded an aggregate decrease of $9,093,564 in the fair
value of the derivative liabilities as other income, net during the six months
ended June 30, 2010.





Fair
Value Measurements





The
Company determines the fair value of its derivative instruments using a
three-level hierarchy for fair value measurements which these assets and
liabilities must be grouped, based on significant levels of observable or
unobservable inputs. Observable inputs reflect market data obtained from
independent sources, while unobservable inputs reflect the Company’s market
assumptions. This hierarchy requires the use of observable market data when
available. These two types of inputs have created the following fair-value
hierarchy:





Level 1 —
Valuations based on unadjusted quoted market prices in active markets for
identical securities. Currently the Company does not have any items classified
as Level 1.





Level 2 —
Valuations based on observable inputs (other than Level 1 prices), such as
quoted prices for similar assets at the measurement date; quoted prices in
markets that are not active; or other inputs that are observable, either
directly or indirectly. Currently the Company does not have any items classified
as Level 2.





Level 3
— Unobservable inputs. We valued warrants and embedded conversion features that
were without observable market values and the valuation required a high level of
judgment to determine fair value (level 3 inputs). The Company estimates the
fair value of these warrants and embedded conversion features using the
Black-Scholes option pricing model. In applying the Black-Scholes option pricing
model, the Company used the following assumptions to value its derivative
liabilities as of June 30, 2010:




For the six monthsended June 30, 2010Annual
      dividend yield
                      
                      -Expected
      life (years)
                      
                      0.16
      - 3.00Risk-free
      interest rate
                      
                      0.16%
      - 1.64%Expected
      volatility
                      
                      122%
      - 234%





If the
inputs used to measure fair value fall in different levels of the fair value
hierarchy, a financial security’s hierarchy level is based upon the lowest level
of input that is significant to the fair value measurement.


10





The
following table presents the Company’s warrants and embedded conversion features
measured at fair value on a recurring basis as of June 30, 2010 classified using
the valuation hierarchy:





Level
      3
                    Carrying
                    Value
                    June
      30,
                    2010Embedded
      conversion options
                  
                  $
                  10,227,182Warrants
                  
                  
                  11,892,381$
                  22,119,563Decrease
      in fair value included in other expense, net
                  
                  $
                  9,093,564





The
following table shows the classification of the Company’s liabilities at June
30, 2010 that are subject to fair value measurements and the roll-forward of
these liabilities from December 31, 2009 (in thousands):





Balance
      at December 31, 2009
                  
                  $
                  354,758Derivative
      liabilities added — conversion options
                  
                  
                  19,142,906Derivative
      liabilities added — warrants
                  
                  
                  12,059,310Reclassification
      to equity in connection with conversion of underlying debt to
      equity
                  
                  
                  (259,975
                  )Reclassification
      to equity in connection with exercise of underlying stock
      warrants
                  
                  
                  (83,872
                  )Change
      in fair value
                  
                  
                  (9,093,564
                  )Balance
      at June 30, 2010
                  
                  $
                  22,119,563





Risks
and Uncertainties





There are
significant risks and uncertainties which could negatively affect the Company’s
operations. These are principally related to (i) the absence of substantive
distribution network for the Company’s ONKO-SUREtm
kits, (ii) the early stage of development of the Company’s CIT technology and
the need to enter into a strategic relationship with a larger company capable of
completing the development of any ultimate product line including the subsequent
marketing of such product and (iii) the absence of any commitments or firm
orders from the Company’s distributors. The Company’s limited sales to date for
the ONKO-SUREtm
kit and the lack of any purchase requirements in the existing distribution
agreements make it impossible to identify any trends in the Company’s business
prospects. Moreover, if either AcuVector and/or the University of Alberta is
successful in their outstanding claims against us, the Company may be liable for
substantial damages, the Company’s rights to the CIT technology will be
adversely affected, and the Company’s future prospects for licensing the CIT
technology will be significantly impaired (see Note 9).





As part
of the deconsolidation of JPI as of September 29, 2009, the Company agreed to
exchange loans and advances to JPI totaling $5,350,000 for a 6% convertible
promissory note from JPI.  There are risks and uncertainties related
to the collectability of these amounts and, as a result, the Company recorded a
50% loan loss reserve at the time of the deconsolidation. Also, there are risks
and uncertainties of investment in JPI and, as a result, as of June 30, 2010,
the Company determined that an impairment charge of approximately $2,300,000 was
necessary.





Share-Based
Compensation





All
issuances of the Company’s common stock for non-cash consideration have been
assigned a per share amount equaling either the market value of the shares
issued or the value of consideration received, whichever is more readily
determinable. The majority of non-cash consideration received pertains to
services rendered by consultants and others and has been valued at the market
value of the shares on the measurement date.





The
Company accounts for equity instruments issued to consultants and vendors in
exchange for goods and services in accordance with the provisions of FASB ASC
505-50-30, Equity-Based
Payments to Non-Employees,(“ASC 505-50-30”). Under ASC 505-30-30, the
measurement date for the fair value of the equity instruments issued is
determined at the earlier of (i) the date at which a commitment for performance
by the consultant or vendor is reached or (ii) the date at which the consultant
or vendor’s performance is complete. In the case of equity instruments issued to
consultants, the fair value of the equity instrument is recognized over the term
of the consulting agreement.





Under the
relevant accounting guidance, assets acquired in exchange for the issuance of
fully vested, non-forfeitable equity instruments are not presented or classified
as an offset to equity on the grantor’s balance sheet once the equity instrument
is granted for accounting purposes. Accordingly, the Company records the fair
value of the fully vested, non-forfeitable common stock issued for future
consulting services as prepaid expense in its consolidated balance
sheet.


11


The
Company have employee compensation plans under which various types of
share-based instruments are granted. The Company account for our share-based
payments in accordance with FASB ASC 718-10, Stock Compensation(“ASC
718-10”). This statement requires all share-based payments to employees,
including grants of employee stock options, to be measured based upon their
grant date fair value, and be recognized in the statements of operations as
compensation expense (based on their estimated fair values) generally over the
vesting period of the awards.





Basic
and Diluted Income (Loss) Per Share





Basic net
loss per common share from continuing operations is computed based on the
weighted-average number of shares outstanding for the period. Diluted net loss
per share from continuing operations is computed by dividing net loss by the
weighted-average shares outstanding assuming all dilutive potential common
shares were issued. In periods of losses from continuing operations, basic and
diluted loss per share before discontinued operations are the same as the effect
of shares issuable upon the conversion of debt and issuable upon the exercise of
stock options and warrants is anti-dilutive. Basic and diluted income per share
from discontinued operations are also the same, as FASB ASC 260-10 requires the
use of the denominator used in the calculation of loss per share from continuing
operations in all other calculations of earnings per share presented, despite
the dilutive effect of potential common shares.





Based on
the conversion prices in effect and the interest accrued through the end of the
respective periods, the potentially dilutive effects of 73,933,723 and
10,451,125 options, warrants and convertible debt were not considered in the
calculation of earnings per share as the effect would be anti-dilutive on June
30, 2010 and 2009, respectively.





Supplemental
Cash Flow Information





Six Months Ended June 30,2010
                  
                  
                  2009Supplemental
      disclosure of cash flow information:Cash
      paid during the period for interest
                  
                  $
                  —
                  
                  
                  $
                  207,356Cash
      paid during the period for taxes
                  
                  $
                  —
                  
                  
                  $
                  736,506Supplemental
      disclosure of non-cash activities:Fair
      value of warrants issued in connection with Senior Notes, included in debt
      issuance costs and debt discount
                  
                  $
                  —
                  
                  
                  $
                  1,853,120Reclassification
      of amounts recorded to additional paid-in capital to warrant liability,
      including $110,858 recorded to retained earnings, representing the change
      in value of the warrants from date of issuance to January 1,
      2009
                  
                  $
                  —
                  
                  
                  $
                  209,166Reclassification
      of warrant liability to additional paid-in capital upon expiration of
      share adjustment terms
                  
                  $
                  —
                  
                  
                  $
                  133,866Fair
      value of common stock recorded as prepaid consulting
                  
                  $
                  1,850,000
                  
                  
                  $
                  —Fair
      value of warrants issued for services, included in prepaid
      expense
                  
                  $
                  —
                  
                  
                  $
                  35,625Reclassification
      of derivative liabilities to equity
                  
                  $
                  343,847
                  
                  
                  $
                  —Amount
      paid directly from proceeds in connection with convertible debt unrelated
      to the financing
                  
                  $
                  25,000
                  
                  
                  $
                  —Conversion
      of notes payable and accrued interest to shares of common
      stock
                  
                  $
                  2,396,544
                  
                  
                  $
                  —Debt
      issuance costs included in accounts payable
                  
                  $
                  70,200
                  
                  
                  $
                  —Additional
      derivative liability for penalty on St. George debt
                  
                  $
                  19,432
                  
                  
                  $
                  —Debt
      discounts related to derivative liabilities
                  
                  $
                  6,333,138
                  
                  
                  $
                  —Conversion
      of accounts payable to shares of common stock
                  
                  $
                  45,000
                  
                  
                  $
                  —





Recent
Accounting Pronouncements





In
January 2010, the FASB issued authoritative guidance to amend the disclosure
requirements related to recurring and nonrecurring fair value measurements. The
guidance requires new disclosures on the transfers of assets and liabilities
between Level 1 (quoted prices in active market for identical assets or
liabilities) and Level 2 (significant other observable inputs) of the fair value
measurement hierarchy, including the reasons and the timing of the transfers.
Additionally, the guidance requires a roll forward of activities on purchases,
sales, issuance, and settlements of the assets and liabilities measured using
significant unobservable inputs (Level 3 fair value measurements). The guidance
became effective for the Company for the reporting period beginning January 1,
2010, except for the disclosure on the roll forward activities for Level 3 fair
value measurements, which will become effective for the Company for the
reporting period beginning January 1, 2011. The adoption of this new guidance
did not have a material impact on our consolidated financial
statements.





Other new
pronouncements issued but not effective until after June 30, 2010, are not
expected to have a significant effect on the Company’s consolidated financial
position or results of operations.


12





NOTE
3 — INVENTORIES





Inventories
consist of the following:





June 30,
                        2010
                      
                      
                      December 31,
                        2009(Unaudited)
                      
                      
                      (Audited)Raw
      materials
                      
                      $
                      68,279
                      
                      
                      $
                      48,852Work-in-process
                      
                      
                      6,048
                      
                      
                      
                      3,265Finished
      goods
                      
                      
                      40
                      
                      
                      
                      27,138$
                      74,367
                      
                      
                      $
                      79,255


13




NOTE
4 — INTANGIBLE ASSETS





Intangible
assets consist of the following:





June 30,
                    2010
                  
                  
                  December 31,
                    2009(Unaudited)
                  
                  
                  (Audited)Intellectual
      property
                  
                  $
                  2,000,000
                  
                  
                  $
                  2,000,000Accumulated
      amortization
                  
                  
                  (891,667
                  )
                  
                  
                  (841,667
                  )$
                  1,108,333
                  
                  
                  $
                  1,158,333





In August
2001, the Company acquired intellectual property rights and an assignment of a
United States patent application for CIT technology for $2,000,000. The
technology was purchased from Dr. Lung-Ji Chang, who developed it while at the
University of Alberta, Edmonton, Canada. During 2003, two lawsuits were filed
challenging the Company’s ownership of this intellectual property. The value of
the intellectual property will be diminished if either of the pending lawsuits
regarding the same is successful (see Note 8).





As part
of the acquisition of the CIT technology, the Company agreed to pay Dr. Chang a
5% royalty on net sales of combination gene therapy products. The Company has
not paid any royalties to Dr. Chang to date as there have been no sales of
combination gene therapy products.





NOTE
5 — INCOME TAXES





The
Company accounts for income taxes under FASB ASC 740-10, Income Taxes (“ASC
740-10”). Under ASC 740-10, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. A
valuation allowance is provided for significant deferred tax assets when it is
more likely than not that such assets will not be recovered.





When tax
returns are filed, it is highly certain that some positions taken would be
sustained upon examination by the taxing authorities, while others are subject
to uncertainty about the merits of the position taken or the amount of the
position that would be ultimately sustained. The benefit of a tax position is
recognized in the financial statements in the period during which, based on all
available evidence, management believes it is more likely than not that the
position will be sustained upon examination, including the resolution of appeals
or litigation processes, if any. Tax positions taken are not offset or
aggregated with other positions. Tax positions that meet the
more-likely-than-not recognition threshold are measured at the largest amount of
tax benefit that is more than 50 percent likely of being realized upon
settlement with the applicable taxing authority. The portion of the benefits
associated with tax positions taken that exceeds the amount measured as
described above is reflected as a liability for unrecognized tax benefits in the
accompanying consolidated balance sheet along with any associated interest and
penalties that would be payable to the taxing authorities upon
examination.


14


NOTE
6 — DEBT





Debt
consists of the following:





June 30,
                                    2010
                                  
                                  
                                  December 31,
                                    2009(Unaudited)
                                  
                                  
                                  (Audited)Convertible
      DebtConvertible
      Notes issued September 2008, net of unamortized discount of $159,547 at
      June 30, 2010 and $1,607,111 at December 31, 2009,
      respectively
                                  
                                  $
                                  66,991
                                  
                                  
                                  $
                                  17,775St.
      George Convertible Note, issued September 2009, net of unamortized
      discount $393,681 at December 31, 2009
                                  
                                  
                                  -
                                  
                                  
                                  
                                  222,707First
      Closing of 2010 Convertible Note, issued March 22, 2010, including
      additional $257,860 principal and interest for trigger event, net of
      unamortized discount of $568,888 at June 30, 2010
                                  
                                  
                                  613,972
                                  
                                  
                                  
                                  —Second
      Closing of 2010 Convertible Note, issued April 8, 2010, including
      additional $1,492,121 principal and interest for trigger event, net of
      unamortized discount of $4,346,378 at June 30, 2010
                                  
                                  
                                  2,635,908
                                  
                                  
                                  
                                  —Third
      Closing of 2010 Convertible Note, issued April 13, 2010, including
      additional $1,067,214 principal and interest for trigger event, net of
      unamortized discount of $3,132,646 at June 30, 2010
                                  
                                  
                                  1,891,698
                                  
                                  
                                  
                                  —Fourth
      Closing of 2010 Convertible Note, issued April 26, 2010, net of
      unamortized discount of $542,423 at June 30, 2010
                                  
                                  
                                  142,747
                                  
                                  
                                  
                                  —$
                                  5,351,316
                                  
                                  
                                  $
                                  240,482Senior
      Notes payable, net of unamortized discount of $1,323,523 and $1,701,398 at
      June 30, 2010 and December 31, 2009, respectively
                                  
                                  
                                  2,229,578
                                  
                                  
                                  
                                  1,851,854Bridge
      note
                                  
                                  
                                  83,000
                                  
                                  
                                  
                                  66,632$
                                  7,663,894
                                  
                                  
                                  $
                                  2,158,968Less:
      Current Portion of Senior Notes and Bridge note
                                  
                                  
                                  (2,312,578
                                  )
                                  
                                  
                                  (1,316,667
                                  )Less:
      Current Portion of Convertible Debt
                                  
                                  
                                  (5,351,316
                                  )
                                  
                                  
                                  (240,482
                                  )$
                                  —
                                  
                                  
                                  $
                                  601,819





The
significant terms of the Company’s debt issued prior to the six months ended
June 30, 2010 are described in the notes to the Company’s Annual Report on Form
10-K/A for the year ended December 31, 2009.





Defaults
on Senior Notes and Proposed Debt Exchanges





The
Company did not pay the interest due on the Series 1 Senior Notes or the Series
2 Senior Notes (together “the Series 1 and 2 Notes”) due on December 1, 2009 or
March 1, 2010. The Company did not have sufficient cash to satisfy these debts
and carry on current operations. Consequently, under the terms of the Series 1
and 2 Notes, the interest rate increased from 12% to 18% per annum. The failure
to pay interest as scheduled represented an event of default under the terms of
the Notes and all senior debt was classified as current. However, none of the
holders declared default, or declared the outstanding Series 1 and 2 Notes and
other contractual obligations immediately due.





In order
to resolve the defaults and to preserve as much cash as possible for operations,
management put together various exchange agreements (the “Debt Exchanges”) to
enter into with its the debt holders, subject to shareholder approval
(“Shareholder Approval”) of such share issuances, pursuant to which the debt
holders would exchange their outstanding Notes or other debt obligations for
shares of the Company’s common stock. Although the exchange terms vary slightly
between the debt holders, based upon the terms of each of the particular Notes,
a few provisions are consistent in all of the exchange agreements: First, all of
the issuances pursuant to the proposed Debt Exchanges are subject to Shareholder
Approval. To that end, the Company filed its initial Preliminary Proxy Statement
on Schedule 14A on February 1, 2010 and is in the process of responding to SEC
comments regarding the same so that it can finalize the proxy and send it out to
its shareholders. The Company has the right to seek Shareholder Approval two
times; if it does not receive Shareholder Approval at the second meeting, the
Company will fall back into default on all of the Notes for which shareholders
did not approve the issuance of shares pursuant to the exchange agreement. Once
the Company obtains Shareholder Approval to issue the shares pursuant to a
particular Debt Exchange, upon such issuance, the debt related to such exchange
agreement will be converted to shares of common stock and the holders thereof
shall waive all current and future defaults under the debt. Second, the Company
agreed to use its best efforts to register the shares issuable pursuant to the
exchange agreements in the next registration statement to be filed under the
Securities Act of 1933, as amended. A Form S-1 registration statement to
register the shares issuable pursuant to the note financings was filed on May 3,
2010, but has not yet been declared effective. And third, the issuance of all of
the shares of Common Stock to be issued under these Debt Exchanges is subject to
NYSE Amex listing approval. Therefore, although some debt holders have signed an
exchange agreement, they are not enforceable by us until the Company receive
Shareholder Approval and approval of the  New York Stock Exchange
(“NYSE”) Amex to list the shares, which the Company cannot guarantee and
therefore the exchange may never occur.


