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EX-31.1 - EXIBIT 31.1 CERTIFICATION - APPLIED NEUROSOLUTIONS INCcertification311.htm
EX-23.1 - EXHIBIT 23.1 CERTIFICATION - APPLIED NEUROSOLUTIONS INCcertification231.htm
EX-32.1 - EXHIBIT 32.1 CERTIFICATION - APPLIED NEUROSOLUTIONS INCcertification321.htm
EX-10.25 - AECOM FIFTH AMENDMENT 11 01 09 - APPLIED NEUROSOLUTIONS INCaecomfifthamend110109.htm
EX-10.26 - LILLY FIRST AMENDMENT 11 25 09 - APPLIED NEUROSOLUTIONS INClillyfirstamendment112509.htm
EX-10.27 - LILLY SECOND AMENDMENT 12 20 09 - APPLIED NEUROSOLUTIONS INClillysecondamendment122009.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
 (Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2009

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from        to

Commission File Number 001-13835

APPLIED NEUROSOLUTIONS, INC.
(Exact name of registrant as specified in its charter)

Delaware
39-1661164
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)

50 Lakeview Parkway, Suite 111,                                                      Vernon Hills, IL  60061
(Address of principal executive offices and zip code)

(847) 573-8000
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12 (b) of the Act:   None

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

Common Stock, $0.0025 par value
(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   [   ]No [X]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes   [   ]No [X]

Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes   [X]
No [   ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.[X]

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

Large accelerated filer                                         [   ]                                Accelerated filer                                                           [   ]
Non-accelerated filer                                           [   ]                                Smaller reporting company                                         [X]

 
 

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

As of June 30, 2009, the aggregate market value of voting common stock held by non-affiliates of the Registrant (3,538,552 shares) was approximately $2,653,914.  The aggregate market value was computed by reference to the last sale price of such common equity as of that date.

As of March 5, 2010, the issuer had 4,404,375 shares of Common Stock outstanding.

Documents Incorporated by Reference:                                                                None


 
 

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INDEX

   
Page
PART I
   
Item 1.
Business
1
Item 1A.
Risk factors
8
Item 2.
Properties
17
Item 3.
Legal proceedings
17
Item 4.
Submission of matters to a vote of security holders
17
     
PART II
   
Item 5.
Market for registrant’s common equity, related stockholder matters and issuer purchases of equity securities
 
18
Item 6.
Selected financial data
18
Item 7.
Management’s discussion and analysis of financial condition and results of  operations
 
19
Item 7A.
Quantitative and qualitative disclosures about market risk
27
Item 8.
Financial statements and supplementary data
28
Item 9.
Changes in and disagreements with accountants on accounting and financial disclosure
56
Item 9A.
Controls and procedures
56
Item 9B.
Other information
57
     
PART III
   
 
Item 10.
 
Directors, executive officers and corporate governance
57
Item 11.
Executive compensation
61
Item 12.
Security ownership of certain beneficial owners and management and related stockholder matters
 
64
Item 13.
Certain relationships and related transactions, and director independence
66
Item 14.
Principal accounting fees and services
66
     
PART IV
   
Item 15.
Exhibits, financial statement schedules
67
     
SIGNATURES
 
72
CERTIFICATIONS
 
73
     


 
 

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PART I

This Form 10-K contains forward-looking statements.  For this purpose, any statements contained in this Form 10-K that are not statements of historical fact may be deemed to be forward-looking statements.  You can identify forward-looking statements by those that are not historical in nature, particularly those that use terminology such as “may,” “will,” “should,” “could,” “expects,” “anticipates,” “contemplates,” “estimates,” “believes,” “plans,” “projected,” “predicts,” “potential,” or “continue” or the negative of these similar terms.  In evaluating these forward-looking statements, you should consider various factors, including those listed below under the heading “Item 1A.  Risk factors”.  The Company’s actual results may differ significantly from the results projected in the forward-looking statements.  The Company assumes no obligation to update forward-looking statements.

As used in this Form 10-K, references to “APNS,” the “Company,” the “Registrant,” “we,” “our,” or “us” refer to Applied NeuroSolutions, Inc. unless the context otherwise indicates.

ITEM 1.                      BUSINESS

Applied NeuroSolutions, Inc. (“APNS” or “the Company” or “we”) is a development stage biotechnology company focused on the development of products for the early diagnosis and treatment of Alzheimer's disease (“AD” or “Alzheimer’s”).

Alzheimer’s Disease
Alzheimer’s disease is the most common cause of dementia among people age 65 and older.  Dementia is the loss of memory, reason, judgment and language to such an extent that it interferes with a person’s daily life and activities.  Currently it is estimated that over five million people in the U.S., and almost 35 million worldwide, have Alzheimer’s disease and the national cost of caring for people with Alzheimer’s is estimated to exceed $148 billion annually.  By 2050, it is estimated that 16 million people in the U.S. will have Alzheimer’s, and the global prevalence of Alzheimer’s is expected to be greater than 115 million (Source:  Alzheimer’s Association and Alzheimer’s Disease International).

Diagnostic Programs
We are focused on developing serum-based tests to detect AD at an early stage in the disease process.  In July 2009 we announced we had achieved feasibility in our development of a serum-based test related to the diagnosis of patients with AD and provided an update in October 2009.  The results of two limited studies achieved sufficient analytical sensitivity to detect tau in serum patient samples.  The protein tau is directly linked to the pathology of Alzheimer’s disease.  This is a key step in the development of a blood-based test to detect AD.  Based on a further analysis of the preliminary data, we believe additional development of the assay, including optimization and validation in key patient population groups, is necessary to determine the specific sensitivity and specificity performance of the assay.  Our focus is on advancing the development of a blood-based test for AD to commercialization in 2011 through reference labs under the Clinical Laboratory Improvement Amendment of 1988 (“CLIA”).  Clinical laboratories regulated under the CLIA, qualified to perform high complexity testing, can provide physicians with test results utilizing in-house diagnostic tests using Analyte specific reagents (“ASR's”), restricted devices under section 520(e) of the Federal Food, Drugs, and Cosmetic Act.  We plan to provide our reference laboratory partner with our proprietary ASR’s and materials.  A serum-based test could be used not only as an aide to early diagnosis of AD, but also as part of a routine annual physical to rule out Alzheimer’s disease.  Our key milestones in the development of a serum-based test and the estimated timeframe for achieving each milestone are listed below:

 Serum-Based Diagnostic Key Milestones

                    Feasibility      Completed
                    Optimization         Mid 2010
                    Validation      2nd half 2010
                    Reference Lab Partnership  1st half 2011
                    U.S. Commercialization     2nd half 2011


 
 

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We have developed a cerebrospinal fluid (“CSF”)-based test that can detect AD at an early stage as well as identify patients with mild cognitive impairment (“MCI”) who are most likely to progress to AD.  In a research setting, our CSF-based test, which detects a certain AD associated protein found in the CSF of AD patients (“P-Tau 231”), has demonstrated an ability to differentiate AD patients from those with other diseases that have similar symptoms. This test is based on extensive testing in the APNS lab, utilizing in excess of 2,500 CSF samples to differentiate patients diagnosed with AD from patients diagnosed with other forms of dementia and relevant neurological diseases, including major depression, as well as age-matched healthy controls.  The CSF-based P-Tau 231 test has demonstrated, based on published research validation studies, overall sensitivity and specificity in the range of 85% to 95%, with sensitivity defined as the percentage of true positives and specificity defined as the percentage of true negatives.

Therapeutic Program - Collaboration with Eli Lilly and Company
In November 2006, we entered into a collaboration agreement with Eli Lilly and Company (“Lilly”).  APNS and Lilly are engaged in the discovery and development of novel therapeutics for the development of treatments for Alzheimer’s disease based upon an approach developed by Dr. Peter Davies, our founding scientist.  As a result of Dr. Davies’ research, APNS and Lilly are focused on discovery of unique therapeutics that may be involved in a common intracellular phosphorylation pathway leading to the development of the abnormal, destructive brain structures, amyloid plaques and neurofibrillary tangles, that are characteristic of Alzheimer’s disease.  APNS has identified various biomarkers that we believe will aid in the development of diagnostics and drug specific diagnostic markers that could also play a role in the development of new AD treatments.

Lilly will, based on the achievement of certain defined milestones, provide us over time with up to a total sum of $20 million in milestone payments for advancing the APNS proprietary target to a therapeutic compound.  The collaboration has also made progress on other targets that are part of the collaboration that could provide additional milestone payments to us over time of up to a total sum of $10 million for advancing each of these other targets to a therapeutic compound.  Royalties are to be paid to us for AD drug compounds brought to market that result from the collaboration.  Lilly will fund the vast majority of all pre-clinical research and development and will fully finance the clinical testing, manufacturing, sales and marketing of AD therapeutics developed from this collaboration.

The collaboration has achieved significant internal milestones to date.  The next milestone, which if reached would result in our receipt of a cash payment from Lilly, is currently expected in 2010.  Lilly remains fully committed to the collaboration with resources focused on program progress and milestone achievement.  The collaboration continues to make progress with additional tau-based targets with various screens established and studies underway.

           In November 2009, we agreed to a one-year renewal of our drug discovery collaboration with Lilly.  We received $250,000 in December from Lilly for this renewal.  In December 2009, we reached agreement with Lilly to increase the scope of our drug discovery collaboration.  In addition to the financial terms from the original collaboration agreement with Lilly announced in 2006, we received a cash payment of $750,000 upon signing the agreement in December and may receive up to $25.5 million based on achievement of identified milestones.  Royalties would be paid to us for any AD therapies brought to market that result from this addition to the original collaboration agreement.

Our key milestones in our collaboration with Lilly, and the current estimated timeframe for achieving each milestone are listed below:

Collaboration with Lilly Key Milestones

                            Target # 1    Expected Completion Date
                    Lead Declaration2010
                    Candidate Selection2012
                    IND filing   2013

                             Additional Targets
                    Portfolio Entry2010

 
 
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Research Products and Services
We market a transgenic mouse containing the human tau gene that develops human paired helical filaments, the building blocks of the neurofibrillary tangles, which are known to be involved in the pathology of Alzheimer’s disease.  The pathology in these mice is Alzheimer-like, with hyperphosphorylated tau accumulating in cell bodies and dendrites as neurofibrillary tangles.  In addition, these transgenic mice have exhibited extensive neuronal death that accompanies the tau pathology.  These transgenic mice could be used for testing the efficacy of therapeutic compounds.  To date, no widely accepted animal model that exhibits both AD pathologies has been developed.  The mice are currently available through Jackson Laboratories.

We also provide diagnostic services to pharmaceutical companies.  Since 2003 we have analyzed approximately 1,500 clinical trial samples with our CSF phosphotau diagnostic assay and have generated approximately $650,000 in revenue.

Alzheimer's Disease Background

The market for Alzheimer’s Disease therapy is expected to grow, based on the aging demographic of the seven major pharmaceutical markets (USA, France, Germany, Italy, Spain, U.K. and Japan).  Currently there are only five drugs approved in the U.S. to treat AD.  Four are primarily acetylcholinesterase inhibitors; and one is an NMDA receptor antagonist.  All are only beneficial in treating symptoms associated with AD in a minority of AD patients for a very limited time period.

Alzheimer’s disease is an intractable, chronic and progressively incapacitating disease characterized by the degeneration and death of several types of neurons in certain regions of the brain.  Patients affected by the disease initially suffer loss of memory, then a decline of intellectual abilities severe enough to interfere with work and activities of daily living, followed by severe dementia and, finally, death.  This illness, currently estimated to affect over five million people in the United States, and almost 35 million people worldwide, is a leading cause of death behind cardiovascular disease and cancer.  While the disease is most common in the elderly, affecting nearly 10% of people age 65 and older and up to 50% of people age 85 and older, it has been diagnosed in patients in their 40’s and 50’s.  Alzheimer’s disease, at present, can be conclusively diagnosed only by histological examination of the brain by biopsy or autopsy.  The diagnosis of patients suspected of having AD is therefore typically made through a process of elimination, by conducting neurological and psychiatric examinations, extensive laboratory tests and brain imaging to rule out other conditions (such as stroke, brain tumor, or depression) that may exhibit similar symptoms.

