UNITED STATES SECURITIES AND EXCHANGE
COMMISSION


WASHINGTON, D.C.
20549




FORM 10-Q




(Mark
One)




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


For
the quarterly period ended September 30, 2010


o
            
            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
                of incorporation or
      organization)
              
              33-0413161
                (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 þ No o




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (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
þ No o




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
              (Do
      not check if a smaller
              reporting
      company)
            
            Smaller
      reporting
              company
      þ




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
November 17, 2010,the Company had 36,760,506 of common shares
outstanding.







Radient
Pharmaceuticals Corporation




FORM 10-Q


FOR
THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2010


INDEX




PART
      I — FINANCIAL INFORMATION
                                    3Item 1.
      Financial Statements
                                    3Condensed
      Consolidated Balance Sheets at September 30, 2010 (Unaudited) and
      December 31, 2009
                                    3Unaudited
      Condensed Consolidated Statements of Operations and Comprehensive Loss for
      the three and nine months ended September 30, 2010 and
2009
                                    4Unaudited
      Condensed Consolidated Statements of Cash Flows for the nine months ended
      September 30, 2010 and 2009
                                    5Notes
      to Unaudited Condensed Consolidated Financial Statements
                                    6Item 2.
      Management’s Discussion and Analysis of Financial Condition & Results
      of Operation
                                    31Item 3.
      Quantitative and Qualitative Disclosure About Market Risks
                                    47Item 4.
      Controls and Procedures
                                    47PART
      II — OTHER INFORMATION
                                    49Item 1.
      Legal Proceedings
                                    49Item 2.
      Unregistered Sales of Equity Securities And Use Of
Proceeds
                                    49Item 3.
      Defaults Upon Senior Securities
                                    49Item 4.
      Removed and Reserved
                                    49Item 5.
      Other Information
                                    49Item 6.
      Exhibits
                                    50Signatures:
                                    51EX-31.1EX-31.2EX-32.1EX-32.2


2


PART I — FINANCIAL
INFORMATION


Item 1.
Financial Statements


Radient
Pharmaceuticals Corporation


CONDENSED
CONSOLIDATED BALANCE SHEETS




September 30,
                                                              
                                                              
                                                              December 31,2010
                                                              
                                                              
                                                              2009(Unaudited)ASSETSCurrent
      assets:Cash
                                                              
                                                              $
                                                              916,513
                                                              
                                                              
                                                              $
                                                              12,145Inventories
                                                              
                                                              
                                                              73,409
                                                              
                                                              
                                                              
                                                              79,255Debt
      issuance costs
                                                              
                                                              
                                                              482,406
                                                              
                                                              
                                                              
                                                              692,969Prepaid
      expenses and other current assets
                                                              
                                                              
                                                              42,479
                                                              
                                                              
                                                              
                                                              57,778Prepaid
      consulting
                                                              
                                                              
                                                              333,332
                                                              
                                                              
                                                              
                                                              358,667Note
      receivable
                                                              
                                                              
                                                              126,937
                                                              
                                                              
                                                              
                                                              −Total
      current assets
                                                              
                                                              
                                                              1,975,076
                                                              
                                                              
                                                              
                                                              1,200,814Property
      and equipment, net
                                                              
                                                              
                                                              80,849
                                                              
                                                              
                                                              
                                                              83,547Intangible
      assets, net
                                                              
                                                              
                                                              1,083,333
                                                              
                                                              
                                                              
                                                              1,158,333Receivable
      from JPI, net of allowance
                                                              
                                                              
                                                              2,675,000
                                                              
                                                              
                                                              
                                                              2,675,000Investment
      in JPI
                                                              
                                                              
                                                              17,738,007
                                                              
                                                              
                                                              
                                                              20,500,000Debt
      issuance cost, net of current portion
                                                              
                                                              
                                                              –
                                                              
                                                              
                                                              
                                                              595,941Other
      assets
                                                              
                                                              
                                                              11,127
                                                              
                                                              
                                                              
                                                              105,451Total
      assets
                                                              
                                                              $
                                                              23,563,392
                                                              
                                                              
                                                              $
                                                              26,319,086LIABILITIES
      AND STOCKHOLDERS’ EQUITY (DEFICIT)Current
      liabilities:Accounts
      payable and accrued expenses
                                                              
                                                              $
                                                              970,170
                                                              
                                                              
                                                              $
                                                              1,542,974Accrued
      salaries and wages
                                                              
                                                              
                                                              359,988
                                                              
                                                              
                                                              
                                                              738,331Accrued
      interest expense
                                                              
                                                              
                                                              1,090,738
                                                              
                                                              
                                                              
                                                              432,337Derivative
      liabilities
                                                              
                                                              
                                                              14,165,687
                                                              
                                                              
                                                              
                                                              354,758Deferred
      revenue
                                                              
                                                              
                                                              103,128
                                                              
                                                              
                                                              
                                                              103,128Convertible
      notes, net of discount
                                                              
                                                              
                                                              13,055,301
                                                              
                                                              
                                                              
                                                              240,482Current
      portion of notes payable, net of discount
                                                              
                                                              
                                                              4,477,596
                                                              
                                                              
                                                              
                                                              1,316,667Total
      current liabilities
                                                              
                                                              
                                                              34,222,608
                                                              
                                                              
                                                              
                                                              4,728,677Other
      long-term liabilities
                                                              
                                                              
                                                              —
                                                              
                                                              
                                                              
                                                              295,830Notes
      payable, net of current portion and debt discount
                                                              
                                                              
                                                              —
                                                              
                                                              
                                                              
                                                              601,819Total
      liabilities
                                                              
                                                              
                                                              34,222,608
                                                              
                                                              
                                                              
                                                              5,626,326Commitments
      and contingenciesStockholders’
      equity (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; 32,283,649
      and 22,682,116 shares issued at September 30, 2010 and December 31,
      2009, respectively; 31,650,509
      and 22,265,441 shares outstanding at September 30, 2010 and
      December 31, 2009, respectively
                                                              
                                                              
                                                              31,650
                                                              
                                                              
                                                              
                                                              22,265Additional
      paid-in-capital
                                                              
                                                              
                                                              80,168,375
                                                              
                                                              
                                                              
                                                              73,109,048Accumulated
      deficit
                                                              
                                                              
                                                              (90,859,241
                                                              )
                                                              
                                                              
                                                              (52,438,553
                                                              )Total
      stockholders’ equity (deficit)
                                                              
                                                              
                                                              (10,659,216
                                                              )
                                                              
                                                              
                                                              20,692,760Total
      liabilities and stockholders’ equity
                                                              
                                                              $
                                                              23,563,392
                                                              
                                                              
                                                              $
                                                              26,319,086





See Accompanying Notes to Condensed
Consolidated Financial Statements




3





Radient Pharmaceuticals
Corporation


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
LOSS


(Unaudited)




Three Months Ended September 30,
                  
                  
                  Nine Months Ended September 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Net
      revenues
                  
                  $
                  34,446
                  
                  
                  $
                  2,714,735
                  
                  
                  $
                  116,840
                  
                  
                  $
                  8,607,515Cost
      of sales
                  
                  
                  6,697
                  
                  
                  
                  1,627,943
                  
                  
                  
                  36,810
                  
                  
                  
                  5,363,921Gross
      profit
                  
                  
                  27,749
                  
                  
                  
                  1,086,792
                  
                  
                  
                  80,030
                  
                  
                  
                  3,243,594Operating
      expenses:Research
      and development
                  
                  
                  45,874
                  
                  
                  
                  91,213
                  
                  
                  
                  340,689
                  
                  
                  
                  516,676Selling,
      general and administrative
                  
                  
                  2,320,540
                  
                  
                  
                  3,330,304
                  
                  
                  
                  6,444,700
                  
                  
                  
                  9,542,5072,366,414
                  
                  
                  
                  3,421,517
                  
                  
                  
                  6,785,389
                  
                  
                  
                  10,059,183Loss
      from operations
                  
                  
                  (2,338,665
                  )
                  
                  
                  (2,334,725
                  )
                  
                  
                  (6,705,359
                  )
                  
                  
                  (6,815,589
                  )Other
      income (expense):Interest
      expense
                  
                  
                  (11,560,549
                  )
                  
                  
                  (1,492,625
                  )
                  
                  
                  (33,662,478
                  )
                  
                  
                  (2,058,876
                  )Gain on
      change in fair value of derivative instruments
                  
                  
                  2,922,826
                  
                  
                  
                  87,083
                  
                  
                  
                  5,681,415
                  
                  
                  
                  87,083Loss
      on extinguishment of debt
                  
                  
                  (1,002,270
                  )
                  
                  
                  -
                  
                  
                  
                  (1,002,270
                  )
                  
                  
                  -Loss
      on deconsolidation
                  
                  
                  -
                  
                  
                  
                  (1,953,516
                  )
                  
                  
                  -
                  
                  
                  
                  (1,953,516
                  )Impairment
      on investment in JPI
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (2,761,993
                  )
                  
                  
                  -Other
      income (expense)
                  
                  
                  31,874
                  
                  
                  
                  35,791
                  
                  
                  
                  29,997
                  
                  
                  
                  (37,039
                  )Total
      other expense, net
                  
                  
                  (9,608,119
                  )
                  
                  
                  (3,323,267
                  )
                  
                  
                  (31,715,329
                  )
                  
                  
                  (3,962,348
                  )Loss
      before provision for income taxes and discontinued
    operations
                  
                  
                  (11,946,784
                  )
                  
                  
                  (5,657,992
                  )
                  
                  
                  (38,420,688
                  )
                  
                  
                  (10,779,937
                  )Provision
      for income taxes
                  
                  
                  -
                  
                  
                  
                  (527,667
                  )
                  
                  
                  -
                  
                  
                  
                  -Loss
      from continuing operations
                  
                  
                  (11,946,784
                  )
                  
                  
                  (5,130,325
                  )
                  
                  
                  (38,420,688
                  )
                  
                  
                  (10,779,937
                  )Loss
      from discontinued operations, net
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (4,139,037
                  )Net
      loss
                  
                  
                  (11,946,784
                  )
                  
                  
                  (5,130,325
                  )
                  
                  
                  (38,420,688
                  )
                  
                  
                  (14,916,974
                  )Other
      comprehensive income:Foreign
      currency translation gain
                  
                  
                  -
                  
                  
                  
                  88,056
                  
                  
                  
                  -
                  
                  
                  
                  130,359Comprehensive
      loss
                  
                  $
                  (11,946,784
                  )
                  
                  $
                  (5,042,267
                  )
                  
                  $
                  (38,420,688
                  )
                  
                  $
                  (14,780,431
                  )Basic
      and diluted loss per common share:Loss
      from continuing operations
                  
                  $
                  (0.39
                  )
                  
                  $
                  (0.31
                  )
                  
                  $
                  (1.38
                  )
                  
                  $
                  (0.67
                  )Loss
      from discontinued operations
                  
                  $
                  -
                  
                  
                  $
                  (0.00
                  )
                  
                  $
                  -
                  
                  
                  $
                  (0.26
                  )Net
      loss
                  
                  $
                  (0.39
                  )
                  
                  $
                  (0.31
                  )
                  
                  $
                  (1.38
                  )
                  
                  $
                  (0.93
                  )Weighted
      average common shares outstanding — basic and diluted
                  
                  
                  30,809,860
                  
                  
                  
                  16,407,021
                  
                  
                  
                  27,836,210
                  
                  
                  
                  16,081,560




See Accompanying Notes to Condensed
Consolidated Financial Statements


4




Radient Pharmaceuticals Corporation


CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS


(Unaudited)




Nine Months Ended September 30,2010
                                                                
                                                                
                                                                2009Cash
      flows from operating activities:Net
      loss
                                                                
                                                                $
                                                                (38,420,688
                                                                )
                                                                
                                                                $
                                                                (14,916,974
                                                                )Less:
      income from discontinued operations
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                (4,139,037
                                                                )(38,420,688
                                                                )
                                                                
                                                                
                                                                (10,777,937
                                                                )Adjustments
      to reconcile net loss before discontinued operations to net cash provided
      by (used in) operating activities:Depreciation
      and amortization
                                                                
                                                                
                                                                102,180
                                                                
                                                                
                                                                
                                                                1,059,466Amortization
      of debt discount and accretion of debt issuance costs
                                                                
                                                                
                                                                10,762,676
                                                                
                                                                
                                                                
                                                                1,494,247Impairment
      on investment in JPI
                                                                
                                                                
                                                                2,761,993
                                                                
                                                                
                                                                
                                                                -Interest
      expense related to fair value of derivative instruments
      granted
                                                                
                                                                
                                                                13,830,523
                                                                
                                                                
                                                                
                                                                -Interest
      income from note receivable
                                                                
                                                                
                                                                (26,937
                                                                )
                                                                
                                                                
                                                                -Incremental
      value of shares and warrants issued to former note holders
                                                                
                                                                
                                                                81,780
                                                                
                                                                
                                                                
                                                                -Additional
      principal added for penalties and triggering events
                                                                
                                                                
                                                                7,978,167
                                                                
                                                                
                                                                
                                                                -Loss
      on extinguishment of debt
                                                                
                                                                
                                                                1,002,270
                                                                
                                                                
                                                                
                                                                -Shares-based
      compensation related to options granted to employees and directors for
      services
                                                                
                                                                
                                                                173,758
                                                                
                                                                
                                                                
                                                                600,825Shares-based
      compensation related to common stock and warrants expensed for
      services
                                                                
                                                                
                                                                2,355,289
                                                                
                                                                
                                                                
                                                                373,953Gain
      on settlement of account payable
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                (20,809
                                                                )Loss
      on deconsolidation
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                1,953,516Provision
      for bad debts
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                1,890,762Change
      in fair value of derivative instruments
                                                                
                                                                
                                                                (5,681,415
                                                                )
                                                                
                                                                
                                                                (51,525
                                                                )Changes
      in operating assets and liabilities:Accounts
      receivable
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                4,489,789Inventories
                                                                
                                                                
                                                                5,846
                                                                
                                                                
                                                                
                                                                143,208Prepaid
      expenses and other assets
                                                                
                                                                
                                                                109,623
                                                                
                                                                
                                                                
                                                                (4,010,517
                                                                )Accounts
      payable and accrueds
                                                                
                                                                
                                                                (1,132,703
                                                                )
                                                                
                                                                
                                                                876,277Income
      taxes payable
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                (320,398
                                                                )Deferred
      revenue
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                (87,735
                                                                )Net
      cash used in operating activities of continuing operations
                                                                
                                                                
                                                                (6,097,638
                                                                )
                                                                
                                                                
                                                                (2,386,878
                                                                )Net
      cash provided by operating activities of discontinued
      operations
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                101,457Net
      cash used in operating activities
                                                                
                                                                
                                                                (6,097,638
                                                                )
                                                                
                                                                
                                                                (2,285,421
                                                                )Cash
      flows from investing activities:Purchase
      of property and equipment
                                                                
                                                                
                                                                (24,482
                                                                )
                                                                
                                                                
                                                                (1,744,065
                                                                )Advances
      for note receivable
                                                                
                                                                
                                                                (100,000
                                                                )
                                                                
                                                                
                                                                -Cash
      balance divested from deconsolidation of subsidiary
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                (53,658
                                                                )Net
      cash used in investing activities of continuing operations
                                                                
                                                                
                                                                (124,482
                                                                )
                                                                
                                                                
                                                                (1,797,723
                                                                )Net
      cash used in investing activities of discontinued
    operations
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                (852,955
                                                                )Net
      cash used in investing activities
                                                                
                                                                
                                                                (124,482
                                                                )
                                                                
                                                                
                                                                (2,650,678
                                                                )Cash
      flows from financing activities:Proceeds
      from issuance of Senior Notes, net of cash issuance costs
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                2,088,593Proceeds
      from issuance of bridge note, net of cash issuance costs
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                43,000Proceeds
      from issuance of convertible debt, net of cash offering
    costs
                                                                
                                                                
                                                                6,308,000
                                                                
                                                                
                                                                
                                                                520,556Proceeds
      from the exercise of warrants
                                                                
                                                                
                                                                818,488
                                                                
                                                                
                                                                
                                                                -Net
      cash provided by financing activities
                                                                
                                                                
                                                                7,126,488
                                                                
                                                                
                                                                
                                                                2,652,149Effect
      of exchange rates on cash and cash equivalents
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                14,600Net
      change in cash and cash equivalents
                                                                
                                                                
                                                                904,368
                                                                
                                                                
                                                                
                                                                (2,269,350
                                                                )Cash
      and cash equivalents, beginning of period
                                                                
                                                                
                                                                12,145
                                                                
                                                                
                                                                
                                                                2,287,283Cash
      and cash equivalents, end of period
                                                                
                                                                $
                                                                916,513
                                                                
                                                                
                                                                $
                                                                17,933




See
Accompanying Notes to Condensed Consolidated Financial
Statements




5




Radient Pharmaceuticals
Corporation


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)


For the Nine Months Ended September
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
September 30, 2010, and its results of operations for the three and nine months
ended September 30, 2010 and 2009 and cash flows for the nine months ended
September 30, 2010 and 2009. The condensed consolidated balance sheet as of
December 31, 2009 has been derived from the December 31, 2009 audited
consolidated 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 evaluated subsequent events through the filing date of
this Form 10-Q, and determined no subsequent events have occurred which
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 its 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 was focused on the
production and distribution of pharmaceutical products through our subsidiaries
located in the People’s Republic of China. The Company recently refocused it’s
business on the development, manufacture and marketing of advanced, pioneering
medical diagnostic products, including 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 employs
approximately 9 people, all located in California at our corporate
headquarters.