15





If and
when the Company do receive Shareholder Approval, the Company shall disclose the
final amount of debt that shall be exchanged and the total number of shares
issued in exchange thereof. Any shares of common stock to be issued pursuant to
the debt exchange will be issued pursuant to Section 4(2) of the Securities Act
for issuances not involving a public offering and Regulation D promulgated
hereunder.





In March
2010, the Company also entered into an Exchange Fee Agreement with Cantone
Research Inc., who was the placement agent for the original issuance of the
Series 1 and 2 Notes. Pursuant to the Exchange Fee Agreement, Cantone Research
agreed to negotiate the exchange with the Series 1 and 2 Note Holders described
above and obtain the Series 1 and 2 Note Holders agreement and signature to the
exchange agreement. Under the Exchange Fee Agreement, the Company agreed to pay
Cantone Research a fee of 2% of the total principal and interest that is due on
the Series 1 and 2 Note, up through March 1, 2010, which, as of such date was
$79,049 or 2% of  $3,952,403. The Company agreed to pay Cantone
Research the number of shares of the Company Common Stock that is equal to the
quotient of $79,048 divided by $0.28, or 282,314 shares. The Company also agreed
to reduce the exercise price of the placement agent warrants issued to Cantone
Research to $0.28 per share upon completion of the Debt Exchange. The issuance
of shares to Cantone Research under the Exchange Fee Agreement is subject to
NYSE Amex and Shareholder Approval. If Shareholder Approval is not received, the
Company will have to pay the exchange fee in cash. Further, if the Company does
not proceed with the Debt Exchanges, none of the other agreements with Cantone
Research Inc. will be consummated. Accordingly, the Company has not accounted
for the related contingent reduction of the exercise of the
warrant.




As of the
date of this Report, we received signatures to the Exchange Agreement from a
majority of the holders of the Series 1 and 2 Notes holding approximately
$3,500,000 of such Notes.





In March
2010, in an effort to further reduce its cash expenditures, the Company also
amended a consulting agreement with Cantone Asset Management, LLC (“Cantone
Asset”). Under the original consulting agreement, the Company was to pay Cantone
Asset an aggregate cash consulting fee of $144,000 and issued Cantone Asset
warrants to purchase 200,000 shares of the Company  common stock at
$0.60 per share. Pursuant to the amendment, (i) Cantone Asset shall instead be
paid with an aggregate of 514,285 shares of the Company  common stock,
(ii) the Company will use the Company  best efforts to register those
shares in the next registration statement the Company file; and, (iii) the
Company will engage counsel to issue a blanket opinion to the
Company  transfer agent regarding the amendment shares once the
related registration statement is declared effective. The Company filed a
registration statement on Form S-1 on May 3, 2010 which included these shares.
In consideration for Cantone Asset agreeing to the amendment, the Company agreed
to adjust the exercise price of their warrant to $0.28 per share. The issuance
of shares pursuant to the amendment is subject to the Company  receipt
of NYSE AMEX listing approval and Shareholder Approval. If the Company do not
receive Shareholder Approval, the exercise price of the warrants will remain at
their pre-agreement amounts and the Company will have to pay the consulting fee
in cash. Accordingly, the Company has not accounted for the related contingent
reduction of the exercise of the warrant.





Additionally,
since the Company did not pay the September 2009 Bridge Loan (the “Bridge Loan”)
back before October 9, 2009, the Interest Rate automatically increased to 18%
per annum, which was retroactive as of September 10, 2009, until the Bridge Loan
is paid in full.  Accordingly, the Company will owe a total of $15,638
in interest payments through August 30, 2010. Under the Bridge Loan Agreement,
the Company agreed to pay the Investor $2,000 as reimbursement for the holder’s
legal fees related to the default. Additionally, since the Bridge Loan was not
repaid by December 1, 2009, $25,000 was added to the principal value of the
Bridge Loan obligation, making the current principle value of the Bridge Loan
$83,000 and the Investor is entitled to $10,000 for any out-of-pocket legal
costs that the Investor may incur to collect the obligation.  Although
the Company did not receive any notice from the holder of the Bridge Loan
requesting acceleration of payment due to the default, the Bridge Loan is due
and owing.




In
March 2010, the Company also entered into an Exchange Agreement with Cantone
Research Inc., who is the note holder of a $83,000 Bridge Note. Under the
Exchange Agreement, we agreed to the the issuance of up to an
aggregate of 404,526 shares of our common stock, issuable upon: (i) exchange and
cancellation of all principal amount of the Bridge Loan ; (ii) cancellation of
all of the interest accrued thereon, accruing at the contractual default rate of
18%, retroactively from September 10, 2009 through August 30, 2010; (iii)
cancellation of all other fees due under the Bridge Loan, totalling
approximately $12,000 and (iv) in consideration for such exchange and
cancellations, a reduction of the warrant exercise price for the 116,000
warrants originally issued in connection with the Bridge Loan from $0.60 per
share to $0.28 per share.The issuance of shares pursuant to the
amendment is subject to our receipt of NYSE AMEX listing approval and
Shareholder Approval. If we do not receive Shareholder Approval, the exercise
price of the warrants will remain at their pre-agreement amounts and the Company
will have to pay the principal and accrued interest in cash. Accordingly, the
Company has not accounted for the related contingent reduction of the exercise
of the warrant.


16





St. George
Convertible Note and Warrant Purchase Agreement Defaults and Waivers; Note
Conversions and Warrant Exercises After January 1, 2010





On
September 15, 2009, the Company issued a 12% Convertible Promissory Note (the
“St. George Note”) to St. George Investments, LLC (“St. George”). On December
11, 2009 the Company entered into a Waiver of Default with St. George pursuant
to which the Company agreed to repay the entire balance of the St. George Note
and any adjustments thereto pursuant to the terms of the initial Waiver by
February 1, 2010. Since the Company failed to pay the entire balance of the note
by February 1, 2010, the Company was in default on the St. George Note. On
February 16, 2010, the Company entered into a Waiver of Default agreement
(“February 16 Waiver”) with St. George pursuant to which: (i) St. George waived
all defaults through May 15, 2010 and agreed not to accelerate the amounts due
under the Note before May 15, 2010 and (ii) St. George shall exercise their
Warrant to purchase 140,000 shares of the Company  common stock at
$0.65 per share. In consideration for this waiver, the Company agreed to pay St.
George a default fee equal to $50,000, which was added to the balance of the
Note effective as of the February 16, 2010. During the six months ended June 30,
2010, St. George converted 100% of its notes and accrued interest of $666,390
and $52,916 respectively into 2,568,951 shares of the Company’s common stock. In
connection with the conversions, the Company accelerated the amortization of
debt discount of $393,681. In addition the Company reclassified derivative
liabilities of $259,975 and $83,872, representing the embedded conversion
features of the converted debt  and warrants, respectively, to equity.
All of such note conversions were at $0.28 per share.





September
2008 Convertible Notes, Note Conversions and Warrant Exercises After January 1,
2010





In
September 2008, we issued $2,510,000 of Convertible Debt securities (the
“Convertible Debt”).   In September 2009, investors holding
approximately 35% of the principal balance of this Convertible Debt elected to
convert their notes to shares of our common stock at the scheduled rate of $1.20
per share.  The total amount converted was $924,605, which included
$885,114 of principal and $39,346 of accrued interest.  These amounts
were converted to 807,243 shares of common stock.  Additionally, we
issued 403,621 warrants, due to the 50% warrant coverage feature associated with
the Convertible Debt, with an exercise price of $0.66 per share.  
Shares issued in connection with this conversion were issued but
unregistered.  Consequently, the investors could not dispose of their
shares. While the investors awaited registration of the shares, the price of our
common stock continued to decline, leaving the investors with ever increasing
unrealized losses.





During
the second quarter of 2010, the Company entered into separate arrangements with
the former Convertible Debt holders that in effect issued the former Convertible
Debt holders: (i) additional shares of common stock, (ii) additional warrants to
purchase more shares of common stock, and (iii) also modified the exercise price
of their warrants.  It should be noted that the substance of the
transaction was to compensate our debt holders for participating in the
Company’s 2010 financings. Accordingly, the Company agreed to issue each of them
a number of shares equal to the amount of interest that would have been earned
from the date of original conversion and such amounts were converted at the same
rate of $1.20.





In total,
The Company has issued approximately 52,000 shares of common stock related to
additional accrued interest and new warrants to purchase approximately 31,000
shares of common stock to these former Convertible Debt holders. As part of this
transaction with the former Convertible Debt holders, the exercise prices of all
of the original warrants issued in connection with the Convertible Debt balances
that converted in 2009 were modified during the second quarter of 2010 and new
exercise prices were established.  The old warrants had exercise prices of
$0.66 per share and under the new modified warrants the exercise prices range
from $1.13 - $1.64 per share.





The
Company valued the incremental shares of common stock issued from the conversion
of the additional accrued interest and recorded a $63,990 charge to interest
expense with an offset to common stock and additional paid in capital.  The
Company also examined the fair value of the original warrants on the date of
modification and compared them to the fair value of the modified warrants on the
date of modification, recording a $17,790 charge to interest expense with an
offset to additional paid in capital.  All of the underlying journal
entries to record these transactions were recorded on the date each debt holder
signed their new exchange agreement during second quarter of 2010.





During
the three months ended June 30, 2010, additional Convertible Debt holders
converted their notes and accrued interest balances to shares of our common
stock.  The total amount of principal and accrued
interest converted as of June 30, 2010 was $2,645,929 which represents 90%
of the total Convertible Debt issued in 2008 and $389,753 of accrued interest
was also converted as of June 30, 2010.  A total of 2,204,941 shares
of common stock have been issued for the conversion of the Convertible Debt and
accrued interest as of June 30, 2010.  Related to all of the
conversions that occurred during the three months ended June 30, 2010, the
Company recorded additional interest expense of $1,262,985 representing the
acceleration of debt discount originally recorded in connection with the
issuance of the Convertible Debt and the additional charges of $81,780 noted
above.  In accordance with the Convertible Debt agreements, the
Company issued warrants to purchase 1,114,658 shares of our common stock, due to
the 50% warrant coverage feature, with exercise prices ranging from $1.13 to
$1.64.  The value of these warrants was contemplated at the inception
of the transaction back in 2008 and was incorporated in the original debt
discount.


17





Note
and Warrant Purchase Agreements- March and April 2010





During
the six month ended June 30, 2010, the Company completed four closings of
convertible note and warrant purchase agreements, aggregating to approximately
$11 million as follows (the “2010 Closings”):





Minimum
                              
                              
                              Maximum
                              
                              
                              WarrantsDate of
                                Issuance
                              
                              Face Value of
                                Convertible
                                Notes
                              
                              
                              Discounts
                              
                              
                              Gross Proceeds
                              
                              
                              Conversion
                                Price Per
                                Share
                              
                              
                              Shares
                                Issuable upon
                                Conversion
                              
                              
                              Number
                              
                              
                              Minimum
                                Exercise
                                Price[1]
                              
                              
                              [2]
                              
                              
                              
                              
                              
                              [3]3/22/2010
                              
                              $
                              925,000
                              
                              
                              $
                              (385,000
                              )
                              
                              $
                              540,000
                              
                              
                              $
                              0.28
                              
                              
                              
                              3,303,571
                              
                              
                              
                              1,100,000
                              
                              
                              $
                              0.284/8/2010
                              
                              
                              5,490,165
                              
                              
                              
                              (2,285,165
                              )
                              
                              
                              3,205,000
                              
                              
                              $
                              0.28
                              
                              
                              
                              19,607,732
                              
                              
                              
                              6,528,213
                              
                              
                              $
                              0.384/13/2010
                              
                              
                              3,957,030
                              
                              
                              
                              (1,647,030
                              )
                              
                              
                              2,310,000
                              
                              
                              $
                              0.28
                              
                              
                              
                              14,132,250
                              
                              
                              
                              4,705,657
                              
                              
                              $
                              0.384/26/2010 [4]
                              
                              
                              599,525
                              
                              
                              
                              (249,525
                              )
                              
                              
                              350,000
                              
                              
                              $
                              0.28
                              
                              
                              
                              2,141,161
                              
                              
                              
                              712,949
                              
                              
                              $
                              0.284/26/2010 [4]
                              
                              
                              85,645
                              
                              
                              
                              (35,645
                              )
                              
                              
                              50,000
                              
                              
                              $
                              0.28
                              
                              
                              
                              305,875
                              
                              
                              
                              101,849
                              
                              
                              $
                              0.89$
                              11,057,365
                              
                              
                              $
                              (4,602,365
                              )
                              
                              $
                              6,455,000
                              
                              
                              
                              
                              
                              
                              
                              39,490,589
                              
                              
                              
                              13,148,668


[1]
              The
      Company also entered into a Registration Rights Agreement with the Lenders
      pursuant to which the Company agreed to file a registration statement by
      May 3, 2010, registering for resale of all of the shares underlying the
      2010 Financing Convertible Notes and the 2010 Financing Warrants. If the
      Company failed to file the registration statement, such event would have
      been deemed a trigger event under the 2010 Financing Convertible Notes.
      The Company timely filed the initial registration statement on May 3,
      2010, but it has not yet been declared effective. Since the registration
      statement, registering all of the securities issuable in the 2010 Debt
      Financing, was not declared effective by June 1, 2010, a trigger event
      under the terms of the notes issued in the First Closing, Second Closing
      and Third Closing occurred (the “June 1 Trigger Event”). The total amount
      of 2010 Financing Convertible Notes issued in the first three closings was
      originally $10,372,195; as a result of the Trigger Event, the principal
      amount of such notes is now $13,189,490 which represents 125% of the
      outstanding principal and accrued interest prior to the event. The
      effective date of the Fourth Closing’s Trigger Event is August 31,
      2010.





[2]
            In
      addition to scheduled debt discounts, the Company incurred debt issuance
      costs of approximately 13% of the proceeds of these
      financings.





[3]
            The
      number of shares of common stock to be issued upon such conversion shall
      be determined by dividing (a) the amount sought to be converted by (b) the
      greater of (i) the Conversion Price (as defined below) at that time, or
      (ii) the Floor Price (as defined below). The Conversion Price is equal to
      80% of the volume-weighted average price for the 5 trading days ending on
      the business day immediately preceding the applicable date the conversion
      is sought, as reported by Bloomberg, LP, or if such information is not
      then being reported by Bloomberg, then as reported by such other data
      information source as may be selected by the lender. The Floor Price is
      initially equal to $0.28 per share, subject to adjustment upon the
      occurrence of certain events, including recapitalization, stock splits,
      issuance of equity securities less than the floor price and similar
      corporate actions.





[4]
            As
      part of the closing on April 26, 2010, certain investors in the 2009
      Registered Direct Offering exercised their Right of Participation and
      purchased $599,525 of the Notes issued in that closing and the Company
      issued such participants warrants to purchase up to 712,949 shares of the
      Company common stock exercisable at $0.28 per share. The remainder of the
      participants received warrants exercisable at $0.89 per
    share.





The
convertible notes and warrants issued pursuant to four 2010 Closings are
virtually the same, but for an addendum the Company entered into at the second
closing regarding the number of shares the Company can issue before receiving
Stockholder Approval to issue more than 19.99% of the Company  issued
and outstanding common stock.





The
private financing described herein was made pursuant to the exemption from the
registration provisions of the Securities Act of 1933, as amended, provided by
Sections 3(a)(9) and 4(2) of the Securities Act and Rule 506 of Regulation D
promulgated hereunder. In addition to the discounts and fees listed above, the
Company paid an aggregate of approximately $1,003,500 in finder’s and legal fees
for the note financings. The securities issued have not been registered under
the Securities Act and may not be offered or sold in the United States absent
registration or an applicable exemption from registration requirements. A Form
S-1 Registration Statement to register the shares issuable pursuant to the note
financings was filed on May 3, 2010, but has not yet been declared
effective.





Each of
the convertible notes issued in the four 2010 Closings, (collectively
“Notes”) matures one year from the date of issuance and carries an original
issue discount. The Lenders have the right, at their sole option, to convert the
Notes, in whole or in part into shares of the Company  common
stock.