Alzheimer’s disease was first described in 1907 by Dr. Alois Alzheimer, a German psychiatrist who discovered large numbers of unusual microscopic deposits in the brain of a demented patient upon autopsy.  These deposits, called amyloid plaques and neurofibrillary tangles, are highly insoluble protein aggregates that form in the brains of AD patients in particular regions, including those involved with memory and cognition.  Generally, amyloid plaques are deposited on the surface of neurons, whereas neurofibrillary tangles are formed within neurons.  The plaques and tangles are associated with degeneration and loss of neurons.  The actual loss of neurons, as well as the impaired function of surviving neurons, is generally believed to be the key neuropathological contributors to the memory loss and dementia that characterizes Alzheimer’s disease.

Sales and Marketing

We currently plan to utilize arrangements with corporate partners or other entities for the marketing and sale of our proposed products.  Under our agreement with Eli Lilly and Company, Lilly has an exclusive worldwide license to market and sell any AD therapeutic, if any, that comes to market from our collaboration agreement.  We do not currently have any agreements with partners or other entities to provide sales and marketing services for our proposed diagnostic products, but would seek those arrangements at the appropriate time.

Manufacturing

We plan to rely upon third-party manufacturers to manufacture our proposed products in accordance with these regulations, or we will most likely utilize the capabilities of our partners and/or collaborators.  Under our

 
 
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agreement with Eli Lilly and Company, Lilly has an exclusive worldwide license to manufacture any therapeutic for AD that comes to market from our collaboration agreement.

Competition

Companies in the pharmaceutical, diagnostic and biotechnology fields are subject to intense competition.  We compete with numerous larger companies that have substantially greater financial and other resources and more experience.  The principal factors affecting our competitive markets include scientific and technological factors, the availability of patent and other protection for technology and products, the ability, length of time and cost required to obtain governmental approval for testing, manufacturing and marketing and physician acceptance.  Companies that complete clinical trials, obtain regulatory approvals and commence commercial sales of their products before us may achieve a significant competitive advantage.  In addition, such companies may succeed in developing products that are more effective and less costly than products that may be developed by us.  There can be no assurance that developments by other companies will not render our products or technologies obsolete or noncompetitive or that we will be able to keep pace with the technological developments of our competitors.

We believe that some of our competitors are in the process of developing technologies that are, or in the future may be, the basis for competitive products.  Some of these products may have an entirely different approach or means of accomplishing the desired therapeutic or diagnostic effect than products being developed by us.  These competing products may be more effective and less costly than the products developed by us.

Significant levels of research within our fields of interest occur at universities, non-profit institutions, and for-profit organizations.  These entities compete with us in recruiting skilled scientific talent.

We believe that our ability to compete successfully will depend upon our ability to create and maintain scientifically advanced technology, obtain adequate funding, develop proprietary products, attract and retain scientific personnel, obtain patent or other protection for our products, develop strategic alliances to enhance the likelihood of success, obtain required regulatory approvals and manufacture and successfully market our products either directly by us or through our collaboration with Eli Lilly and Company and other collaborations or partnerships we may enter into.

Diagnostics

There is currently no FDA-approved diagnostic to detect Alzheimer's disease ("AD"), although there are tests available under the CLIA exemption through reference labs.  If any of our current diagnostic programs are ultimately successfully marketed, they would compete against, or augment, the most widely used current practice of detecting AD through a battery of tests, namely neurological and psychiatric examinations, extensive laboratory tests and brain imaging to rule out other conditions (such as stroke, brain tumor, or depression) with similar symptoms.  The AD predictive accuracy of such a battery of exams is generally in the range of 80%-90% in some of the larger AD centers, but is usually closer to 60% when diagnosed outside of the AD centers.  Costs to patients for such testing can range from $1,000 - $4,000, including imaging procedures.  A simple, predictive, accurate and cost effective diagnostic test could, therefore, be an attractive alternative for medical practitioners and insurers to the current practice to detect AD.  If the test was a serum-based test it could potentially be utilized as a routine screening test.

We are aware of other companies and academic institutions pursuing the development of biochemical markers to be utilized in the diagnosis of AD.  Potential competitors include Nymox Pharmaceutical Corp. and Innogenetics, who have developed diagnostic tests for AD.  Athena Diagnostics has “research use only” type CSF-based tests available, and others (Satoris, Power 3 Medical, OPKO Health, ExonHit Therapeutics, Diagenic and Acumen Pharmaceuticals) have programs directed toward identifying proteomic or genetic markers for AD.  Competitive diagnostics in development, as well as some that are marketed through reference laboratories, include approaches which attempt to identify AD patients by measuring: (i) normal tau, total tau or phosphorylated tau in CSF, either individually, or as part of a panel, (ii) beta amyloid, (iii) neural thread protein in CSF and/or urine, (iv) amyloid derived diffusible ligands (“ADDL’s”) in CSF, (v) imaging plaques in the brain, or (vi) employing proteomic or genetic markers for AD.  Much of our knowledge of potential competitors and their diagnostic tests comes from our review of published articles in scientific journals.  Publications and other information publicly available indicate that tests being developed by these companies and others are unable to adequately distinguish AD

 
 

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from other brain disorders or are in too early a development stage to be evaluated.  At this time, we believe our CSF-based diagnostic test exhibits a unique ability to recognize early stage AD and to differentiate patients diagnosed with AD from patients diagnosed with other forms of dementia and relevant neurological diseases, including major depression, as well as healthy controls.  In addition, our CSF-based diagnostic test has shown to be a strong predictor of the decline from MCI to AD.

Therapeutics

The only products with FDA approved label claims for pharmaceutical management of AD in the U.S. provide symptomatic treatment through the use of acetylcholinesterase (“AchE”) inhibitors, of which there are four: Aricept/donepezil (Pfizer and Esai), Exelon/rivastigmine (Novartis), Razadyne/galantamine (Johnson & Johnson), and Cognex/tacrine (Pfizer); or through the use of NMDA antagonists, of which there is one:  Namenda/memantine (Forest Labs).  Despite limited clinical effectiveness and a poor safety and side effect profile, sales of these drugs in 2008 exceeded  $6.0 billion, according to BioPharm Reports.

The market for AD therapy is expected to grow, based on the aging demographic of the seven major pharmaceutical markets (USA, France, Germany, Italy, Spain, U.K. and Japan).  AchE inhibitors remain the largest class of drugs within the late stage development pipeline.  However, their apparent limited efficacy would seem to provide an opportunity for other promising compounds.  It is estimated that over 100 potential compounds are currently being developed by both major pharmaceutical companies as well as small biotech companies.  The lack of current effective pharmacological therapy for an increasing AD population provides an attractive opportunity for therapeutics we may discover utilizing our novel therapeutic approach in our collaboration with Eli Lilly and Company.

Patents, licenses, trade secrets and proprietary rights

Our success depends and will continue to depend, in part, upon our ability to retain our exclusive licenses, to maintain patent protection for our products and processes, to preserve our trade secrets and proprietary information and to operate without infringing the proprietary rights of third parties.  We believe in securing and supporting a strong competitive position through the filing and prosecution of patents where available, and through trade secrets, when patenting is precluded.

We have filed patent applications in the U.S. for composition of matter and use of compounds to treat AD, method of use, as well as aspects of our diagnostic test technologies for use in MCI and methods for developing novel therapeutic screens for the discovery of compounds useful in the treatment of AD, novel approaches to therapeutic intervention, transgenic mouse production and a novel gene.  Patent Cooperation Treaty (“P.C.T.”) applications have been filed abroad, when applicable.


Alzheimer's disease technology license

We have various License and Collaborative Research Agreements (the "Agreements") with Albert Einstein College of Medicine ("AECOM").  These Agreements grant us the exclusive rights to neurodegenerative disease technology, primarily Alzheimer's disease technology for diagnostic and therapeutic applications from Dr. Peter Davies’ lab at AECOM.  These Agreements were amended in March 2002, in September 2002, in October 2006, in December 2008, and in November 2009 and remain effective on an evergreen basis.  The minimum annual payments to be made to AECOM, which consist of payments due for support of research conducted in Dr. Davies' lab and for annual license maintenance, are as follows:

Year
 
Amount
     
2010 and each subsequent year
 
 $500,000

As part of the December 2008 amendment, AECOM agreed to defer the 2009 semi-annual maintenance payments until the earlier of December 31, 2009 or a fund raise at least equal to $3,500,000. In exchange for this deferral, we agreed to prepay the quarterly funding payments that are due in February 2009, May 2009 and August 2009.  This prepayment of $112,500 was made in December 2008.  As part of the November 2009 amendment,

 
 

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AECOM agreed to further defer the 2009 semi-annual maintenance payments and the 2010 semi-annual maintenance payments until the earlier of (i) December 31, 2010 or (ii) a fund raise at least equal to $4,000,000.  AECOM also agreed to defer the November 2009 quarterly research support payment until February 2010.  We are currently in discussions with AECOM on the timing of a payment for AECOM’s percentage of the $750,000 we received from Eli Lilly and Company in December 2009.  We are obligated to continue to pay AECOM $500,000 for each year after 2010 in which the Agreements are still in effect.  In addition, we are obligated to pay AECOM a percentage of all revenues we receive from selling and/or licensing aspects of the AD technology licensed under the Agreements that exceeds the minimum obligations reflected in the annual license maintenance payments.

Confidentiality and assignment of inventions agreements

We require our employees, consultants and advisors having access to our confidential information to execute confidentiality agreements upon commencement of their employment or consulting relationships with us.  These agreements generally provide that all confidential information we develop or make known to the individual during the course of the individual's employment or consulting relationship with us must be kept confidential by the individual and not disclosed to any third parties.  We also require all of our employees and consultants who perform research and development for us to execute agreements that generally provide that all inventions conceived by these individuals will be our property.

Government regulation

The research, development, manufacture, and marketing of our potential products are subject to substantial regulation by the U.S. Food and Drug Administration (“FDA”) in the United States and by comparable authorities in other countries.  These national agencies and other federal, state, and local entities regulate, among other things, research and development activities and the testing, manufacture, safety, effectiveness, labeling, storage, record keeping, approval, advertising, and promotion of our potential products.

Diagnostics

We plan to market our serum and CSF in vitro diagnostic products in the United States without FDA approval under the Clinical Laboratory Improvement Amendment (“CLIA”) of 1988.  Clinical laboratories regulated under the CLIA, qualified to perform high complexity testing, can provide physicians with test results utilizing in-house diagnostic tests using Analyte specific reagents (“ASR's”), restricted devices under section 520(e) of the Federal Food, Drugs, and Cosmetic Act.  We plan to provide our reference laboratory partner with our proprietary ASR’s and materials.  The reference laboratory(ies) performing the tests are required to inform the ordering person of the diagnostic test result that, “This test was developed and its performance characteristics determined by (Laboratory Name). It has not been cleared or approved by the U.S. Food and Drug Administration."

In the future we may seek FDA approval, utilizing the Premarket Approval Application (“PMA”) process regulated by the Office of In Vitro Diagnostic Device and Safety (“OIVD”) of the FDA.  The regulatory process leading to a submission of an in vitro diagnostic device PMA for FDA approval to market involves a multistage process including: (1) a Pre-Investigational Device Exemption (“Pre-IDE”) program in which preliminary information is submitted to the FDA for review and guidance on, and acceptance of, the test protocol and proposed clinical trial to evaluate the safety and effectiveness of an in vitro diagnostic product followed by, (2) an Investigational Device Exemption (“IDE”) submission for approval to allow the investigational diagnostic device to be used in a clinical study in order to (3) collect safety and effectiveness data required to support a PMA to receive FDA approval to market a device.  Data from a clinical trial is used to evaluate the clinical performance of the diagnostic test.

Regulatory authorities in foreign countries must grant approval prior to the commencement of commercial sales of the product in such countries.   We may seek regulatory approval in Europe, most likely in collaboration with a partner.

Therapeutics

As an initial step in the FDA regulatory approval process for a prospective therapeutic product, preclinical studies are typically conducted in animals to identify potential safety problems.  For certain diseases, animal models

 
 

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 may exist which are believed to be predictive of human efficacy.  For these diseases, a drug candidate is tested in an animal model.  The results of the studies are submitted to the FDA as a part of an Investigational New Drug Application (“IND”), which is filed to comply with FDA regulations prior to beginning human clinical testing.