The Company is now actively engaged in the research, development,
manufacturing, sale and marketing of 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 manufactures and
distributes Onko-SureTM  at our licensed manufacturing facility located at
2492 Walnut Avenue, Suite 100, in Tustin, California. The Company is a
United States Food and Drug Administration (“USFDA”), GMP approved manufacturing
facility. The Company maintains a current Device Manufacturing License issued by
the State of California, Department of Health Services, Food and Drug
Branch.




6




Discontinued
Operations








Deconsolidation and Accounting of
JPI




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”).





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, exchanged $730,946 in salaries and related
interest, accrued by the Company as of September 29, 2009, into 730,946
shares of JPI’s preferred stock, 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 changed 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 occur until September 29,
2009, the Company’s results of operations included in the accompanying
statements of operations and comprehensive loss for the three and nine months
ended September 30, 2009 included the operations of JPI. For the nine months
ended September 30, 2009, the net revenues, gross profit, operating expenses and
net loss before discontinued operations of JPI were $8,469,652,
$3,426,772, $4,610,153 and $1,356,302, respectively.





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 $2,800,000 was necessary. The valuation of JPI was based
upon unobservable inputs (Level 3 inputs).





In  June 2010, JPI’s management decided to shift their product
base to concentrate on the manufacture and distribution of cancer centric
products, specifically JPI’s Domperidone tables. As a result, revenues from
JPI’s HPE based products (GoodNak), which were originally forecasted to
contribute substantively to top line revenue, were eliminated in the current
forecast. Revenues from this shift in product mix will not immediately be
realized because cancer centric products require more time to produce revenues
due to the difficulty in penetrating a market space with competing products. The
primary factors the Company considered to determine the impairment include, but
are not limited to:





•
            Sales
      growth: based on JPI management’s expectations and historical analysis,
      the Company expects growth of 150% in 2011, 20% in 2012 and 2013 and 10%
      in 2014.





•
            Risk
      adjusted weighted average cost of capital (“WACC”) — a WACC of 17.7% was
      utilized.





•
            Long
      term growth rate: we assumed a long term growth rate of
  5%





•
            Cost
      of debt: assumed an after tax rate of
4.46%





•
            Cost
      of equity





•
            Risk
      free rate: 2.93%




7




•
            Equity
      risk premium: 11.15%





•
            Small
      stock risk premium: 3.99%





•
            Beta:
      .86x





•
            Subject
      company risk: 0%





•
            Discounts:
      combined discount for lack of marketability and lack of control of
      35%





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 $38,420,688
and $10,779,937 for the nine months ended September 30, 2010 and 2009,
respectively, and had an accumulated deficit of $90,859,241 at September 30,
2010. In addition, the Company used cash in operating activities of continuing
operations of $6,097,638 and had a working capital deficit of approximately $38
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 Company’s monthly cash requirement of $480,000 for operating
expenses does not include any extraordinary items or expenditures, including
payments to the Mayo Clinic on clinical trials for our Onko-Sure tm
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 nine months ended September 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-Sure tm
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) current defaults in existing
indebtedness and (v) failure to meet operational covenants in existing
financing agreements which have triggered additional defaults or penalties.
Our limited sales to date of the Onko-Sure tm
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.




8




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 nine months ended September 30, 2009 and for the unaudited condensed
consolidated statements of cash flows for the nine months ended September 30,
2009. Intercompany transactions for the three and nine months ended September
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 period 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
September 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 to receivables 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, prior to September 29, 2009,
JPI’s revenues were 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.




9




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.





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:




10




•
            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 September
30, 2010 except the impairment of the investment in JPI as noted above for the
quarter ended June 30, 2010. 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. Each year the Company
conducts an impairment analysis in accordance with the provisions within FASB
ASC 320-10-35 paragraphs 25 through 32.




Note
Receivable
   On
August 27, 2010, the Company advanced $100,000 to Provista Diagnostic, Inc.
(“Provista”). In connection with the note receivable agreement, Provista agreed
to deliver two separate reports to the Company by September 30, 2010. Due to
Provista’s failure to deliver such reports by September 30, 2010, the Company
recorded interest income of $26,937, which represents the 25% increase from the
principal balance of the note plus accrued interest of $1,927. The note requires
5 equal payments of $20,000 (totaling $100,000) on the 1st day of
each month commencing on the initial interest payment date (as defined in the
note) and continuing thereafter until maturity (August 27, 2011). Interest
accrues on the unpaid principal balance at a rate of 12% per annum.
  Beneficial
Conversion Feature
 
 In
certain instances, the Company enters into convertible notes that provide for an
effective or actual rate of conversion that is below market value, and the
embedded conversion feature does not qualify for derivative treatment (a
“BCF”).  In these instances, we account for the value of the BCF as a
debt discount, which is then amortized to expense over the life of the related
debt using the straight-line method which approximates the effective interest
method.


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 nine months ended September 30, 2010,
the Company issued convertible debt with warrants and recorded derivative
liabilities related to a reset provision associated with 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 $17,986,337 as computed using the Binomial Lattice option
pricing model. Due to the reset provisions within the embedded conversion
feature and a reset provision associated with the exercise price of the
warrants, the Company determined that the Binomial Lattice Model was most
appropriate for valuing these instruments.





In November 2009, the Company granted 1,644,643 warrants in
connection with a common stock financing transaction to two individuals. The
exercise price of the warrants have reset provisions which are accounted for as
derivative instruments in accordance with relevant accounting guidance. At the
date of grant, the warrants were valued at $509,840, which reasonably represents
the fair value as computed using the Binomial Lattice option pricing
model.





During the nine months ended September 30, 2010, several holders of
the Company’s convertible debt converted portions of their notes and accrued
interest into shares of the Company’s common stock. This resulted in a decrease
of the derivative liability of $354,830, representing the embedded conversion
features of the converted debt. In addition, during the nine months ended
September 30, 2010, one holder of the Company`s convertible debt exercised
500,000 warrants. This resulted in a decrease of the derivative liability of
$83,872, representing the value of the warrants immediately prior to the
exercise.





During the nine months ended September 30, 2010, the Company
recorded additional derivative liability of $32,027 as a result of a trigger
event related to the St. George convertible debt and also recorded additional
derivative liability of $1,912,682 as a result of a trigger events related to
the 2010 Closings (see Note 6).




11


The Company re-measured the fair values of all of its derivative
liabilities as of each period end and recorded an aggregate decrease of
$5,681,415 in the fair value of the derivative liabilities as a component of
other expense, net during the nine months ended September 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 issued 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 Binomial Lattice model. In applying the Binomial Lattice
model, the Company used the following assumptions to value its derivative
liabilities during the nine months ended September 30, 2010:





For the nine monthsended September 30, 2010Annual
      dividend yield
                  
                  
                  —Expected
      life (years)
                  
                  
                  0.41
      — 6.17Risk-free
      interest rate
                  
                  
                  0.25%
      — 2.90%Expected
      volatility
                  
                  
                  87.3%
      — 298.6%





For
instruments that include an optional cashless exercise provision, the Company
applied a 50/50 probability that the holder will exercise under either
scenarios, that is the cashless exercise or the cash exercise. The cashless
exercise provision expires once the underlying instrument’s shares are
registered.





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.




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





Level 3CarryingValueSeptember 30,2010Derivative
      Liabilities:Embedded
      conversion features
                                  
                                  $
                                  3,807,796Warrants
                                  
                                  
                                  10,357,891$
                                  14,165,687Decrease
      in fair value included in other expense, net
                                  
                                  $
                                  5,681,415





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





Description:
                                    
                                    Embedded
                                      Conversion
      FeaturesBalance
      at December 31, 2009
                                    
                                    $
                                    44,358Derivative
      liabilities added — conversion features
                                    
                                    
                                    5,775,266Reclassification
      to equity in connection with conversion of underlying debt to
      equity
                                    
                                    
                                    (354,830
                                    )Gain
      on change in fair value included in net loss
                                    
                                    
                                    (1,656,998
                                    )Balance
      at September 30, 2010
                                    
                                    $
                                    3,807,796


Description:
                                      
                                      WarrantsBalance
      at December 31, 2009
                                      
                                      
                                      310,400Derivative
      liabilities added — warrants
                                      
                                      
                                      14,155,780Reclassification
      to equity in connection with exercise of underlying stock
      warrants
                                      
                                      
                                      (83,872
                                      )Gain
      on change in fair value included in net loss
                                      
                                      
                                      (4,024,417
                                      )Balance
      at September 30, 2010
                                      
                                      $
                                      10,357,891


12




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-Sure tm
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-Sure tm
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.





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 $2,800,000 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 505-50-30, 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.





The Company has 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
91,589,703 options, warrants and convertible debt were not considered in the
calculation of EPS as the effect would be anti-dilutive on September 30,
2010.




13




Supplemental Cash Flow
Information





Nine Months Ended September 30,2010
            
            
            2009Supplemental
      disclosure of cash flow information:Cash paid
      during the period for interest
            
            $
            —
            
            
            $
            321,701Cash paid
      during the period for taxes
            
            $
            —
            
            
            $
            695,322Supplemental
      disclosure of non-cash activities:Fair
      value of warrants issued in connection with Senior Notes, included in debt
      issuance costs and debt discount
            
            $
            —
            
            
            $
            1,887,920Reclassification 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
            
            $
            1,321,089
            
            
            $
            —Fair
      value of warrants issued for services, included in prepaid
      expense
            
            $
            400,000
            
            
            $
            283,951Reclassification of
      derivative liabilities to equity
            
            $
            438,702
            
            
            $
            —Amount
      paid directly from proceeds in connection with convertible debt unrelated
      to the financing
            
            $
            35,000
            
            
            $
            —Conversion of notes
      payable and accrued interest to shares of common stock
            
            $
            2,905,880
            
            
            $
            924,605Debt
      issuance costs included in accounts payable
            
            $
            876,501
            
            
            $
            —Additional
      derivative liability for penalty on St. George debt
            
            $
            19,430
            
            
            $
            —Debt
      discounts related to derivative liabilities
            
            $
            6,181,165
            
            
            $
            —Conversion of
      accounts payable to shares of common stock
            
            $
            45,000
            
            
            $
            56,089Beneficial
      conversion feature recorded as debt discount
            
            $
            275,150
            
            
            $
            —Conversion of
      warrants to common stock
            
            $
            —
            
            
            $
            38Carrying value of
      net assets of JPI for deconsolidation
            
            $
            —
            
            
            $
            25,698,405Fair value of
      derivative liabilities
            
            $
            —
            
            
            $
            510,417Conversion of
      accrued salaries to ownership in JPI
            
            $
            —
            
            
            $
            730,496




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
September 30, 2010, are not expected to have a significant effect on the
Company’s consolidated financial position or results of operations.




14






NOTE 3 —
INVENTORIES






Inventories consist of the following:





September 30,
                          
                          
                          December 31,2010
                          
                          
                          2009(Unaudited)Raw
      materials
                          
                          $
                          68,025
                          
                          
                          $
                          48,852Work-in-process
                          
                          
                          4,207
                          
                          
                          
                          3,265Finished
      goods
                          
                          
                          1,177
                          
                          
                          
                          27,138$
                          73,409
                          
                          
                          $
                          79,255




NOTE
4 — INTANGIBLE ASSETS




Intangible assets consist of the following:




September 30,
                        
                        
                        December 31,2010
                        
                        
                        2009(Unaudited)Intellectual
      property
                        
                        $
                        2,000,000
                        
                        
                        $
                        2,000,000Accumulated
      amortization
                        
                        
                        (916,667
                        )
                        
                        
                        (841,667
                        )$
                        1,083,333
                        
                        
                        $
                        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.




15




NOTE 6 — DEBT




Debt consists of the following:





September 30,
                                      
                                      
                                      December 31,2010
                                      
                                      
                                      2009(Unaudited)Convertible
      Debt:Convertible
      Notes issued September 2008, net of unamortized discount of $100,005
      at September 30, 2010 and $1,607,111 at December 31, 2009,
      respectively
                                      
                                      $
                                      296,437
                                      
                                      
                                      $
                                      17,775St.
      George Convertible Note, issued September 2009, net of unamortized
      discount of $393,681 at December 31, 2009
                                      
                                      
                                      —
                                      
                                      
                                      
                                      222,707First
      Closing of 2010 Convertible Note, issued March 22, 2010, including
      additional $633,142 principal and interest for trigger events, net of
      unamortized discount of $115,720 at September 30, 2010
                                      
                                      
                                      933,086
                                      
                                      
                                      
                                      —Second
      Closing of 2010 Convertible Note, issued April 8, 2010, including
      additional $3,953,316 principal and interest for trigger events, net of
      unamortized discount of $2,973,833 at September 30, 2010
                                      
                                      
                                      6,469,648
                                      
                                      
                                      
                                      —Third
      Closing of 2010 Convertible Note, issued April 13, 2010, including
      additional $2,748,332 principal and interest for trigger events, net of
      unamortized discount of $2,143,384 at September 30, 2010
                                      
                                      
                                      4,561,978
                                      
                                      
                                      
                                      —Fourth
      Closing of 2010 Convertible Note, issued April 26, 2010, including
      additional $480,108 principal and interest for trigger events, net of
      unamortized discount of $371,126 at September 30, 2010
                                      
                                      
                                      794,152
                                      
                                      
                                      
                                      —$
                                      13,055,301
                                      
                                      
                                      $
                                      240,482Senior
      Notes payable, net of unamortized discount of $0 and $1,701,398 at
      September 30, 2010 and December 31, 2009,
respectively
                                      
                                      
                                      4,441,374
                                      
                                      
                                      
                                      1,851,854Bridge
      note, including additional $82,360 principal and interest for penalties,
      net of unamortized discount of $104,138 at September 30,
    2010
                                      
                                      
                                      36,222
                                      
                                      
                                      
                                      66,632$
                                      17,532,897
                                      
                                      
                                      $
                                      2,158,968Less:
      current portion of senior notes and Bridge note
                                      
                                      
                                      (4,477,596
                                      )
                                      
                                      
                                      (1,316,667
                                      )Less:
      current portion of convertible debt
                                      
                                      
                                      (13,055,301
                                      )
                                      
                                      
                                      (240,482
                                      )$
                                      —
                                      
                                      
                                      $
                                      601,819




The significant terms of the Company’s debt issued prior to the nine
months ended September 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. The Company has the right to seek
Shareholder Approval two times; since we did not receive Shareholder
Approval at the second meeting on or before November 15, 2010, the Company
fell back into default on all of the Notes for which shareholders did not
approve the issuance of shares pursuant
to the exchange agreement (see September 2010 Amendments below). Due to
the SEC’s review of the periodic reports that we are required to mail with the
Proxy Statement, such reports were not cleared by the November 5, 2010
deadline (10-day mailing period), and therefore we are unable to timely mail the
shareholder meeting materials and hold the shareholder meeting on
November 15, 2010. Based on the terms of the various exchange and/or
extension/wavier agreements, all of the notes discussed in this Proxy Statement
shall fall back into default, pursuant to which the note holders can declare the
full amount owed on the notes immediately due and payable, if we fail to hold
the meeting by November 15, 2010, which is further extended to December 3,
2010. All of the consideration granted to the note holders pursuant to the
exchange and/or extension/waiver agreements remains in effect and no other
consideration is owed to the note holders pursuant to this default. We believe
it is beneficial for the note holders to maintain their note and wait until the
shareholder meeting to receive shareholder approval, and then receive the shares
of common stock underlying their note. As of the date of this filing, we have
not received notice from any note holders declaring a default. 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 receives 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.