If,
during the term of the Notes, the average closing bid price of the Company’s
common stock for at least 20 of the immediately preceding 30 trading days equals
or exceeds $1.25, then on 20 days’ irrevocable notice, and subject to certain
conditions set forth in the Note, the Company can cause the lenders to convert
the outstanding balance of the Notes into shares of common stock. The number of
shares of common stock to be so delivered shall not exceed an amount equal to
the product of the average daily volume of common stock traded on the primary
exchange for common stock during the 20 prior trading days as of the mandatory
conversion determination date multiplied by twenty.


18





Interest
on the unpaid principal balance of the Notes shall accrue at the rate of 12% per
annum, which shall increase to 18% upon the occurrence of a trigger event, as
that term is defined in the Notes. Pursuant to the terms of the First, Second
and Third Closing, a trigger event occured when the Registration Statement the
Company filed on May 3, 2010 was not declared effective by June 1, 2010 and
therefore the interest on the notes issued in those three
Closings increased to 18% per annum. The terms of the Fourth
Closing require us to have the registration statement declared effective by
August 31, 2010 and therefore a Trigger Event did not occur with respect to the
notes issued in the Fourth Closing.Commencing on the 6 month
anniversary of the Notes and each 90 days thereafter on which a payment of
interest is due and continuing on the first day of every third month thereafter
until the one year anniversary of the Note, the Company shall pay the lenders
all interest, fees and penalties accrued but unpaid under the Notes as of such
date. Pursuant to the terms of the Notes, the Company shall also pay lenders six
equal payments representing one-twelfth of the principal amount of the Notes,
commencing on the six month anniversary of the Notes and continuing thereafter
until the Maturity Date, when the Company shall pay all remaining principal and
interest, in cash. The Company maintains the right to make any and all of the
six payments, at the Company option, in cash or shares of common stock at the
greater of the Floor Price or 80% of the volume-weighted average price for the 5
trading days ending on the business day immediately preceding the applicable
payment date.





Notwithstanding
any other terms to the contrary, pursuant to the terms of the Notes, the Company
must pay all amounts due under the Notes in cash unless all of the following
conditions are met: (i) a payment in common stock would not cause an individual
lenders’ beneficial ownership of common stock to exceed 9.99% of the
Company  then outstanding shares of common stock; (ii) the Company
received NYSE Amex listing approval for the common stock issuable under the
Notes; (iii) not less than seven calendar days prior to the applicable payment
date, the Company shall have notified the Lenders that the Company intend to
make such payment in common stock; (iv) (a) the common stock to be issued have
been registered under the Securities Act of 1933, as amended, or (b) (A) Rule
144 promulgated hereunder is available for their sale, (B) the Company provided
to the Lenders (prior to the delivery of the common stock on the applicable
payment date) an attorney’s opinion, in a form acceptable to the lenders, which
provides that Rule 144 is available for the sale of the common stock, (C) the
Company is current on all of the Company  Securities and Exchange
Commission reporting obligations, and (D) the Company is not subject to an
extension for reporting the Company  quarterly or annual results; (v)
the closing bid price for the common stock on the business day on which notice
is given is greater than the Floor Price divided by 80%; and (vi) neither an
Event of Default nor a Trigger Event shall have occurred.





The
Warrants issued in connection with the Notes “Warrants” have a term of five
years and are initially exercisable at the higher of: (i) 105% for the First
closing, 80% for the Second, Third and Fourth Closings of the average VWAP for
the five trading days immediately preceding the date the Company issued the
Warrants; and (ii) the Floor Price (the same as in the Notes) in effect on the
date the Warrants is exercised. The exercise price is subject to the occurrence
of certain events, including capital adjustments and reorganizations. The
Lenders may exercise the Warrants via a cashless exercise if a registration
statement for the Warrant Shares is not  in effect. Pursuant to the
terms of the Warrants, the Company will not affect the exercise of any warrants,
and no person who is a holder of any warrant has the right to exercise his/her
Warrants, if after giving effect to such exercise, such person would
beneficially own in excess of 9.99% of the then outstanding shares of the
Company’s  common stock.





Since the
Company is listed on the NYSE Amex, the Company is required to obtain
stockholder approval to issue more than 19.99% of the Company  issued
and outstanding common stock at a discount from book or market value at the time
of issuance (“19.99% Cap”), which as of the date of the first closing equals
5,085,308 shares, as of the second and third closing equals 5,367,529 shares,
and as of the fthe Company the closing equals 5,919,395 shares of the
Company  common stock. If the Notes and Warrants issued pursuant to
the first closing is fully converted and exercised (but no shares of the
Company  common stock are issued in payment of interest on the Note),
then the Company will issue 4,403,571 shares of the Company  common
stock, which represents 17.3% of the Company  issued and outstanding
common stock. If the Notes and Warrants issued in the Second and Third Closings
are fully converted and exercised (but no shares of the
Company  common stock are issued in payment of interest on the Notes),
then the Company may possibly issue up to a total of 44,973,850 shares of the
Company  common stock, which exceeds 19.99% of the
Company  issued and outstanding common stock. If the Notes and
Warrants issued in the 2010 Closings are fully converted, at the floor price,
and exercised (but no shares of the Company’s common stock are issued in payment
of interest on the Notes), then the Company may possibly issue up to a total of
approximately 3,261,834 shares of the Company  common stock, which
exceeds 19.99% of the Company  issued and outstanding common stock.
Accordingly, the Company is required under the terms of the Notes to obtain
Stockholder Approval, on or before July 15, 2010 for the First and Second
Closings and on or before August 31, 2010, for the Third and Fourth closing. As
of July 31, 2010, the Company did not obtain Stockholder Approval. However, the
Company agreed to seek Stockholder Approval at the Company’s next meeting of
stockholders. The Company is making every effort to hold its annual shareholder
meeting, and obtain the required approval on August 31, 2010. Although we have
responded to all previously received SEC comments, due to the permissible SEC
comment period, the Company may not be cleared to file and mail its definitive
proxy statement timely for an August 31, 2010 meeting. If the Company is unable
to have the meeting and obtain the required approval, an Event of Default under
the Notes shall occur.   The Company is not required to issue any
shares above the 19.99% Cap, if such 19.99% Cap is applicable, until the Company
receives the Stockholder Approval of same.


19





The
Addendum the Company entered into in the Second Closing prohibits the Company
from issuing more than 594,528 shares to the lenders, unless the Company receive
Stockholder Approval and NYSE Amex approval to list and issue all shares
issuable: (i) upon exercise of all of the Warrants at $0.28 per share, (ii) all
of the Notes are converted at that same price (which is the lowest price
possible, although the initial conversion price is to 80% of the five day volume
weighted average closing price of the Company  common stock preceding
the date of conversion) and (iii) no shares are issued in payment of interest.
Pursuant to an Addendum to the Note and Warrant purchase Agreement the Company
entered into in the Second Closing, in the event (i) any Lender in the Second or
Third closing attempts to convert the Notes or exercise the Warrant prior to the
Company  receipt of such Stockholder Approval and NYSE Amex approval
and (ii) such conversion or exercise would require the Company to issue in
excess of 19.99% of the Company  outstanding common stock to any
Lender in the Second or Third closing at any time after the Second closing date
(after reserving 4,403,571 shares for issuance to the lender of the First
closing), then the Company shall not be obligated to issue any shares that would
be in excess of the 19.99% Cap until required approvals are obtained from the
stockholders and NYSE Amex, if required.





NYSE Amex
approved the application for listing on April 19, 2010 for the shares issuable
on conversion of the Notes and Warrants in the First Closing and approved the
application for listing approval of the shares issuable on conversion of the
Notes or issuable on exercise of the Warrants in the Second Closing and the
Third Closing on May 3, 2010. The Company has applied for listing of the shares
issuable on conversion of the Fourth Closing Notes and issuable on exercise of
the Warrants issued in the Fourth Closing or pursuant to their Rights of
Participation, but has not yet received listing approval for the Second, Third
and Fourth Closings.





In
accordance with its Registration Rights Agreement with the lenders, the Company
filed a registration statement on May 3, 2010, registering for resale all of the
shares underlying the Notes and the Warrants, as well as shares issuable under
the Notes and Warrants pursuant to potential adjustments that may occur pursuant
thereto and shares of common stock issuable as interest payments. Pursuant to
the terms of the Registration Rights Agreement, the Company obligation to
register all such shares was satisfied by the registration of that number of
shares of common stock which is at least equal to the sum of (i) the principal
amount of the note plus one year of interest at the rate of 12% divided by the
Floor Price of the Note, which is $0.28 and (ii) the number of shares of common
stock underlying the Lender’s Warrants.





Upon a
Triggering Event, as defined in the Notes, the outstanding balance of the Notes
shall immediately increase to 125% of the then owing principal balance and
interest shall accrue at the rate of 1.5% per month which occurred on June
1st,
2010 for the First, Second and Third Closings. Upon an Event of Default, as
defined in the Notes, the lender may declare the unpaid principal balance
together with all accrued and unpaid interest thereon immediately due and
payable. However, all outstanding obligations payable by the Company shall
automatically become immediately due and payable if the Company become the
subject of a bankruptcy or related proceeding.




In
connection with the registration rights entered into with the First, Second and
Third Closings, the Company recorded an additional $390,000 as interest expense
as a result of a trigger event, which represents the maximum amount of $10,000
payable to each convertible Note Holder.





As noted
above, since the registration statement, registering all of the securities
issuable in the First, Second and Third
Closings, was not declared effective by June 1, 2010, a trigger event
under the terms of the notes issued in the First , Second  and Third
Closings occurred (the “June 1 Trigger Event”). The total amount of 2010
Financing Convertible Notes issued in the first three closings was originally
$10,372,195; as a result of the Trigger Event, the principal amount of such
notes is now $13,189,490.




On
March 22, 2010, the Board of Directors authorized the Company to enter into
a Note and Warrant Purchase Agreement (“Purchase Agreement”) with one accredited
investor (“ISP Holdings” or “First Closing”) pursuant to which the Company
issued the lender in the First Closing a Convertible Promissory Note in the
principal amount of $925,000 bearing interest at a rate of 12%, increasing to
18% upon the occurrence of an event of certain triggering events. The Purchase
Agreement includes a five year warrant to purchase up to 1,100,000 shares
of the Company’s Common Stock at an exercise price of $0.28. The Note carries a
20% original issue discount and matures on March 22, 2011. The Company
agreed to pay $385,000 to the lender in the First Closing to cover their
transaction costs incurred in connection with this transaction; such amount was
withheld from the loan at the closing of the transaction. As a result, the total
net proceeds the Company received were $403,000, after payment made directly by
lender in the First Closing to a vendor of the Company, issuance costs and
finder’s fees paid in connection with the transaction. The lender in the First
Closing may convert the Note, in whole or in part into shares of the
Company’s Common Stock. The Conversion Price is equal to 80% of the
volume-weighted average price for the 5 trading days ending on the business day
immediately preceding the applicable date the conversion is sought but will be
at least $0.28 per share, subject to adjustment upon the occurrence of certain
events. The embedded conversion feature of the convertible debt and warrants are
recorded as derivative liabilities in accordance with relevant accounting
guidance. The fair value on the grant date of the embedded conversion and
warrants amounted to $231,628 and $186,539, respectively, as computed using the
Black-Scholes option pricing model. Due to
the registration statement filed on May 3, 2010, not having been declared
effective by June 1, 2010, the Company increased the principal amount of the
convertible note by $257,860, which represents 25% of the outstanding balance
prior to the June 1, 2010 Trigger Event. As a result, the Company also recorded
additional derivative liabilities for the embedded conversion feature of the
additional interest of $262,873 on June 1, 2010.


20


On April
8, 2010, the Company entered into Note and Warrant Purchase Agreements
(“Purchase Agreements”) with accredited investors  (“Second Closing”)
pursuant to which the Company issued the lenders in the Second Closing a
Convertible Promissory Note in the principal amount of $5,490,165 bearing
interest at a rate of 12%, increasing to 18% upon the occurrence of certain
triggering events. The Purchase Agreement includes a five year warrant to
purchase up to 6,528,213 shares of the Company’s Common Stock at an exercise
price of $0.38. The Note carries a 20% original issue discount and matures in
April 8, 2011. The Company agreed to pay $2,285,165 to the lenders in the Second
Closing to cover their transaction costs incurred in connection with this
transaction; such amount was withheld from the loans at the closing of the
transactions. As a result, the total net proceeds the Company received were
$3,195,000, after payments made directly by lenders in the Second
Closing to a vendor of the Company, issuance costs and finder’s fees paid
in connection with the transaction. The lenders in the Second Closing may
convert the Notes, in whole or in part into shares of the Company’s Common
Stock. The Conversion Price is equal to 80% of the volume-weighted average price
for the 5 trading days ending on the business day immediately preceding the
applicable date the conversion is sought but will be at least $0.28 per share,
subject to adjustment upon the occurrence of certain events. The embedded
conversion feature of the convertible debt and warrants are recorded as
derivative liabilities in accordance with relevant accounting guidance. The fair
value on the grant date of the embedded conversion and warrants amounted to
$11,015,989 and $4,112,774, respectively, as computed using the Black-Scholes
option pricing model. Due to
the registration statement filed on May 3, 2010, not having been declared
effective by June 1, 2010, the Company increased the principal amount of the
convertible note by $1,492,121, which represents 25% of the outstanding balance
prior to the June 1, 2010 Trigger Event. As a result, the Company also recorded
additional derivative liabilities for the embedded conversion feature of the
additional interest of $1,491,007 on June 1, 2010.





On April
13, 2010, the Company entered into Note and Warrant Purchase Agreements
(“Purchase Agreements”) with accredited investors  (“Third Closing”)
pursuant to which the Company issued the lenders in the Third Closing a
Convertible Promissory Note in the principal amount of $3,957,030 bearing
interest at a rate of 12%, increasing to 18% upon the occurrence of certain
triggering events. The Purchase Agreement includes a five year warrant to
purchase up to 4,705,657 shares of the Company’s Common Stock at an exercise
price of $0.38. The Note carries a 20% original issue discount and matures in
April 13, 2011. The Company agreed to pay $1,647,030 to the lenders in the Third
Closing to cover their transaction costs incurred in connection with this
transaction; such amount was withheld from the loans at the closing of the
transactions. As a result, the total net proceeds the Company received were
$2,310,000, after payments made directly by lenders in the Third Closing to
a vendor of the Company, issuance costs and finder’s fees paid in connection
with the transaction. The lenders in the Third Closing may convert the
Notes, in whole or in part into shares of the Company’s Common Stock. The
Conversion Price is equal to 80% of the volume-weighted average price for the 5
trading days ending on the business day immediately preceding the applicable
date the conversion is sought but will be at least $0.28 per share, subject to
adjustment upon the occurrence of certain events. The embedded conversion
feature of the convertible debt and warrants are recorded as derivative
liabilities in accordance with relevant accounting guidance. The fair value on
the grant date of the embedded conversion and warrants amounted to $4,482,492
and $7,011,429, respectively, as computed using the Black-Scholes option pricing
model. Due to
the registration statement filed on May 3, 2010, not having been declared
effective by June 1, 2010, the Company increased the principal amount of the
convertible note by $1,067,314, which represents 25% of the outstanding balance
prior to the June 1, 2010 Trigger Event. As a result, the Company also recorded
additional derivative liabilities for the embedded conversion feature of the
additional interest of $1,066,517 on June 1, 2010.





On April
26, 2010, the Company entered into Note and Warrant Purchase Agreements
(“Purchase Agreements”) with accredited investors  (“Forth Closing”)
pursuant to which the Company issued the lenders in the Forth Closing a
Convertible Promissory Note in the principal amount of $685,170 bearing interest
at a rate of 12%, increasing to 18% upon the occurrence of certain triggering
events. The Purchase Agreement includes a five year warrant to purchase up
to 712,949 shares of the Company’s Common Stock at an exercise price of $0.28
and upto 101,849 shares at an exercise price of $0.89 to two leanders in
the Forth Closing. The Note carries a 20% original issue discount and matures in
April 26, 2011. The Company agreed to pay $285,170 to the lenders in the Forth
Closing to cover their transaction costs incurred in connection with this
transaction; such amount was withheld from the loans at the closing of the
transactions. As a result, the total net proceeds the Company received were
$400,000, after payments made directly by lenders in the Forth Closing to a
vendor of the Company, issuance costs and finder’s fees paid in connection with
the transaction. The lenders in the Forth Closing may convert the Notes, in
whole or in part into shares of the Company’s Common Stock. The Conversion Price
is equal to 80% of the volume-weighted average price for the 5 trading days
ending on the business day immediately preceding the applicable date the
conversion is sought but will be at least $0.28 per share, subject to adjustment
upon the occurrence of certain events. The embedded conversion feature of the
convertible debt and warrants are recorded as derivative liabilities in
accordance with relevant accounting guidance. The fair value on the grant date
of the embedded conversion and warrants amounted to $560,373 and $748,596,
respectively, as computed using the Black-Scholes option pricing
model.