Clinical trials for new therapeutics are typically conducted in three sequential phases, although the phases may overlap.  In Phase I, the compound is tested in healthy human subjects for safety (adverse effects), dosage tolerance, absorption, biodistribution, metabolism, excretion, clinical pharmacology and, if possible, to gain early information on effectiveness.  Phase II typically involves studies in a small sample of the intended patient population to assess the efficacy of the drug for a specific indication, to determine dose tolerance and the optimal dose range, and to gather additional information relating to safety and potential adverse effects.  Phase III trials are comparative clinical studies undertaken to further evaluate clinical safety and efficacy in an expanded patient population at geographically dispersed study sites in order to determine the overall risk-benefit ratio of the drug and to provide an adequate basis for physician labeling.  Each trial is conducted in accordance with certain standards under protocols that detail the objectives of the study, the parameters to be used to monitor safety and efficacy criteria to be evaluated.  Each protocol must be submitted to the FDA as part of the IND.  Further, each clinical study must be evaluated by an independent Institutional Review Board (“IRB”) at the institution at which the study will be conducted.  The IRB will consider, among other things, ethical factors, the safety of human subjects and the possible liability of the institution.

Data from preclinical testing and clinical trials are submitted to the FDA in a New Drug Application (“NDA”) for marketing approval.  Preparing an NDA involves considerable data collection, verification, analysis and expense, and there can be no assurance that any approval will be granted on a timely basis, if at all.  The approval process is affected by a number of factors, including the severity of the disease, the availability of alternative treatments and the risks and benefits demonstrated in clinical trials.  The FDA may deny an NDA if applicable regulatory criteria are not satisfied or require additional testing or information.  Among the conditions for marketing approval is the requirement that the prospective manufacturer's quality control and manufacturing procedures conform to the FDA's good manufacturing practices (“GMP”) regulations, which must be followed at all times.  In complying with standards set forth in these regulations, manufacturers must continue to expend time, monies and effort in the area of production and quality control to ensure full technical compliance.  Manufacturing establishments serving the U.S. markets, both foreign and domestic, are subject to inspections by, or under the authority of, the FDA and by other federal, state or local agencies.

The process of completing clinical testing and obtaining FDA approval for a new drug is likely to take a number of years from the commencement of the clinical trial and require the expenditure of substantial resources.  We would require significant additional funds in the future to finance the clinical testing process if we developed any therapeutic products on our own.  Under our agreement with Eli Lilly and Company, however, Lilly will finance the clinical testing process of any AD therapeutic developed from our collaboration.

Environmental regulation

In connection with our research and development activities, our business is, and will in the future continue to be, subject to regulation under various state and federal environmental laws.  These laws and regulations govern our use, handling and disposal of various biological and chemical substances used in our operations.  Although we believe that we have complied with these laws and regulations in all material respects and we have not been required to take any action to correct any noncompliance, there can be no assurance that we will not be required to incur significant costs of complying with health and safety regulations in the future.

Employees

As of March 5, 2010 we had three full-time employees, two of whom have advanced scientific degrees.  None of our employees are covered by a collective bargaining agreement and we believe all relations with our employees are satisfactory.  In addition, to complement our internal expertise, we have license agreements with AECOM that provide access to Dr. Peter Davies and the academic researchers in his lab and we may contract with other academic research laboratories, outside organizations with specific expertise and scientific consultants that provide pertinent expertise with therapeutic and diagnostic development.  In the future, we may hire additional research, development and other personnel in addition to utilizing outside organizations and consultants.

 
 

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History

On September 10, 2002, Hemoxymed, Inc. and Molecular Geriatrics Corporation (“MGC”) established a strategic alliance through the closing of a merger (the “Merger”).  The Merger agreement provided that the management team and Board of Directors of MGC took over control of the merged company.  The transaction was tax-free to the shareholders of both companies.  In October 2003, we changed our name to Applied NeuroSolutions, Inc.  The Merger transaction has been accounted for as a reverse merger.  For financial reporting purposes, MGC (now “APNS”) is continuing as the primary operating entity under the Company’s name, and its historical financial statements have replaced those of the Company.  Thus, all financial information prior to the Merger date is the financial information of MGC only.

After the Merger, we had two wholly-owned operating subsidiaries, which were dissolved during 2004.  The assets of these dissolved subsidiaries were transferred to us.

One of the wholly-owned operating subsidiaries we dissolved was MGC, a development stage biopharmaceutical company incorporated in November 1991, with operations commencing in March 1992, to develop diagnostics to detect AD, and therapeutic targets directed at AD solutions.

The other wholly-owned operating subsidiary we dissolved was Hemoxymed Europe, SAS, a development stage biopharmaceutical company incorporated in February 1995 to develop therapies aimed at improving tissue oxygenation by increasing oxygen release from hemoglobin to provide therapeutic value to patients with serious,  medical needs.  We are not currently funding the development of this technology.

ITEM 1A.                      RISK FACTORS

Factors that could cause or contribute to differences in our actual results include those discussed in the following section, as well as those discussed in other parts of this Annual Report on Form 10-K.  You should consider carefully the following risk factors, together with all of the other information included in this Annual Report on Form 10-K.  Each of these risk factors could adversely affect our business, operating results and financial condition, as well as adversely affect the value of our common stock.

Our cash balances as of December 31, 2009 should be sufficient to fund our current planned development activities into the second quarter of 2010.  We will need to raise funds in the second quarter of 2010 in order to continue operations and we may have difficulty raising capital.

As of December 31, 2009, we had cash of $794,003.  The cash on hand will be used for ongoing research and development, working capital, general corporate purposes and possibly to secure appropriate partnerships and expertise.  Since we do not expect to generate significant revenues from operations in 2010, we will be required to raise additional capital in financing transactions or through some form of collaborative partnership in order to satisfy our expected cash expenditures after the second quarter of 2010.  On March 10, 2010, we entered into a Securities Purchase Agreement (the “Agreement”), with an outside investor, providing for the issuance of an 8% Secured Convertible Note, due December 10, 2010, in the principal amount of $100,000 (the “Note”).  The Note is convertible at any time prior to maturity into shares of our common stock at a variable conversion price generally equal to 62.5% of the average of the daily dollar volume-weighted average sale price of our common stock over the ten consecutive trading days immediately preceding the date on which the conversion price is determined.  We expect to raise additional capital by selling shares of our capital stock, proceeds from exercises of existing warrants and/or stock options and/or by borrowing money.  However, such additional capital may not be available to us at acceptable terms or at all.  As of March 5, 2010, we have approximately 94,700,000 authorized shares of common stock available for issuance, which are sufficient available authorized shares of common stock to issue in a funding and for other uses as deemed appropriate by our Board of Directors.  Further, if we sell additional shares of our capital stock, current ownership positions in our Company will be subject to dilution. In the event that we are unable to obtain additional capital, we may be forced to further reduce key operating expenditures or to cease operations altogether.

 
 

 


Our financial statements have been prepared assuming that we would continue as a going concern.  We have had recurring net losses, including net losses for each of the years ended December 31, 2009 and 2008, and have an accumulated deficit of approximately $51.4 million as of December 31, 2009.  In the view of our independent registered public accountants, these conditions raise substantial doubt about our ability to continue as a going concern.  We anticipate that our cash balances at December 31, 2009, should be sufficient to fund our current level of operations into the second quarter of 2010.  We will need additional funding in the second quarter of 2010 in order to continue our research, product development and operations.  If we are successful in achieving key milestones for our serum-based diagnostic test for AD, we believe we could begin generating revenue from our serum diagnostic program in mid 2011 under the Clinical Laboratory Improvement Amendment of 1988 (“CLIA”). Clinical laboratories regulated under the CLIA, qualified to perform high complexity testing, can provide physicians with test results utilizing in-house diagnostic tests using Analyte specific reagents (“ASR's”), restricted devices under section 520(e) of the Federal Food, Drugs, and Cosmetic Act.  We plan to provide our reference laboratory partner with our proprietary ASR’s and materials.  The reference laboratory(ies) performing the tests are required to inform the ordering person of the diagnostic test result that, “This test was developed and its performance characteristics determined by (Laboratory Name).  It has not been cleared or approved by the U.S. Food and Drug Administration."  In order to sell our serum-based diagnostic test under CLIA, we would need to contract or partner with a CLIA certified lab.

If we are unable to raise additional capital, we may be forced to discontinue our business.

We are a development stage company without any products currently being validated under CLIA regulations or in FDA clinical trials.

We are a development stage company.  Our product furthest along is a diagnostic test which detects Alzheimer’s disease utilizing cerebrospinal fluid (“CSF”).  Our serum diagnostic is in development, with product revenue expected in the second half of 2011.  Our therapeutic products are in pre-clinical development, and product revenues may not be realized from the sale of any such products for several years, if at all.  Our proposed products will require significant additional research and development efforts prior to any commercial use.  There can be no assurances that our research and development efforts will be successful, that our potential products will prove to be safe and effective in clinical trials or that we will develop any commercially successful products.  We currently have no approved products on the market and have not received any commercial revenues from the sale or license of any FDA approved diagnostic or therapeutic products.

We have a history of operating losses and expect to sustain losses in the future.

We have experienced significant operating losses since our inception.  As of December 31, 2009, we had an accumulated deficit of approximately $51.4 million.  We expect to incur operating losses over the next few years as our research and development and commercialization efforts continue.  Our ability to achieve profitability depends in part upon our ability, alone or with or through others, to raise additional capital to execute our business plan, to advance development of our proposed products, to obtain required regulatory approvals, to manufacture and market our products, and to successfully commercialize our approved products.

We face extensive governmental regulation and any failure to comply could prevent or delay product approval or cause the disallowance of our products after approval.

The U.S. Food and Drug Administration, and comparable agencies in foreign countries, impose many requirements on the introduction of new therapeutics through lengthy and detailed clinical testing procedures, and other costly and time consuming compliance procedures relating to the manufacture, distribution, advertising, pricing and marketing of pharmaceutical products.  These requirements make it difficult to estimate when any of our products in development will be available commercially, if at all.

The regulatory process takes many years and requires the expenditure of substantial resources.  Clinical trials for diagnostic products, including the FDA submission and approval process, generally take less time than for therapeutic products.  Data obtained from pre-clinical and clinical activities are subject to varying interpretations that could delay, limit or prevent regulatory agency approval. We may also encounter delays or rejections based on changes in regulatory agency policies during the period in which we develop our products and/or the period required

 
 

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for review of any application for regulatory agency approval of a particular product. Delays in obtaining regulatory agency approvals will make the projects more costly and adversely affect our business.

We plan to market our serum and CSF in-vitro diagnostic products in the United States without FDA approval under the Clinical Laboratory Improvement Amendment (“CLIA”) of 1988.  Clinical laboratories regulated under the CLIA, qualified to perform high complexity testing, can provide physicians with test results utilizing in-house diagnostic tests using Analyte specific reagents (“ASR's”), restricted devices under section 520(e) of the Federal Food, Drugs, and Cosmetic Act.  We plan to provide our reference laboratory partner with our proprietary ASR’s and materials.  The reference laboratory(ies) performing the tests are required to inform the ordering person of the diagnostic test result that, “This test was developed and its performance characteristics determined by (Laboratory Name).  It has not been cleared or approved by the U.S. Food and Drug Administration."

In the future, we may seek FDA approval, utilizing the Premarket Approval Application (“PMA”) process regulated by the Office of In Vitro Diagnostic Device and Safety (“OIVD”) of the FDA.  The regulatory process leading to a submission of an in vitro diagnostic device PMA for FDA approval to market involves a multistage process including: (1) a Pre-Investigational Device Exemption (“Pre-IDE”) program in which preliminary information is submitted to the FDA for review and guidance on, and acceptance of, the test protocol and proposed clinical trial to evaluate the safety and effectiveness of an in vitro diagnostic product followed by, (2) an Investigational Device Exemption (“IDE”) submission for approval to allow the investigational diagnostic device to be used in a clinical study in order to (3) collect safety and effectiveness data required to support a PMA to receive FDA approval to market a device.  Data from a clinical trial is used to evaluate the clinical performance of the diagnostic test.

Even if we successfully enroll patients in clinical trials for our diagnostic or therapeutic products, setbacks are a common occurrence in clinical trials.  These setbacks often include:

·  
Failure to comply with the regulations applicable to such testing may delay, suspend or cancel our clinical trials,
·  
The FDA might not accept the test results,
·  
The FDA, or any comparable regulatory agency in another country, may suspend clinical trials at any time if it concludes that the trials expose subjects participating in such trials to unacceptable health risks,
·  
Human clinical testing may not show any current or future product candidate to be safe and effective to the satisfaction of the FDA or comparable regulatory agencies, and
·  
The data derived from clinical trials may be unsuitable for submission to the FDA or other regulatory agencies.