16


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 $2,800,000 of such Notes.





In September 2010, the Company amended the Debt Exchange
Agreement (“September 2010 Amendment to Debt Exchange Agreement”) with the
Series 1 and 2 Note Holders. Pursuant to the September 2010 Amendment
to Debt Exchange Agreement, the Series 1 and 2 Note Holders agreed to
extend the date of the required shareholder meeting to a date on or before
November 15, 2010 instead of September 15, 2010. In return, the
Company agreed to (a) increase the principal balance due on the Notes by
25% effective September 1, 2010 and (b) the Company in its - sole
discretion — maintains the right to pay the interest due on the Notes in shares
of its common stock so long as the market price of the Company’s common stock is
equal to or above $0.28 per share on the date such interest is due. The issuance
of shares under the September 2010 Amendment Debt Exchange Agreement is
subject to NYSE Amex and Shareholder Approval. Due to
the SEC’s review of the periodic reports that we are required to mail with the
Proxy Statement, such reports were not cleared by the November 5, 2010
deadline (10-day mailing period), and therefore we are unable to timely mail the
shareholder meeting materials and hold the shareholder meeting on
November 15, 2010. Based on the terms of the various exchange and/or
extension/wavier agreements, all of the notes discussed in this Proxy Statement
shall fall back into default, pursuant to which the note holders can declare the
full amount owed on the notes immediately due and payable, if we fail to hold
the meeting by November 15, 2010, which is further extended to December 3,
2010. All of the consideration granted to the note holders pursuant to the
exchange and/or extension/waiver agreements remains in effect and no other
consideration is owed to the note holders pursuant to this default. We believe
it is beneficial for the note holders to maintain their note and wait until the
shareholder meeting to receive shareholder approval, and then receive the shares
of common stock underlying their note. As of the date of this filing, we have
not received notice from any note holders declaring a default.


If and when the Company does 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, 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. Due to our current cash situation, Cantone
agreed to accept shares of our common stock in lieu of the Cash Consulting Fee
and as consideration therefor, we agreed to reduce the warrant exercise price of
the Cantone Warrants to $0.28 per share (the “Amendment”). Pursuant to the
Amendment, and subject to stockholder approval, we shall issue Cantone an
aggregate of 514,286 shares of our common stock (the “Amendment Shares”), which
does not include the shares of common stock underlying the Cantone Warrants.
Pursuant to the Amendment, we were required to obtain shareholder approval by
September 15, 2010. Due to the continuing SEC review of our Proxy Statement
and the periodic reports that we are required to submit therewith, we were
unable to file and mail our definitive proxy statement so as to give our
shareholders proper notice of a September 15, 2010 meeting. Since we were
unable to hold the meeting on the original agreed date, Cantone agreed to extend
the time with which we must obtain shareholder approval to November 15,
2010. Due to
the SEC’s review of the periodic reports that we are required to mail with the
Proxy Statement, such reports were not cleared by the November 5, 2010
deadline (10-day mailing period), and therefore we are unable to timely mail the
shareholder meeting materials and hold the shareholder meeting on
November 15, 2010. Based on the terms of the various exchange and/or
extension/wavier agreements, all of the notes discussed in this Proxy Statement
shall fall back into default, pursuant to which the note holders can declare the
full amount owed on the notes immediately due and payable, if we fail to hold
the meeting by November 15, 2010, which is further extended to December 3,
2010. All of the consideration granted to the note holders pursuant to the
exchange and/or extension/waiver agreements remains in effect and no other
consideration is owed to the note holders pursuant to this default. We believe
it is beneficial for the note holders to maintain their note and wait until the
shareholder meeting to receive shareholder approval, and then receive the shares
of common stock underlying their note. As of the date of this filing, we have
not received notice from any note holders declaring a default.In consideration for their agreement, we agreed to increase their Cash
Consulting Fee by 25%, to $180,000, and instead issue 642,857 Amendment Shares,
which shall be full and complete payment of all fees owed to Cantone under the
Agreement and the Amendment.




17




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 price 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 entered into
an Exchange Agreement with the Investor. Under the Exchange Agreement, we agreed
to 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, totaling 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. Pursuant
to the Exchange Agreement, we were required to obtain shareholder approval by
September 15, 2010. Due to the continuing SEC review of our Proxy Statement and
the periodic reports that we were required to submit therewith, we were unable
to file and mail our definitive proxy statement so as to give our shareholders
proper notice of a September 15, 2010 meeting. Since we were unable to hold the
meeting on the original agreed date, the holder of the Bridge Loan agreed to
extend the time with which we must obtain shareholder approval to November 15,
2010. In consideration for their agreement, we agreed to increase the principal
balance of the Bridge Loan and pay an additional $5,000 in legal fees related to
the default, as a result of which we agreed to issue the holder 592,261 shares
(instead of 404,526), which includes interest payments due through December 31,
2010.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.




Since
we were unable to have the meeting on November 15, 2010, due to the SEC comment
period, all of these notes are susceptible to default, pursuant which the
holders can declare the notes immediately due and payable. As of November
18, 2010 we have not received any default notices.




18






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 nine months ended September 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”) which matured in September 2010. 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 $34,491 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. The financial statement effects of 
these transactions were recorded on the date each debt holder signed their new
exchange agreement during second quarter of 2010.





During
the second quarter of 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 September 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 September 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 September 30, 2010. Related to
all of the conversions that occurred during the nine months ended September
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.




Pursuant to
a Letter Agreement dated September 24, 2010, we sought the remaining September
2008 Convertible Note holders’ agreement to waive the current default and give
us until November 15, 2010 to issue them the shares underlying the
September 2008 Convertible Note. In consideration for waiving the default and
extending the maturity date to November 15, 2010, we increased the
principal balance of the September 2008 Convertible Note outstanding as of
September 14, 2010 by 56,635 or 25% of the outstanding balance on September
14, 2010 (the “25% Increase”) and increased the interest rate to 18%, which
rate shall apply to the interest due from September 15, 2010 until the Note
is converted pursuant to the 2008 Letter Agreement. The September 2008
Convertible Note holders are entitled to the Bonus Interest, which we
calculated as a one time fee of $113,269 or 50% of the outstanding
principal balance on September 14, 2010 the principal balance of the Notes
outstanding on September 14, 2010; however, such interest shall accrue at the
rate of 18% per annum until paid. The amount of the 25% Increase and Bonus
Interest shall be combined and such total shall be directly applied to the
principal amount of the Notes outstanding on September 14, 2010. The
outstanding balance of the 2008 Note immediately before the 2008 Letter
Agreement was $226,538 with a corresponding unamortized debt discount of
$159,547. Due to the effect of the 2008 Letter Agreement, the Company
accelerated the amortization of the remaining debt discount and recorded an
increased to the outstanding principal balance by $113,269 and $56,635
representing 50% bonus interest and 25% interest, respectively. Since the 50%
bonus interest was in accordance with the terms of the original convertible note
agreement, the Company recorded such amount as interest penalty. In accordance
with relevant accounting guidance, the Company recorded the 25% increase as a
loss on extinguishment since the terms as described in the 2008 Letter Agreement
indicates that the prior debt agreement would be extinguished.Finally,
we agreed to adjust the Conversion Price of the September 2008 Convertible Note
to equal 80% of the VWAP for the 5 trading days immediately preceding the date
we receive NYSE Amex Approval of the additional shares to be issued pursuant to
the adjusted price (the “Adjusted Shares”); provided however, that in no event
shall the Conversion Price be less than $0.28 per share.




As of
September 30, 2010, a total of $396,442 is outstanding on the September 2008
Convertible Note, with a combined accrued interest, calculated through
September 30, 2010 of $48,374, all of which is convertible into shares of
our common stock pursuant to the Letter Agreement described above. In accordance
with relevant accounting guidance, on September 14, 2010 the Company recorded a
beneficial conversion feature of the principal balance of the note which
resulted in the recording of $134,790 as debt discount and amortization
expense of $34,785 as of September 30, 2010. Since we
did not issue the shares on November 15, 2010, because the SEC comment period
prevented us from holding a shareholder meeting to obtain the related approval
for such issuance on November 15, 2010, the outstanding September 2008
Convertible Notes are susceptible to default. As of filing date we have not
received any default notices.




19






Note and Warrant
Purchase Agreements- March and April 2010




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




MinimumConversion
                                                
                                                
                                                
                                                WarrantsPrice Per
                                                
                                                Maximum
                                                
                                                
                                                
                                                
                                                
                                                MinimumFace Value of
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                Share at
                                                
                                                Shares
                                                
                                                
                                                
                                                
                                                
                                                ExerciseDate of
                                                
                                                Convertible
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                Issuance
                                                
                                                Issuable upon
                                                
                                                
                                                
                                                
                                                
                                                Price atIssuance
                                                
                                                Notes
                                                
                                                
                                                Discounts
                                                
                                                
                                                Gross
      Proceeds
                                                
                                                
                                                Date
                                                
                                                Conversion
                                                
                                                Number
                                                
                                                
                                                Issuance
      Date[1]
                                                
                                                
                                                [2]
                                                
                                                
                                                
                                                
                                                
                                                
                                                [3]
                                                
                                                
                                                
                                                [5]First
      Closing3/22/2010
                                                
                                                $
                                                925,000
                                                
                                                
                                                $
                                                (385,000
                                                )
                                                
                                                $
                                                540,000
                                                
                                                
                                                $
                                                0.28
                                                
                                                3,303,571
                                                
                                                
                                                1,100,000
                                                
                                                
                                                $
                                                0.28
                                                [6]Second
      Closing 4/8/2010
                                                
                                                
                                                5,490,165
                                                
                                                
                                                
                                                (2,285,165
                                                )
                                                
                                                
                                                3,205,000
                                                
                                                
                                                $
                                                0.28
                                                
                                                19,607,732
                                                
                                                
                                                6,528,213
                                                
                                                
                                                $
                                                0.38
                                                [7]Third
      Closing 4/13/2010
                                                
                                                
                                                3,957,030
                                                
                                                
                                                
                                                (1,647,030
                                                )
                                                
                                                
                                                2,310,000
                                                
                                                
                                                $
                                                0.28
                                                
                                                14,132,250
                                                
                                                
                                                4,705,657
                                                
                                                
                                                $
                                                0.38
                                                [7]Fourth
      Closing 4/26/2010 [4]
                                                
                                                
                                                599,525
                                                
                                                
                                                
                                                (249,525
                                                )
                                                
                                                
                                                350,000
                                                
                                                
                                                $
                                                0.28
                                                
                                                2,141,161
                                                
                                                
                                                712,949
                                                
                                                
                                                $
                                                0.28
                                                [7]Fourth
      Closing 4/26/2010
                                                
                                                
                                                85,645
                                                
                                                
                                                
                                                (35,645
                                                )
                                                
                                                
                                                50,000
                                                
                                                
                                                $
                                                0.28
                                                
                                                305,875
                                                
                                                
                                                101,849
                                                
                                                
                                                $
                                                0.89
                                                [7]$
                                                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 timely or failed to
      have it declared effective timely pursuant to the terms of the
      Registration Rights Agreement, each 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. Therefore, 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”) and a trigger event
      under the terms of the notes issued in the Fourth Closing occurred (the
      “August 31 Trigger Event”). The total amount of 2010 Financing Convertible
      Notes issued in the four closings was originally $11,057,365; as a result
      of the June 1 Trigger Event and the August 31 Trigger Event, the principal
      amount of such notes is now $14,081,712 which represents 125% of the
      outstanding principal and accrued interest prior to the
    event.
  Additionally,
we are required under the terms of the 2010 Closings to obtain stockholder
approval, on or before July 15, 2010 for the First Closing and on or before
August 31, 2010, for the Second, Third and Fourth Closings. Due to the SEC
review of our proxy statement and periodic reports that we are required to
submit to our shareholders with this Proxy Statement, we were unable to file and
mail our definitive proxy statement so as to give our shareholders proper notice
of an August 31, 2010 meeting and therefore were not able to have a meeting
or obtain shareholder approval on such date. This failure constitutes an event
of default under the 2010 Closings, pursuant to which the note holders were
entitled to declare the entire principal and interest due on the notes then
immediately payable. In light of the potential default, to maintain good
relationships with the investors of the 2010 Closings, we requested the 2010
Closings’ investors to waive the July 15, 2010 and August 31, 2010
shareholder meeting date requirement and instead allow us to hold the meeting on
or before November 15, 2010 (the “Extension”).
  In
exchange for their agreement to the Extension, we increased the principal
balance of the note by another 25% to avoid our Note holders declaring a default
and to obtain their agreement for us to instead hold the meeting on November 15,
2010, The Note holders also agreed to waive any defaults related to our failure
to hold a meeting or obtain shareholder approval by July 15 or August 31. As of
the date this filing, approximately 60% of the investors of the 2010 Closings
signed the agreement. Since we are unable to hold the meeting on November 15,
2010, the 2010 Closings are susceptible to default pursuant to which the
investors of the 2010 Closings can declare the entire amount outstanding
immediately due and payable. As a result of the 2nd Trigger
Event, the principal amount of such notes was increased to
$18,462,263.
 
 [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 for a price
      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’s common stock exercisable at $0.28 per share (the remainder of
      the participants in the Fourth Closing received warrants exercisable at
      $0.89 per share).
 
 [5]
              At
      any time prior to the expiration date of the warrant, if and only if there
      is no then effective registration statement covering the warrant shares,
      the Holder may elect a “cashless” exercise of this warrant whereby the
      Holder shall be entitled to receive a number of shares of common stock
      equal to (x) the excess of the Current Market Value over the
      aggregate Exercise Price of the portion of the Warrant then being
      exercised, divided by (y) the Adjusted Price of the Common Stock (as
      these terms are defined in the warrant agreement). This formula, as it
      contains variables that are directly linked to changes in the market price
      of the Company’s shares, and depending on the market price of the share on
      the date of exercise, might result in the Company having to issue
      additional number of shares than what is indicated in the table
      above.
 
 [6]
              The
      exercise price in First Closing warrants equals to the higher of:
      (i) 105% of the VWAP for the five trading days immediately preceding
      the date the Company issued the Warrants; or (ii) the Floor Price (as
      defined in the First Closing Note).
 
 [7]
              The
      exercise price in Second, Third and Fourth Closings, can be adjusted down
      (down-round protection) to a lower price if the Company sells common stock
      or instruments convertible into or exercisable for common shares in the
      future at a lower price than the exercise
price.