Shares
Issued in Connection with Warrant Exercises and Financing
Arrangements





During
the six months ended June 30, 2010, St. George, a convertible debt holder,
exercised outstanding warrants to purchase an aggregate of 500,000 Shares of the
Company’s common stock. All warrants exercised during the six months ended June
30, 2010 by St. George were at $0.28 per share, the adjusted warrant exercise
price pursuant to the terms of the warrants. The total net proceeds from the
exercise of warrants by St. George during such period were $140,000. The
aggregate intrinsic value of the warrants exercised was $16,000.





At
various times during April 2010 debt holder of Senior Notes Series 1 and 2,
exercised outstanding warrants to purchase an aggregate of 748,000 Shares of the
Company’s common stock. The warrants were exercised at the contractual exercise
prices between $0.98 and $1.11 per share. The total gross proceeds from the
exercise of warrants by Senior Notes Series 1 and 2 note holders during such
period were $740,800 which excludes commission expense of approximate $62,000.
The aggregate intrinsic value of the warrants exercised was $486,200. In
addition, on April 20, 2010, the Company issued 3,499,999 shares of its common
stock to various service providers as compensation services to be provided to
the Company (see Note 10). On April 20, 2010 the Company issued 160,714 shares
to settle a balance payable to a professional services
firm.


21




Activity
in connection with the Company’s convertible debt during the six months ended
June 30, 2010, is as follows:





10% Notes
                            
                            
                            St. George
                              Debt
                            
                            
                            2010 NotesIssued
                            
                            
                            Issued
                            
                            
                            Issued
                            
                            
                            Issued
                            
                            
                            Issued
                            
                            
                            IssuedSep-08
                            
                            
                            Sep-09
                            
                            
                            Mar-10
                            
                            
                            Apr-10
                            
                            
                            Apr-10
                            
                            
                            Apr-10
                            
                            
                            TotalCarrying
      Value Before Discount at December 31, 2009
                            
                            $
                            1,624,886
                            
                            
                            $
                            616,390
                            
                            
                            $
                            —
                            
                            
                            $
                            —
                            
                            
                            $
                            —
                            
                            
                            $
                            —
                            
                            
                            $
                            2,241,276Face
      value of debt issued 2010
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            925,000
                            
                            
                            
                            5,490,165
                            
                            
                            
                            3,957,030
                            
                            
                            
                            685,170
                            
                            
                            
                            11,057,365Additional
      penalties and trigger events note increase
                            
                            
                            —
                            
                            
                            
                            50,000
                            
                            
                            
                            257,860
                            
                            
                            
                            1,492,121
                            
                            
                            
                            1,067,314
                            
                            
                            
                            —
                            
                            
                            
                            2,867,295Portion
      of note converted to equity
                            
                            
                            (1,398,348
                            )
                            
                            
                            (666,390
                            )
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            (2,064,738
                            )Carrying Value Before Discount at June 30,
      2010
                            
                            
                            226,538
                            
                            
                            
                            —
                            
                            
                            
                            1,182,860
                            
                            
                            
                            6,982,286
                            
                            
                            
                            5,024,344
                            
                            
                            
                            685,170
                            
                            
                            
                            14,101,198Discount,
      net of accumulated amortization at December 31, 2009
                            
                            
                            (1,607,111
                            )
                            
                            
                            (393,681
                            )
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            (2,000,792
                            )Acceleration
      of amortization in connection with conversion
                            
                            
                            1,419,215
                            
                            
                            
                            393,681
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            1,812,896Discount
      attributable to 2010 notes
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            (803,138
                            )
                            
                            
                            (5,490,165
                            )
                            
                            
                            (3,957,030
                            )
                            
                            
                            (685,170
                            )
                            
                            
                            (10,935,503
                            )Amortization expense during the six months ended
      June 30, 2010
                            
                            
                            28,350
                            
                            
                            
                            —
                            
                            
                            
                            234,250
                            
                            
                            
                            1,143,787
                            
                            
                            
                            824,384
                            
                            
                            
                            142,747
                            
                            
                            
                            2,373,518Discount, net of accumulated amortization at June
      30, 2010
                            
                            
                            (159,546
                            )
                            
                            
                            —
                            
                            
                            
                            (568,888
                            )
                            
                            
                            (4,346,378
                            )
                            
                            
                            (3,132,646
                            )
                            
                            
                            (542,423
                            )
                            
                            
                            (8,555,797
                            )Net
      Carrying Value at June 30, 2010
                            
                            
                            66,991
                            
                            
                            $
                            —
                            
                            
                            $
                            613,972
                            
                            
                            $
                            2,635,908
                            
                            
                            $
                            1,891,698
                            
                            
                            $
                            142,747
                            
                            
                            $
                            5,351,316




22




Activity
in connection with the Company’s Senior debt during the six months ended June
30, 2010, is as follows:





Series 1Dec-08
                  
                  
                  Jan-09
                  
                  
                  May-09
                  
                  
                  Jun-09
                  
                  
                  TotalCarrying
      Value Before Discount at June 30, 2010
                  
                  $
                  1,077,500
                  
                  
                  $
                  680,000
                  
                  
                  $
                  1,327,249
                  
                  
                  $
                  468,350
                  
                  
                  $
                  3,553,099Discount,
      net of accumulated amortization, at December 31, 2009
                  
                  
                  (318,178
                  )
                  
                  
                  (327,809
                  )
                  
                  
                  (782,043
                  )
                  
                  
                  (273,366
                  )
                  
                  
                  (1,701,396
                  )Amortization
      expense for the six months ended June 30, 2010
                  
                  
                  144,468
                  
                  
                  
                  108,288
                  
                  
                  
                  68,011
                  
                  
                  
                  57,106
                  
                  
                  
                  377,873Discount,
      net of accumulated amortization, at June 30, 2010
                  
                  
                  (173,710
                  )
                  
                  
                  (219,521
                  )
                  
                  
                  (714,032
                  )
                  
                  
                  (216,260
                  )
                  
                  
                  (1,323,523
                  )Net
      Carrying Value at June 30, 2010
                  
                  $
                  903,790
                  
                  
                  $
                  460,479
                  
                  
                  $
                  613,217
                  
                  
                  $
                  252,090
                  
                  
                  $
                  2,229,576





Bridge
Note





On
September 10, 2009, the Company entered into a Bridge Loan Agreement (the
“Bridge Loan Agreement”) with Cantone Research, Inc. (the “Lender”) whereby the
Lender agreed to provide a Bridge Loan for $58,000 inclusive of penalties, (the
“Bridge Loan”) and the Company agreed that the proceeds of the Bridge Loan would
be used exclusively to pay interest due on currently outstanding “12% Senior
Notes”. During the fthe Company th quarter of 2009, the Company defaulted on the
loan and incurred an additional penalty of $25,000 that was added to the
principal balance. Also, on or about January 22, 2010, the Company and the
lender entered in to an exchange agreement, were the Company and the Investor
will cancel and terminate the Bridge Loan in full and exchange the indebtedness
represented thereby for shares of the Company’s common stock, par value $0.001
per share agreed to the payment in full of the Bridge Loan, consisting of the
New Principal Amount of $83,000, the Default Interest Payments and the Legal
Fees in exchange for: i) 404,526 shares of the Company’s common stock (the
“Penalty Common Stock”);and  ii) adjusting the exercise price of the
Bridge Loan Warrant to $0.28 per share (the “Exercise Price”) (the shares of
common stock underlying the Bridge Loan Warrant, the “Warrant Shares ”, together
with the Penalty Common Stock, the “Securities”). As of June 30, 2010, the
outstanding balance of the loan is $83,000, which is due upon demand. The
issuance of shares to Cantone Research under the Exchange Fee Agreement is
subject to NYSE Amex and Shareholder Approval. If the Company do not receive
Shareholder Approval, the Company will have to pay the exchange fee in cash.
Further, if the Company do not proceed with the Debt Exchanges, none of the
other agreements with Cantone Research Inc. will be consummated. Accordingly,
the Company has not accounted for the related contingent reduction of the
exercise price of the warrant.





NOTE
7 — EMPLOYMENT CONTRACT TERMINATION LIABILITY





In
October 2008, the Company’s former chief executive officer agreed to retire from
his employment with the Company. The Company negotiated a settlement of its
employment contract with the former chief executive officer under which he
received $150,000 upon the effective date of the agreement, including $25,000
for reimbursement of his legal expenses. In addition the Company agreed to pay
$540,000 in monthly installments of $18,000, commencing January 31, 2009, to
continue certain insurance coverages, and to extend the term of options
previously granted which would have expired shortly after termination of
employment. Pursuant to FASB ASC 420-10, the Company recorded a liability of
approximately $517,000 for the present value of the monthly installments and
insurance coverage’s due under the settlement agreement. Approximately $251,000
and $225,000 are included in accrued salaries and wages in the accompanying
condensed consolidated balance sheets at June 30, 2010 and December 31, 2009,
respectively. During the six month ended June 30, 2010, the Company paid
approximately $90,000 under this arrangement to the Company’s former
CEO.


23


NOTE
8 — COMMITMENTS AND CONTINGENCIES





Litigation





On
February 22, 2002, AcuVector Group, Inc. (“AcuVector”) filed a statement of
claim in the Court of Queen’s Bench of Alberta, Judicial District of Edmonton
relating to the Company’s CIT technology acquired from Dr. Chang in August 2001.
The claim alleges damages of $CDN 20 million and seeks injunctive relief against
Dr. Chang for, among other things, breach of contract and breach of fiduciary
duty, and against the Company for interference with the alleged relationship
between Dr. Chang and AcuVector. The claim for injunctive relief seeks to
establish that the AcuVector license agreement with Dr. Chang is still in
effect. The Company performed extensive due diligence to determine that
AcuVector had no interest in the technology when the Company acquired it. The
Company is confident that AcuVector’s claims are without merit and that the
Company will receive a favorable result in the case. As the final outcome is not
determinable, no accrual or loss relating to this action is reflected in the
accompanying condensed consolidated financial statements.





The
Company is also defending a companion case filed in the same court the Governors
of the University of Alberta filed against the Company and Dr. Chang in August
2003. The University of Alberta claims, among other things, that Dr. Chang
failed to remit the payment of the University’s portion of the monies paid by
the Company to Dr. Chang for the CIT technology purchased by the Company from
Dr. Chang in 2001. In addition to other claims against Dr. Chang relating to
other technologies developed by him while at the University, the University also
claims that the Company conspired with Dr. Chang and interfered with the
University’s contractual relations under certain agreements with Dr. Chang,
thereby damaging the University in an amount which is unknown to the University
at this time. The University has not claimed that the Company is not the owner
of the CIT technology, just that the University has an equitable interest
therein or the revenues there from.





If either
AcuVector or the University is successful in their claims, the Company may be
liable for substantial damages, its rights to the technology will be adversely
affected and its future prospects for exploiting or licensing the CIT technology
will be significantly impaired.





On June
11, 2010, Hudson Bay Fund, LP. (“Hudson Bay”) filed a statement of claim in the
Court of Cook County, County Department, Law Division, State of Illinois
relating to the Company’s April 8, 2010 Convertible Promissory Notes. The claim
alleges that a Trigger Event occurred, because the registration statement
contemplated by the Registration Rights Agreement was not declared effective on
or before June 1, 2010. As a result to the Trigger Event, the balance was
immediately increased to 125% of the outstanding balance. The Company noted this
Trigger Event and recorded in its accompanied financial statements the increase
of principal.    Moreover, the claim alleged that an
additional Trigger Event occurred because the Company did not cured the first
Trigger Event within five trading days. As a result to the Second Trigger Event,
Hudson Bay alleges that the outstanding balance of the Note should be
immediately increased by an additional 125%. The Company does not agree with
Hudson Bay’s second allegation. The Company is confident that Hudson Bay’s
Second Trigger Event claim is without merit and that the Company will receive a
favorable result in the case. As the final outcome is not determinable, no
accrual or loss relating to the second allegation is reflected in the
accompanying condensed consolidated financial statements





In the
ordinary course of business, there could be other potential claims and lawsuits
brought by or against the Company. In the opinion of management, the ultimate
outcome of these matters will not materially affect the Company’s operations or
financial position or are covered by insurance.





Licensing
Agreements





The
Company has agreed to pay a 5% royalty on net sales of products developed from
the Company’s CIT technology. The Company has not paid any royalties to date as
there have been no sales of such products.





Indemnities
and Guarantees





The
Company has executed certain contractual indemnities and guarantees, under which
it may be required to make payments to a guaranteed or indemnified party. The
Company has agreed to indemnify its directors, officers, employees and agents to
the maximum extent permitted under the laws of the State of Delaware. In
connection with a certain facility lease, the Company has indemnified its lessor
for certain claims arising from the use of the facilities. Pursuant to various
Sale and Purchase Agreements, the Company has indemnified the holders of
registrable securities for any claims or losses resulting from any untrue,
allegedly untrue or misleading statement made in a registration statement,
prospectus or similar document. Additionally, the Company has agreed to
indemnify the former owners of JPI against losses up to a maximum of $2,500,000
for damages resulting from breach of representations or warranties in connection
with the original JPI acquisition. The duration of the guarantees and
indemnities varies, and in many cases is indefinite. These guarantees and
indemnities do not provide for any limitation of the maximum potential future
payments the Company could be obligated to make. Historically, the Company has
not been obligated to make any payments for these obligations and no liabilities
have been recorded for these indemnities and guarantees in the accompanying
consolidated balance sheets.


24


Tax
Matters





The
Company is required to file federal and state income tax returns in the United
States and various other income tax returns in foreign jurisdictions. The
preparation of these income tax returns requires the Company to interpret the
applicable tax laws and regulations in effect in such jurisdictions, which could
affect the amount of tax paid by the Company. The Company, in consultation with
its tax advisors, bases its income tax returns on interpretations that are
believed to be reasonable under the circumstances. The income tax returns,
however, are subject to routine reviews by the various taxing authorities in the
jurisdictions in which the Company files its income tax returns. As part of
these reviews, a taxing authority may disagree with respect to the
interpretations the Company used to calculate its tax liability and therefore
require the Company to pay additional taxes.





NOTE
9 — SHARE-BASED COMPENSATION





The
Company has six share-based compensation plans under which it may grant common
stock or incentive and non-qualified stock options to officers, employees,
directors and independent contractors. A detailed description of the Company’s
share-based compensation plans and option grants outside the option plans is
contained in the notes to the audited December 31, 2009 consolidated financial
statements on form 10-K/A.





For the
six months ended June 30, 2010 and 2009, the Company recorded share-based
compensation expense to employees and directors of $173,758 and $154,056,
respectively. Substantially all of such compensation expense is reflected in the
accompanying condensed consolidated statements of operations and comprehensive
loss within the selling, general and administrative line item. Share-based
compensation expense recognized in the periods presented is based on awards that
have vested or are ultimately expected to vest. Historically, options have
vested upon grant, thus it was not necessary for management to estimate
forfeitures. Options granted in 2008 vested ratably over 24 months. Based on
historical turnover rates and the vesting pattern of the options, the Company’s
management has assumed that there will be no forfeitures of unvested
options.





Summary
of Activity





As of
June 30, 2010, all outstanding stock options are fully vested. There were
1,858,001 stock options outstanding, vested and exercisable with a weighted
average exercise price of $1.90 at June 30, 2010 and December 31, 2009,
respectively. The Company granted no stock options, and no stock options were
exercised during the entire year ended December 31, 2009 or during the six
months ended June 30, 2010. There were no forfeitures or expirations of stock
options during the six months ended June 30, 2010. The aggregate intrinsic value
of options outstanding at June 30, 2010, considering only options with positive
intrinsic values and based on the closing stock price, was zero.





NOTE
10 — FINANCING ACTIVITIES





Common
Stock Issued for Services





On
January 22, 2009, the Company entered into an agreement with B&D Consulting
for investor relations services through July 7, 2010. The Company granted
B&D Consulting 400,000 shares of the Company’s common stock in exchange for
services. In accordance with FASB ASC 505-50, the shares issued are periodically
valued, as earned, through the vesting period. Approximately 183,333 shares were
earned during the year ended December 31, 2009 and 100,000 shares were earned
during the six months ended June 30, 2010. During the six months ended June 30,
2010 and 2009, the Company recorded general and administrative expense of
$65,643 and $29,632, respectively, related to the agreement.





On
September 22, 2009, the Company entered into an agreement with Lyon Consulting
for investor relation services through September 2010. The Company granted Lyons
Consulting 200,000 restricted shares of the Company’s common stock in exchange
for services. In accordance with FASB ASC 505-50, the shares issued will be
periodically valued through the vesting period. Approximately 100,000 shares
were earned during the year ended December 31, 2009 and 100,000 shares were
earned during the six months ended June 30, 2010. During the six months ended
June 30, 2010, the Company recorded general and administrative expense of
$60,000 related to the agreement.





On
January 7, 2010, the Company entered into an agreement for the issuance of
100,000 shares of common stock to Boston Financial Partners for financial
advisory services to be provided for the period January 1, 2010 through July1,
2010. The shares vest  ratably over the seven month
period.  The issuance of the shares was contingent upon AMEX Approval.
AMEX Approval was received in April 8, 2010.  Therefore, the shares
for compensation were measured and recorded on the date of AMEX approval and the
Company recorded prepaid expense of $71,000 related to the agreement. The shares
were being amortized over the service period, and the associated general and
administrative expense of $71,000 was recorded.