In 2005 we filed with the FDA a Pre-Investigational Device Exemption (“Pre-IDE”) application with respect to our CSF-based diagnostic test and we had our Pre-IDE meeting with the FDA in November 2005.    Subsequent to our meeting with the FDA, we worked with our clinical consultants to refine our clinical protocol.  At that time, work was suspended until such time that we, along with our consultants, could identify a cost effective protocol that would be acceptable to the FDA and offer the opportunity to obtain desired claims and indications.  It is uncertain when we will file a Pre-IDE for any of our diagnostic programs in development. We have not filed any Investigational New Drug (“IND”) with respect to our AD therapeutic, and the timing of such filing in the future is uncertain, and subject to the progress of our collaboration with Eli Lilly and Company.  We cannot predict with certainty when we might submit any of our proposed products currently under development for regulatory review.  Once we submit a proposed product for review, the FDA or other regulatory agencies may not issue their approvals on a timely basis, if at all.  If we are delayed or fail to obtain such approvals, our business may be adversely affected.   If the FDA grants approval for a drug or device, such approval may limit the indicated uses for which we may market the drug or device and this could limit the potential market for such drug or device. Furthermore, if we obtain approval for any of our products, the marketing and manufacture of such products remain subject to extensive regulatory requirements. Even if the FDA grants approval, such approval would be subject to continual review, and later discovery of unknown problems could restrict the products future use or cause their withdrawal from the market. If we fail to comply with regulatory requirements, either prior to approval or in marketing our products after approval, we could be subject to regulatory or judicial enforcement actions.  Failure to comply with regulatory requirements could, among other things, result in:

 
 

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·  
product recalls or seizures,
·  
fines and penalties,
·  
injunctions,
·  
criminal prosecution,
·  
refusals to approve new products and withdrawal of existing approvals, and/or
·  
enhanced exposure to product liabilities.

 
In order to market our products outside of the United States, we must comply with numerous and varying regulatory requirements of other countries regarding safety and quality. The approval procedures vary among countries and can involve additional product testing and administrative review periods. The time required to obtain approval in other countries might differ from that required to obtain FDA approval. The regulatory approval process in other countries includes all of the risks associated with obtaining FDA approval detailed above. Approval by the FDA does not ensure approval by the regulatory authorities of other countries.

In addition, many countries require regulatory agency approval of pricing and may also require approval for the marketing in such countries of any drugs or devices we develop. We cannot be certain that we will obtain any regulatory approvals in other countries and the failure to obtain such approvals may materially adversely affect our business.

Under our agreement with Eli Lilly and Company, however, all aspects of our therapeutic collaboration will be largely funded by Lilly.

Our technologies are subject to licenses and termination of any of those licenses would seriously harm our business.

We have exclusive licenses with Albert Einstein College of Medicine ("AECOM") covering virtually all of our Alzheimer's disease technology, including virtually all our AD related diagnostic and therapeutic products currently in development.  We depend on these licensing arrangements to maintain rights to our products under development.  These agreements require us to make payments in order to maintain our rights.  The agreements also generally require us to pay royalties on the sale of products developed from the licensed technologies, fees on revenues from sublicensees, where applicable, and the costs of filing and prosecuting patent applications.  We are currently in discussions with AECOM on the timing of a payment for AECOM’s percentage of the $750,000 we received from Eli Lilly and Company in December 2009.  Our current interpretation of the Agreements, as amended, is that we are currently in compliance with our license agreements; however if the payment is now due, we may be in default of the Agreements with AECOM if we are unable to make the payment. Further, we will need to raise additional capital prior to December 31, 2010 in order to meet our ongoing obligations to AECOM.  If we fail to raise sufficient funds, and consequently default on our obligations to AECOM, our licenses could terminate, and we could lose the rights to our proprietary technologies. Such a loss would have a material adverse effect on our operations and prospects.

Our collaboration agreement with Eli Lilly and Company may not provide the future payments we anticipate over the course of the agreement, or may not provide the future payments in a time frame consistent with our expectations, which could result in the termination of our operations.

In November 2006, we entered into an agreement with Eli Lilly and Company to develop therapeutics to treat AD.  Lilly received the exclusive worldwide rights to the intellectual property related to our expertise in understanding the molecular neuropathology of AD as it pertains to the formation of neurofibrillary tangles.  In December 2009, we entered into an agreement with Lilly to increase the scope of our collaboration.  Lilly may not advance any of the technology under the agreements as fast, or as far, as we would anticipate, if at all, to provide us with the milestone and royalty payments we expected when we signed the agreements.  In addition, Lilly may decide to allocate internal resources to other projects and slow down, or stop the work, under our collaboration agreements for a period of time, which could cause our technology under the agreements not to be advanced at the rate we expected, or not be advanced at all.  Such a situation could have a material adverse effect on our operations and prospects and we may have to shut down, or scale back, our operations unless we could enter into new partnership arrangements or raise additional capital.

 
 

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The demand for diagnostic products for Alzheimer’s disease may be limited because there is currently no cure or highly effective therapeutic products to treat the disease.

Since there is currently no cure or highly effective therapy that can stop the progression of Alzheimer’s disease, the market acceptance and financial success of a diagnostic technology capable of detecting Alzheimer’s disease may be limited.  As a result, even if we successfully develop a safe and effective diagnostic technology for identifying this disease, its commercial value might be limited.

The value of our research could diminish if we cannot protect, enforce and maintain our intellectual property rights adequately.

The pharmaceutical and diagnostic industries place considerable importance on obtaining patent and trade secret protection for new technologies, products and processes, and where possible, we actively pursue both domestic and foreign patent protection for our proprietary products and technologies. Our success will depend in part on our ability to obtain and maintain patent protection for our technologies and to preserve our trade secrets. When patent protection is available, it is our policy to file patent applications in the United States and selected foreign jurisdictions. We currently hold and maintain issued United States patents and various related foreign patents.    No assurance can be given that our issued patents will provide competitive advantages for our technologies or will not be challenged or circumvented by competitors. With respect to already issued patents, there can be no assurance that any patents issued to us will not be challenged, invalidated, circumvented or that the patents will provide us proprietary protection or a commercial advantage. We also rely on trade secrets and proprietary know-how, which we seek to protect, in part, through confidentiality agreements with employees, consultants, collaborative partners and others. There can be no assurance that these agreements will not be breached.

The ability to develop our technologies and to commercialize products will depend on avoiding the infringement of patents of others.  While we are aware of patents issued to competitors, we are not aware of any claim of patent infringement against us, except as described in the following two paragraphs.  Any potential patent infringement may require us to acquire licensing rights to allow us to continue the development and commercialization of our products.  Any such future claims concerning us infringing patents and proprietary technologies could have a material adverse effect on our business. In addition, litigation may also be necessary to enforce any of our patents or to determine the scope and validity of third-party proprietary rights.  There can be no assurance that our patents would be held valid by a court of competent jurisdiction.  We may have to file suit to protect our patents or to defend use of our patents against infringement claims brought by others.  Because we have limited cash resources, we may not be able to afford to pursue or defend against litigation in order to protect our patent rights.

In March 2004 we were notified by email from Innogenetics, a Belgian biopharmaceutical company involved in specialty diagnostics and therapeutic vaccines, that it believes the CSF diagnostic test we have been developing uses technology that is encompassed by the claims of its U.S. patents.    Innogenetics also informed us that it could be amenable to entering into a licensing arrangement or other business deal with us regarding our patents.  We had some discussions with Innogenetics concerning a potential business relationship, however no further discussions have been held since the second quarter of 2006.

We have reviewed these patents with our patent counsel on several occasions prior to receipt of the email from Innogenetics and subsequent to receipt of the email.  Based on these reviews, we believe that our CSF diagnostic test does not infringe the claims of these Innogenetics patents.    If we were unable to reach a mutually agreeable arrangement with Innogenetics, we may be forced to litigate the issue.  Expenses involved with litigation may be significant, regardless of the ultimate outcome of any litigation.  An adverse decision could prevent us from possibly marketing a future diagnostic product and could have a material adverse impact on our business.

We also rely on trade secrets to protect our proprietary technologies, especially where we do not believe patent protection is appropriate or obtainable.  However, trade secrets can be difficult to protect.  We rely in part on confidentiality agreements with our employees, consultants, outside scientific collaborators, sponsored researchers and others to protect our trade secrets and other proprietary information.  These agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy if unauthorized disclosure of confidential information occurs.  In addition, others may independently discover our trade secrets and proprietary

 
 

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 information.  Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive position.  None of our employees, consultants, scientific researchers or collaborators has any rights to publish scientific data and information generated in the development or commercialization of our products without our approval, with the exception of Eli Lilly and Company’s rights under our collaboration agreement.  Under the license agreements with us, AECOM has a right to publish scientific results relating to the diagnosis of AD and precursor or related conditions in scientific journals, provided, that AECOM must give us pre-submission review of any such manuscript to determine if it contains any of our confidential information or patentable materials.

We face large competitors and our limited financial and research resources may limit our ability to develop and market new products.

The biotechnology, diagnostic and pharmaceutical markets generally involve rapidly changing technologies and evolving industry standards.  Many companies, both public and private, are developing products to diagnose and to treat Alzheimer’s disease.  Most of these companies have substantially greater financial, research and development, manufacturing and marketing experience and resources than we do.  As a result, our competitors may more rapidly develop effective diagnostic products as well as therapeutic products that are more effective or less costly than any product that we may develop.  Under our agreement with Eli Lilly and Company, however, all aspects of our therapeutic collaboration will be largely funded by Lilly.

We also face competition from universities, governmental agencies and other public and private research institutions.  These competitors are becoming more active in seeking patent protection and licensing arrangements to collect royalties for use of technology that they have developed.  Some of these technologies may compete directly with the technologies being developed by us.  Also, these institutions may also compete with us in recruiting highly qualified scientific personnel.

We do not have manufacturing capability and we must rely on third- party manufacturers to produce our products, giving us limited control over the quality of our products and the volume of products produced.

While we have internally manufactured some of the reagents and materials necessary to conduct our activities related to research and development of our diagnostic products, we do not currently have any large scale manufacturing capability, expertise or personnel and expect to rely on outside manufacturers to produce material that will meet applicable standards for clinical testing of our products and for larger scale production if marketing approval is obtained.

We will either find our own manufacturing facilities, rely upon third-party manufacturers to manufacture our proposed products in accordance with appropriate regulations, or we will most likely utilize the capabilities of our partners and/or collaborators.  Under our agreement with Eli Lilly and Company, Lilly has an exclusive worldwide license to manufacture, market and sell any AD therapeutic that comes to market from our collaboration agreements. We do not have any outside manufacturing agreements for our proposed diagnostic products.  If we, or Lilly, choose to utilize an outside manufacturer, we cannot assure that any outside manufacturer that we, or Lilly, select will perform suitably or will remain in the contract manufacturing business, in which instances we (or Lilly) would need to find a replacement manufacturer or we would have to develop our own manufacturing capabilities.  If we are unable to do so, our ability to obtain regulatory approval for our products could be delayed or impaired.  Our ability, and Lilly’s ability, to market our products could also be affected by the failure of our third-party manufacturers or suppliers to comply with the good manufacturing practices required by the FDA and foreign regulatory authorities.

We do not have marketing and sales staff to sell our products and we must rely on third parties to sell and market our products, the cost of which may make our products less profitable for us.

We do not have marketing and sales experience or personnel.  As we currently do not intend to develop a marketing and sales force, we will depend on arrangements with partners or other entities for the marketing and sale of our proposed products.  Under our agreement with Eli Lilly and Company, Lilly has an exclusive worldwide license to market and sell any AD therapeutic that comes to market from our collaboration agreements.  We do not currently have any agreements with corporate partners or other entities to provide sales and marketing services for our proposed diagnostic products.  We may not succeed in entering into any satisfactory third-party arrangements

 
 

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for the marketing and sale of our proposed products, or we may not be able to obtain the resources to develop our own marketing and sales capabilities.  We may never have an AD therapeutic come to market under the Lilly agreements, or we may never have a diagnostic product come to market.  The failure to develop those capabilities, either externally or internally, may adversely affect future sales of our proposed products.

 
We are dependent on our key employees and consultants, who may not readily be replaced.

We are highly dependent upon the principal members of our management team, especially Craig S. Taylor, Ph.D., our President and Chief Executive Officer, and Peter Davies, Ph.D., our founding scientist, as well as our other officers and directors.  Our consulting agreement with Dr. Davies is effective through November 2011.  We do not have an employment agreement with Dr. Taylor.  We do not currently maintain key-man life insurance and the loss of any of these persons' services, and the resulting difficulty in finding sufficiently qualified replacements, could adversely affect our ability to develop and market our products and obtain necessary regulatory approvals.