The
First, Second, Third and Fourth Closings entered into during 2010 carry embedded
conversion features and warrants which are accounted for as derivative
instruments under the relevant accounting guidance. Originally, the Company used
the Black-Scholes model to valuate these derivatives. The September 30, 2010
Form 10-Q and accompanying interim condensed consolidated financial statements
reflect the valuation of certain derivative liabilities related to embedded
conversion features of the debt and warrants based upon the Binomial Lattice
option pricing model. Subsequent to the filing of the June 30, 2010 Form 10-Q,
the Company decided to move from the Black-Scholes option pricing model to the
Binomial lattice option pricing model for the valuation of these embedded
conversion features and warrants. The Company determined that the Binomial
Lattice model more accurately valued the “down-round protections”, or reset
features included in the embedded conversion
features and a reset provision associated with the exercise price of the
warrants. As a
result of this change to the Binomial Lattice option pricing model, the Company
amended its quarterly filing for the six month period ended June 30, 2010.The Company believes the Binomial Lattice model provides a better
estimate of fair value of the derivative instruments at their grant dates,
triggering dates, and quarter ends. In applying the Binomial Lattice model, the
Company used the following assumptions to value its derivative liabilities
during the nine months ended September 30, 2010:






20




For the nine monthsended September 30, 2010Annual
      dividend yield
                
                
                —Expected
      life (years)
                
                
                0.41
      — 6,17Risk-free
      interest rate
                
                
                0.25%
      — 2.92%Expected
      volatility
                
                
                87.3%
      — 298.6%





As
explained in the footnote 5 above, the warrants carry a “cashless exercise”
feature. This cashless exercise feature has value to the holder. To evaluate the
value of the “cashless exercise” feature, the Company used the following
assumptions. Based on the current circumstances, the Company estimated that the
Company’s registration statement will be declared effective on or around
February 28, 2011. As stated in the warrant agreement, upon an effective
registration statement the cashless exercise feature is no longer available to
the holder. We also evaluated the likelihood of the warrant holders exercising
their warrants under the cashless exercise feature versus a cash exercise from
the original grant date of each warrant until the estimated date that
registration statement is declared effective. Based on the cashless exercise
notices already received by the Company through the date of this filing and
based on our best estimate of the warrant holders’ intent going forward, the
Company believes a conservative estimate is that there is a 50% likelihood that
the investors would exercise under the cashless exercise provision and 50%
likelihood that they would effect a standard exercise via cash.





The
Company, through its valuation expert, then performed the following steps to
estimate the fair value of the warrants on their grant date, at March 31,
2010, June 30, 2010 and at September 30, 2010. The Company has previously valued
the warrants (assuming standard cash exercises,) under the Binomial Lattice
option pricing model (“Binomial Model — Normal”). In addition, the Company
valued the same warrants under a separate Binomial Lattice option pricing model
(“Binomial Model — Cashless”), assuming that the holder would exercise under the
cashless exercise feature prior to the date of the registration statement being
declared effective. Under the Binomial Model — Cashless, the Company used a much
shorter expected term (commensurate with the assumed date that the Company
expect the registration statement to be declared effective), resulting in
different volatility amounts and discount rates. One other factor that was
considered for the value estimated under the Binomial Model — Cashless was that
if the holder of the warrant decided to exercise under the cashless exercise
feature, the number of warrant shares available to the holder was then computed
under the formula noted in section 2.1(b) of the warrant agreement. On some
dates, it resulted in potentially more shares being issued to the holder than
what are stated on the holder’s warrant agreement and on some dates it results
in potentially less shares being issued to the holder than what are stated on
the warrant agreement.





We then
took the total values computed under each Binomial Model and assigned a 50%
likelihood or probability that the investor may exercise under either scenarios.
Using 50% of the value under the Binomial Model — Normal and 50% of the value
under the Binomial Model — Cashless, we then arrived at the estimated fair value
assigned to warrant as of their grant dates, March 31, 2010, June 30, 2010
and September 30, 2010.





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”) mature one year from the date of issuance and carry an
original issue discount. The note holders have the right, at their sole option,
to convert the Notes, in whole or in part into shares of the Company’s 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.





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 Closings, a trigger event occurred 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
requires the Company to have the registration statement declared effective by
August 31, 2010 and therefore a Trigger Event occurred when the
Registration Statement the Company filed on May 3, 2010 was not declared
effective by August 31, 2010 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 nine equal payments representing
one-twelfth of the principal amount of the Notes, commencing on the nine 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 nine payments, at the Company’s
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.




21


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 have a term of
five years. The Warrant exercise price for the First Closing is initially
exercisable at the higher of: (i) 105% of the average volume-weighted
average price (the “VWAP”) for the five trading
days immediately preceding the date the Company issued the Warrants; or
(ii) the Floor Price (as defined in the First Closing Note), which is
subject to adjustment. The Warrant exercise price for the Second, Third and
Fourth Closings are different from the Warrant exercise price in the First
Closing in that they are initially fixed at a stated price ($0.28, $0.38 and
$0.89) as shown in the above table. The exercise price in Second, Third and
Fourth Closings and the Floor Price in the First Closing, can be adjusted down
to a lower price if the Company sells common stock or instruments convertible
into or exercisable for common shares in the future at a lower price than the
exercise price or the Floor Price. Additionally, the Lenders may exercise the
Warrants via a cashless exercise only if a registration statement for the
Warrant shares is not in effect at the time of the exercise. The number of
shares each holder is entitled to under the cashless exercise equals
(x) the excess of the Current Market Value over the aggregate Exercise
Price of the portion of the Warrant then being exercised, divided by
(y) the Adjusted Price of the Common Stock (as these terms are defined in
the warrant agreement). This formula, as it contains variables that are directly
linked to changes in the market price of the Company’s shares, and the market
price of the Company’s shares on the date of exercise, might result in the
Company having to issue additional warrant shares than what is indicated in the
table above. Pursuant to the terms of the Warrants, the Company will not affect
the exercise of any warrants, and no warrant holder 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.





Additionally,
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”). Accordingly, the Company is required under the terms of
the Notes to obtain Stockholder Approval, on or before July 15, 2010 for
the First Closing and on or before August 31, 2010, for the Second, Third
and Fourth closing. As of September 30, 2010, the Company did not obtain
Stockholder Approval but as explained below, due to the SEC comment period,
scheduled the meeting for December 3, 2010. 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.





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 Closing attempts to convert the Notes or exercise the Warrant
prior to the Company’s receipt of Stockholder Approval and NYSE Amex approval
and (ii) such conversion or exercise would require the Company to issue
shares in excess of 19.99% of the Company’s outstanding common stock to any
Lender in the Second Closing at any time (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.





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. The Company has applied for listing of the shares issuable
pursuant to the Second, Third and Fourth Closings, 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’s 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.




22




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 and unpaid interest balance, and interest shall accrue at the rate of
1.5% per month. 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 becomes the subject of a bankruptcy or related
proceeding.





As noted above, since the registration statement registering all of
the securities issuable in the First, Second, Third and Fourth Closings, was not
declared effective by June 1 and August 31, 2010, a Trigger Event under the
terms of the Notes issued in the 2010 Closings occurred (the “1st Trigger
Event”). The total amount of 2010 Financing Convertible Notes issued in the 2010
Closings was originally $11,057,365; as a result of the 1st Trigger
Event, the principal amount of such notes was increased to $14,081,712. In
addition, pursuant to the terms of the Registration Rights Agreement, the
Company recorded an additional $410,000 as interest expense which represents the
maximum amount of $10,000 payable to each convertible Note Holder in the four
closings due to failure to obtain effectiveness of registration
statement.





Additionally,
we are required under the terms of the 2010 Closings to obtain stockholder
approval, on or before July 15, 2010 for the First Closing and on or before
August 31, 2010, for the Second, Third and Fourth Closings. Due to SEC
review of our proxy statement and periodic reports that we are required to
submit to our shareholders with this Proxy Statement, we were unable to file and
mail our definitive proxy statement so as to give our shareholders proper notice
of an August 31, 2010 meeting and therefore were not able to have a meeting
or obtain shareholder approval on such date. This failure constitutes an event
of default under the 2010 Closings, pursuant to which the note holders were
entitled to declare the entire principal and interest due on the notes then
immediately payable. In light of the potential default, to maintain good
relationships with the investors of the 2010 Closings, we requested the 2010
Closings’ investors to waive the July 15, 2010 and August 31, 2010
shareholder meeting date requirement and instead allow us to hold the meeting on
or before November 15, 2010 (the “Extension”).




As
provided in the initial agreement, we increased the principal balance of the
notes by another 25%, except that pursuant to settlement negotiations with our
lead investor we agreed to increase the principal balance of the note issued in
the First Closing by 68% which will be based on the carrying balance of the debt
at October 14, 2010, to avoid our Note holders declaring a default and to
obtain their agreement for us to instead hold the meeting on November 15, 2010,
the Note holders also agreed to waive any defaults related to our failure to
hold a meeting or obtain shareholder approval by July 15 or August 31. As of the
date of  this filing, approximately 62% of the investors of the 2010
Closings signed the agreement. Since we are unable to hold the meeting on
November 15, 2010, the 2010 Closings are susceptible to default pursuant to
which the investors of the 2010 Closings can declare the entire amount
outstanding immediately due and payable. As a result of the 2nd Trigger
Event, the principal amount of such notes was increased to
$18,362,927.





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 certain triggering
events as defined in the note (the agreement is limited to a maximum of two
triggering events). The Purchase Agreement includes a five year warrant (major
terms of warrant are detailed above) to purchase 1,100,000 shares of the
Company’s Common Stock at an exercise price equal to the higher of:
(i) 105% of the VWAP for the five trading days immediately preceding the
date the Company issued the Warrants; or (ii) the Floor Price (as defined
in the First Closing Note). The Note carries a 20% original issue discount and
matures on March 22, 2011. The Company agreed to pay $200,000 to the lender
in the First Closing to cover their transaction costs incurred in connection
with this transaction; such amount was withheld from the Note 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 the greater of the Floor Price (as defined in the Note) or 80% of the VWAP
for the five (5) Trading Days ending on the business day immediately
preceding the applicable date of conversion. The embedded conversion feature of
the convertible debt and Warrants are recorded as derivative liabilities in
accordance with relevant accounting guidance due to the down-round protection of
the conversion price of the Notes and the exercise price of the Warrants. The
fair value on the grant date of the embedded conversion feature of the
convertible debt and warrants amounted to $85,796 and $90,296, respectively, as
computed using the Binomial Lattice option pricing model. In regards to the
1st
Trigger Event, 2nd Trigger
Event and Registration Rights Agreement penalties and per the terms of the
convertible note agreement and the Company’s agreement with the note holder,
such penalties earned by the note holders have the same conversion rights as the
original convertible note payable. Accordingly, since the terms of the
convertible note allow for non-standard anti-dilution (“down-round protection”),
the Company also recorded additional derivative liabilities for the embedded
conversion feature of the additional principal and interest. During the 3rd quarter
of 2010, ISP Holdings converted $509,336 of their Note balance into 900,000
shares of the Company’s common stock. Upon conversion, the unamortized debt
discount of $141,443 related to the converted amount was immediately
charged to interest expense on the day the amounts were converted.





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 aggregate principal amount of $5,490,165
bearing interest at a rate of 12%, increasing to 18% upon the occurrence of
certain triggering events as defined in the note (the agreement is limited to a
maximum of two triggering events). The Purchase Agreement includes a five year
warrant (major terms of warrant are detailed above) to purchase up to 6,528,213
shares of the Company’s Common Stock at an initial exercise price of $0.38 per
share. The Note carries a 20% original issue discount and matures on
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
these transactions; such amount was withheld from the Note 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
these transactions. 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 the greater of the Floor Price (as defined in the Note) or 80% of
the VWAP for the five (5) Trading Days ending on the business day
immediately preceding the applicable date of conversion. The embedded conversion
feature of the convertible debt and warrants are recorded as derivative
liabilities in accordance with relevant accounting guidance due to the
down-round protection of the conversion price of the Notes and the exercise
price of the Warrants. The fair value on the grant date of the embedded
conversion feature of the convertible debt and warrants amounted to $2,448,402
and $4,714,626, respectively, as computed using the Binomial Lattice option
pricing model. In regards to the 1st Trigger
Event, 2nd Trigger
Event and Registration Rights Agreement penalties and per the terms of the
convertible note agreement and the Company’s agreement with the note holder,
such penalties earned by the note holders have the same conversion rights as the
original convertible note payable. Accordingly, since the terms of the
convertible note allow for non-standard anti-dilution (“down-round protection”),
the Company also recorded additional derivative liabilities for the embedded
conversion feature of the additional principal and interest.





23




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 aggregate principal amount of $3,957,030
bearing interest at a rate of 12%, increasing to 18% upon the occurrence of
certain triggering events as defined in the note (the agreement is limited to a
maximum of two triggering events). The Purchase Agreement includes a five year
warrant (major terms of warrant are detailed above) to purchase up to 4,705,657
shares of the Company’s Common Stock at an initial exercise price of $0.38 per
share. The Note carries a 20% original issue discount and matures on
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 these
transactions; such amount was withheld from the Note 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
on 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 the greater of the Floor Price (as defined in the Note) or 80% of the
VWAP for the five (5) Trading Days ending on the business day immediately
preceding the applicable date of conversion. The embedded conversion feature of
the convertible debt and warrants are recorded as derivative liabilities in
accordance with relevant accounting guidance due to the down-round protection of
the conversion price of the Notes and the exercise price of the Warrants. The
fair value on the grant date of the embedded conversion feature of the
convertible debt and warrants amounted to $1,147,985 and $8,576,322,
respectively, as computed using the Binomial Lattice option pricing model. In
regards to the 1st Trigger
Event, 2nd Trigger
Event and Registration Rights Agreement penalties and per the terms of the
convertible note agreement and the Company’s agreement with the note holder,
such penalties earned by the note holders have the same conversion rights as the
original convertible note payable. Accordingly, since the terms of the
convertible note allow for non-standard anti-dilution (“down-round protection”),
the Company also recorded additional derivative liabilities for the embedded
conversion feature of the additional principal and interest.





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 aggregate principal amount of $685,170
bearing interest at a rate of 12%, increasing to 18% upon the occurrence of
certain triggering events (the agreement is limited to a maximum of two
triggering events). The Purchase Agreement includes a five year warrant (major
terms of warrant are detailed above) to purchase up to 712,949 shares of the
Company’s Common Stock at an initial exercise price of $0.28 per share for two
investors and up to 101,849 shares at an exercise price of $0.89 per share for
the remaining two investors. The Notes carry 20% original issue discounts and
mature on 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 these transactions; such amount was withheld from the Note at the closing
of these 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 the greater of the Floor Price (as defined in the Note) or 80% of
the VWAP for the five (5) Trading Days ending on the business day
immediately preceding the applicable date of conversion. The embedded conversion
feature of the convertible debt and warrants are recorded as derivative
liabilities in accordance with relevant accounting guidance due to the
down-round protection of the conversion price of the Notes and the exercise
price of the Warrants. The fair value on the grant date of the embedded
conversion feature of the convertible debt and warrants amounted to $148,374 and
$774,535, respectively, as computed using the Binomial Lattice option pricing
model. In regards to the 1st Trigger
Event, 2nd Trigger
Event and Registration Rights Agreement penalties and per the terms of the
convertible note agreement and the Company’s agreement with the note holder,
such penalties earned by the note holders have the same conversion rights as the
original convertible note payable. Accordingly, since the terms of the
convertible note allow for non-standard anti-dilution (“down-round protection”),
the Company also recorded additional derivative liabilities for the embedded
conversion feature of the additional principal and interest.




The following events constitute Trigger Events under the terms of
the Notes. Upon occurrence of any of these events, the Company will record a
liability.




1)
Decline in 5-day trailing average VWAP less than $0.20 at any given
time;


2)
Decline in 10-day trailing average daily dollar volume of the Common shares to
less than $35,000 per day;


3) A
judgment for an amount equal to or greater than $100,000;


4)
Failure to file Registration Statement and have it declared effective by certain
dates. We filed the Registration Statement timely, but failed to have the
Registration Statement declared effective timely and accounted for such
occurrence.


5)
Occurrence of Events of Default such as our failure to pay or make payments,
failure to deliver conversion shares, breaches of covenants, incomplete or
misleading representation and warranties, voluntary or involuntary bankruptcy,
certain governmental actions and the failure to timely cure a Trigger
Event.





In no
event, may the Trigger Events be applied more than twice.




See Note
2 for more information on accounting for derivative liabilities related to
embedded conversion features and warrants with down round protection and
valuation of these derivative liabilities.





Shares Issued in Connection with
Warrant Exercises and Financing Arrangements




During the nine months ended September 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 nine months ended September 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.




24




At various times during April 2010 debt holders 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.