25


On
January 13, 2010, the Company entered into an agreement with B&D Consulting
for investor relations services through June 13, 2010. The Company granted
B&D Consulting 200,000 shares of the Company’s common stock in exchange for
services. In accordance with FASB ASC 505-50, the shares issued are periodically
valued, as earned, through the vesting period. The shares were earned during the
six months ended June 30, 2010, and the Company recorded general and
administrative expense of $107,875 related to the agreement.





On
February 5, 2010, the Company entered into an agreement for the issuance of
480,000 shares of common stock to Garden State Securities pursuant to a
consulting agreement for consulting services to be provided from February 5,
2010 through February 5, 2011. The issuance of the shares was contingent upon
AMEX Approval. AMEX Approval was received in April 8, 2010. The shares were
issued, and service agreement does not have a forfeiture provision. Therefore,
the shares for compensation were measured on the date of AMEX approval and the
Company recorded $340,800 as prepaid consulting expenses. The Company recorded
general and administrative expenses of $142,000 related to the agreement for the
six months ended June 30, 2010.





On
February 9, 2010, the Company entered into an agreement for the issuance of
900,000 shares of common stock to LWP1 pursuant to a consulting
agreement for financial advisory services to be provided from February 9,
2010 through November 9, 2010. The shares vest over a ten month period as
follows: 450,000 on February 9, 2010 and 50,000 for each of the nine months
ended November 31, 2010.The issuance of the shares was contingent upon AMEX
Approval. AMEX Approval was received in April 8, 2010.  Therefore, the
shares for compensation were measured and recorded at the day of AMEX approval
and the Company recorded prepaid expense of $639,000 related to the agreement.
The shares are being valued monthly as the shares are vested based on the
trading price of the common stock on the month end date, and the associated
consulting expenses are recorded.  During the quarter ended June 30,
2010, the Company recorded general and administrative expense of $461,500
related to the agreement.





On
February 22, 2010, the Company issued 160,714 shares of common stock to settle
an unpaid invoice in the amount of $45,000 of accounts payable through the date
of the agreement, subject to NYSE Amex Approval. AMEX Approval was received on
April 8, 2010 and the Company recorded the common stock issuance of $45,000
based on stock price on such date.





On March
1, 2010, the Company entered into an agreement for the issuance of 720,000
shares of common stock to JFS Investments pursuant to a consulting agreement for
financial advisory services to be provided indefinitely. The consulting
agreement indicates that the agreement can be terminated by each party after 90
days, with or without case. The shares were issued, and service agreement does
not have a forfeiture provision. Therefore, the shares for compensation were
measured on the date of AMEX approval and the Company recorded $511,200 as
prepaid consulting expenses. The Company recorded general and administrative
expenses of $170,400 related to the agreement for the six months ended June 30,
2010.





Warrants





A summary
of activity with respect to warrants outstanding follows:





Six months ended
                    June 30, 2010Warrants
                  
                  
                  Weighted
                    Average
                    Exercise
                    PriceOutstanding
      and exercisable, January 1, 2010
                  
                  
                  10,393,287
                  
                  
                  $
                  1.84Granted
                  
                  
                  13,148,668
                  
                  
                  
                  0.37Exercised
                  
                  
                  (1,248,000
                  )
                  
                  $
                  0.71Outstanding
      and exercisable, June 30, 2010
                  
                  
                  22,293,955
                  
                  
                  $
                  1.03





In
connection with the First, Second, Third and Fourth  Closing of the
convertible note purchase agreements effective March 22, 2010, April 8, 2010,
April 13, 2010 and April 26, 2010, (see Note 6 for further information), the
Company issued warrants to purchase up to 13,148,668 shares of the Company’s
common stock at exercise prices ranging between $0.28 and $0.89.





During
the six months ended June 30, 2010, St. George, a convertible debt holder,
exercised outstanding warrants to purchase an aggregate of 500,000 Shares of the
Company’s common stock. All warrants exercised during the six months ended June
30, 2010 by St. George were at $0.28 per share, the adjusted warrant exercise
price pursuant to the terms of the warrants. The total net proceeds from the
exercise of warrants by St. George during such period were $140,000. The
aggregate intrinsic value of the warrants exercised was
$19,000.


26


During
the six months ended June 30, 2010, convertible debt holder of Senior Notes
Series 1 and 2, exercised outstanding warrants to purchase an aggregate of
748,000 Shares of the Company’s common stock. The warrants were exercised at the
contractual exercise prices between $0.98 and $1.11 per share. The total gross
proceeds from the exercise of warrants by Senior Notes Series 1 and 2 note
holders during such period were $740,800 before commission of $62,000. The
aggregate intrinsic value of the warrants exercised was $486,200.





NOTE
11 — SEGMENT REPORTING





Prior to
the deconsolidation, the Company had two reportable segments: (i) China, which
consists of manufacturing and wholesale distribution of pharmaceutical and
cosmetic products to distributors, hospitals, clinics and similar institutional
entities in China, and (ii) Corporate, which comprises the development of
in-vitro diagnostics and the Company’s CIT technology, as well as the
development of the Company’s HPE-based products for markets outside of
China.





The
following is information for the Company’s reportable segments for the three
months ended June 30, 2009:





China
                  
                  
                  Corporate
                  
                  
                  TotalNet
      revenue
                  
                  $
                  3,152,693
                  
                  
                  $
                  28,350
                  
                  
                  $
                  3,181,043Gross
      profit
                  
                  $
                  1,013,903
                  
                  
                  $
                  16,737
                  
                  
                  $
                  1,030,640Depreciation
                  
                  $
                  263,512
                  
                  
                  $
                  31,777
                  
                  
                  $
                  295,289Amortization
                  
                  $
                  602,684
                  
                  
                  $
                  50,000
                  
                  
                  $
                  652,684Interest
      expense
                  
                  $
                  55,756
                  
                  
                  $
                  276,278
                  
                  
                  $
                  332,034Income
      (loss) before discontinued operations
                  
                  $
                  (1,532,428
                  )
                  
                  $
                  (2,340,433
                  )
                  
                  $
                  (3,872,861
                  )Capital
      expenditures
                  
                  $
                  1,360,682
                  
                  
                  $
                  646
                  
                  
                  $
                  1,361,328





The
following is information for the Company’s reportable segments for the six
months ended June 30, 2009:





China
                  
                  
                  Corporate
                  
                  
                  TotalNet
      revenue
                  
                  $
                  5,841,360
                  
                  
                  $
                  51,420
                  
                  
                  $
                  5,892,780Gross
      profit
                  
                  $
                  2,125,072
                  
                  
                  $
                  31,732
                  
                  
                  $
                  2,156,804Depreciation
                  
                  $
                  469,899
                  
                  
                  $
                  45,678
                  
                  
                  $
                  515,577Amortization
                  
                  $
                  709,837
                  
                  
                  $
                  75,000
                  
                  
                  $
                  784,837Interest
      expense
                  
                  $
                  111,458
                  
                  
                  $
                  454,793
                  
                  
                  $
                  566,251Income
      (loss) before discontinued operations
                  
                  $
                  (1,133,864
                  )
                  
                  $
                  (4,677,114
                  )
                  
                  $
                  (5,810,978
                  )Capital
      expenditures
                  
                  $
                  1,661,401
                  
                  
                  $
                  107,083
                  
                  
                  $
                  1,768,484





Substantially,
all of the Company’s revenues for the three and six months ended June 30, 2009
were from foreign customers.





NOTE
12 — RELATED PARTY TRANSACTIONS





As part
of the deconsolidation of JPI as of September 29, 2009, the Company agreed to
exchange loans and advances to JPI totaling $5,350,000 for a 6% convertible
promissory note from JPI. These amounts were previously classified as
intercompany balances and eliminated in consolidation. The note will bear
interest at 6% annually. The exchange, including final payment terms of the
convertible note, are expected to be finalized in fiscal 2010.





NOTE
13 — SUBSEQUENT EVENTS





On July
12, 2010, the Company entered into a Letter of Intent with Provista Diagnostics
Inc., a Nevada company offering laboratory services meeting the Clinical
Laboratory Improvement Act guidelines, who the Company intends to acquire if and
when the due diligence process are successfully completed, therefore, the
acquisition may not occur.





On July
25, 2010, Jade Pharmaceutical Inc, entered into a Letter of Intent with Shanxi
Bao Tai Pharmaceutical Co, LTD (the “Seller”), a China company, for the
acquisition of 100% equity interest of the Seller. The transaction is contingent
upon satisfactory due diligence searches, therefore, the transaction may not
occur.


27


Item
2





MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATION





This report contains forward-looking
statements. These statements relate to future events or our future
financial performance. In some cases, you can identify forward-looking statements
by terminology such as “may,” “will,” “should,” “expect,” “plan,”
“anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” the
negative of such terms or other comparable terminology. These statements are
only predictions. Actual events or results may differ
materially.





Although we believe that the
expectations reflected in the forward-looking statements are reasonable, we cannot
guarantee future results, levels of activity, performance or
achievements. Moreover, neither we, nor any other person, assume responsibility for
the accuracy and completeness of the forward-looking statements. We are
under no obligation to update any of the forward-looking statements after the
filing of this Quarterly Report to conform such statements to actual results or
to changes in our expectations.





The following discussion of our
financial condition and results of operations should be read in
conjunction with our consolidated financial statements and the related notes and
other financial information appearing elsewhere in this Quarterly Report.
Readers are also urged to carefully review and consider the various disclosures
made by us which attempt to advise interested parties of the factors
which affect our business, including without limitation the disclosures made
under the caption “Management’s Discussion and Analysis of Financial Condition and
Results of Operations,” and the audited consolidated financial statements
and related notes included in our Annual Report on Form 10-K/A for the year
ended December 31, 2009, previously filed with the U.S. Securities and
Exchange Commission (SEC).





Overview





The
Company





Until
September 2009, we were focused on the production and distribution of
pharmaceutical products through our subsidiaries located in the People’s
Republic of China. We have recently refocused our business on the development,
manufacture and marketing of advanced, pioneering medical diagnostic products,
including our ONKO-SURETM a proprietary In-Vitro Diagnostic (“IVD”) Cancer Test.
During the third and fourth quarter of 2009, we repositioned various business
segments in order to monetize the value of these assets through either new
partnership, separate IPO’s or that could be positioned to be sold. These
special assets include: (i) our 98% ownership in China-based pharmaceuticals
business, Jade Pharmaceuticals Inc. (JPI); (ii) our 100% ownership of a
proprietary cancer vaccine therapy technology: Combined Immunogene Therapy
(“CIT”); and (iii) 100% ownership of the Elleuxe brand of advanced skin care
products with proprietary formulations that include human placenta extract
ingredients sourced from our deconsolidated Chinese subsidiary’s operation. We
currently employ approximately 7 people, all located in California at our
corporate headquarters.





Until
September 2009, we operated in China through our then wholly owned subsidiary,
JPI. JPI engages in the manufacture and distribution of generic and homeopathic
pharmaceutical products and supplements, as well as cosmetic products. JPI
manufactures and distributes its products through two wholly-owned Chinese
subsidiaries, Jiangxi Jiezhong Bio-Chemical Pharmacy Company Limited (“JJB”) and
Yangbian Yiqiao Bio-Chemical Pharmacy Company Limited (“YYB”). However, JPI sold
its interest in YYB in June 2009 and during the quarter ended September 30,
2009, we deconsolidated JPI due to the inability to exercise significant
influence of its operations (See below). In connection with the deconsolidation,
the Company has reclassified its China pharmaceutical manufacturing and
distribution business (conducted through JPI subsidiary) as a business
investment, rather than a consolidated operating subsidiary of the
Company.





On
September 25, 2009, we changed our corporate name from “AMDL, Inc.” to “Radient
Pharmaceuticals Corporation,” because we believe Radient Pharmaceuticals as a
brand name has considerable market appeal and reflects our new corporate
direction and branding statements.





We are
now actively engaged in the research, development, manufacturing, sale and
marketing of our ONKO-SURETM a proprietary IVD Cancer Test in the United States,
Canada, China, Chile, Europe, India, Korea, Taiwan, Vietnam and other markets
throughout the world.


28


We
manufacture and distribute our proprietary ONKO-SURETM cancer test kits at our
licensed manufacturing facility located at 2492 Walnut Avenue, Suite 100, in
Tustin, California. We are a United States Food and Drug Administration
(“USFDA”), GMP approved manufacturing facility. We maintain a current Device
Manufacturing License issued by the State of California, Department of Health
Services, Food and Drug Branch. For the six months ended June 30 2010, we
generated approximately $82,000 in the sales of the Company’s ONKO-SURETM IVD
cancer diagnostic test kits, which is an increase of approximately 60% in sales
of this product over the same period for 2009. We believe, subject to receipt of
adequate financing, revenues from ONKO-SURE will significantly increase in 2010
due to the creation of distribution agreements which are anticipated to move the
IVD cancer diagnostic test kit in markets throughout the world. However, the
success of the Company’s distribution strategy for these products in 2010 is
dependent upon a number of factors. Accordingly, we may not be able to implement
our distribution strategy at the rate we anticipate which will have a material
adverse effect on anticipated 2010 revenues.





Deconsolidation





Due to
several factors including deterioration in its relationship with local
management of JPI, we relinquished control over JPI. Effective September 29,
2009, we agreed to exchange its shares of JPI for 28,000,000 non-voting shares
of preferred stock, which represents 100% of the outstanding preferred shares,
relinquished all rights to past and future profits, surrendered our management
positions and agreed to non-authoritative minority role on JPI’ board of
directors. For accounting purposes, we converted our interest in JPI to that of
an investment to be accounted for under the cost method and deconsolidated JPI
as of September 29, 2009. We recorded a loss on deconsolidation of $1,953,516 in
connection with the transaction during the nine months ended September 30, 2009.
In connection with the deconsolidation, we reclassified China pharmaceutical
manufacturing and distribution business (conducted through JPI subsidiary) as a
business investment, rather than a consolidated operating subsidiary of the
Company.





Based on
management’s evaluation of the current and projected operations of JPI as of
June 30, 2010, we determined that an impairment charge of approximately
$2,300,000 was necessary.  The primary factors considered in our
determination are the financial condition, operating performance, projections of
future operations and the general economic environment.





The
significant terms of the deconsolidation of our operations in China are
described in the notes to our Annual Report on Form 10-K/A for the year ended
December 31, 2009.





Monetization
of the Value of JPI





We and
the management of JPI have recently developed a new path to monetizing the value
of JPI. This new monetization path focuses around JPI acquiring a well-managed
China-based pharmaceuticals manufacturing and marketing company, where in the
acquired company’s management would take over operations of the combined
companies. This combined broader-based pharmaceuticals business would then seek
a financing and public listing in the U.S. Recently, JPI has had active dialogue
with various prospective companies that have indicated an interest in being
acquired by JPI. Although a non-binding letter of intent has been executed, no
definitive agreements had been reached at this time. JPI’s management has
indicted that they believe an acquisition of this type, as described above,
could begin before the end of 2010.





As part
of the deconsolidation of JPI as of September 29, 2009, we agreed to exchange
loans and advances to JPI totaling $5,350,000 for a 6% convertible promissory
note from JPI.  There are risks and uncertainties related to the
collectability of these amounts and, as a result, we recorded a 50% loan loss
reserve at the time of the deconsolidation. Also, there are risks and
uncertainties of investment in JPI and, as a result, as of June 30, 2010, we
determined that an impairment charge of approximately $2,300,000 was
necessary.





IV
Diagnostics





IVD
Cancer Diagnostics





ONKO-SURETM
Kit





Our
ONKO-SURETM product
is manufactured at our Tustin, California based facilities and is sold to third
party distributors, who then sell directly to Clinical Laboratory Improvement
Amendments (“CLIA”) certified reference laboratories in the United States (“US”)
as well as clinical reference labs, hospital laboratories and physician operated
laboratories in the international market. Our test kits are currently being sold
to one diagnostic reference laboratory in the United States


29


The
majority of our sales were outside of the U.S. with, limited sales of test kits
within the U.S. We have developed the next generation version of
the  ONKO-SURE TM test
kit, and in 2009, we entered into a collaborative agreement with the Mayo Clinic
to conduct a clinical study to determine whether the new version of the kit can
lead to improved accuracy in the detection of early-stage cancer. In addition,
we are involved with research conducted with CLIA Laboratories to expand on the
Clinical utility of ONKO-SURETM . The
Company’s ONKO-SURE TM in- vitrodiagnostic test
enables physicians and their patients to effectively monitor and/or detect solid
tumor cancers by measuring the accumulation of specific breakdown products in
the blood called Fibrin and Fibrinogen Degradation Products (FDP). ONKO-SURE
TM
is a simple, non-invasive blood test used for the detection and/or monitoring of
14 different types of cancer including: lung, breast, stomach, liver, colon,
rectal, ovarian, esophageal, cervical, trophoblastic, thyroid, malignant
lymphoma, and pancreatic. ONKO-SURE TM can be
a valuable diagnostic tool in the worldwide battle against cancer, the second
leading cause of death worldwide.