Our success also will depend in part on the continued service of other key scientific personnel, and our ability to identify, hire and retain additional staff, if necessary.  We face intense competition for qualified employees and consultants.  Large pharmaceutical companies and other competitors, which have greater resources and experience than we have, can, and do, offer superior compensation packages to attract and retain skilled personnel.  As a result, we may have difficulty retaining such employees and consultants because we may not be able to match the packages offered by such competitors and large pharmaceutical companies, and we may have difficulty attracting suitable replacements.

We expect that our potential expansion into areas and activities requiring additional expertise, such as clinical trials, governmental approvals, contract manufacturing and sales and marketing, will be done by working with outside contractors who have the appropriate expertise or by utilizing collaborators/partners.  The management of these processes may require an increase in management and scientific personnel and the development of additional expertise by existing management personnel.  The failure to attract and retain such personnel or to develop such expertise could materially adversely affect prospects for our success.

If our current research collaborators, scientific advisors, and specifically our founding scientist, Dr. Peter Davies, terminate their agreements with us, or develop relationships with competitors, our ability to advance existing programs and add new tools and technologies could be adversely impacted.

We derive significant support and benefit from research collaborators and other expertise that we utilize.  These collaborators are not our employees and operate under consulting agreements that are subject to termination provisions.  Our core technology in the AD field is based on exclusive licenses with AECOM covering virtually all of our diagnostic and therapeutic applications in the field of neurodegenerative diseases.  We therefore cannot control the explicit amount of time or output that is derived from our collaborators through our agreements.  Dr. Davies is currently actively deploying the time and resources at his lab at AECOM that are necessary to advance our collaboration agreements with Eli Lilly and Company as well as providing support to our diagnostic development programs.  We may not derive any new or additional tools or technologies from our relationship with Dr. Davies at AECOM, that would be appropriate for us to develop, or that fall outside of the rights of the Lilly collaboration.

We use hazardous materials in our research and that may subject us to liabilities in excess of our resources.

Our research and development involves the controlled use of hazardous materials such as acids, caustic agents, flammable solvents and carcinogens.  Although we believe that our safety procedures for handling and disposing of hazardous materials comply in all material respects with the standards prescribed by government regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated.  In the event of an accident, we could be held liable for any damages that result.  Although we have insurance coverage for third-party liabilities of this nature, such liability beyond this insurance coverage could exceed our resources.  Our insurance for hazardous materials liabilities has a deductible of $5,000 and a cap on coverage for damages of $250,000.  There can be no assurance that current or future environmental or transportation laws, rules, regulations or policies will not have a material adverse effect on us.

If we have any products used in clinical trials or products sold commercially, potential product liability claims against us could result in reduced demand for our products or extensive damages in excess of insurance coverage.

 
 

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The use of our products in clinical trials or from commercial sales will expose us to potential liability claims if such use, or even their misuse, results in injury, disease or adverse effects.  We intend to obtain product liability insurance coverage before we initiate clinical trials for any of our products.   This insurance is expensive and insurance companies may not issue this type of insurance when needed.  Any product liability claim resulting from the use of our diagnostic test in a clinical study, even one that was not in excess of our insurance coverage or one that is meritless, could adversely affect our ability to complete our clinical trials or obtain FDA approval of our product, which could have a material adverse effect on our business.

The healthcare reimbursement environment is uncertain and the consumer may not get significant insurance reimbursement for our products, which could have a materially adverse affect on our sales and our ability to sell our products.

Recent efforts by governmental and third-party payors, including private insurance plans, to contain or reduce the costs of health care could affect the levels of revenues and profitability of pharmaceutical, diagnostic and biotechnology products and companies.  For example, in some foreign markets, pricing or profitability of prescription pharmaceuticals is subject to government control.  In the United States, there have been a number of federal and state proposals to implement similar government control.  Pricing constraints on our potential products could negatively impact revenues and profitability.

In the United States and elsewhere, successful commercialization of our products will depend in part on the availability of reimbursement to the consumer using our products from third-party health care payors.  Insufficient reimbursement levels could affect demand for our products, and therefore, our ability to realize an appropriate return on our investment in product development.  Third-party health care payors are increasingly challenging the price and examining the cost-effectiveness of medical products and services.  If we succeed in bringing one or more products to market, and the government or third-party payors fail to provide adequate coverage or reimbursement rates for those products, it could reduce our product revenues and profitability.

Our stock price may fluctuate significantly due to reasons unrelated to our operations, our products or our financial results.  Our stock price may decrease if we have to issue a large number of shares of common stock in order to raise the additional funds needed in 2010.

Stock prices for many technology companies fluctuate widely for reasons which may be unrelated to operating performance or new product or service announcements.  Broad market fluctuations, earnings and other announcements of other companies, general economic conditions or other matters unrelated to us or our operations and outside our control also could affect the market price of the Common Stock.  During the 2009 fiscal year, the highest closing price of our stock was $1.50 and the lowest closing price of our stock during the same period was $0.31.  At our current level of operations, we have sufficient cash to last into the second quarter of 2010, and we will need to raise additional funds in the second quarter of 2010.  In order to raise additional funds, we may have to sell a significant number of shares of our common stock and/or issue warrants exercisable to purchase shares of our common stock.  While the inflow of additional funds may cause our stock price to increase, the prospect of issuing, or the actual issuance of, a substantial number of additional shares of common stock may cause our stock price to decrease.

Our share price may decline due to a large number of shares of our common stock eligible for sale in the public markets and a large number of shares of our common stock that could be issued upon the exercise of warrants and options should our stock price increase to a level above the exercise price of the warrants and options.

As of March 5, 2010, we had outstanding 4,404,375 shares of Common Stock, without giving effect to shares of Common Stock issuable upon exercise of (i) warrants issued to SF Capital, exercisable for 207,143 shares of our common stock, (ii) 363,881 options granted under our stock option plan, (iv) 292,882 options granted outside of our stock option plan, and (iv) 36,074 other warrants previously issued.  Of such outstanding shares of common stock, all are freely tradable, except for any shares not yet registered, shares underlying stock options that are not yet vested, and any shares held by our "affiliates" within the meaning of the Securities Act (officers, directors and 10% security holders), which shares will be subject to the resale limitations of Rule 144 promulgated under the Securities Act.  We will need to raise capital in the second quarter of 2010 and this may cause us to issue additional shares of our common stock in 2010.

 
 

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The holders of our outstanding warrants and stock options may not exercise them, or they may expire before we are able to receive any proceeds from the exercise of these warrants and stock options.

As of March 5, 2010, we had 243,217 outstanding warrants and 656,763 outstanding stock options.  The outstanding warrants have an average exercise price of $5.60 and have expiration dates between 2011 and 2013.  The outstanding stock options have exercise prices ranging from $0.65 to $45.00 and have expiration dates between 2010 and 2020.  We may not receive any significant proceeds from the exercise of these outstanding warrants and stock options due to market conditions and/or the expiration of the warrants and stock options prior to exercise.  This could impact our future fund raising options.

We have not paid any dividends and do not anticipate paying dividends in the foreseeable future.

A predecessor of Applied NeuroSolutions liquidated most of its assets and paid a dividend to its shareholders in August 2001.  We have not paid cash dividends on our common stock, and we do not anticipate paying cash dividends on our common stock in the foreseeable future.  Investors who require dividend income should not rely on an investment in our common stock to provide such dividend income.  Potential income to investors in our common stock would only come from any rise in the market price of our common stock, which is uncertain and unpredictable.

A limited market for our common stock and “penny stock” rules may make buying or selling our common stock difficult.

Our common stock presently trades in the over-the-counter market on the OTC Bulletin Board. As a result, an investor may find it difficult to sell, or to obtain accurate quotations as to the price of our securities.  In addition, our common stock is subject to the penny stock rules that impose additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors.  The SEC regulations generally define a penny stock to be an equity that has a market price of less than $5.00 per share, subject to certain exceptions.  Unless an exception is available, those regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the risks associated therewith and impose various sales practice requirements on broker-dealers who sell penny stocks to persons other than established customers and accredited investors (generally institutions and high net worth individuals).  In addition, the broker-dealer must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer's account.  Moreover, broker-dealers who recommend such securities to persons other than established customers and accredited investors must make a special written suitability determination for the purchaser and receive the purchaser's written agreement to transactions prior to sale.  Regulations on penny stocks could limit the ability of broker-dealers to sell our common stock and thus the ability of purchasers of our common stock to sell their shares in the secondary market.

Our disclosure controls and procedures and our internal controls over financial reporting are not adequate and may result in our failure to disclose items that we may be required to disclose under the Securities Act or the Securities Exchange Act or may result in financial statements that are incomplete or subject to restatement.

Section 404 of the Sarbanes Oxley Act of 2002 (“Section 404”) requires significant additional procedures and review processes of our system of internal controls.  Section 404 requires that we evaluate and report on our system of internal controls over financial reporting beginning with the Annual Report on Form 10-K for the year ended December 31, 2007.  In addition, our independent auditors must report on management’s evaluation of those controls for the year ending December 31, 2010.  Our internal controls under Section 404 may not be adequate.  The additional costs associated with this process may be significant and any costs incurred for external evaluation, consulting, testing and documenting of our system may not alleviate any material weaknesses.  After our internal documenting and testing of our system, we have identified the following material weaknesses:

·  
We lack segregation of duties in the period-end financial reporting process, and
·  
Our accounting software has inherent control deficiencies.

 
 

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Due to these material weaknesses, our chief executive officer and chief financial officer concluded that as of December 31, 2009, our disclosure controls and procedures were not effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.  Additionally, our Chief Financial Officer resigned his full-time position with the Company effective March 5, 2010.  As a result, our Chief Executive Officer will act as our Chief Financial Officer until a replacement is hired, further limiting the segregation of duties in the period-end financial reporting process.  Consequently, we may fail to disclose items that we are required to report in our SEC filings, including registration statements, proxy statements and periodic reports.  If we are required to amend prior reports as a result of failing to disclose required information, investors may react adversely to such amendments and our stock price may decrease.

Our Independent Registered Public Accountants have substantial doubt about our ability to continue as a going concern.

We have had net losses for each of the years ended December 31, 2009 and 2008, and we have an accumulated deficit as of December 31, 2009.  Since the financial statements for each of these periods were prepared assuming that we would continue as a going concern, in the view of our independent registered public accountants, these conditions raise substantial doubt about our ability to continue as a going concern.  We anticipate that our cash balances at December 31, 2009, should be sufficient to fund our current level of operations into the second quarter of 2010.  We will need additional funding in the second quarter of 2010 in order to continue our research, product development and our operations.  Since we do not expect to generate any material revenues for the foreseeable future, our ability to continue as a going concern depends, in large part, on our ability to raise additional capital in the second quarter of 2010, either through some form of collaboration or joint venture or debt or equity financing, which may include the exercise of outstanding stock options and/or warrants.  If we are unable to raise additional capital, we may be forced to discontinue our business.

ITEM 2.                      PROPERTIES

We lease approximately 7,500 square feet of office and laboratory space in Vernon Hills, Illinois at an annual rental of approximately $125,000. Our current lease agreement expired in May 2007 and was renewed for a three-year period ending May 2010 at a slightly reduced base rent.

ITEM 3.                      LEGAL PROCEEDINGS

We are not currently involved in any legal proceedings.

ITEM 4.                      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

 
 

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PART II

ITEM 5.                      MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is quoted on the OTC (Over-the-Counter) Bulletin Board and traded under the symbol, "APSN".  Prior to July 1, 2009, our common stock was traded on the OTC Bulletin Board under the symbol “APNS”.  Prior to November 25, 2003, our common stock was traded on the OTC Bulletin Board under the symbol “HMYD”.  Our common stock was previously traded on the OTC Bulletin Board under the symbol “OPHD” until February 5, 2002.

The following table sets forth the range of high and low daily last sale prices for our common stock, from January 1, 2008 through December 31, 2009 (adjusted for our 1-for-30 reverse stock split in June 2009), and for each of the quarterly periods indicated as reported by the OTC Bulletin Board.