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




St. George10% Notes
                                    
                                    
                                    Debt
                                    
                                    
                                    2010 NotesIssued
                                    
                                    
                                    Issued
                                    
                                    
                                    Issued
                                    
                                    
                                    Issued
                                    
                                    
                                    Issued
                                    
                                    
                                    IssuedSep-08
                                    
                                    
                                    Sep-09
                                    
                                    
                                    Mar-10
                                    
                                    
                                    Apr-10
                                    
                                    
                                    Apr-10
                                    
                                    
                                    Apr-10
                                    
                                    
                                    TotalCarrying
      ValueBefore
      Discount atDecember 31,
      2009
                                    
                                    $
                                    1,624,886
                                    
                                    
                                    $
                                    616,390
                                    
                                    
                                    $
                                    —
                                    
                                    
                                    $
                                    —
                                    
                                    
                                    $
                                    —
                                    
                                    
                                    $
                                    —
                                    
                                    
                                    $
                                    2,241,276Face
      value of debtissued
      2010
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    925,000
                                    
                                    
                                    
                                    5,490,165
                                    
                                    
                                    
                                    3,957,030
                                    
                                    
                                    
                                    685,170
                                    
                                    
                                    
                                    11,057,365Additional
      penalties and trigger events note increase
                                    
                                    
                                    169,904
                                    
                                    
                                    
                                    50,000
                                    
                                    
                                    
                                    633,142
                                    
                                    
                                    
                                    3,953,316
                                    
                                    
                                    
                                    2,748,332
                                    
                                    
                                    
                                    480,108
                                    
                                    
                                    
                                    8,034,802Portion
      of note converted to equity
                                    
                                    
                                    (1,398,348
                                    )
                                    
                                    
                                    (666,390
                                    )
                                    
                                    
                                    (509,336
                                    )
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (2,574,074
                                    )Carrying
      Value Before Discount at September 30, 2010
                                    
                                    
                                    396,442
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    1,048,806
                                    
                                    
                                    
                                    9,443,481
                                    
                                    
                                    
                                    6,705,362
                                    
                                    
                                    
                                    1,165,278
                                    
                                    
                                    
                                    18,759,369Discount,
      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
                                    
                                    
                                    
                                    182,727
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    1,995,623Discount
      attributable to 2010 notes
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (651,165
                                    )
                                    
                                    
                                    (5,490,165
                                    )
                                    
                                    
                                    (3,957,030
                                    )
                                    
                                    
                                    (685,170
                                    )
                                    
                                    
                                    (10,783,530
                                    )Amortization
      expense during the nine months ended September 30, 2010
                                    
                                    
                                    87,891
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    352,718
                                    
                                    
                                    
                                    2,516,332
                                    
                                    
                                    
                                    1,813,646
                                    
                                    
                                    
                                    314,044
                                    
                                    
                                    
                                    5,084,631Discount,
      net of accumulated amortization at September 30, 2010
                                    
                                    
                                    (100,005
                                    )
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (115,720
                                    )
                                    
                                    
                                    (2,973,833
                                    )
                                    
                                    
                                    (2,143,384
                                    )
                                    
                                    
                                    (371,126
                                    )
                                    
                                    
                                    (5,704,068
                                    )Net
      Carrying Value at September 30, 2010
                                    
                                    
                                    296,437
                                    
                                    
                                    $
                                    —
                                    
                                    
                                    $
                                    933,086
                                    
                                    
                                    $
                                    6,469,648
                                    
                                    
                                    $
                                    4,561,978
                                    
                                    
                                    $
                                    794,152
                                    
                                    
                                    $
                                    13,055,301




25




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





Series 1
                                                  
                                                  
                                                  Series
      2Dec-08
                                                  
                                                  
                                                  Jan-09
                                                  
                                                  
                                                  May-09
                                                  
                                                  
                                                  Jun-09
                                                  
                                                  
                                                  TotalCarrying
      Value Before Discount at December31, 2009
                                                  
                                                  $
                                                  1,077,500
                                                  
                                                  
                                                  $
                                                  680,000
                                                  
                                                  
                                                  $
                                                  1,327,249
                                                  
                                                  
                                                  $
                                                  468,350
                                                  
                                                  
                                                  $
                                                  3,553,099Additional
      penalties and trigger events note increase
                                                  
                                                  
                                                  269,375
                                                  
                                                  
                                                  
                                                  170,000
                                                  
                                                  
                                                  
                                                  331,812
                                                  
                                                  
                                                  
                                                  117,088
                                                  
                                                  
                                                  
                                                  888,275Carrying
      Value Before Discount at September30, 2010
                                                  
                                                  
                                                  1,346,875
                                                  
                                                  
                                                  
                                                  850,000
                                                  
                                                  
                                                  
                                                  1,659,061
                                                  
                                                  
                                                  
                                                  585,438
                                                  
                                                  
                                                  
                                                  4,441,374Discount,
      net of accumulated amortization, at December 31, 2009
                                                  
                                                  
                                                  (318,178
                                                  )
                                                  
                                                  
                                                  (327,809
                                                  )
                                                  
                                                  
                                                  (782,043
                                                  )
                                                  
                                                  
                                                  (273,366
                                                  )
                                                  
                                                  
                                                  (1,701,396
                                                  )Amortization
      expense for the nine months ended September 30, 2010
                                                  
                                                  
                                                  318,178
                                                  
                                                  
                                                  
                                                  327,809
                                                  
                                                  
                                                  
                                                  782,043
                                                  
                                                  
                                                  
                                                  273,366
                                                  
                                                  
                                                  
                                                  1,701,396Discount,
      net of accumulated amortization, at September 30, 2010
                                                  
                                                  
                                                  −
                                                  
                                                  
                                                  
                                                  −
                                                  
                                                  
                                                  
                                                  −
                                                  
                                                  
                                                  
                                                  −
                                                  
                                                  
                                                  
                                                  −Net
      Carrying Value at September 30, 2010
                                                  
                                                  $
                                                  1,346,875
                                                  
                                                  
                                                  $
                                                  850,000
                                                  
                                                  
                                                  $
                                                  1,659,061
                                                  
                                                  
                                                  $
                                                  585,438
                                                  
                                                  
                                                  $
                                                  4,441,374





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 fourth quarter of 2009, the
Company defaulted on the loan and incurred an additional penalty of $25,000 that
was added to the principal balance. In March 2010, the Company entered into
an Exchange Agreement with the Lender. Under the Exchange Agreement, we agreed
to 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, totaling 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.





Pursuant
to the Bridge Loan Exchange Agreement, we were required to obtain shareholder
approval by September 15, 2010. Since our failure to obtain shareholder approval
by September 15, 2010 would subject us to being in default of the Bridge Loan,
on September 13, 2010, we sought the Bridge Loan holder’s agreement to instead
hold the meeting on or before November 15, 2010. In consideration for their
agreement to extend the time in which we must obtain shareholder approval, and
waive any defaults related to our failure to hold the meeting by September 15,
2010, we agreed to increase the principal balance of the Bridge Loan by
25%. In
accordance with relevant accounting guidance, the Company recorded the 25%
increase of $57,360 to the principal balance as a loss on extinguishment which
is included in the accompanying statement of operations and comprehensive
loss. As a result of this increase, the current amount of principal due
on the Bridge Loan is $140,360; together with the outstanding interest,
calculated through September 30, 2010 of $18,896, a total of $159,256 may be
exchanged pursuant to the Bridge Loan Exchange Agreement for a total of 568,771
shares. In accordance with relevant accounting guidance, on September 14,
2010, the Company recorded a beneficial conversion feature of the principal
balance of the note, which resulted in the recording of $140,360 as debt
discount and amortization expense of $36,222 as of September 30, 2010. If
we do not receive stockholder approval for this Proposal, we will once again be
in default of the Bridge Loan.





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 $259,000 and $225,000 are included in accrued salaries and wages
in the accompanying condensed consolidated balance sheets at September 30, 2010
and December 31, 2009, respectively. During the nine month ended September
30, 2010, the Company paid approximately $203,000 under this arrangement to the
Company’s former CEO.


26


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 of the Trigger Event, the
balance was immediately increased to 125% of the outstanding balance. The
Company noted this Trigger Event and recorded in its accompanying financial
statements the increase of principal. Moreover, the claim alleged that an
additional Trigger Event occurred because the Company did not cure 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. 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.


27





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 nine months ended September 30, 2010 and 2009, the Company recorded
share-based compensation expense to employees and directors of $173,758 and
$600,825, 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 September 30, 2010, all outstanding stock options are fully vested. There
were 1,898,001 stock options outstanding, vested and exercisable with a weighted
average exercise price of $1.80 at September 30, 2010 and December 31,
2009. The Company granted no stock options, and no stock options were exercised
during the entire year ended December 31, 2009. There were no
forfeitures or expirations of stock options during the nine months ended
September 30, 2010. The aggregate intrinsic value of options outstanding at
September 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 nine months ended September 30, 2010. During the nine months ended
September 30, 2010 and 2009, the Company recorded general and administrative
expense of $52,643 and $36,165, 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 nine months ended September 30, 2010. During the nine months
ended September 30, 2010, the Company recorded general and administrative
expense of $74,500 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 July 1,
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 the Company received 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 in the nine month period ended September 30,
2010.




28




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
nine months ended September 30, 2010, and the Company recorded general and
administrative expense of $160,334 related to the agreement.
 
 On
January 13, 2010, the Company entered into an agreement with Catawaba LTD
(“Catawaba”) for investor relations services through September 13, 2010. The
Company granted Catawaba 900,000 shares of the Company’s common stock in
exchange for services which were valued at $288,000 and was recorded as prepaid
consulting expense. The prepaid consulting expense will be amortized to
consulting expense ratably over the service period. During the nine months ended
September 30, 2010, the Company amortized $288,000 related to the consulting
agreement, such amount is included in general and administrative expenses in the
accompanying condensed consolidated statement of operations and comprehensive
loss for the nine months ended September 30, 2010.
 
 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 $85,200 as prepaid consulting expenses for the initial 120,000
shares that is to be vested over three months and the remaining shares are
expensed when earned. The Company recorded general and administrative expenses
of $291,797 related to the agreement for the nine months ended September 30,
2010 with 126,667 to be earned in the subsequent period.
 
 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 30,
2010.The issuance of the shares was contingent upon AMEX Approval. AMEX Approval
was received on April 8, 2010. 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 nine months
ended September 30, 2010, the Company recorded general and administrative
expense of $649,450 related to the agreement with 75,000 shares to be earned in
the subsequent period.
 
 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 through February 28, 2011. 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
$127,800 as prepaid consulting expenses for the initial 180,000 shares that is
be vested over three months and the remaining shares are expensed when earned.
The Company recorded general and administrative expenses of $378,200 related to
the agreement for the nine months ended September 30, 2010 with 242,000 shares
to be earned in the subsequent period.
 
 During
the nine months ended September 30, 2010, certain 2008 Convertible Debt holders
converted their note balance and accrued interest balances to 1,397,698 shares
of our common stock (see Note 6).
 
 During
the nine months ended September 30, 2010, St. George converted 100% of its note
balance and accrued interest of $666,390 and $52,916, respectively into
2,568,951 shares of our common stock (see Note 6).
 
 During
the nine months ended September 30, 2010, ISP Holdings converted an aggregate of
$509,336 of their Note balance into 900,000 shares of our common stock (see Note
6).





Warrants





A summary
of activity with respect to warrants outstanding follows:





Nine
      months endedSeptember 30, 2010WeightedAverageExerciseWarrants (1)
                                                  
                                                  PriceOutstanding
      and exercisable, January 1, 2010
                                                  
                                                  
                                                  10,393,287
                                                  
                                                  $
                                                  1.84Granted
                                                  
                                                  
                                                  13,548,668
                                                  
                                                  
                                                  0.40Exercised
                                                  
                                                  
                                                  (1,248,000
                                                  )
                                                  $
                                                  0.71Outstanding
      and exercisable, September 30, 2010
                                                  
                                                  
                                                  22,693,955
                                                  
                                                  $
                                                  1.04




(1)
            The
      Company may be required to issue additional warrant shares as a result of
      the cashless exercise feature associated with the First, Second, Third and
      Fourth Closings, which may significantly impact the table
      above.





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 a minimum exercise price at issuance date ranging
between $0.28 and $0.89 per share.





During
the nine months ended September 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 nine months ended
September 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.


29





During
the nine months ended September 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 approximately
$62,000. The aggregate intrinsic value of the warrants exercised was
$486,200.




On May
27, 2010, the Company granted a four-year warrant to purchase 400,000 shares of
the Company’s common stock at an exercise price of $1.23 per share to be earned
over a 2 year period. The warrants were valued using the black-scholes option
pricing model under expected term of 4 years, volatility of 130.01%, risk free
interest rate of 2.18% and zero dividend rate. As a result of the valuation, the
Company recorded $400,000 as Prepaid Consulting expense and amortized $66,668 as
of September 30,2010.





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 September 30, 2009:





China
                      
                      
                      Corporate
                      
                      
                      TotalNet
      revenue
                      
                      $
                      2,628,292
                      
                      
                      $
                      86,443
                      
                      
                      $
                      2,714,735Gross
      profit
                      
                      
                      1,022,040
                      
                      
                      
                      64,752
                      
                      
                      
                      1,086,792Depreciation
                      
                      
                      187,628
                      
                      
                      
                      17,901
                      
                      
                      
                      205,529Amortization
                      
                      
                      95,454
                      
                      
                      
                      25,000
                      
                      
                      
                      120,454Interest
      expense
                      
                      
                      61,877
                      
                      
                      
                      1,430,748
                      
                      
                      
                      1,492,625Loss
      before discontinued operations
                      
                      
                      (955,735
                      )
                      
                      
                      (4,174,590
                      )
                      
                      
                      (5,130,325
                      )Identifiable
      assets of continuing operations
                      
                      
                      -
                      
                      
                      
                      27,909,792
                      
                      
                      
                      27,909,792Capital
      expenditures
                      
                      $
                      2,564
                      
                      
                      $
                      817
                      
                      
                      $
                      3,381




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





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





China
                      
                      
                      Corporate
                      
                      
                      TotalNet
      revenue
                      
                      $
                      8,469,652
                      
                      
                      $
                      137,863
                      
                      
                      $
                      8,607,515Gross
      profit
                      
                      
                      3,147,110
                      
                      
                      
                      96,484
                      
                      
                      
                      3,243,594Depreciation
                      
                      
                      585,506
                      
                      
                      
                      89,306
                      
                      
                      
                      674,812Amortization
                      
                      
                      309,574
                      
                      
                      
                      75,000
                      
                      
                      
                      384,574Interest
      expense
                      
                      
                      173,335
                      
                      
                      
                      1,885,541
                      
                      
                      
                      2,058,876Loss
      before discontinued operations
                      
                      
                      (1,397,511
                      )
                      
                      
                      (9,380,426
                      )
                      
                      
                      (10,777,937
                      )Identifiable
      assets
                      
                      
                      -
                      
                      
                      
                      27,909,792
                      
                      
                      
                      27,909,792Capital
      expenditures
                      
                      $
                      1,447,356
                      
                      
                      $
                      296,709
                      
                      
                      $
                      1,744,065





Substantially,
all of the Company’s revenues for the three and nine months ended September 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





During
October and November 2010, ISP Holdings converted a total of $1,353,329 of the
balance owed them under the First Closing Convertible Note into 2,821,000 shares
of the Company’s common stock. Additionally, during the same period ISP Holdings
exercised 1,100,000 warrants into the same number of our common stock through a
cashless exercise. All of these shares were previously approved by AMEX for
issuance.





The
Company issued common stock purchase warrants to purchase, in the aggregate, up
to approximately 2,756,000 shares of our common stock on October 31, 2007,
December 21, 2007, March 5, 2008 and September 15, 2008 to various
investors.  As a result of private negotiations during October 2010,
we re-priced approximately 105,856 of these warrants held by 5 of the investors
to $0.52 per share.  The original price of the warrants that were
re-priced was $3.68, $4.74 and $2.69.  The remaining unexercised
warrants remain exercisable at their original exercise price as set forth
above.  The 105,856 warrants have now been exercised, pursuant to
which we received approximately $55,000.