ONKO-SURETM is sold
as a blood test for cancer in Europe (CE Mark certified), India, Taiwan, Korea,
Vietnam, and in Chile (research use); approved in the U.S. for the monitoring of
colorectal cancer (CRC); approved in Canada (by Health Canada) for lung cancer
detection and lung cancer treatment monitoring; and in many key markets, has the
significant potential to be used as a general cancer screening
test.





Because
the ONKO-SURETM test
kit is a non-invasive blood test, there are no side effects of the
administration of the test. As with other cancer diagnostic products, false
positive and false negative test results could pose a small risk to patient
health if the physician is not vigilant in following up on the ONKO-SURE TM test
kit results with other clinically relevant diagnostic modalities. While the
ONKO-SURE TM test
kit is helpful in diagnosing whether a patient has cancer, the attending
physician needs to use other testing methods to determine and confirm the type
and kind of cancer involved.





On July
8, 2009, we changed the brand name of the our in-vitrodiagnostic cancer
test from DR-70to the
more consumer friendly, trademarked brand name “ONKO-SURE TM ,”
which we believe communicates it as a high quality, innovative consumer cancer
test. We are also installing a new tag line — “The Power of Knowing” —
which communicates to cancer patients and their physicians that the test is
effective in assessing whether a patient’s cancer is progressing during
treatment or is in remission.





IVD
Cancer Research and Development





During
the three months ended June 30, 2010, we spent $243,779 on research and
development costs related to the ONKO-SURE TM, as
compared to $332,779 for the same period in 2009. During the six months ended
June 30, 2010, we spent $294,815 on research and development related to the
ONKO-SURE TM, as
compared to $425,463 for the same period in 2009. These expenditures were
incurred as part of the Company’s efforts to improve the existing ONKO-SURE
TMand develop the next generation ONKO-SURE TM.





During
the six months ended June 30, 2010 the majority of expenses incurred were to
fund:





·
            Validation
      study to determine if ONKO-SURETM can be utilized as a general cancer
      screen for 10 to 20 different cancers in a CLIA laboratory developed test
      environment;


·
            Evaluate
      ONKO-SURETM as an additional marker in a existing test to determine if the
      addition will enhance and improve analytical
  performance.





The
Company expect expenditures for research and development to grow during the
second half of 2010 due to additional staff and consultants needed to support an
agreement with Mayo Clinic to conduct a clinical study for the validation of the
Company  next generation version of its United States Food and Drug
Administration(“USFDA”) approved ONKO-SURE TM test
kit, additional costs involved with research conducted with CLIA Laboratories to
expand on the Clinical utility of ONKO-SURETM and
additional development costs associated with entry into new
markets.  The objective of the collaboration is to validate the
ONKO-SURETM as an aid in monitoring the disease status in patients who have been
previously diagnosed with colorectal cancer and determine response to
therapy.  More specifically, by testing each specimen on both the
generation-one kit and generation-two kit, the Company will compare the
ONKO-SURETM values of colorectal cancer patients over the full range of clinical
pathology stages.





For USFDA
regulatory approval on the new test, we  intend to perform an
additional study to demonstrate the safety and effectiveness of the next
generation test for monitoring colorectal cancer. The validation study will run
for three months and final results are expected in the fourth quarter of 2010 or
in early 2011.





Cancer
Therapeutics





In 2001,
the Company acquired the CIT technology, which forms the basis for a proprietary
cancer vaccine. The Company’s  CIT technology is a U.S. patented
technology (patent issued May 25, 2004). The Cancer Therapeutics division is
engaged in commercializing the CIT technology. In April 2010, the Company
entered into a five year collaboration agreement with Jaiva Technologies, Inc.,
(“Jaiva”) where Jaiva will conduct clinical trials of the CIT technology that
potentially could lead to gaining governmental approval in
India.


30


Critical
Accounting Estimates





The
Company’s consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America.
The preparation of these consolidated financial statements requires the Company
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. The Company base its  estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis of making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources.





Actual
results may differ from these estimates under different assumptions or
conditions and the differences could be material.





The
Company believe the following critical accounting policies, among others, affect
the Company’s more significant judgments and estimates used in the preparation
of the Company’s consolidated financial statements.





Revenue Recognition.Revenues
from the wholesale sales of over-the counter and prescription pharmaceuticals
are recognized when persuasive evidence of an arrangement exists, title and risk
of loss have passed to the buyer, the price is fixed or readily determinable and
collection is reasonably assured.





The
Company have entered into several distribution agreements for various geographic
locations with third party distributors. Under the terms of one agreement, the
Company sell product to the distributor at a base price that is the greater of a
fixed amount (as defined in each agreement) or 50% of the distributor’s invoiced
Net Sales price (as defined) to its customers. The distributor is required to
provide quarterly reconciliations of the distributor’s actual invoiced prices at
which time the price becomes fixed and determinable by the Company. Until the
price is fixed and determinable, the Company defers the recognition of revenues
under this arrangement. As of June 30, 2010, the Company had $103,128 of
deferred revenue related to this arrangement recorded in our accompanying
consolidated balance sheet.





Any
provision for sales promotion discounts and estimated returns are accounted for
in the period the related sales are recorded. Buyers generally have limited
rights of return, and the Company provides for estimated returns at the time of
sale based on historical experience. Returns from customers historically have
not been material. Actual returns and claims in any future period may differ
from the Company’s  estimates. In accordance with FASB ASC 605-45-50,
Taxes Collected from Customers
and Remitted to Governmental Authorities, JPI’s revenues are reported net
of value added taxes (“VAT”) collected.





Sales Allowances.A portion
of the Company’s business is to sell products to distributors who resell the
products to end customers. In certain instances, these distributors obtain
discounts based on the contractual terms of these arrangements. Sales discounts
are usually based upon the volume of purchases or by reference to a specific
price in the related distribution agreement. The Company recognizes the amount
of these discounts at the time the sale is recognized. Additionally, sales
returns allowances are estimated based on historical return data, and recorded
at the time of sale. If the quality or efficacy of the Company’s products
deteriorates or market conditions otherwise change, actual discounts and returns
could be significantly higher than estimated, resulting in potentially material
differences in cash flows from operating activities.





Allowance for Doubtful Accounts.The Company maintain allowances for doubtful accounts for estimated
losses resulting from the inability of the Company’s customers to make required
payments. The allowance for doubtful accounts is based on specific
identification of customer accounts and the Company’s  best estimate
of the likelihood of potential loss, taking into account such factors as the
financial condition and payment history of major customers. The Company
regularly evaluate the collectability of the Company’s  receivables.
If the financial condition of the Company’s customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required. The differences could be material and could
significantly impact cash flows from operating activities.





Inventories.Major components
of inventories are raw materials, packaging materials, direct labor and
production overhead. The Company’s  inventories consist primarily of
raw materials and related materials, and are stated at the lower of cost or
market with cost determined on a first-in, first-out (“FIFO”) basis. The Company
regularly monitors inventories for excess or obsolete items and makes any
valuation corrections when such adjustments are needed. Once established,
write-downs are considered permanent adjustments to the cost basis of the
obsolete or excess inventories. The Company writes down inventories for
estimated obsolescence or unmarketable inventory equal to the difference between
the cost of inventories and the estimated market value based upon assumptions
about future demand, future pricing and market conditions. If actual future
demand, future pricing or market conditions are less favorable than those
projected by management, additional write-downs may be required and the
differences could be material. Such differences might significantly impact cash
flows from operating activities.


31


Impairment
of Long-Lived Assets





In
accordance with FASB ASC 360-10-5, Accounting for the Impairment
or Disposal of
Long-Lived Assets, the Company evaluate the carrying value of the
Company’s  long-lived assets for impairment whenever events or changes
in circumstances indicate that such carrying values may not be recoverable. The
Company uses its best judgment based on the current facts and circumstances
relating to its business when determining whether any significant impairment
factors exist. The Company consider the following factors or conditions, among
others, that could indicate the need for an impairment review:





•
            significant
      under performance relative to expected historical or projected future
      operating results;





•
            market
      projections for cancer research
technology;





•
            its
      ability to obtain patents, including continuation patents, on
      technology;





•
            significant
      changes in its strategic business objectives and utilization of the
      assets;





•
            significant
      negative industry or economic trends, including legal
    factors;





•
            potential
      for strategic partnerships for the development of its patented
      technology;





•
            changing
      or implementation of rules regarding manufacture or sale of
      pharmaceuticals in China; and





•
            ability
      to maintain Good Manufacturing Process (“GMP”)
    certifications.





If we
determine that the carrying values of long-lived assets may not be recoverable
based upon the existence of one or more of the above indicators of impairment,
our management performs an undiscounted cash flow analysis to determine if
impairment exists. If impairment exists, we measure the impairment based on the
difference between the asset’s carrying amount and its fair value, and the
impairment is charged to operations in the period in which the long-lived asset
impairment is determined by management. Based on our analyses, we believe that
no indicators of impairment of the carrying value of its long-lived assets
existed at June 30, 2010 except the impairment of the investment in JPI noted
above. There can be no assurance, however, that market conditions will not
change or demand for our products will continue or allow us to realize the value
of its long-lived assets and prevent future impairment.





The
carrying value of our investment in JPI represents our ownership interest in
JPI, accounted for under the cost method. The ownership interest is not adjusted
to fair value on a recurring basis. Each reporting period we assess the fair
value of our ownership interest in JPI fair value in accordance with FASB ASC
325-20-35 paragraphs 1A and 2. Each year we conduct an impairment analysis in
accordance with the provisions within FASB ASC 320-10-35 paragraphs 25 through
32.





Deferred Taxes.We record a
valuation allowance to reduce the deferred tax assets to the amount that is more
likely than not to be realized. We have considered estimated future taxable
income and ongoing tax planning strategies in assessing the amount needed for
the valuation allowance. Based on these estimates, all of our deferred tax
assets have been reserved. If actual results differ favorably from those
estimates used, we may be able to realize all or part of our net deferred tax
assets. Such realization could positively impact our consolidated operating
results and cash flows from operating activities.





Litigation.We account for
litigation losses in accordance with accounting principles generally accepted in
the United States, (“GAAP”), loss contingency provisions are recorded for
probable losses at management’s best estimate of a loss, or when a best estimate
cannot be made, a minimum loss contingency amount is recorded. These estimates
are often initially developed substantially earlier than when the ultimate loss
is known, and the estimates are refined each accounting period, as additional
information is known. Accordingly, we often initially unable to develop a best
estimate of loss; therefore, the minimum amount, which could be zero, is
recorded. As information becomes known, either the minimum loss amount is
increased or a best estimate can be made, resulting in additional loss
provisions. Occasionally, a best estimate amount is changed to a lower amount
when events result in an expectation of a more favorable outcome than previously
expected. Due to the nature of current litigation matters, the factors that
could lead to changes in loss reserves might change quickly and the range of
actual losses could be significant, which could materially impact our
consolidated results of operations and comprehensive loss and cash flows from
operating activities.





Stock-Based Compensation Expense.All issuances of our common stock for non-cash consideration have been
assigned a per share amount equaling either the market value of the shares
issued or the value of consideration received, whichever is more readily
determinable. The majority of non-cash consideration received pertains to
services rendered by consultants and others and has been valued at the market
value of the shares on the measurement date.





We
account for equity instruments issued to consultants and vendors in exchange for
goods and services in accordance with GAAP. The measurement date for the fair
value of the equity instruments issued is determined at the earlier of (i) the
date at which a commitment for performance by the consultant or vendor is
reached or (ii) the date at which the consultant or vendor’s performance is
complete. In the case of equity instruments issued to consultants, the fair
value of the equity instrument is recognized over the term of the consulting
agreement.


32


We
account for equity awards issued to employees as follows. GAAP requires a public
entity to measure the cost of employee services received in exchange for an
award of equity instruments, including stock options, based on the grant-date
fair value of the award and to recognize the portion expected to vest as
compensation expense over the period the employee is required to provide service
in exchange for the award, usually the vesting period.





Derivative
Financial Instruments.





We apply
the provisions of FASB ASC 815-10, Derivatives and Hedging(“ASC
815-10”). Derivatives within the scope of ASC 815-10 must be recorded on the
balance sheet at fair value. During the six months ended June 30, 2010,
we  issued convertible debt with warrants and recorded derivative
liabilities related to the embedded conversion feature of the convertible debt
and a reset provision associated with the exercise price of the warrants. The
fair value of these derivative liabilities on the grant date was $28,349,790 as
computed using the Black-Scholes option pricing model.





In
November 2009, we granted 1,664,643 warrants in connection with a common stock
financing transaction to two individuals. The exercise price of the warrants has
a reset provision which is accounted for as derivative instruments in accordance
with relevant accounting guidance. At the date of grant, the warrants were
valued at $509,839 using the Black-Scholes option pricing model.


During
the six months ended June 30, 2010, a holder of the Company’s convertible debt
converted 100% of its notes and accrued interest into shares of the Company’s
common stock. This resulted in a decrease of the derivative liability of
$259,975, representing the embedded conversion features of the converted debt.
In addition, during the six months ended June 30, 2010, this holder of the
Company`s convertible debt exercised 500,000 warrants. This resulted in a
decrease of $83,872, representing the value of the warrants prior to the
exercise.





In May
2010, we also recorded additional derivative liability of $2,852,427 as a result
of a Trigger Event related to the First, Second and Third 2010 closings (see
Note 6).





The
Company re-measured the fair values of all of its derivative liabilities as of
each period end and recorded an aggregate decrease of $9,093,564 in the fair
value of the derivative liabilities as other income, net during the three and
six months ended June 30, 2010.





Results
of Operations





Six  Months
Ended June 30, 2010 Compared to Six Months Ended June 30, 2009





Introduction





As noted
above, we deconsolidated our operations in China effective September 29, 2009.
The table below reflects the comparative results for the six months ended June
30, 2010 as compared to the six months ended June 30, 2009, after the
elimination of our China based operations:





Six months ended June 30,
                      
                      
                      Difference2010
                      
                      
                      2009
                      
                      
                      $
                      
                      
                      %Net
      revenues
                      
                      $
                      82,394
                      
                      
                      $
                      51,420
                      
                      
                      $
                      30,974
                      
                      
                      
                      60
                      %Cost
      of sales
                      
                      
                      30,113
                      
                      
                      
                      19,688
                      
                      
                      
                      10,425
                      
                      
                      
                      53
                      %Gross
      profit
                      
                      
                      52,281
                      
                      
                      
                      31,732
                      
                      
                      
                      20,549
                      
                      
                      
                      65
                      %Operating
      expenses:Research
      and development
                      
                      
                      294,815
                      
                      
                      
                      425,463
                      
                      
                      
                      (130,648
                      )
                      
                      
                      (31
                      )%Selling,
      general and administrative
                      
                      
                      4,124,160
                      
                      
                      
                      3,757,049
                      
                      
                      
                      367,111
                      
                      
                      
                      10
                      %4,418,975
                      
                      
                      
                      4,182,512
                      
                      
                      
                      236,463
                      
                      
                      
                      6
                      %Loss
      from operations
                      
                      
                      (4,366,694
                      )
                      
                      
                      (4,150,780
                      )
                      
                      
                      (215,914
                      )
                      
                      
                      5
                      %Other
      income (expense):Interest
      expense
                      
                      
                      (34,312,584
                      )
                      
                      
                      (454,793
                      )
                      
                      
                      (33,857,791
                      )
                      
                      
                      7445
                      %Other
      expense, net
                      
                      
                      (1,877
                      )
                      
                      
                      (36,093
                      )
                      
                      
                      34,216
                      
                      
                      
                      (95
                      )%Gain
      on change in fair value of derivative instruments
                      
                      
                      9,093,564
                      
                      
                      
                      -
                      
                      
                      
                      9,093,564
                      
                      
                      
                      100
                      %Impairment
      of investment in JPI
                      
                      
                      (2,299,705
                      )
                      
                      
                      -
                      
                      
                      
                      (2,299,705
                      )
                      
                      
                      100
                      %Total
      other expense, net
                      
                      
                      (27,520,602
                      )
                      
                      
                      (490,886
                      )
                      
                      
                      (27,029,716
                      )
                      
                      
                      5506
                      %Net
      loss
                      
                      
                      (31,887,296
                      )
                      
                      
                      (4,641,666
                      )
                      
                      
                      (27,245,630
                      )
                      
                      
                      587
                      %


33




Net
Revenues





Net
revenues during the six months ended June 30, 2010, were primarily earned from
the sale of ONKO-SURETM test kits. The increase in revenues during the six months
ended June 30, 2010, as compared to the same prior years, results from our
efforts to develop our distribution networks. With USFDA approval of the
Company’s ONKO-SUREtm
product, our goal is to enter into additional exclusive or non-exclusive
distribution agreements for various regions, and due to our overall
commercialization efforts, we expect that sales will continue to increase
in the remaining half of 2010.