   
High
   
Low
 
2008:
           
First quarter                                           
  $ 3.90     $ 2.70  
Second quarter                                           
    3.00       1.80  
Third quarter                      
    2.40       1.50  
Fourth quarter                                           
    1.80       0.60  
                 
2009:
               
First quarter                      
  $ 1.20     $ 0.50  
Second quarter                                           
    0.81       0.33  
Third quarter                      
    1.50       0.31  
Fourth quarter                                           
    1.40       0.31  

As of March 5, 2010, we had approximately 2,100 record holders of our common stock.  We estimate that as of such date, there were more than 2,000 beneficial holders of our common stock.

No dividends were paid in 2008 and 2009.  There are no restrictions on the payment of dividends.  We do not intend to pay dividends for the foreseeable future.

All of our securities that were issued or sold by us since March 15, 2001, have been registered with the SEC, except a) 88,889 stock options issued outside our Stock Option Plan in 2006, b) 203,993 stock options issued outside our Stock Option Plan in 2009, c) 56,329 shares of restricted common stock issued in 2006 through 2009, and d) 3,515 warrants issued in 2008.  All of these issuances were made in reliance upon the exemption set forth in Section 4(2) of the Securities Act of 1933.  We filed an SB-2 registration statement in July 2004, an S-8 registration statement in December 2004, and an SB-2 registration statement in November 2007. An S-8 registration statement is expected to be filed in the second quarter of 2010 to register the stock options, restricted common stock and warrants noted above.


ITEM 6.                      SELECTED FINANCIAL DATA

           Not applicable.

 
 

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ITEM 7.                      MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the financial statements and the related notes thereto included in this document.


OVERVIEW
Applied NeuroSolutions, Inc. (“APNS” or “the Company” or “we”) is a development stage biotechnology company focused on the development of products for the early diagnosis and treatment of Alzheimer's disease (“AD” or “Alzheimer’s”).

Alzheimer’s Disease
Alzheimer’s disease is the most common cause of dementia among people age 65 and older.  Dementia is the loss of memory, reason, judgment and language to such an extent that it interferes with a person’s daily life and activities.  Currently it is estimated that over five million people in the U.S., and almost 35 million worldwide, have Alzheimer’s disease and the national cost of caring for people with Alzheimer’s is estimated to exceed $148 billion annually.  By 2050, it is estimated that 16 million people in the U.S. will have Alzheimer’s, and the global prevalence of Alzheimer’s is expected to be greater than 115 million.

Diagnostic Programs
We are focused on developing serum-based tests to detect AD at an early stage in the disease process.  In July 2009, we announced we had achieved feasibility in our development of a serum-based test related to the diagnosis of patients with AD, and we provided an update in October 2009.  The results of two limited studies achieved sufficient analytical sensitivity to detect tau in serum patient samples.  The protein tau is directly linked to the pathology of Alzheimer’s disease.  This is a key step in the development of a blood-based test to detect AD.  Based on a further analysis of the preliminary data, we believe additional development of the assay, including optimization and validation in key patient population groups, is necessary to determine the specific sensitivity and specificity performance of the assay.  Our focus is on advancing the development of a blood-based test for AD to commercialization in 2011, through reference labs under the Clinical Laboratory Improvement Amendment of 1988 (“CLIA”).  Clinical laboratories regulated under the CLIA, qualified to perform high complexity testing, can provide physicians with test results utilizing in-house diagnostic tests using Analyte specific reagents (“ASR's”), restricted devices under section 520(e) of the Federal Food, Drugs, and Cosmetic Act.  We plan to provide our reference laboratory partner with our proprietary ASR’s and materials.  A serum-based test could be used not only as an aide to early diagnosis of AD, but also as part of a routine annual physical to rule out Alzheimer’s disease.  Our key milestones in the development of a serum-based test and the estimated timeframe for achieving each milestone are listed below:

Serum-Based Diagnostic Key Milestones

                     Feasibility                Completed
                     Optimization            Mid 2010
                     Validation                 2nd half 2010
                     Reference Lab Partnership1st half 2011
                     U.S. Commercialization2nd half 2011


We have developed a cerebrospinal fluid (“CSF”)-based test that can detect AD at an early stage as well as identify patients with mild cognitive impairment (“MCI”) who are most likely to progress to AD.  In a research setting, our CSF-based test, which detects a certain AD associated protein found in the CSF of AD patients (“P-Tau 231”), has demonstrated an ability to differentiate AD patients from those with other diseases that have similar symptoms. This test is based on extensive testing in the APNS lab, utilizing in excess of 2,500 CSF samples to differentiate patients diagnosed with AD from patients diagnosed with other forms of dementia and relevant neurological diseases, including major depression, as well as age-matched healthy controls.  The CSF-based P-Tau 231 test has demonstrated, based on published research validation studies, overall sensitivity and specificity in the range of 85% to 95%.

 
 

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Therapeutic Program – Collaboration with Eli Lilly and Company
In November 2006, we entered into a collaboration agreement with Eli Lilly and Company (“Lilly”).  APNS and Lilly are engaged in the discovery and development of novel therapeutics for the development of treatments for Alzheimer’s disease based upon an approach developed by Dr. Peter Davies, our founding scientist.  As a result of Dr. Davies’ research, APNS and Lilly are focused on discovery of unique therapeutics that may be involved in a common intracellular phosphorylation pathway leading to the development of the abnormal, destructive brain structures, amyloid plaques and neurofibrillary tangles, that are characteristic of Alzheimer’s disease.  APNS has identified various biomarkers that we believe will aid in the development of diagnostics and drug specific diagnostic markers that could also play a role in the development of new AD treatments.

Lilly will, based on the achievement of certain defined milestones, provide us over time with up to a total sum of $20 million in milestone payments for advancing the APNS proprietary target to a therapeutic compound.  The collaboration has also made progress on other targets that are part of the collaboration that could provide milestone payments to us over time of up to a total sum of $10 million for advancing each of these other targets to a therapeutic compound.  Royalties are to be paid to us for AD drug compounds brought to market that result from the collaborations.  Lilly will fund the vast majority of all pre-clinical research and development and will fully finance the clinical testing, manufacturing, sales and marketing of AD therapeutics developed from this collaboration.

The collaboration has achieved significant internal milestones to date.  The next milestone, which if reached would result in our receipt of a cash payment from Lilly is currently expected in 2010.  Lilly remains fully committed to the collaboration with resources focused on program progress and milestone achievement.  The collaboration continues to make progress with additional tau-based targets with various screens established and studies underway.

In November 2009, we agreed to a one-year renewal of our drug discovery collaboration with Lilly.  We received $250,000 in December from Lilly for this renewal.  In December 2009, we reached agreement with Lilly to increase the scope of our drug discovery collaboration.  In addition to the financial terms from the original collaboration agreement with Lilly announced in 2006, we received a cash payment of $750,000 in December upon signing the agreement and may receive up to $25.5 million based on achievement of identified milestones.  Royalties would be paid to us for any AD therapies brought to market that result from this addition to the original collaboration agreement.

  Our key milestones in our collaboration with Lilly, and the current estimated timeframe for achieving each milestone are listed below:


Collaboration with Lilly Key Milestones

  Target # 1    Expected Completion Date
Lead Declaration2010
Candidate Selection2012
IND filing2013

Additional Targets
Portfolio Entry2010



Research Products and Services
We market a transgenic mouse containing the human tau gene that develops human paired helical filaments, the building blocks of the neurofibrillary tangles, which are known to be involved in the pathology of Alzheimer’s disease. The pathology in these mice is Alzheimer-like, with hyperphosphorylated tau accumulating in cell bodies and dendrites as neurofibrillary tangles.  In addition, these transgenic mice have exhibited extensive neuronal death that accompanies the tau pathology.  These transgenic mice could be used for testing the efficacy of therapeutic compounds.  To date, no widely accepted animal model that exhibits both AD pathologies has been developed.  The mice are currently available through Jackson Laboratories.

 
 

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We also provide diagnostic services to pharmaceutical companies.  Since 2003 we have analyzed approximately 1,500 clinical trial samples with our CSF phosphotau diagnostic assay and have generated approximately $650,000 in revenue.  In addition to generating revenue for us, these research agreements provide useful data to validate our CSF phosphotau assay.

Liquidity and Capital Resources

As of December 31, 2009, we had cash of $794,003.  We anticipate that our cash balances at December 31, 2009 should be sufficient to fund our current level of operations into the second quarter of 2010.  On March 10, 2010, we entered into a Securities Purchase Agreement (the “Agreement”) with an outside investor providing for the issuance of an 8% Secured Convertible Note due December 10, 2010, in the principal amount of $100,000 (the “Note”).  The Note is convertible at any time prior to maturity into shares of our common stock at a variable conversion price generally equal to 62.5% of the average of the daily dollar volume-weighted average sale price of our common stock over the ten consecutive trading days immediately preceding the date on which the conversion price is being determined.  We will need to raise additional funds in the second quarter of 2010 in order to continue our research, product development and our operations.  The cash on hand will be used for ongoing research and development, working capital, general corporate purposes and possibly to secure appropriate partnerships and expertise.  We will be required to raise additional capital in financing transactions or through some form of collaborative partnership in order to satisfy our expected cash expenditures after the second quarter of 2010.  We expect to raise such additional capital by selling shares of our capital stock, proceeds from exercises of existing warrants and/or stock options and/or by borrowing money.  However, such additional capital may not be available to us at acceptable terms or at all.  As of March 5, 2010, we have approximately 94,700,000 authorized shares of common stock available for issuance, which are sufficient available authorized shares of common stock to issue in a funding and for other uses as deemed appropriate by our Board of Directors.  Further, if we sell additional shares of our capital stock, current ownership positions in our Company will be subject to dilution. In the event that we are unable to obtain additional capital, we may be forced to further reduce key operating expenditures or to cease operations altogether.

If we are successful in achieving our next milestone to increase the sensitivity and specificity of our serum-based diagnostic test, while significantly increasing the analysis of patient samples, we believe the Company could begin generating revenue from our serum diagnostic program in 2011 under the Clinical Laboratory Improvement Amendment of 1988 (“CLIA”).  Clinical laboratories regulated under the CLIA, qualified to perform high complexity testing, can provide physicians with test results utilizing in-house diagnostic tests using Analyte specific reagents (“ASR's”), restricted devices under section 520(e) of the Federal Food, Drugs, and Cosmetic Act.  We plan to provide our reference laboratory partner with our proprietary ASR’s and materials.  The reference laboratory(ies) performing the tests are required to inform the ordering person of the diagnostic test result that, “This test was developed and its performance characteristics determined by (Laboratory Name).  It has not been cleared or approved by the U.S. Food and Drug Administration."  In order to sell our serum-based diagnostic test under CLIA, we would need to contract or partner with a CLIA certified lab.

We do not anticipate the purchase, lease or sale of any significant property and equipment during 2010.  We do not anticipate any significant changes in our employee count during 2010.

Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.  The consolidated financial statements include the accounts of APNS and its wholly-owned subsidiaries prior to our dissolution of our subsidiaries in 2004.  All significant intercompany balances and transactions have been eliminated.  The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

On an on-going basis, our management evaluates its estimates and judgments, including those related to tax valuation and equity compensation.  Our management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances.  Actual results may differ

 
 

21
 

from these estimates under different assumptions or conditions.  Our management believes the following critical accounting policies, among others, affect our more significant judgments and estimates used in preparation of these consolidated financial statements.

Revenue Recognition

We generate revenues from research agreements and collaborations, and in the past, we also generated revenues from grants.  Revenue is recognized when earned.  Grant revenues represent funds received from certain government agencies for costs expended to further research on the subject of the grant.  In accordance with current accounting literature, if revenue arrangements contain multiple deliverables, we separate the deliverables into separate accounting units if they meet all of the following:  a) the delivered items have stand-alone value to the customer; b) the fair value of any undelivered items can be reliably determined; and c) if the arrangement includes a general right of return, delivery of the undelivered items if probable and substantially controlled by the seller.  Deliverables that do not meet these criteria are combined with one or more other deliverables into one accounting unit.  Revenue from each accounting unit is recognized based on the applicable accounting literature.

Research and Development

All research and development costs are expensed as incurred and include salaries of, and expenses related to, employees and consultants who conduct research and development.  We have, from time to time, entered into arrangements whereby we will obtain research reimbursement in the form of funds received to partially reimburse us for costs expended.

Income Taxes and Net Deferred Tax Asset Valuation Allowance

The carrying value of our deferred tax assets is dependent upon our ability to generate sufficient future taxable income in certain tax jurisdictions. Should we determine that it is more likely than not that some portion or all of our deferred tax assets will not be realized, a valuation allowance to the deferred tax assets would be established in the period such determination was made. At December 31, 2009, a valuation allowance has been established for the entire amount of deferred tax assets.