On
October 14, 2010, the Company entered into a forbearance agreement (“Forbearance
Agreement”) with two investors (ISP Holdings, LLC and St. George Investments,
LLC) of the 2010 closings. These investors negotiated the terms of the
Forbearance Agreement in line of entering into the Extension the other 2010
closing investors signed. Accordingly, the Company and the two investors
executed the Forbearance Agreement whereby the two investors refrained and
temporarily forbear from exercising and enforcing their remedies against the
Company due to the event of default and in return the Company agreed as a
compensation for damages to the two investors to increase the outstanding
balance of the convertible note to ISP Holdings, LLC by 68% and increase the
outstanding balance of the note to St. George Investments, LLC by 25%. In
addition, the Company agreed to obtain the required Stockholder Approval to
issue the shares underlying the convertible note and warrants on or before
December 3, 2010.








30
 
 
 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 8 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.
 
 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 nine months ended September 30 2010, we
generated approximately $117,000 in the sales of the Company’s Onko-SureTM IVD
cancer diagnostic test kits, which is an decrease of approximately 98% in sales
of this product over the same period for 2009. We believe, subject to receipt of
adequate financing, revenues from Onko-SureTM will significantly increase in 2011
due to the creation of distribution agreements which are anticipated to move the
IVD cancer diagnostic test kit in markets throughout the world.  In
addition to increasing our distribution network, we are also negotiating
partnership agreements with laboratories certified under the Clinical Laboratory
Improvement Act (“CLIA”) which will purchase Onko-SureTM test kit for in-house
use.  However, the success of the Company’s distribution strategy for
these products in 2010 and 2011 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
2010-2011 revenues.
  31
  Deconsolidation
and Accounting of JPI
 
 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, exchanged $730,946 in salaries and related interest, accrued
by the Company as of September 29, 2009, into 730,946 shares of JPI’s
preferred stock, 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.
 
 As
a result, the Company ownership interest in JPI is 97.46%. 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
September 30, 2010, we determined that an impairment charge of approximately
$2,800,000 was necessary.
 
 In
June 2010, JPI’s management decided to shift their product base to concentrate
on the manufacture and distribution of cancer centric products, specifically
JPI’s Domperidone tables. As a result, revenues from JPI’s HPE based products
(GoodNak), which were originally forecasted to contribute substantively to top
line revenue, were eliminated in the current forecast. Revenues from this shift
in product mix will not immediately be realized because cancer centric products
require more time to produce revenues due to the difficulty in penetrating a
market space with competing products. The primary factors we considered to
determine the impairment include, but are not limited to:
 
 •
              Sales
      growth: based on JPI management’s expectations and historical analysis, we
      expect growth of 150% in 2011, 20% in 2012 and 2013 and 10% in
      2014.
 
 •
              Risk
      adjusted weighted average cost of capital (“WACC”) — a WACC of 17.7% was
      utilized.
 
 •
              Long
      term growth rate: we assumed a long term growth rate of
  5%
 
 •
              Cost
      of debt: assumed an after tax rate of
4.46%
 
 •
              Cost
      of Equity:
  •
              Risk
      free rate: 2.93%
 
 •
              Equity
      risk premium: 11.15%
 
 •
              Small
      stock risk premium: 3.99%
 
 •
              Beta:
      .86x
 
 •
              Subject
      company risk: 0%
  •
              Discounts:
      combined discount for lack of marketability and lack of control of
      35%
 
 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 management would take over operations of the
combined companies.  JPI is moving forward with its plans to obtain
financing, complete a reverse merger, list on a senior U.S. stock exchange,
and acquire Shanxi BaoTai Pharmaceutical Co., Ltd. (BaoTai) — a privately
owned pharmaceutical manufacturing company located in Taiyuan,
China.    JPI’s intentions are to acquire BaoTai through a
nontaxable merger of business assets into a single cancer-centric pharmaceutical
company focused on developing, manufacturing and commercializing novel,
high-growth cancer pharmaceutical products.  JPI and BaoTai are
currently engaged in due diligence for the proposed merger and believe all
closing conditions will be satisfied or waived and the deal completion to close
during the first quarter of 2011.
  Although
a non-binding letter of intent has been executed, no definitive agreements had
been reached at this time.
  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 September 30, 2010,
we determined that an impairment charge of approximately $2,800,000 was
necessary.
  32
 
 IV
Diagnostics
 IVD
Cancer Diagnostics
 
 Onko-Sure
TM
Kit
 
 Our
Onko-Sure TM product
is manufactured at our Tustin, California based facilities and is sold to third
party distributors, who then sell directly to 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
 
 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-SureTM 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-SureTM 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-SureTM is a
simple, non-invasive blood test used for the detection and/or monitoring of 19
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-Sure
TM
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-SureTM 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 our in-vitrodiagnostic cancer
test from DR-70 to 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 September 30, 2010, we spent $45,874 on research and
development costs related to the Onko-Sure TM, as
compared to $91,213 for the same period in 2009. During the nine months ended
September 30, 2010, we spent $340,689 on research and development related to the
Onko-Sure TM , as
compared to $516,676 for the same period in 2009. These expenditures were
incurred as part of the Company’s efforts to improve the existing Onko-Sure
TM
and develop the next generation Onko-Sure TM
..
 
 During
the nine months ended September 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
fourth quarter of 2010 and first half of 2011  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.
  33
  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 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.
 
 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 has entered into several distribution agreements and a laboratory
service partner agreement for various geographic locations with third party
distributors and a CLIA certified laboratory. Under terms of one agreement with
a distributor and the laboratory service partner agreement, , the Company sells
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) and Net Income (as defined) to its customers. The distributor
is required to provide quarterly reconciliations 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 September 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 maintains 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.
  34
 
 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.
  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 September 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.
  35
 
 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.
 
 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.
  Note
Receivable
  On August
27, 2010, the Company advanced $100,000 to Provista Diagnostic, Inc.
(“Provista”). In connection with the note receivable agreement, Provista agreed
to deliver two separate reports to the Company by September 30, 2010. Due to
Provista’s failure to deliver such reports by September 30, 2010, the Company
recorded interest income of $26,937, which represents the 25% increase from the
principal balance of the note plus accrued interest of $1,927. The note requires
5 equal payments of $20,000 (totaling $100,000) on the 1st day of
each month commencing on the initial interest payment date (as defined in the
note) and continuing thereafter until maturity (August 27, 2011). Interest
accrues on the unpaid principal balance at a rate of 12% per
annum.
 Beneficial
Conversion Feature
 
 In
certain instances, the Company enters into convertible notes that provide for an
effective or actual rate of conversion that is below market value, and the
embedded conversion feature does not qualify for derivative treatment (a
“BCF”).  In these instances, we account for the value of the BCF as a
debt discount, which is then amortized to expense over the life of the related
debt using the straight-line method which approximates the effective interest
method.
 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 nine months ended September 30, 2010, we
issued convertible debt with warrants and recorded derivative liabilities
related to a reset provision associated with 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 $17,986,337 as computed using the Binomial Lattice option pricing model. Due
to the reset provisions within the embedded conversion feature and a reset
provision associated with the exercise price of the warrants, we determined that
the Binomial Lattice Model was most appropriate for valuing these
instruments.
  In
November 2009, we granted 1,644,643 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 $509,840, which reasonably represents the
fair value as computed using the Binomial Lattice option pricing
model.
  During
the nine months ended September 30, 2010, St. George converted 100% of its
convertible note 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 nine months ended September 30, 2010, this holder of the
Company`s convertible debt exercised 500,000 warrants. This resulted in a
decrease of the derivative liability of $83,872, representing the value of the
warrants immediately prior to the exercise.
  During
the nine months ended September 30, 2010, a 2010 Note holder of the Company’s
convertible debt converted $509,336 of its notes and accrued interest into
shares of the Company’s common stock. This resulted in a decrease of the
derivative liability of $94,855, representing the embedded conversion features
of the converted debt.
  During
the nine months ended September 30, 2010, we recorded additional derivative
liability of $32.027 as a result of a trigger event related to the St. George
convertible debt and also recorded additional derivative liability of $1,912,683
as a result of a trigger event related to the First, Second, Third an Fourth
2010 closings (see Note 6).
  We
re-measured the fair values of all of its derivative liabilities as of each
period end and recorded an aggregate decrease of $5,681,415 in the fair value of
the derivative liabilities as a component of other expense, net during the nine
months ended September 30, 2010.
  36
 
 Results
of Operations
 Nine
Months Ended September 30, 2010 Compared to Nine Months Ended September 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 nine months ended
September 30, 2010 as compared to the nine months ended September 30, 2009,
after the elimination of our China based operations:
 
 Nine
      months ended September 30,
                                                                    
                                                                    Difference2010
                                                                    
                                                                    2009
                                                                    
                                                                    $
                                                                    
                                                                    
                                                                    %Net
      revenues
                                                                    
                                                                    $
                                                                    116,840
                                                                    
                                                                    
                                                                    $
                                                                    137,863
                                                                    
                                                                    
                                                                    $
                                                                    (21,023
                                                                    )
                                                                    
                                                                    
                                                                    (15
                                                                    )%Cost
      of sales
                                                                    
                                                                    
                                                                    36,810
                                                                    
                                                                    
                                                                    
                                                                    41,379
                                                                    
                                                                    
                                                                    
                                                                    (4,569
                                                                    )
                                                                    
                                                                    
                                                                    (11
                                                                    )%Gross
      profit
                                                                    
                                                                    
                                                                    80,030
                                                                    
                                                                    
                                                                    
                                                                    96,484
                                                                    
                                                                    
                                                                    
                                                                    (16,454
                                                                    )
                                                                    
                                                                    
                                                                    (17
                                                                    )%Operating
      expenses:Research
      and development
                                                                    
                                                                    
                                                                    340,689
                                                                    
                                                                    
                                                                    
                                                                    516,676
                                                                    
                                                                    
                                                                    
                                                                    (175,987
                                                                    )
                                                                    
                                                                    
                                                                    (34
                                                                    )%Selling,
      general and administrative
                                                                    
                                                                    
                                                                    6,444,700
                                                                    
                                                                    
                                                                    
                                                                    5,759,056
                                                                    
                                                                    
                                                                    
                                                                    685,644
                                                                    
                                                                    
                                                                    
                                                                    12
                                                                    %6,785,389
                                                                    
                                                                    
                                                                    
                                                                    6,275,732
                                                                    
                                                                    
                                                                    
                                                                    509,657
                                                                    
                                                                    
                                                                    
                                                                    8
                                                                    %Loss
      from operations
                                                                    
                                                                    
                                                                    (6,705,359
                                                                    )
                                                                    
                                                                    
                                                                    (6,179,248
                                                                    )
                                                                    
                                                                    
                                                                    (526,111
                                                                    )
                                                                    
                                                                    
                                                                    9
                                                                    %Other
      income (expense):Interest
      expense
                                                                    
                                                                    
                                                                    (33,662,478
                                                                    )
                                                                    
                                                                    
                                                                    (1,885,541
                                                                    )
                                                                    
                                                                    
                                                                    (31,776,937
                                                                    )
                                                                    
                                                                    
                                                                    1,685
                                                                    %Gain
      on change in fair value of derivative instruments
                                                                    
                                                                    
                                                                    5,681,415
                                                                    
                                                                    
                                                                    
                                                                    87,083
                                                                    
                                                                    
                                                                    
                                                                    5,594,332
                                                                    
                                                                    
                                                                    
                                                                    6,424
                                                                    %Gain
      on extinguishment of debt
                                                                    
                                                                    
                                                                    (1,002,270
                                                                    )
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    (1,002,270
                                                                    )
                                                                    
                                                                    
                                                                    100
                                                                    %Impairment
      of investment in JPI
                                                                    
                                                                    
                                                                    (2,761,993
                                                                    )
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    (2,761,993
                                                                    )
                                                                    
                                                                    
                                                                    100
                                                                    %Other
      expense, net
                                                                    
                                                                    
                                                                    29,997
                                                                    
                                                                    
                                                                    
                                                                    (37,029
                                                                    )
                                                                    
                                                                    
                                                                    67,026
                                                                    
                                                                    
                                                                    
                                                                    (181
                                                                    )%Total
      other expense, net
                                                                    
                                                                    
                                                                    (31,715,329
                                                                    )
                                                                    
                                                                    
                                                                    (1,835,487
                                                                    )
                                                                    
                                                                    
                                                                    (29,879,842
                                                                    )
                                                                    
                                                                    
                                                                    1,628
                                                                    %Net
      loss
                                                                    
                                                                    
                                                                    (38,420,688
                                                                    )
                                                                    
                                                                    
                                                                    (8,014,735
                                                                    )
                                                                    
                                                                    
                                                                    (30,405,953
                                                                    )
                                                                    
                                                                    
                                                                    379
                                                                    %
  Net
Revenues
 
 Net
revenues during the nine months ended September 30, 2010, were primarily earned
from the sale of ONKO-SURETM test kits. The revenues during the nine months ended
September 30, 2010, decreased 15% as compared to the same period in prior year.
We increased efforts to develop our distribution networks. With USFDA approval
of the Company’s ONKO-SURE tm
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 increase in the remaining
of 2010 and will continue in 2011.
  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-SURE tm
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-SURE tm
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-SURE TM 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-SURE tm
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.
  37
  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 decrease sales of ONKO-SURE tm
test kits. In addition, during the nine months ended September 30, 2010, our
gross margin decreased to approximately 68% from approximately 70%, during the
same period of the prior year, due to increase of direct labor cost as a result
of hiring qualified manufacturing staff.
 
 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-SURE
      tm
      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 nine months
ended September 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 nine months ended September 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.
 
 The table
below details the major components of selling, general and administrative
expenses after the elimination of our China based operations:
 
 Nine months ended September
    30,2010
                                    
                                    
                                    2009Investor
      relations (including value of warrants/common stock
shares)
                                    
                                    $
                                    2,849,673
                                    
                                    
                                    $
                                    660,742Salary
      and wages (including value of options)
                                    
                                    
                                    1,306,297
                                    
                                    
                                    
                                    2,158,208Accounting
      and other professional fees
                                    
                                    
                                    1,346,966
                                    
                                    
                                    
                                    1,350,630Stock
      exchange fees
                                    
                                    
                                    103,318
                                    
                                    
                                    
                                    —Directors
      fees (including value of options)
                                    
                                    
                                    122,968
                                    
                                    
                                    
                                    352,809Rent
      and office expenses
                                    
                                    
                                    138,241
                                    
                                    
                                    
                                    128,364Employee
      benefits
                                    
                                    
                                    96,411
                                    
                                    
                                    
                                    91,568Travel
      and entertainment
                                    
                                    
                                    159,091
                                    
                                    
                                    
                                    130,831Insurance
                                    
                                    
                                    42,592
                                    
                                    
                                    
                                    145,029Taxes
      and licenses
                                    
                                    
                                    72,494
                                    
                                    
                                    
                                    74,417Other
                                    
                                    
                                    206,649
                                    
                                    
                                    
                                    666,458$
                                    6,444,700
                                    
                                    
                                    $
                                    5,759,056
 
 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 nine months ended September 30, 2010. In applying the Binomial
Lattice model, the Company used the following assumptions to value its
derivative liabilities during the nine months ended September 30,
2010:
 
 For
      the nine monthsended
      September 30, 2010Annual
      dividend yield
                      
                      
                      —Expected
      life (years)
                      
                      
                      0.41
      — 6.17Risk-free
      interest rate
                      
                      
                      0.25%
      — 2.9%Expected
      volatility
                      
                      
                      87.3%
      — 298.6%
 
 For
instruments that include an optional cashless exercise provision, the Company
applied a 50/50 probability that the holder will exercise under either
scenarios, that is the cashless exercise or the cash exercise. The cashless
exercise provision expires once the underlying instruments’ shares are
registered.
  38
  The
significant increase in interest expense from $2,058,876 to $33,662,478 for the
nine months ended September 30, 2009 compared to the same period in 2010,
respectively, is primarily due to (i) $11,905,244 in excess fair value of the
debt discount, recorded at origination, for the four closings in 2010 for the
derivatives associated with the conversion feature and warrants, (ii) $1,925,279
related to additional interest penalty recorded as derivative liabilities for
the embedded conversion feature associated with the incremental principal and
accrued interest added to the outstanding balance of the convertible debt; and
(iii) $10,806,592 of amortization of debt discounts and debt issuance costs on
convertible debt balances.
  [1]
                                      