We
presently have exclusive distribution agreements in place for ONKO-SURETM test
kits in the U.S., Canada, Korea, India, Russia, Greece, Israel, Vietnam,
Cambodia and Laos. We entered into a consulting arrangement during the second
quarter of 2010 to assist in our business and corporate development, web site
development for the South America market.  Our consultant is currently
reviewing various marketing options including entering into a distribution
agreement.  We anticipate either a direct marketing agreement or a
distribution agreement will be in place by the end of the 2010.





Our
expectations concerning future sales represent forward-looking statements that
are subject to certain risks and uncertainties which could result in sales below
those achieved in previous periods. Sales of ONKO-SUREtm
test kits in 2010 could be negatively impacted by potential competing products,
lack of adequate supply and overall market acceptance our
products.





We have a
limited supply of one of the key components of the ONKO-SUREtm
test kit. The anti-fibrinogen-HRP is limited in supply and additional quantities
cannot be purchased. We currently have two lots remaining which are estimated to
produce approximately 30,000 kits. Based on our current and anticipated orders,
this supply is adequate to fill all orders. Although we are working on replacing
this component so that we are in a position to have an unlimited supply of
ONKO-SURETM in the
future, we cannot assure that this anti-fibrinogen-HRP replacement will be
completed. An integral part of our research and development through 2010 is the
testing and development of an improved version of the ONKO-SUREtm
test kit. We are reviewing various alternatives and believes that a
replacement anti-fibrinogen-HRP will be identified, tested and USFDA approved
before the current supply is exhausted. We will test and evaluate the
performance of the substitute. If the substitute antibody has statistically
better results than precedent antibody, we will need to submit to the USFDA for
approval before replacement take place. If the test results show the same
effectiveness as the current antibody, the new antibody is ready for use and no
further USFDA  approval will be required.





Gross
Profit





The major
components of cost of sales include raw materials and production overhead.
Production overhead is comprised of depreciation of manufacturing equipment,
utilities and repairs and maintenance. The increase in cost of sales is
primarily due to increase sales of ONKO-SUREtm test
kits. In addition, during the six months ended June 30, 2010, our gross margin
increased to approximately 63% from approximately 37%, during the same period of
the prior year, due to improvement of manufacturing process, economies of scale
and improved planning for manufacture of perishable components used in
manufacturing process.





Research
and Development.





The
reduction in research and development expenses is primarily due to reduction in
expenditures for clinical trial, and secondarily, is consistent with
management’s general effort to manage expenditures as resources become
available.





We expect
research and development expenditures to increase during the remainder of 2010
due to:





•
            The
      need for research and development for an updated version of the
      ONKO-SUREtm
      test kit in the US, clinical trials for such tests and funds for ultimate
      USFDA approval; and





•
            Additional
      expenditures for research and development incurred under agreements with
      CLIA laboratories.





Selling,
General and Administrative Expenses





Selling,
general and administrative expenses consist primarily of consulting (including
financial consulting) and legal expenses, director and commitment fees,
regulatory compliance, professional fees related to patent protection, payroll,
payroll taxes, investor and public relations, financial reporting, stock
exchange and shareholder services. Included in selling, general and
administrative expenses were non-cash expenses incurred during the six months
ended June 30, 2010 of approximately $174,000 for options issued to employees
and directors, $1,621,000 of common stock, options and warrants issued to
consultants for services. This increase is primarily due to increase of cash and
noncash expenses of investor relations related to our four closings of debt
financing during the six months ended June 30, 2010. The decrease in the
remaining balance of the selling, general and administrative expenses is due to
relinquished control, deconsolidation of JPI effective September 29, 2009, and
management’s continued efforts to manage selling, general and administrative
expenses.


34


The table
below details the major components of selling, general and administrative
expenses after the elimination of our China based operations:





Six months ended June 30,2010
                  
                  
                  2009Investor
      relations (including value of warrants/common stock
shares)
                  
                  $
                  1,840,701
                  
                  
                  $
                  547,797Salary
      and wages (including value of options)
                  
                  
                  882,270
                  
                  
                  
                  1,446,979Accounting
      and other professional fees
                  
                  
                  781,214
                  
                  
                  
                  849,023Stock
      exchange fees
                  
                  
                  142,500
                  
                  
                  
                  -Directors
      fees (including value of options)
                  
                  
                  86,694
                  
                  
                  
                  170,096Rent
      and office expenses
                  
                  
                  76,907
                  
                  
                  
                  130,296Employee
      benefits
                  
                  
                  66,218
                  
                  
                  
                  129,612Travel
      and entertainment
                  
                  
                  70,133
                  
                  
                  
                  77,584Insurance
                  
                  
                  40,889
                  
                  
                  
                  96,346Taxes
      and licenses
                  
                  
                  33,057
                  
                  
                  
                  99,567Other
                  
                  
                  103,577
                  
                  
                  
                  209,749$
                  4,124,160
                  
                  
                  $
                  3,757,049





Interest
Expense





Interest
expense increased due to the issuance of debt instruments derivative liabilities
and the amortization of the related debt discounts and debt issuance costs
during the six months ended June 30, 2010.





Other
Expense





The
increase in other expense, net is primarily due to approximately $34 million
increase in interest expenses due to the issuance of debt instruments and the
amortization of the related debt discounts, debt issuance costs, penalty
interest, derivative liabilities and a $2,299,705 charge to impairment of
investment to JPI during the six months ended June 30, 2010, offset by a gain of
approximately $9.1 million from change in fair value of derivative
liabilities.





Three
Months Ended June 30, 2010 Compared to Three Months Ended June 30,
2009





As noted
above, we deconsolidated our operations in China effective September 29, 2009.
The table below reflects the comparative results for the three months ended June
30, 2010 as compared to the three months ended June 30, 2009, after the
elimination of our China based operations:





Three months ended June 30,
                        
                        
                        Difference2010
                        
                        
                        2009
                        
                        
                        $
                        
                        
                        %Net
      revenues
                        
                        $
                        45,552
                        
                        
                        $
                        28,350
                        
                        
                        $
                        17,202
                        
                        
                        
                        61
                        %Cost
      of sales
                        
                        
                        8,178
                        
                        
                        
                        11,613
                        
                        
                        
                        (3,435
                        )
                        
                        
                        (30
                        )%Gross
      profit
                        
                        
                        37,374
                        
                        
                        
                        16,737
                        
                        
                        
                        20,637
                        
                        
                        
                        123
                        %Operating
      expenses:Research
      and development
                        
                        
                        243,779
                        
                        
                        
                        332,679
                        
                        
                        
                        (88,900
                        )
                        
                        
                        (27
                        )%Selling,
      general and administrative
                        
                        
                        2,768,978
                        
                        
                        
                        1,712,665
                        
                        
                        
                        1,056,313
                        
                        
                        
                        62
                        %3,012,757
                        
                        
                        
                        2,045,444
                        
                        
                        
                        967,313
                        
                        
                        
                        47
                        %Loss
      from operations
                        
                        
                        (2,975,383
                        )
                        
                        
                        (2,028,707
                        )
                        
                        
                        (946,776
                        )
                        
                        
                        47
                        %Other
      expense:Interest
      expense
                        
                        
                        (33,149,910
                        )
                        
                        
                        (276,278
                        )
                        
                        
                        (32,873,632
                        )
                        
                        
                        11,899
                        %Other
      expense, net
                        
                        
                        (1,614
                        )
                        
                        
                        (36,734
                        )
                        
                        
                        35,120
                        
                        
                        
                        (96
                        )%Gain
      on change in fair value of derivative instruments
                        
                        
                        9,136,558
                        
                        
                        
                        -
                        
                        
                        
                        9,136,558
                        
                        
                        
                        100
                        %Impairment
      of investment in JPI
                        
                        
                        (2,299,705
                        )
                        
                        
                        -
                        
                        
                        
                        (2,299,705
                        )
                        
                        
                        100
                        %Total
      other expense, net
                        
                        
                        (26,314,671
                        )
                        
                        
                        (313,012
                        )
                        
                        
                        (26,001,659
                        )
                        
                        
                        8,307
                        %Net
      loss
                        
                        
                        (29,290,054
                        )
                        
                        
                        (2,341,719
                        )
                        
                        
                        (26,948,435
                        )
                        
                        
                        1,151
                        %


35


Net
Revenues





Net
revenues during the three months ended June 30, 2010, were earned from the sale
of ONKO-SURETM test kits. The increase in revenues during the three months ended
June 30, 2010, as compared to the same prior year results from our efforts
to develop our  distribution networks. With USFDA approval of
our ONKO-SUREtm
product, our  goal is to enter into additional exclusive or
non-exclusive distribution agreements for various regions, and due to our
overall commercialization efforts, we expect that sales will continue to
increase in the latter half 2010.





We presently
have exclusive distribution agreements in place for ONKO-SURETM test kits in the
U.S., Canada, Korea, India, Russia, Greece, Israel, Vietnam, Cambodia and
Laos. We entered into a consulting arrangement during the second quarter of
2010 to assist in business and corporate development, web site development for
the South America market.  Our consultant is currently reviewing
various marketing options including entering into a distribution
agreement.  We anticipate either a direct marketing agreement or a
distribution agreement will be in place by the end of the 2010.





Our expectations
concerning future sales represent forward-looking statements that are subject to
certain risks and uncertainties which could result in sales below those achieved
in previous periods. Sales of ONKO-SUREtm
test kits in 2010 could be negatively impacted by potential competing products,
lack of adequate supply and overall market acceptance of our
products.





We have a
limited supply of one of the key components of the ONKO-SUREtm
test kit. The anti-fibrinogen-HRP is limited in supply and additional quantities
cannot be purchased. We currently have two lots remaining which are estimated to
produce approximately 30,000 kits. Based on our current and anticipated
orders, this supply is adequate to fill all orders. Although we are working
on replacing this component so that we are in a position to have an
unlimited supply of ONKO-SURETM in the
future, we cannot assure that this anti-fibrinogen-HRP replacement will be
completed. An integral part of our research and development through 2010 is the
testing and development of an improved version of the ONKO-SUREtm
test kit. We are reviewing various alternatives and believes that a
replacement anti-fibrinogen-HRP will be identified, tested and USFDA approved
before the current supply is exhausted.  We will test and evaluate the
performance of the substitute. If the substitute antibody has statistically
better results than precedent antibody, we will need to submit to the USFDA
for approval before replacement take place. If the test results show the same
effectiveness as the current antibody, the new antibody is ready for use and no
further USFDA  approval will be required.





Gross
Profit





The major
components of cost of sales include raw materials and production overhead.
Production overhead is comprised of depreciation of manufacturing equipment,
utilities and repairs and maintenance. The decrease in cost of sales is
primarily due to improvement of manufacturing process and better planning for
manufacture of perishable components used in manufacturing process. In addition,
during the three months ended June 30, 2010, the Company’s  gross
margin increased to approximately 82% during the three months ended June 30,
2010 from approximately 59%, during the same period of the prior
year.





Research
and Development.





The
reduction in research and development expenses is primarily due to reduction in
expenditures for clinical trial, and secondarily, is consistent with
management’s general effort to manage expenditures as resources become
available. We  expect research and development expenditures to
increase during the remainder of 2010 due to:





•
            The
      need for research and development for an updated version of the
      ONKO-SUREtm
      test kit in the US, clinical trials for such tests and funds for ultimate
      USFDA approval; and





•
            Additional
      expenditures for research and development incurred under agreements with
      CLIA laboratories.





Selling,
General and Administrative Expenses





Selling,
general and administrative expenses consist primarily of consulting (including
financial consulting) and legal expenses, director and commitment fees,
regulatory compliance, professional fees related to patent protection, payroll,
payroll taxes, investor and public relations, financial reporting, stock
exchange and shareholder services. Included in selling, general and
administrative expenses were non-cash expenses incurred during the three months
ended June 30, 2010 of approximately $1,278,000 of common stock and warrants
issued to consultants for services. The increase in selling, general and
administrative expenses is primarily due to increase of cash and noncash
expenses of investor relations and secondarily due to increased accounting and
other professional fees. The increase in these categories are related to
the four closings of debt financing during the six months ended June
30, 2010.  The decrease in the remaining categories of the selling,
general and administrative expenses is due to relinquished control and
deconsolidation of JPI effective September 29, 2009 and management’s continued
efforts to manage selling, general and  administrative
expenses.


36


The table
below details the major components of selling, general and administrative
expenses:





Three months ended June 30,2010
                  
                  
                  2009Investor
      relations (including value of warrants/options)
                  
                  $
                  1,379,364
                  
                  
                  $
                  244,932Salary
      and wages (including value of options)
                  
                  
                  474,784
                  
                  
                  
                  734,646Accounting
      and other professional fees
                  
                  
                  693,674
                  
                  
                  
                  316,367Stock
      exchange fees
                  
                  
                  57,107
                  
                  
                  
                  -Directors
      fees (including value of options)
                  
                  
                  14,194
                  
                  
                  
                  73,720Rent
      and office expenses
                  
                  
                  45,445
                  
                  
                  
                  55,572Employee
      benefits
                  
                  
                  34,906
                  
                  
                  
                  102,496Travel
      and entertainment
                  
                  
                  40,041
                  
                  
                  
                  70,093Insurance
                  
                  
                  15,483
                  
                  
                  
                  38,606Taxes
      and licenses
                  
                  
                  10,481
                  
                  
                  
                  40,473Other
                  
                  
                  3,499
                  
                  
                  
                  35,760$
                  2,768,978
                  
                  
                  $
                  1,712,665





Interest
Expense





Interest
expense increased due to the issuance of debt instruments and the amortization
of the related debt discounts, debt issuance costs, and derivative liabilities
during the three months ended June 30, 2010.





Other
Expense





The
increase in other expenses, net is primarily due to approximately $33 million
increase in interest expenses due to the issuance of debt instruments and the
amortization of the related debt discounts, debt issuance costs, and derivative
liabilities and a $2,299,705 charge to impairment of investment in JPI during
the three months ended June 30, 2010, offset by a gain of approximately $9.1
million from change in fair value of derivative liabilities.





Liquidity
and Capital Resources





Historically, our operations
have not been a source of liquidity. At June 30, 2010, We had a significant
amount of relatively short term indebtedness that was in default or past due
and we may be unable to satisfy its  obligations to pay interest
and principal thereon. As of June 30, 2010, we had the following
approximate amounts of outstanding short term indebtedness:





(i)
              Accounts
      payable and accrued expenses of approximately $1.6
  million;





(ii)
              Accrued
      salaries of approximately
$341,000;





(iii)
              Accrued
      interest of $777,000;





(iv)
              Approximately
      $227,000 in unsecured convertible notes bearing interest at 10% per annum
      due September 15, 2010;





(v)
              Approximately
      $13,875,000 in unsecured convertible notes bearing interest at 12% per
      annum, increased to 18% per annum upon the occurrence of trigger event,
      due one year from issuance. As of June 30, 2010, the principal increased
      by $2.9 million due to trigger events. These convertible notes are related
      to four  closings during March and April of
  2010;





(vi)
              An
      $83,000 unsecured bridge loan bearing interest at 12% per annum which was
      due October 9, 2009 and obligations under a consulting agreement
      aggregating $25,000 due to Cantone Research, Inc. and Cantone Asset
      Management, LLC, respectively;
and





(vii)
              Approximately
      $3.6 million in senior unsecured promissory notes bearing interest at 18%
      interest, payable quarterly in cash, which are due between December 2010
      and May 2011.


37


See
details below of the four closings of convertible note and warrant purchase
agreements, as follows:





Minimum
                  
                  
                  Maximum
                  
                  
                  WarrantsDate of
                    Issuance
                  
                  Face Value of
                    Convertible
                    Notes
                  
                  
                  Discounts
                  
                  
                  Gross Proceeds
                  
                  
                  Conversion
                    Price Per
                    Share
                  
                  
                  Shares
                    Issuable upon
                    Conversion
                  
                  
                  Number
                  
                  
                  Minimum
                    Exercise
                    Price[1]
                  
                  
                  [2]
                  
                  
                  
                  
                  
                  [3]3/22/2010
                  
                  $
                  925,000
                  
                  
                  $
                  (385,000
                  )
                  
                  $
                  540,000
                  
                  
                  $
                  0.28
                  
                  
                  
                  3,303,571
                  
                  
                  
                  1,100,000
                  
                  
                  $
                  0.284/8/2010
                  
                  
                  5,490,165
                  
                  
                  
                  (2,285,165
                  )
                  
                  
                  3,205,000
                  
                  
                  $
                  0.28
                  
                  
                  
                  19,607,732
                  
                  
                  
                  6,528,213
                  
                  
                  $
                  0.384/13/2010
                  
                  
                  3,957,030
                  
                  
                  
                  (1,647,030
                  )
                  
                  
                  2,310,000
                  
                  
                  $
                  0.28
                  
                  
                  
                  14,132,250
                  
                  
                  
                  4,705,657
                  
                  
                  $
                  0.384/26/2010 [4]
                  
                  
                  599,525
                  
                  
                  
                  (249,525
                  )
                  
                  
                  350,000
                  
                  
                  $
                  0.28
                  
                  
                  
                  2,141,161
                  
                  
                  
                  712,949
                  
                  
                  $
                  0.284/26/2010 [4]
                  
                  
                  85,645
                  
                  
                  
                  (35,645
                  )
                  
                  
                  50,000
                  
                  
                  $
                  0.28
                  
                  
                  
                  305,875
                  
                  
                  
                  101,849
                  
                  
                  $
                  0.89$
                  11,057,365
                  
                  
                  $
                  (4,602,365
                  )
                  
                  $
                  6,455,000
                  
                  
                  
                  
                  
                  
                  
                  39,490,589
                  
                  
                  
                  13,148,668


[1]
            The
      Company also entered into a Registration Rights Agreement with the Lenders
      pursuant to which the Company agreed to file a registration statement by
      May 3, 2010, registering for resale of all of the shares underlying the
      2010 Financing Convertible Notes and the 2010 Financing Warrants. If the
      Company fail to file the registration statement, such event shall be
      deemed a trigger event under the 2010 Financing Convertible Notes. The
      Company timely filed the initial registration statement on May 3, 2010,
      but it has not yet been declared effective. Since the registration
      statement, registering all of the securities issuable in the 2010 Debt
      Financing, was not declared effective by June 1, 2010, a trigger event
      under the terms of the notes issued in the First Closing, Second Closing
      and Third Closing occurred (the “June 1 Trigger Event”). The total amount
      of 2010 Financing Convertible Notes issued in the first three closings was
      originally $10,372,195; as a result of the Trigger Event, the principal
      amount of such notes is now $13,189,490 which represents 125% of the
      outstanding principal and accrued interest prior to the event. The
      principal amount of the notes issued in the fourth closing will also
      suffer a Trigger Event if the Notes are not approved by the
      Shareholders on or before August 31,
  2010.