It is our policy to provide for uncertain tax positions and the related interest and penalties based upon our management's assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities.  At December 31, 2009, our management believes there were not any unrecognized income tax benefits and/or liabilities.

Stock-Based Compensation

We record share-based payment awards exchanged for employee services at fair value on the date of grant and expense the awards in the consolidated statements of operations over the requisite employee service period.  Stock-based compensation expense includes an estimate for forfeitures and is generally recognized over the expected term of the award on a straight-line basis.  Stock-based compensation expense related to awards with a market or performance condition is recognized over the expected term of the award utilizing the graded vesting method.  The fair value of stock options is determined using the Black-Scholes valuation model and the assumptions shown in Note 1(i) of the Notes to the Consolidated Financial Statements.  The assumptions used in calculating the fair value of share-based payment awards represent our management's best estimates.  These estimates may be impacted by certain variables including, but not limited to, stock price volatility, employee stock option exercise behaviors, additional stock option grants, estimates of forfeitures, the company's performance, and related tax impacts.

Recent Accounting Pronouncements

In June 2009, the FASB issued Accounting Standards Update 2009-01, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles”  (“ASU 2009-01”).  ASU 2009-01 or the FASB Accounting Standards Codification (“Codification”) will become the source of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied by nongovernmental entities.  On the effective date of ASU 2009-01, the Codification will supersede all then-existing non-SEC

 
 

22
 

accounting and reporting standards.  All other non-grandfathered, non-SEC accounting literature not included in the Codification will become non-authoritative.  ASU 2009-01 is effective for financial statements issued for interim and annual periods ending after September 15, 2009.  The adoption of the standard did not have a material impact on the Company’s consolidated balance sheets, statements of operations, or cash flows.

Results of Operations

The following discussion of the financial condition and results of operations should be read in conjunction with the consolidated financial statements and notes thereto included in Item 8.
 

Year Ended December 31, 2009 Compared to Year Ended December 31, 2008

Revenues

We recognized $1,551,399 of revenues in 2009 primarily from the recognition of the remaining eleven months of our initial funds received from our 2006 collaboration with Eli Lilly and Company and $750,000 received in 2009 for an increase in the scope of our original collaboration with Lilly.  We recognized $838,133 of revenues in 2008 primarily from the recognition of twelve months of our initial funds received from our 2006 collaboration with Eli Lilly and Company.

Research and development

Research and development expenses consist primarily of compensation of personnel and related benefits and taxes, funding for research and development programs, funding of research related to license agreements, scientific consultant expenses and overhead costs.  Research and development expenses for the year ended December 31, 2009 decreased 10% or $151,654 to $1,319,874 from $1,471,528 for the year ended December 31, 2008.  Below is a summary of our research and development expenses:

               
Increase
 
Expense
 
2009
   
2008
   
(Decrease)
 
Compensation, taxes and benefits
  $ 363,952     $ 441,262     $ (77,310 )
Program R & D funding, license fees and consulting
    816,438       870,853       (54,415 )
Rent, telephone and utilities
    108,027       112,304       (4,277 )
Other research and development expenses
    31,457       47,109       (15,652 )
Total Research and Development Expenses
  $ 1,319,874     $ 1,471,528     $ (151,654 )

This decrease was primarily due to a decrease in compensation related expenses and a decrease in our program R & D funding to advance the development of our serum-based AD diagnostic programs.  The decrease in compensation related expenses is due to a reduction in benefits and a decrease in costs of ongoing benefits as well as the elimination of one technician position in February 2008 and an additional technician position in July 2009.  Prior to July 2009, we had been providing more resources for our program R & D funding, however, in July 2009, we temporarily scaled back our diagnostic R&D programs due to funding constraints.  There was no non-cash expense for stock based payments in 2009 and 2008.  If we are able to raise sufficient funds to continue our diagnostic programs, we estimate that we may incur costs of approximately $100,000 to $150,000 per month on research and development activities going forward.  This excludes the non-cash effect of accounting for equity instruments included in the amounts mentioned above.  These expenditures, however, may fluctuate from quarter-to-quarter and year-to-year depending upon the resources available, our development schedule, and our progress.  Results of preclinical studies, clinical trials, regulatory decisions and competitive developments for our diagnostic programs may significantly increase the amount of our research and development expenditures.

General and administrative

General and administrative expenses consist primarily of compensation of personnel and related benefits and taxes, public company compliance expenses, including legal and accounting expenses, and occupancy related expenses.  General and administrative expenses for the year ended December 31, 2009 decreased 22% or $363,001

 
 

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 to $1,279,011 from $1,642,012 for the year ended December 31, 2008.  Below is a summary of our general and administrative expenses:

     
Increase
Expense
2009
2008
(Decrease)
Compensation, taxes and benefits
$578,290
$693,250
$     (114,960)
Consulting
 72,000
 105,377
 (33,377)
Professional fees
 194,355
 298,176
 (103,821)
Rent, telephone and utilities
 40,435
 43,550
 (3,115)
Stock option compensation expense
 260,292
 306,014
 (45,722)
Other general and administrative expenses
 133,639
 195,645
 (62,006)
Total General and Administrative Expenses
$1,279,011
$1,642,012
$(363,001)

This decrease is primarily due to across the board cost reductions.  The decrease in compensation related expenses is due to a reduction in benefits and a decrease in costs of ongoing benefits as well as the elimination of one administrative position in July 2009 and reduced compensation costs for our executive officers.  The decrease in consulting is primarily due to a one-time business development consulting contract in the second quarter of 2008.  The decrease in professional fees is due to a reduction in costs associated with patent expenses and patent maintenance costs and a decrease in general legal expenditures.  Compensation expense for all stock based payments is required to be measured and recognized at fair value.  Non-cash expense for all stock based payments in 2009 was $260,292 and in 2008 was $306,014.  Other expenses decreased primarily due to the cost of our shareholder meeting in the third quarter of 2008.  If we are able to raise sufficient funds to continue our diagnostic programs, we estimate that we may incur costs of approximately $80,000 to $130,000 per month on general and administrative activities going forward.  This excludes the non-cash effect of accounting for equity instruments included in the amounts mentioned above.  These expenditures, however, may fluctuate from quarter-to-quarter and year-to-year depending upon the resources available, SEC requirements, and our development schedule.

Other income and expense

Interest expense for the year ended December 31, 2009 was $64,060, due to accrued interest related to the $535,000 notes payable.  We did not incur any interest expense for the year ended December 31, 2008.  Interest income for the year ended December 31, 2009 decreased 91% or $39,235, to $3,804 from $43,039 for the year ended December 31, 2008.  The decrease is primarily due to lower average invested balances and a lower rate of return.

We currently do not hedge foreign exchange transaction exposures.  As of December 31, 2009, we do not have any assets denominated in foreign currencies.  At December 31, 2009 and 2008, we did have amounts due in euros to a European collaborator.  Included in accounts payable at December 31, 2009 was an estimate of $21,682 due to this collaborator.  This amount due was settled for $21,527 in January 2010.  Included in accounts payable at December 31, 2008 was an estimate of $50,935 due to this collaborator.  This amount due was settled for $50,005 in January 2009.

Net loss

We incurred a net loss of $1,107,742 for the year ended December 31, 2009 compared to a net loss of $2,232,368 for the year ended December 31, 2008.  The primary reasons for the $1,124,626 decrease in the net loss in 2009 were the $750,000 in revenue recognized in 2009 from the increase in the scope of our collaboration agreement with Eli Lilly and Company, the $114,960 decrease in G & A compensation and related taxes and benefits, the $103,821 decrease in professional fees, the $77,310 decrease in R & D compensation and related taxes and benefits, the $62,006 decrease in other G & A expenses and the $54,415 decrease in program R & D funding.  This was partially offset by a $64,060 increase in interest expense in 2009.

Capital resources and liquidity

To date, we have raised equity and convertible debt financing and received research agreement revenues, collaboration revenues and grant revenues to fund our operations, and we expect to continue this practice to fund our ongoing operations.  Since inception, we have raised net proceeds of approximately $42.6 million from private

 
 

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equity and convertible debt financings.  We have also received approximately $5.9 million from research agreements, collaboration revenues and grant revenues.

Our cash and cash equivalents were $794,003 and $1,045,020 at December 31, 2009 and 2008, respectively.  The decrease in our cash balance is due to the cash used in operations in 2009, less the $1,000,000 received from Eli Lilly and Company in 2009 and $35,000 in convertible debt funding received in January 2009.

Net cash used in operating activities was $283,742 for the year ended December 31, 2009 versus net cash used in operating activities of $2,414,138 for the year ended December 31, 2008.  This decrease reflects an overall reduction in expenses in 2009, plus an increase in liabilities due to deferral of payments to AECOM in 2009, that was partially offset by $1,000,000 of revenue received in 2009.  Cash used in investing activities was negligible in 2009 and 2008.  Net cash provided by financing activities was $35,000 in 2009 and $500,000 in 2008 due to the proceeds from convertible notes received each year.

We have incurred recurring losses since our inception and expect to incur substantial additional research and development costs prior to reaching profitability.  We incurred research and development costs of $1,319,874 in 2009 and $1,471,528 in 2008.  Prior to 2007, virtually all of our research and development costs were internal costs and license costs which were not specifically allocated to any of our research and development projects.  Beginning in 2007, an increasing amount of our research and development costs are being specifically allocated to our research and development projects.  Through a restructuring, we eliminated a senior scientific management position in November 2007, a staff scientist position in February 2008, and another staff scientist position in July 2009.  The compensation that had been utilized for the scientists is now being allocated to direct R & D projects and working with outside companies and consultants to obtain specific expertise and access to technologies to assist us in advancing our programs.  We anticipate that our cash balances as of December 31, 2009, will be sufficient to cover our planned research and development activities and general operating expenses into the second quarter of 2010.  We will need additional funding in the second quarter of 2010 to cover operations.  If additional funding is not obtained, we will not be able to fund the costs of any programs in development.  This would have a material adverse effect on our operations and our prospects.

As we currently do not have any approved products in the marketplace, we do not have a time frame for generating significant revenues from our research and development activities.

We currently do not have sufficient resources to maintain operations and complete the development of our proposed research projects.  Therefore, we will need to raise additional capital in the second quarter of 2010 to fund our operations.  We cannot be certain that any financing will be available when needed, or on terms acceptable to us.  If we fail to raise additional financing as we need it, we may have to delay or terminate our own product development programs or pass on opportunities to in-license or otherwise acquire new products and/or technologies that we believe may be beneficial to our business.  We may spend capital on:

•      research and development programs;
•      pre-clinical studies and clinical trials; and
•      regulatory processes.

The amount of capital we may need will depend on many factors, including the:

•      progress, timing and scope of research and development programs;
•      progress, timing and scope of our pre-clinical studies and clinical trials;
•      time and cost necessary to obtain regulatory approvals;
•      time and cost necessary to seek third-party manufacturers to manufacture our products for us;
•      time and cost necessary to seek marketing partners to market our products for us;
•      time and cost necessary to respond to technological and market developments;
•      changes made to, or new developments in, our existing collaborative, licensing and other
commercial relationships; and
•      new collaborative, licensing and other commercial relationships that we may establish.



 
 

25
 
Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Commitments

We have several financial commitments, including those relating to our license agreements with Albert Einstein College of Medicine (“AECOM”).

Under our license agreements with AECOM, we are required to:
•      pay semi-annual maintenance payments in January and July each year;
 
pay quarterly funding payments in February, May, August and November each year as long as the license agreements are in place; and
•      pay the costs of patent prosecution and maintenance of the patents included in the agreement.

In December 2008, AECOM agreed to defer the 2009 semi-annual maintenance payments until the earlier of December 31, 2009 or a fund raise at least equal to $3,500,000. In exchange for this deferral, we agreed to prepay the quarterly funding payments to support Dr. Davies lab at AECOM that were due in February 2009, May 2009 and August 2009.  This prepayment of $112,500 was made in December 2008.  In November 2009, AECOM agreed to defer the 2009 semi-annual maintenance payments that had previously been deferred until December 31, 2009 and the 2010 semi-annual maintenance payments until the earlier of December 31, 2010 or a fund raise at least equal to $4,000,000. AECOM also agreed to defer the quarterly funding payment to support Dr. Davies lab at AECOM that was due in November 2009 until February 2010.