                                      
                                      [2],[4]
                                      
                                      
                                      [3]Fair
      Value of
                                        Derivatives
      in
                                        Excess
      of Debt
                                        Discounts
                                      
                                      
                                      Penalties
                                        Added
      To
                                        Principal
                                      
                                      
                                      Penalties
                                        added
      to
                                        Derivatives
                                      
                                      
                                      Amortization
                                        of
      Debt
                                        Issuance
      Cost
                                      
                                      
                                      Amortization
                                        of
      Debt
                                        Discount
                                      
                                      
                                      Total[7]
                                      
                                      
                                      
                                      
                                      
                                      [7]
                                      
                                      
                                      [8]
                                      
                                      
                                      [8]Senior
      Notes:December
      2008
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      169,947
                                      
                                      
                                      $
                                      318,178
                                      
                                      
                                      $
                                      488,125January
      2009
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      119,279
                                      
                                      
                                      
                                      327,808
                                      
                                      
                                      
                                      447,087May
      2009
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      348,276
                                      
                                      
                                      
                                      782,043
                                      
                                      
                                      
                                      1,130,319June
      2009
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      128,386
                                      
                                      
                                      
                                      273,366
                                      
                                      
                                      
                                      401,752Other
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      77,109
                                      
                                      
                                      
                                      36,222
                                      
                                      
                                      
                                      113,331Convertible
      Debt:September
      2008
                                      
                                      
                                      -
                                      
                                      
                                      
                                      113,269
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      287,474
                                      
                                      
                                      
                                      400,743Conversions
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      445,912
                                      
                                      
                                      
                                      1,398,348
                                      
                                      
                                      
                                      1,844,260St.
      George
                                      
                                      
                                      -
                                      
                                      
                                      
                                      50,000
                                      
                                      
                                      
                                      12,597
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      393,681
                                      
                                      
                                      
                                      456,2781st
      Closing
                                      
                                      
                                      -
                                      
                                      
                                      
                                      633,142
                                      
                                      
                                      
                                      154,991
                                      
                                      
                                      
                                      144,675
                                      
                                      
                                      
                                      535,445
                                      
                                      
                                      
                                      1,468,2532nd
      Closing
                                      
                                      
                                      3,968,028
                                      
                                      
                                      
                                      3,953,316
                                      
                                      
                                      
                                      969,329
                                      
                                      
                                      
                                      203,966
                                      
                                      
                                      
                                      2,516,332
                                      
                                      
                                      
                                      11,610,9713rd
      Closing
                                      
                                      
                                      7,414,307
                                      
                                      
                                      
                                      2,748,333
                                      
                                      
                                      
                                      674,580
                                      
                                      
                                      
                                      147,005
                                      
                                      
                                      
                                      1,813,646
                                      
                                      
                                      
                                      12,797,8714th
      Closing
                                      
                                      
                                      522,909
                                      
                                      
                                      
                                      480,108
                                      
                                      
                                      
                                      113,782
                                      
                                      
                                      
                                      25,450
                                      
                                      
                                      
                                      314,044
                                      
                                      
                                      
                                      1,456,293Incremental
      Cost of Shares and Warrants
                                      
                                      
                                      -
                                      [5]
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      81,780Interest
      on Debt (excluding amounts added to principal)
                                      
                                      
                                      -
                                      [6]
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      965,415Total
      Interest expense
                                      
                                      $
                                      11,905,244
                                      
                                      
                                      $
                                      7,978,168
                                      
                                      
                                      $
                                      1,925,279
                                      
                                      
                                      $
                                      1,810,005
                                      
                                      
                                      $
                                      8,996,587
                                      
                                      
                                      $
                                      33,662,478
  [1]
              This
      amount represents the excess fair value of the debt discount related to
      the derivative liability associated with the embedded conversion feature
      and warrants (see Note 6).
 
 [2]
              This
      amount represents additional penalty interest and/or accrued interest
      added directly to the outstanding prinicipal of the convertible debt for
      Trigger Events (see Note 2).
 
 [3]
              This
      amount represents additional interest recognized for the increase in
      principal balance associated with the embedded conversion feature of the
      2010 Closings as a result of the June 1, 2010 and August 31,Trigger Event
      (see Note 6).
 
 [4]
              This
      amount includes $410,000 of additional penalty recognized for the default
      related to the registration rights agreements as a result of not being
      declared effective by June 1, 2010 related to the First, Second and Third
      Closings in 2010 and byAugust 31, 2010 for the Fourth
    closing.
 
 [5]
              This
      amount represents the incremental costs associated with the additional
      shares and warrants issued in connection with the 2008 convertible debt
      that occurred during Q2 of 2010.
 
 [6]
              This
      amount represents the interest portion of the debt based on the respective
      interest rates as noted in footnote 6, as of September 30,
      2010.
 
 Sum of
      [7]
              13,830,523
      Total interest expense related to fair value of derivative instruments
      granted
 
 Sum of
      [8]
              10,806,592
      Total amortization of debt discount and debt issuance
  costs
  Other
Expense, Net
  The
increase in total other expenses, net is primarily due to approximately $32
million increase in interest expense due to the interest penalties, triggering
events, issuance of debt instruments and warrants with derivative liabilities
and amortization of the related debt discounts and debt issuance costs,
approximately $1 million loss on extinguishment of debt, offset by a gain
of approximately $6 million from change, in fair value of derivative liabilities
for the nine months end September 30, 2010.
 39
 
 Three
Months Ended September 30, 2010 Compared to Three Months Ended September 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 September 30, 2010 as compared to the three months ended September 30,
2009, after the elimination of our China based operations:
  Three months ended September
      30,
                                                                                            
                                                                                            
                                                                                            Difference2010
                                                                                            
                                                                                            
                                                                                            2009
                                                                                            
                                                                                            
                                                                                            $
                                                                                            
                                                                                            
                                                                                            %Net
      revenues
                                                                                            
                                                                                            $
                                                                                            34,446
                                                                                            
                                                                                            
                                                                                            $
                                                                                            86,443
                                                                                            
                                                                                            
                                                                                            $
                                                                                            (51,997
                                                                                            )
                                                                                            
                                                                                            
                                                                                            60
                                                                                            %Cost
      of sales
                                                                                            
                                                                                            
                                                                                            6,697
                                                                                            
                                                                                            
                                                                                            
                                                                                            21,691
                                                                                            
                                                                                            
                                                                                            
                                                                                            (14,994
                                                                                            )
                                                                                            
                                                                                            
                                                                                            (69
                                                                                            )%Gross
      profit
                                                                                            
                                                                                            
                                                                                            27,749
                                                                                            
                                                                                            
                                                                                            
                                                                                            64,752
                                                                                            
                                                                                            
                                                                                            
                                                                                            (37,003
                                                                                            )
                                                                                            
                                                                                            
                                                                                            (57
                                                                                            )%Operating
      expenses:Research
      and development
                                                                                            
                                                                                            
                                                                                            45,874
                                                                                            
                                                                                            
                                                                                            
                                                                                            91,213
                                                                                            
                                                                                            
                                                                                            
                                                                                            (45,339
                                                                                            )
                                                                                            
                                                                                            
                                                                                            (50
                                                                                            )%Selling,
      general and administrative
                                                                                            
                                                                                            
                                                                                            2,320,540
                                                                                            
                                                                                            
                                                                                            
                                                                                            2,002,007
                                                                                            
                                                                                            
                                                                                            
                                                                                            318,533
                                                                                            
                                                                                            
                                                                                            
                                                                                            16
                                                                                            %2,366,414
                                                                                            
                                                                                            
                                                                                            
                                                                                            2,093,220
                                                                                            
                                                                                            
                                                                                            
                                                                                            273,194
                                                                                            
                                                                                            
                                                                                            
                                                                                            13
                                                                                            %Loss
      from operations
                                                                                            
                                                                                            
                                                                                            (2,338,665
                                                                                            )
                                                                                            
                                                                                            
                                                                                            (2,028,468
                                                                                            )
                                                                                            
                                                                                            
                                                                                            (310,197
                                                                                            )
                                                                                            
                                                                                            
                                                                                            15
                                                                                            %Other
      expense:Interest
      expense
                                                                                            
                                                                                            
                                                                                            (11,560,549
                                                                                            )
                                                                                            
                                                                                            
                                                                                            (1,430,748
                                                                                            )
                                                                                            
                                                                                            
                                                                                            (10,129,801
                                                                                            )
                                                                                            
                                                                                            
                                                                                            708
                                                                                            %Gain
      on change in fair value of derivative instruments
                                                                                            
                                                                                            
                                                                                            2,922,826
                                                                                            
                                                                                            
                                                                                            
                                                                                            87,083
                                                                                            
                                                                                            
                                                                                            
                                                                                            2,835,743
                                                                                            
                                                                                            
                                                                                            
                                                                                            3,256
                                                                                            %Gain
      on extinguishment of debt
                                                                                            
                                                                                            
                                                                                            (1,002,270
                                                                                            )
                                                                                            
                                                                                            
                                                                                            —
                                                                                            
                                                                                            
                                                                                            
                                                                                            (1,002,270
                                                                                            )
                                                                                            
                                                                                            
                                                                                            100
                                                                                            %Other
      expense, net
                                                                                            
                                                                                            
                                                                                            31,874
                                                                                            
                                                                                            
                                                                                            
                                                                                            35,798
                                                                                            
                                                                                            
                                                                                            
                                                                                            (3,924
                                                                                            )
                                                                                            
                                                                                            
                                                                                            (11
                                                                                            )%Total
      other expense, net
                                                                                            
                                                                                            
                                                                                            (9,608,119
                                                                                            )
                                                                                            
                                                                                            
                                                                                            (1,307,867
                                                                                            )
                                                                                            
                                                                                            
                                                                                            (8,324,604
                                                                                            )
                                                                                            
                                                                                            
                                                                                            635
                                                                                            %Net
      loss
                                                                                            
                                                                                            
                                                                                            (11,946,784
                                                                                            )
                                                                                            
                                                                                            
                                                                                            (3,336,335
                                                                                            )
                                                                                            
                                                                                            
                                                                                            (8,610,449
                                                                                            )
                                                                                            
                                                                                            
                                                                                            258
                                                                                            %
 
 Net
Revenues
  Net
revenues during the three months ended September 30, 2010, were primarily earned
from the sale of ONKO-SURETM test kits. The revenues during the three months
ended September 30, 2010, decreased 60% as compared to the same period in prior
year. We increased efforts to develop our distribution networks. With USFDA
approval of the Company’s ONKO-SURE tm
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 increase in the remaining
of 2010 and will continue in 2011.
  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-SURE tm
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-SURE tm
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-SURE TM 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-SURE tm
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 decreased sales. During the three months ended September 30,
2010, the Company’s gross margin increased to approximately 81% during the three
months ended September 30, 2010 from approximately 75%, 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-SURE
      tm
      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.
  40
 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 September 30, 2010 of approximately $978,000 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 three months ended September 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.
  The
table below details the major components of selling, general and administrative
expenses:
 
 Three months ended September
      30,2010
                                  
                                  
                                  2009Investor
      relations (including value of warrants/options)
                                  
                                  $
                                  1,018,662
                                  
                                  
                                  $
                                  112,945Salary
      and wages (including value of options)
                                  
                                  
                                  449,302
                                  
                                  
                                  
                                  705,780Accounting
      and other professional fees
                                  
                                  
                                  581,496
                                  
                                  
                                  
                                  332,678Stock
      exchange fees
                                  
                                  
                                  (39,182
                                  )
                                  
                                  
                                  —Directors
      fees (including value of options)
                                  
                                  
                                  11,000
                                  
                                  
                                  
                                  182,713Rent
      and office expenses
                                  
                                  
                                  47,518
                                  
                                  
                                  
                                  34,886Employee
      benefits
                                  
                                  
                                  30,193
                                  
                                  
                                  
                                  34,368Travel
      and entertainment
                                  
                                  
                                  88,958
                                  
                                  
                                  
                                  53,247Insurance
                                  
                                  
                                  1,703
                                  
                                  
                                  
                                  48,683Taxes
      and licenses
                                  
                                  
                                  31,778
                                  
                                  
                                  
                                  9,581Other
                                  
                                  
                                  144,986
                                  
                                  
                                  
                                  487,126$
                                  2,366,414
                                  
                                  
                                  $
                                  2,002,007
 
 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 September 30, 2010. In applying the Binomial
Lattice model, the Company used the following assumptions to value its
derivative liabilities during the three months ended September 30,
2010:
 
 For
      the three monthsended September 30, 2010Annual
      dividend yield
                  
                  —Expected
      life (years)
                  
                  0.41
      — 5.67Risk-free
      interest rate
                  
                  0.25%
      — 1.90%Expected
      volatility
                  
                  125.6%
      — 298.6%
 
 For
instruments that include an optional cashless exercise provision, the Company
applied a 50/50 probability that the holder will exercise under either
scenarios, that is the cashless exercise or the cash exercise. The cashless
exercise provision expires once the underlying instruments’ shares are
registered.
  41
  The
significant increase in interest expense from $1,492,625 to $11,560,549 for the
three months ended September 30, 2009 compared to the same period in 2010,
respectively, is primarily due to (i) $1,096,705 related to additional interest
penalty recorded as derivative liabilities for the embedded conversion feature
associated with the incremental principal and accrued interest added to the
outstanding balance of the convertible debt, (ii) $4,740,873 of default
penalties added directly to the outstanding convertible debt balance and (iii)
$5,549,240 of amortization of debt discounts and debt issuance costs on
convertible debt balances.
  [1]
                                  
                                  
                                  [2],[4]
                                  
                                  
                                  [3]Fair
      Value of
                                    Derivatives
      in
                                    Excess
      of Debt
                                    Discounts
                                  
                                  
                                  Penalties
                                    Added
      To
                                    Principal
                                  
                                  
                                  Penalties
                                    added
      to
                                    Derivatives
                                  
                                  
                                  Amortization
                                    of
      Debt
                                    Issuance
      Cost
                                  
                                  
                                  Amortization
                                    of
      Debt
                                    Discount
                                  
                                  
                                  Total[7]
                                  
                                  
                                  
                                  
                                  
                                  [7]
                                  
                                  
                                  [8]
                                  
                                  
                                  [8]Senior
      Notes:December
      2008
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  92,783
                                  
                                  
                                  $
                                  173,710
                                  
                                  
                                  $
                                  266,493January
      2009
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  79,877
                                  
                                  
                                  
                                  219,521
                                  
                                  
                                  
                                  299,398May
      2009
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  317,988
                                  
                                  
                                  
                                  714,032
                                  
                                  
                                  
                                  1,032,020June
      2009
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  101,566
                                  
                                  
                                  
                                  216,260
                                  
                                  
                                  
                                  317,826Other
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  64,988
                                  
                                  
                                  
                                  36,222
                                  
                                  
                                  
                                  101,210-
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Convertible
      Debt:
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -September
      2008
                                  
                                  
                                  -
                                  
                                  
                                  
                                  113,269
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  238,258
                                  
                                  
                                  
                                  351,527Conversions
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  92,290
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  92,290St.
      George
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -1st
      Closing
                                  
                                  
                                  -
                                  
                                  
                                  
                                  365,282
                                  
                                  
                                  
                                  86,569
                                  
                                  
                                  
                                  91,531
                                  
                                  
                                  
                                  371,790
                                  
                                  
                                  
                                  915,1722nd
      Closing
                                  
                                  
                                  -
                                  
                                  
                                  
                                  2,211,195
                                  
                                  
                                  
                                  524,035
                                  
                                  
                                  
                                  111,255
                                  
                                  
                                  
                                  1,372,545
                                  
                                  
                                  
                                  4,219,0303rd
      Closing
                                  
                                  
                                  -
                                  
                                  
                                  
                                  1,571,019
                                  
                                  
                                  
                                  372,319
                                  
                                  
                                  
                                  80,184
                                  
                                  
                                  
                                  989,262
                                  
                                  
                                  
                                  3,012,7844th
      Closing
                                  
                                  
                                  -
                                  
                                  
                                  
                                  480,108
                                  
                                  
                                  
                                  113,782
                                  
                                  
                                  
                                  13,881
                                  
                                  
                                  
                                  171,297
                                  
                                  
                                  
                                  779,068Interest
      on Debt (excluding amounts added to principal)
                                  
                                  
                                  -
                                  [6]
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  173,731Total
      Interest expense
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  4,740,873
                                  
                                  
                                  $
                                  1,096,705
                                  
                                  
                                  $
                                  1,046,343
                                  
                                  
                                  $
                                  4,502,897
                                  
                                  
                                  $
                                  11,560,549
  [1]
              This
      amount represents the excess fair value of the debt discount related to
      the derivative liability associated with the embedded conversion feature
      and warrants (see Note 6).
 