[2]
            In
      addition to scheduled debt discounts, the Company incurred debt issuance
      costs of approximately 13% of the proceeds of these
      financings.





[3]
            The
      number of shares of common stock to be issued upon such conversion shall
      be determined by dividing (a) the amount sought to be converted by (b) the
      greater of (i) the Conversion Price (as defined below) at that time, or
      (ii) the Floor Price (as defined below). The Conversion Price is equal to
      80% of the volume-weighted average price for the 5 trading days ending on
      the business day immediately preceding the applicable date the conversion
      is sought, as reported by Bloomberg, LP, or if such information is not
      then being reported by Bloomberg, then as reported by such other data
      information sthe Company ce as may be selected by the lender. The Floor
      Price is initially equal to $0.28 per share, subject to adjustment upon
      the occurrence of certain events, including recapitalization, stock
      splits, and similar corporate
actions.





[4]
            As
      part of the closing on April 26, 2010, certain investors in the 2009
      Registered Direct Offering exercised their Right of Participation and
      purchased $599,525 of the Notes issued in that closing and the Company
      issued such participants warrants to purchase up to 712,949 shares of the
      Company common stock exercisable at $0.28 per share. The remainder of the
      participants received warrants exercisable at $0.89 per
    share.




Each of
the notes matures one year from the date of issue and is convertible at the
option of the holders. We are attempting to obtain stockholder approval to
restructure and convert a significant portion of the indebtedness referred to in
(ii), and (vi) above; however, there can be no assurance that such indebtedness
will be restructured, converted into equity or that the requisite approvals
therefore can be obtained. Absent approval of our stockholders and the NYSE Amex
to restructure these obligations or the receipt of a new financing or series of
financings, our current operations do not generate sufficient cash to pay the
interest and principal on these obligations when they become due. Accordingly,
there can be no assurance that we will be able to pay these or other obligations
which we may incur in the future.


38




Our cash
balances at June 30, 2010 and December 31, 2009 were approximately $2,522,000
and approximately $12,000, respectively.





Operating activities.Our  cash used in and provided by operations was $4,601,375 and
$2,124,145 for the six months ended June 30, 2010 and 2009, respectively. The
primary driver of cash used or provided by operations during the six months
ended June 30, 2010 and 2009 was the net losses of approximately $32 million and
approximately $9.8 million, respectively. The effect of the net loss during the
six months ended June 30, 2010 was partially offset by significant non-cash
activity such as (i) approximately $5,344,000 for the amortization of debt
issuance costs and  debt discounts, (ii) approximately $174,000 for
the fair value of options granted to employees and directors for service, (iii)
approximately $1,621,000 representing the fair market value of common stock,
warrants and options expensed for services, (iv) approximately $2,877,000
related to additional principal added for triggering events, and
(v) $24,053,345 representing interest expense related to fair value of
derivative instruments granted. The effect of the net loss was further offset by
an aggregate gain from change in fair value of derivative liabilities interest
expenses of $9,093,564.





Investing activities.We used
$15,000 and approximately $2 million in investing activities in the six months
ended June 30, 2010 and 2009, respectively. During the six months ended June 30,
2009, we made expenditures in an effort to regain our GMP certification for
JJB’s small injectible manufacturing lines. In addition, we acquired lab and
office equipment for our U.S. facility to support our ONKO-SURE test kit
initiatives. During the Six months ended June 30, 2010, we acquired lab and
office equipment for our Tustin facility.




Financing
activities .Cash proceeds from the
issue of debt, net of discounts and debt issue costs, were approximately $6.3
million and approximately $2.1 million during the six months ended June 30, 2010
and 2009, respectively. In addition, we collected proceeds of approximately
$818,000 from the exercise of warrants during the six months ended June 30,
2010.





Off-Balance
Sheet Arrangements





We are
not party to any off-balance sheet arrangements, however, we have executed
certain contractual indemnities and guarantees, under which we may be required
to make payments to a guaranteed or indemnified party. We have agreed to
indemnify our directors, officers, employees and agents to the maximum extent
permitted under the laws of the State of Delaware. In connection with a certain
facility lease, we have indemnified our lesser for certain claims arising from
the use of the facilities. Pursuant to the Sale and Purchase Agreement, we have
indemnified the holders of registrable securities for any claims or losses
resulting from any untrue, allegedly untrue or misleading statement made in a
registration statement, prospectus or similar document. Additionally, we have
agreed to indemnify the former owners of JPI against losses up to a maximum of
$2,500,000 for damages resulting from breach of representations or warranties in
connection with the JPI acquisition. The duration of the guarantees and
indemnities varies, and in many cases is indefinite. These guarantees and
indemnities do not provide for any limitation of the maximum potential future
payments we could be obligated to make. Historically, we have not been obligated
to make any payments for these obligations and no liabilities have been recorded
for these indemnities and guarantees in the accompanying consolidated balance
sheets.





Going
Concern





The
condensed consolidated financial statements have been prepared assuming we
will continue as a going concern, which contemplates, the realization of assets
and satisfaction of liabilities in the normal course of business. We
incurred losses from continuing operations of $31,887,296 and $5,810,979 for the
six months ended June 30, 2010 and 2009, respectively, and had an accumulated
deficit of $84,325,849 at June 30, 2010. In addition, we used cash in
operating activities of continuing operations of $4,601,375 and had a working
capital deficit of approximately $38.9 million, based on the face amount of the
current portion of debt. These factors raise substantial doubt about our
ability to continue as a going concern.





The
monthly cash requirement of $300,000 does not include any extraordinary items or
expenditures, including payments to the Mayo Clinic on clinical trials
for our ONKO-SUREtm
kit, research conducted through CLIA Laboratories or expenditures related to
further development of the CIT technology, as no significant expenditures are
anticipated other than recurring legal fees incurred in furtherance to of patent
protection for the CIT technology.





We raised
gross proceeds of approximately $6.5 million in connection with convertible note
and warrant purchase agreements during the six months ended June 30, 2010.
Additionally, in 2010, we entered into a 5-year collaboration agreement
with a third party to commercialize our CIT technology in India,
resulting in a potential revenue sharing arrangement. We are actively securing
additional distribution agreements that include potential revenue sharing
arrangements in 2010.


39


Management’s
plans include seeking financing, conversion of certain existing notes payable to
common stock, alliances or other partnership agreements with entities interested
in our technologies, or other business transactions that would generate
sufficient resources to assure continuation of our operations and research
and development programs.




There are
significant risks and uncertainties which could negatively affect our
operations. These are principally related to (i) the absence of substantive
distribution network for our ONKO-SUREtm
kits, (ii) the early stage of development of our CIT technology and the need to
enter into additional strategic relationships with larger companies capable of
completing the development of any ultimate product line including the subsequent
marketing of such product, (iii) the absence of any commitments or firm orders
from our distributors, (iv) possible defaults in existing indebtedness and (v)
failure to meet operational covenants in existing financing agreements which
would trigger additional defaults or penalties. Our limited sales to date for
the ONKO-SUREtm
kit and the lack of any purchase requirements in the existing distribution
agreements make it impossible to identify any trends in our business prospects.
Moreover, if either AcuVector and/or the University of Alberta is successful in
their claims, we may be liable for substantial damages, our rights to the CIT
technology will be adversely affected, and our future prospects for licensing
the CIT technology will be significantly impaired.





ITEM
3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Not
applicable.





ITEM
4.  CONTROLS AND PROCEDURES





Disclosure
of Controls and Procedures





We maintain
disclosure controls and procedures designed to provide reasonable assurance that
material information required to be disclosed by the us in the
reports we file or submit under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms, and that the information is accumulated and
communicated to our management, including our Chief Executive Officer
and Principal Financial Officer, as appropriate to allow timely decisions
regarding required disclosure. We performed an evaluation, under the
supervision and with the participation of our management,
including our Chief Executive Officer and Principal Financial Officer, of
the effectiveness of the design and operation of our disclosure controls
and procedures as of the end of the period covered by this report. Based on the
existence of the material weaknesses discussed below under the heading “Material
Weaknesses” our management, including the Chief Executive Officer and
Principal Financial Officer, concluded that our disclosure controls and
procedures were not effective at the reasonable assurance level as of the end of
the period covered by this report.





We
do not expect our disclosure controls and procedures will prevent
all errors and all instances of fraud. Disclosure controls and procedures, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the disclosure controls and
procedures are met. Further, the design of disclosure controls and procedures
must reflect the fact that there are resources, constraints, and the benefits
must be considered relative to their costs. Because of the inherent limitations
in all disclosure controls and procedures, no evaluation of disclosure controls
and procedures can provide absolute assurance that we detected all our
control deficiencies and instances of fraud, if any. The design of disclosure
controls and procedures also is based partly on certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future
conditions.





Material
Weaknesses





In our
Management’s Report on Internal Control Over Financial Reporting included
in our Form 10-K/A for the period ended December 31, 2009, management
concluded that our internal control over financial reporting was not
effective due to the existence of the material weaknesses as of December 31,
2009, discussed below. A material weakness is a control deficiency, or a
combination of control deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected.





During
the six months ended June 30, 2010, we did not maintain effective controls
to ensure there is adequate analysis, documentation, reconciliation, and review
of accounting records and supporting data, especially as it relates to
subsidiary accounting records. This control deficiency contributed to the
individual material weaknesses described below:





a)
Shortage of qualified financial reporting personnel with sufficient depth,
skills and experience to apply accounting principles generally accepted in the
United States of America (“GAAP”).


40


b) We
did not maintain effective controls to ensure there is adequate analysis,
documentation, reconciliation, and review of accounting records and supporting
data.





c) We do
not have adequate controls in place to identify and approve non-recurring
transactions such that the validity and proper accounting can be determined on a
timely basis.





In
summary, the control deficiencies and material weaknesses noted above could
result in a material misstatement of the aforementioned accounts or disclosures
that would result in a material misstatement to our interim or annual
consolidated financial statements that would not be prevented or detected.
Accordingly, management has determined that each of the control deficiencies
described above constitutes a material weakness.





Remediation
Plan for Material Weaknesses





As of
December 31, 2009 and June 30, 2010 there were control deficiencies which
constitute material weaknesses in our  internal control over
financial reporting. To the extent reasonably possible in our current
financial condition, we have:





1. added
staff members and outside consultants with appropriate levels of experience and
accounting expertise to the finance department and information technology
department to ensure that there is sufficient depth and experience to implement
and monitor the appropriate level of control procedures;





2. issued
policies and procedures regarding the delegation of authority and conducted
training sessions with appropriate individuals.





Through
these steps, we believe we are addressing the deficiencies that
affected our  internal control over financial reporting as of
December 31, 2009 and June 30, 2010. Because the remedial actions require hiring
of additional personnel, upgrading certain of our  information
technology systems, and relying extensively on manual review and approval, the
successful operation of these controls for at least several quarters may be
required before management may be able to conclude that the material weakness
have been remediated. We intend to continue to evaluate and
strengthen our Internal Control Over Financial Reporting (“ICFR’) systems.
These efforts require significant time and resources.





Notwithstanding
the material weaknesses discussed above, our management has concluded that the
condensed consolidated financial statements included in this Quarterly Report on
Form 10-Q fairly present in all material respects our financial condition,
results of operations, and cash flows for the period ended June 30, 2010 in
conformity with accounting principles generally accepted in the United States of
America.





Changes
in Internal Control Over Financial Reporting.





Except
as set forth above, there have not been any changes in our internal control over
financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) during the six months ended June 30, 2010 that have
materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.


41





PART
II - OTHER INFORMATION





ITEM
      1.
            Legal
      Proceedings




On June
11, 2010, Hudson Bay Fund, LP. (“Hudson Bay”) and Hudson Bay Overseas Fund, Ltd
("Hudson Overseas", together with Hudson Bay, "Hudson") filed a
statement of claim in the Court of Cook County, County Department, Law Division,
State of Illinois relating to our April 8, 2010 Convertible Promissory
Notes issued to Hudson, (the "Hudson Notes"). The claim alleges that a Trigger
Event occurred, because the registration statement contemplated by the
Registration Rights Agreement was not declared effective on or before June 1,
2010. As a result of the Trigger Event, the balance was immediately increased to
125% of the outstanding balance. We recorded in its accompanied financial
statements the increase of principal.    Moreover, the claim
alleged that an additional Trigger Event occurred because we did not cure
the first Trigger Event within five trading days, (the “Second Trigger Event”).
As a result of the Second Trigger Event, Hudson alleges that the
outstanding balance of the Hudson Notes should be immediately increased by
an additional 125%. We do not agree with Hudson second
allegation. We are confident that Hudsons Second Trigger Event
claim is without merit and that we will receive a favorable result in the
case. As the final outcome is not determinable, no accrual or loss relating to
the second allegation is reflected in the accompanying condensed consolidated
financial statements.





In the
ordinary course of business, there could be other potential claims and lawsuits
brought by or against us. However, other than the above, we are not a party to
any material legal proceeding and to our knowledge no such proceeding is
currently contemplated or pending.





ITEM
      2.
            Unregistered
      Sales of Equity Securities and Use of
Proceeds





(a)
            Information relating to sales of
      the Company’s securities that were not registered under the Securities Act
      are disclosed in the Current Reports on Form 8-K that the Company filed on
      March 26, 2010, April 13, 2010, April 16, 2010 and April 28, 2010 and
      we are therefore not furnishing such information
      herein.





(b)
            Not
      Applicable.





(c)
            Not
      Applicable.





ITEM
      3.
            Defaults
      upon Senior Securities





(a)
            We previously
      disclosed information relating to defaults on our senior notes in the
      Current Report on Form 8-K that we filed with the Securities and
      Exchange Commission on March 16, 2010 and therefore are not required
      to provide such information herein.





(b)
            We previously
      disclosed information relating to defaults on our convertible
      notes in the Current Report on Form 8-K that we filed with the
      Securities and Exchange Commission on August 12, 2010 and therefore are
      not required to provide such information
herein.





(c)
            Not
      applicable.





ITEM
      4.
            Removed
      and Reserved





ITEM
      5.
            Other
      Information





(a)
            On
      June 11, 2010, a claim was filed against us in an Illiniois Court.
      The details of the claim are set forth on Part II, Item 1
      above.





(b)
            Not
      applicable.


42


ITEM
6.  EXHIBITS





(a) The
following exhibits are filed as part of this report.





Exhibit Number
            Document3.1
            Certificate
      of Incorporation of the Company, as amended. (Incorporated by reference to
      Exhibit 3.1 to the Current Report on Form 8-K filed on September 18,
      2009.)3.2
            Amended
      and restated Bylaws of the Company (Incorporated by reference to
      Exhibit 3.1 to the Current Report on Form 8-K filed on July 12,
      2010.)31.1
            Certification
      of Principal Executive Officer required by Rule 13a-14/15d-14(a)
      under the Exchange Act31.2
            Certification
      of Principal Financial Officer  Pursuant to Section
      302 of the Sarbanes-Oxley Act of 2002.32.1
            Certification
      of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.32.2
            Certification
      of  Principal Financial Officer pursuant to 18 U.S.C. Section
      1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.


43


Radient
Pharmaceuticals Corporation





SIGNATURES





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 thereunto
duly authorized.





RADIENT
      PHARMACEUTICALS CORPORATION(Registrant)Date:
      August 17, 2010
                
                By:
                /s/ Douglas C. MacLellanDouglas
      C. MacLellan, President andChief
      Executive OfficerDate:
      August 17, 2010
                
                By:
                /s/
      Akio AriuraAkio
      Ariura, Chief Financial Officer andSecretary
      (Principal Financial Officer)


44