 [2]
              This
      amount represents additional penalty interest and/or accrued interest
      added directly to the outstanding prinicipal of the convertible debt for
      Trigger Events (see Note 2).
 
 [3]
              This
      amount represents additional interest recognized for the increase in
      principal balance associated with the embedded conversion feature of
      the 2010 Closings as a result of Trigger Events (see Note
      6).
 
 [4]
              This
      amount includes $40,000 of additional penalty recognized for the default
      related to the registration rights agreements as a result of not being
      declared effective by August 31, 2010 related to the Fourth
      Closing in 2010.
 
 [5]
              This
      amount represents the interest portion of the debt based on the respective
      interest rates as noted in footnote 6, as of June 30,
  2010.
 
 Sum of
      [7]
              1,096,705
       Total interest expense related to fair value of derivative
      instruments granted
 
 Sum of
      [8]
              5,549,240  Total
      amortization of debt discount and debt issuance costs
  42
 
 Other
Expense, Net
  The
increase in total other expenses, net is primarily due to approximately
$11.6 million in interest expense due to the issuance of debt instruments
and the amortization of the related debt discounts, debt issuance costs, and
derivative liabilities, approximately $1 million loss on extinguishment of debt
during the three months ended September 30, 2010, offset by a gain of
approximately $2.9 million from change in fair value of derivative
liabilities.
 
 Liquidity
and Capital Resources
  Historically,
our operations have not been a source of liquidity. At September 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 our obligations to pay
interest and principal thereon. As of September 30, 2010, we had the following
approximate amounts of outstanding short term indebtedness:
  (i)
                Accounts
      payable and accrued expenses of approximately
  $970,000;
 
 (ii)
                Accrued
      salaries of approximately
$360,000;
 
 (iii)
                Accrued
      interest of approximately
$1,091,000;
 
 (iv)
                Approximately
      $396,000 in unsecured convertible notes bearing default interest at 10%
      per annum increased to 18% per annum due to failure to pay the Notes by
      September 29, 2010; On September 24, 2010, pursuant to letter Agreement,
      we sought the September 2008 convertible Note holders' agreement to
      waive the current default and extend the maturity date until November
      15, 2010. (See Note 6)
 
 (v)
                Approximately
      $18.4 million 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 September 30, 2010, the principal
      increased by approximately $7.8 million due to trigger events and
      default. These convertible notes are related to four closings during March
      and April of 2010;
 
 (vi)
                An
      $140,000 unsecured bridge loan bearing interest at 12% per
      annum increased to 18% per annum due to nonpayment which was due
      October 9, 2009. As of September 30, 2010, the principal increased by
      approximately $57,000 due to default.  Also, we have obligations
      under a consulting agreement aggregating $25,000 due to Cantone Research,
      Inc. and Cantone Asset Management, LLC, respectively;
  and
 
 (vii)
                Approximately
      $4.4 million in senior unsecured promissory notes bearing interest at
      18% interest, payable quarterly in cash, which are due between
      December 2010 and May 2011. As of September 30, 2010, the
      principal increased by approximately $888,000 (which is recorded as
      loss on extinguishment in accordance with relevant accounting guidance)
      due tofailure to pay
      interest due on December 1, 2009 or March 1, 2010. 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 obligations for shares of the Company's common stock. (See Note
      6)
  43
 See
details below of the four closings of convertible note and warrant purchase
agreements, as follows:
  Minimum
            
            
            
            
            
            WarrantsConversion
            
            
            Maximum
            
            
            
            
            
            MinimumFace Value of
            
            
            
            
            
            
            
            
            Price Per
            
            
            Shares
            
            
            
            
            
            ExerciseDate of
            
            Convertible
            
            
            
            
            
            
            
            
            Share at Issuance
            
            
            Issuable upon
            
            
            
            
            
            Price at IssuanceIssuance
            
            Notes
            
            
            Discounts
            
            
            Gross Proceeds
            
            
            Date
            
            
            Conversion
            
            
            Number
            
            
            Date[1]
            
            
            [2]
            
            
            
            
            
            [3]
            
            
            
            
            
            [5]First
      Closing 3/22/2010
            
            $
            925,000
            
            
            $
            (385,000
            )
            
            $
            540,000
            
            
            $
            0.28
            
            
            
            3,303,571
            
            
            
            1,100,000
            
            
            $
            0.28
            [6]Second
      Closing 4/8/2010
            
            
            5,490,165
            
            
            
            (2,285,165
            )
            
            
            3,205,000
            
            
            $
            0.28
            
            
            
            19,607,732
            
            
            
            6,528,213
            
            
            $
            0.38
            [7]Third
      Closing 4/13/2010
            
            
            3,957,030
            
            
            
            (1,647,030
            )
            
            
            2,310,000
            
            
            $
            0.28
            
            
            
            14,132,250
            
            
            
            4,705,657
            
            
            $
            0.38
            [7]Fourth Closing
      4/26/2010 [4]
            
            
            599,525
            
            
            
            (249,525
            )
            
            
            350,000
            
            
            $
            0.28
            
            
            
            2,141,161
            
            
            
            712,949
            
            
            $
            0.28
            [7]Fourth
      Closing 4/26/2010
            
            
            85,645
            
            
            
            (35,645
            )
            
            
            50,000
            
            
            $
            0.28
            
            
            
            305,875
            
            
            
            101,849
            
            
            $
            0.89
            [7]$
            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 timely or failed to
      have it declared effective timely pursuant to the terms of the
      Registration Rights Agreement, each 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. Therefore, 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”) and a trigger event
      under the terms of the notes issued in the Fourth Closing occurred (the
      “August 31 Trigger Event”). The total amount of 2010 Financing Convertible
      Notes issued in the four closings was originally $11,057,365; as a result
      of the June 1 Trigger Event and the August 31 Trigger Event, the principal
      amount of such notes is now $14,081,712 which represents 125% of the
      outstanding principal and accrued interest prior to the
    event.
  Additionally,
we are required under the terms of the 2010 Closings to obtain stockholder
approval, on or before July 15, 2010 for the First Closing and on or before
August 31, 2010, for the Second, Third and Fourth Closings. Due to the SEC
review of our proxy statement and periodic reports that we are required to
submit to our shareholders with this Proxy Statement, we were unable to file and
mail our definitive proxy statement so as to give our shareholders proper notice
of an August 31, 2010 meeting and therefore were not able to have a meeting
or obtain shareholder approval on such date. This failure constitutes an event
of default under the 2010 Closings, pursuant to which the note holders were
entitled to declare the entire principal and interest due on the notes then
immediately payable. In light of the potential default, to maintain good
relationships with the investors of the 2010 Closings, we requested the 2010
Closings’ investors to waive the July 15, 2010 and August 31, 2010
shareholder meeting date requirement and instead allow us to hold the meeting on
or before November 15, 2010 (the “Extension”).
  In
exchange for their agreement to the Extension, we increased the principal
balance of the note by another 25% to avoid our Note holders declaring a default
and to obtain their agreement for us to instead hold the meeting on November 15,
2010, The Note holders also agreed to waive any defaults related to our failure
to hold a meeting or obtain shareholder approval by July 15 or August 31. As of
the date this filing, approximately 60% of the investors of the 2010 Closings
signed the agreement. Since we are unable to hold the meeting on November 15,
2010, the 2010 Closings are susceptible to default pursuant to which the
investors of the 2010 Closings can declare the entire amount outstanding
immediately due and payable. As a result of the 2nd Trigger
Event, the principal amount of such notes was increased to
$18,462,263.
 
 [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 for a price
      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’s common stock exercisable at $0.28 per share (the remainder of
      the participants in the Fourth Closing received warrants exercisable at
      $0.89 per share).
 
 [5]
              At
      any time prior to the expiration date of the warrant, if and only if there
      is no then effective registration statement covering the warrant shares,
      the Holder may elect a “cashless” exercise of this warrant whereby the
      Holder shall be entitled to receive a number of shares of common stock
      equal to (x) the excess of the Current Market Value over the
      aggregate Exercise Price of the portion of the Warrant then being
      exercised, divided by (y) the Adjusted Price of the Common Stock (as
      these terms are defined in the warrant agreement). This formula, as it
      contains variables that are directly linked to changes in the market price
      of the Company’s shares, and depending on the market price of the share on
      the date of exercise, might result in the Company having to issue
      additional number of shares than what is indicated in the table
      above.
 
 [6]
              The
      exercise price in First Closing warrants equals to the higher of:
      (i) 105% of the VWAP for the five trading days immediately preceding
      the date the Company issued the Warrants; or (ii) the Floor Price (as
      defined in the First Closing Note).
 
 [7]
              The
      exercise price in Second, Third and Fourth Closings, can be adjusted down
      (down-round protection) to a lower price if the Company sells common stock
      or instruments convertible into or exercisable for common shares in the
      future at a lower price than the exercise
price.
  44
  The
First, Second, Third and Fourth Closings entered into during 2010 carry embedded
conversion features and warrants which are accounted for as derivative
instruments under the relevant accounting guidance. Originally, the Company used
the Black-Scholes model to valuate these derivatives. Consequent to the filing
of the September 30, 2010 Form 10-Q, the Company decided to move from the
Black-Scholes option pricing model to the Binomial Lattice option pricing model
for the valuation of these embedded conversion features and a reset provision
associated with the exercise price of the warrants. The Company determined that
the Binomial Lattice model more accurately valued the “down-round protections”,
or reset features included in the embedded conversion features and warrants. The
Company believes the Binomial Lattice model provides a better estimate of fair
value of the derivative instruments at their grant dates, triggering dates, and
quarter ends. In applying the Binomial Lattice model, the Company used the
following assumptions to value its derivative liabilities during the three
months ended September 30, 2010:
 
 For
      the nine monthsended September 30, 2010Annual
      dividend yield
                  
                  
                  —Expected
      life (years)
                  
                  
                  0.47
      — 6.17Risk-free
      interest rate
                  
                  
                  0.25%
      — 2.9%Expected
      volatility
                  
                  
                  87.3%
      — 298.6%
 
 As
explained above, the warrants carry a “cashless exercise” feature. This cashless
exercise feature has value to the holder. To evaluate the value of the “cashless
exercise” feature, the Company used the foregoing explained assumptions. Based
on the current circumstances, we estimate that the Company’s registration
statement will be declared effective on or around February 28, 2011. As
stated in the warrant agreement, upon an effective registration statement the
cashless exercise feature is no longer available to the holder. We also
evaluated the likelihood of the warrant holders exercising their warrants under
the cashless exercise feature versus a cash exercise from the original grant
date of each warrant until the estimated date that registration statement is
declared effective. Based on the cashless exercise notices already received by
the Company through the date of this letter and based on our best estimate of
the warrant holders’ intent going forward, the Company believes a conservative
estimate is that there is a 50% likelihood that the investors would exercise
under the cashless exercise provision and 50% likelihood that they would effect
a standard exercise via cash.
  The
Company, through its valuation expert, then performed the following steps to
estimate the fair value of the warrants on their grant date, at March 31,
2010, and at September 30, 2010. The Company has previously valued the warrants
(assuming standard cash exercises, ) under the Binomial Lattice option pricing
model (“Binomial Model — Normal”). In addition, the Company valued the same
warrants under a separate Binomial Lattice option pricing model (“Binomial Model
— Cashless”), assuming that the holder would exercise under the cashless
exercise feature prior to the date of the registration statement being declared
effective. Under the Binomial Model — Cashless, the Company used a much shorter
expected term (commensurate with the assumed date that the Company expect the
registration statement to be declared effective), resulting in different
volatility amounts and discount rates. One other factor that was considered for
the value estimated under the Binomial Model — Cashless was that if the holder
of the warrant decided to exercise under the cashless exercise feature, the
number of warrant shares available to the holder was then computed under the
formula noted in section 2.1(b) of the warrant agreement. On some dates, it
resulted in potentially more shares being issued to the holder than what are
stated on the holder’s warrant agreement and on some dates it results in
potentially less shares being issued to the holder than what are stated on the
warrant agreement.
  We then
took the total values computed under each Binomial Model and assigned a 50%
likelihood or probability that the investor may exercise under either scenarios.
Using 50% of the value under the Binomial Model — Normal and 50% of the value
under the Binomial Model — Cashless, we then arrived at the estimated fair value
assigned to warrant as of their grant dates, March 31, 2010 and September
30, 2010 (see Note 13 Restatement for the effect of the change from the Black
Scholes model to the Binomial Model).
  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.
  45
 
 Our
cash balances at September 30, 2010 and December 31, 2009 were
approximately $917,000 and $12,000, respectively.
 
 Operating activities.Our net
cash used in operations of continuing operations was $6,097,638 and $2,386,878
for the nine months ended September 30, 2010 and 2009, respectively. The primary
driver of cash used in operations during the nine months ended September 30,
2010 and 2009 was the net loss of approximately $38.4 million and
$14.9 million, respectively. The effect of the net loss during the nine
months ended September 30, 2010 was partially offset by significant non-cash
activity such as (i) approximately $10,763,000 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 $2,355,000 representing the fair market value of common
stock, warrants and options expensed for services, (iv) approximately
$7,978,000 related to additional principal added for triggering events,
(v) approximately $2,762,000 representing impairment charge on investment
in JPI, (vi) approximately $1,000,000 representing loss on extinguishment of
debt and (vii) approximately $13,831,000 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 of approximately $5,681,000.
 
 Investing activities.We used
approximately $124,000 and $1.8 million in investing activities during the
nine months ended September 30, 2010 and 2009, respectively. During the nine
months ended September 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 nine months ended September 30, 2010,
we acquired lab and office equipment for our Tustin facility and advanced
$100,000 for a note receivable.
 
 Financing activities .Cash
proceeds from the issue of debt, net of discounts and debt issue costs, were
approximately $6.3 million and $2.1 million during the nine months
ended September 30, 2010 and 2009, respectively. In addition, we collected
proceeds of approximately $818,000 from the exercise of warrants during the nine
months ended September 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 $38,420,688 and $10,779,937 for the nine months
ended September 30, 2010 and 2009, respectively, and had an accumulated deficit
of $90,859,241 at September 30, 2010. In addition, we used cash in operating
activities of continuing operations of $6,097,638 and had a working capital
deficit of $32,247,532.  These factors raise substantial doubt about
our ability to continue as a going concern.
  The
Company’s monthly cash requirement of $480,000 for operating expenses does not
include any extraordinary items or expenditures, including payments to the Mayo
Clinic on clinical trials for our ONKO-SURE tm
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 net proceeds of approximately $6.3 million in connection with
convertible note and warrant purchase agreements during the nine months ended
September 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.
  46
 
 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-SURE tm
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-SURE tm
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 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 nine months ended September 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:
  47
  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”).
  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 September 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
September 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 September 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 nine months ended September 30,
2010 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
  48
  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. 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)
              None.
 
 (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 October 15, 2010 and therefore are not required to
      provide such information herein.
 
 (b)
              Not
      Applicable.
 
 (c)
              Not
      applicable.
   ITEM
4. Removed and Reserved
  ITEM 5. Other
Information
  (a)
              Not
      Applicable.
 
 (b)
              Not
      applicable.
  49
  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.
  50
  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:
      November 22, 2010
                      By:
                      /s/ Douglas C. MacLellanDouglas
      C. MacLellan,President
      and Chief Executive OfficerDate:
      November 22, 2010
                      By:
                      /s/ Akio AriuraAkio
      Ariura,Chief
      Financial Officer and Secretary
                        (Principal
      Financial
Officer)
  51