Our fixed expenses, such as rent, license payments and other contractual commitments, may increase in the future, as we may:
•      enter into additional leases for new facilities and capital equipment;
•      enter into additional licenses and collaborative agreements; and
•      incur additional expenses associated with being a public company.

In addition to the commitments to AECOM, we also have a consulting agreement with Dr. Peter Davies, our founding scientist, through November 2011, and minimum annual lease payments on our office and lab facility in Vernon Hills, Illinois through May 2010.  In December 2008, Dr. Davies agreed to defer a portion of his monthly consulting fees.  In December 2009, we agreed to repay him these deferred consulting fees over twelve months in 2010.

The following table summarizes the timing of these future long term contractual obligations and commitments for the next five years ending December 31:

 
Contractual Obligations
 
2010
Year 1
   
2011
Year 2
   
2012
Year 3
   
2013
Year 4
   
2014
Year 5
   
Total
 
Operating Leases
  $ 37,266     $ -     $ -     $ -     $ -     $ 37,266  
Consulting Agreements with initial terms greater than one year
       175,500          99,000          -          -          -          274,500  
Commitments Under License Agreement with AECOM
       887,500          500,000          500,000          500,000          500,000         2,887,500  
Total Contractual Cash Obligations
  $ 1,100,266     $ 599,000     $ 500,000     $ 500,000     $ 500,000     $ 3,199,266  

We are obligated to continue to pay AECOM $500,000 for each year in which the Agreements are still in effect.  In addition, we are obligated to pay AECOM a percentage of all revenues we receive from selling and/or licensing aspects of the AD technology licensed under the Agreements that exceeds the minimum obligations reflected in the annual license maintenance payments.  The future long-term contractual obligations and commitments for 2010 include all amounts deferred from 2009 that are scheduled to be paid in 2010.

 
 

26
 




ITEM 7A.                      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

 
 

27
 

ITEM 8.                       FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



APPLIED NEUROSOLUTIONS, INC.
(a development stage company)
 
FINANCIAL STATEMENTS



Contents

 
Page
Report of Independent Registered Public Accounting Firm
29
Consolidated Balance Sheets as of December 31, 2009 and 2008
30
Consolidated Statements of Operations for the Years Ended December 31, 2009 and 2008, and for the Cumulative Period From March 14, 1992 (inception) to December 31, 2009
 
31
Consolidated Statements of Stockholders’ Equity/(Deficit) for the Years Ended December 31, 2009 and 2008, and for the Cumulative Period From March 14, 1992 (inception) to December 31, 2009
 
32-34
Consolidated Statements of Cash Flows for the Years Ended December 31, 2009 and 2008, and for the Cumulative Period From March 14, 1992 (inception) to December 31, 2009
 
35-36
Notes to Consolidated Financial Statements for the Years Ended December 31, 2009 and 2008, and for the Cumulative Period From March 14, 1992 (inception) to December 31, 2009
 
37-55







 
 

28
 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Stockholders, Audit Committee and Board of Directors
Applied NeuroSolutions, Inc.
Vernon Hills, Illinois


We have audited the accompanying consolidated balance sheets of Applied NeuroSolutions, Inc. (a development stage company) as of December 31, 2009 and 2008, and the related consolidated statements of operations, shareholders' equity/(deficit) and cash flows for the years then ended.  These consolidated financial statements are the responsibility of the company's management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audit included consideration of its internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.  Accordingly, we express no such opinion.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall consolidated financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Applied NeuroSolutions, Inc. (a development stage company) as of December 31, 2009 and 2008 and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.


The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1(c) to the consolidated financial statements, the Company has suffered recurring losses from operations, has an accumulated deficit and requires additional capital to support the Company's continued development efforts, which raises substantial doubt about its ability to continue as a going concern.  Management’s plans in regard to these matters are also described in Note 1(c).  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.


/s/ Baker Tilly Virchow Krause, LLP

Chicago, Illinois
March 24, 2010






 
 

29
 

APPLIED NEUROSOLUTIONS, INC.
(a development stage company)
 
CONSOLIDATED BALANCE SHEETS
 

   
December 31,
   
December 31,
 
   
2009
   
2008
 
Assets
Current assets:
           
Cash
  $ 794,003     $ 1,045,020  
Accounts receivable
    -       4,800  
Prepaids and other current assets
    72,049       157,786  
Total current assets
    866,052       1,207,606  
                 
Property and equipment:
               
Equipment and leaseholds
    2,168,787       2,168,498  
Accumulated depreciation and amortization
    (2,163,975 )     (2,156,805 )
Net property and equipment
    4,812       11,693  
                 
Other assets:
               
Deposits
    8,281       8,281  
Total other assets
    8,281       8,281  
Total assets
  $ 879,145     $ 1,227,580  
Liabilities and Stockholders’ Equity
               
Current liabilities:
               
Accounts payable
  $ 171,872     $ 119,866  
Notes payable
    535,000       -  
Deferred revenues
    250,000       301,399  
Accrued collaboration costs
    387,500       -  
Accrued consultant fees
    81,500       4,500  
Accrued vacation wages
    10,514       28,703  
Accrued 401k match
    -       38,550  
Accrued interest
    64,060       -  
Other accrued expenses
    18,019       26,432  
Total current liabilities
    1,518,465       519,450  
Long term liabilities:
               
Notes payable
    -       500,000  
Total long term liabilities
    -       500,000  
Stockholders' equity:
               
Preferred stock, par value $0.0025: 5,000,000 shares authorized; none issued and outstanding
     -        -  
Common stock, par value $0.0025; 100,000,000 shares authorized;
   4,389,000 shares issued and outstanding
     325,665        325,547  
Treasury stock, 777 shares, at cost
    (10,614 )     (10,614 )
Additional paid-in capital
    50,416,754       50,156,580  
Deficit accumulated during the development stage
    (51,371,125 )     (50,263,383 )
Total stockholders' equity/(deficit)
    (639,320 )     208,130  
Total liabilities and stockholders' equity
  $ 879,145     $ 1,227,580  
See accompanying notes to consolidated financial statements.
               

 
 

30
 


APPLIED NEUROSOLUTIONS, INC.
(a development stage company)
 
CONSOLIDATED STATEMENTS OF OPERATIONS
                   
   
Year Ended December 31,
   
Period from March 14, 1992 (inception) to December 31,
 
   
2009
   
2008
   
2009
 
               
(unaudited)
 
Research agreement revenues
  $ -     $ 4,800     $ 1,707,500  
Collaboration revenues
    1,551,399       833,333       3,249,999  
Grant revenues
    -       -       669,022  
Total revenues
    1,551,399       838,133       5,626,521  
                         
Operating expenses:
                       
Research and development……………
    1,319,874       1,471,528       33,832,070  
General and administrative
    1,279,011       1,642,012       19,375,363  
Loss on impairment of intangible assets
    -       -       411,016  
Loss on writedown of leasehold improvements
     -        -        1,406,057  
Total operating expenses
    2,598,885       3,113,540       55,024,506  
Operating loss
    (1,047,486 )     (2,275,407 )     (49,397,985 )
Other (income) expense:
                       
Interest expense
    64,060       -       780,404  
Interest income
    (3,804 )     (43,039 )     (925,358 )
Amortization of debt discount
    -       -       272,837  
Beneficial conversion of debt to equity
    -       -       274,072  
Inducement to convert debt to equity
    -       -       1,631,107  
Cost of fund raising activities
    -       -       62,582  
Loss on extinguishments of debt
    -       -       4,707,939  
Gain on derivative instrument, net
    -       -       (4,894,163 )
Net other expense
    -       -       63,720  
Total other (income) expense
    60,256       (43,039 )     1,973,140  
                         
Net loss
    (1,107,742 )     (2,232,368 )     (51,371,125 )
Less: Deemed dividend to common
   Stockholders…………………………
     -        -       (391,312 )
Less: Fair value of induced preferred stock conversion…………………….
     -        -       (1,866,620 )
Net loss attributable to common stockholders…………………………
  $ (1,107,742 )   $ (2,232,368 )   $ (53,629,057 )
Basic and diluted loss per common share:
                       
Net loss attributable to common stockholders per share, basic and diluted
  $ (0.25 )   $ (0.51 )   $ (36.36 )
Weighted average shares outstanding
    4,366,000       4,342,000       1,475,000  
See accompanying notes to consolidated financial statements
         

 
 

31
 

 
APPLIED NEUROSOLUTIONS, INC.
 
 (a development stage company)
 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY / (DEFICIT)
 
FOR THE PERIOD FROM MARCH 14, 1992 (INCEPTION) TO DECEMBER 31, 2009


   
Shares
   
Common
Stock
   
Treasury
Stock
   
Additional
Paid in
Capital
   
Deficit Accumulated During the Development Stage
   
Total
Stockholders’
Equity
(Deficit)
 
                                     
Issuance of Common Stock
    12,423     $ 932     $ -     $ (332 )   $ -     $ 600  
Net loss
    -       -       -       -       (922,746 )     (922,746 )
Balance at December 31, 1992
    12,423       932       -       (332 )     (922,746 )     (922,146 )
Issuance of Common Stock
    14,494       1,087       -       (387 )     -       700  
Issuance of Preferred Stock, subsequently converted to Common Stock
     5,532        415        -        1,201,750        -        1,202,165  
Issuance of Preferred Stock, subsequently converted to Common Stock
     25,403        1,905        -        5,640,172        -        5,642,077  
Issuance of Common Stock upon conversion of note and accrued interest
     12,278        921        -        2,964,005        -        2,964,926  
Net loss
    -       -       -       -       (4,875,845 )     (4,875,845 )
Balance at December 31, 1993
    70,130       5,260       -       9,805,208       (5,798,591 )     4,011,877  
Issuance of Preferred Stock, subsequently converted to Common Stock
     17,768        1,333        -        4,006,404        -        4,007,737  
Retirement of Common Stock
    (63 )     (5 )     -       (13,663 )     -       (13,668 )
Net loss
    -       -       -       -       (6,154,275 )     (6,154,275 )
Balance at December 31, 1994
    87,835       6,588       -       13,797,949       (11,952,866 )     1,851,671  
Issuance of Preferred Stock, subsequently converted to Common Stock
     16,461        1,235        -        748,765        -        750,000  
Issuance of Preferred Stock upon conversion of bridge loan and accrued interest, subsequently converted to Common Stock
         22,973            1,723            -            1,005,840            -            1,007,563  
Net loss
    -       -       -       -       (2,191,159 )     (2,191,159 )
Balance at December 31, 1995
    127,269       9,546       -       15,552,554       (14,144,025 )     1,418,075  
Issuance of Preferred Stock, subsequently converted to Common Stock
     165,239        12,393        -        6,864,881        -        6,877,274  
Issuance of Common Stock
    1,061       80       -       96,524       -       96,604  
Net loss
    -       -       -       -       (2,591,939 )     (2,591,939 )
Balance at December 31, 1996
    293,569       22,019       -       22,513,959       (16,735,964 )     5,800,014  
Issuance of Common Stock in connection with acquisition of intangible assets
     4,390        329        -        399,671        -        400,000  
Net loss
    -       -       -       -       (2,040,092 )     (2,040,092 )
Balance at December 31, 1997
    297,959       22,348       -       22,913,630       (18,776,056 )     4,159,922  
Net loss
    -       -       -       -       (2,549,920 )     (2,549,920 )
Balance at December 31, 1998
    297,959       22,348       -       22,913,630       (21,325,976 )     1,610,002  
Net loss
    -       -       -       -       (1,692,356 )     (1,692,356 )
Balance at December 31, 1999
    297,959       22,348       -       22,913,630       (23,018,332 )     (82,354 )
Issuance of Preferred Stock, subsequently converted to Common Stock
     48,884        3,666        -        983,614        -        987,280  
Issuance of warrants to purchase shares of Common Stock
     -        -        -        83,406        -        83,406  


 
 

32
 


   
Shares
   
Common
Stock
   
Treasury
Stock
   
Additional
Paid in
Capital
   
Deficit Accumulated During the Development Stage
   
Total
Stockholders’
Equity
(Deficit)
 
Extension of warrants to purchase shares of Common Stock
     -        -        -        154,685        -        154,685  
Stock options granted to non-employees
    -       -       -       315,976       -       315,976  
Net loss
    -       -       -       -       (2,395,538 )     (2,395,538 )
Balance at December 31, 2000
    346,843       26,014       -       24,451,311       (25,413,870 )     (936,545 )
Issuance of Common Stock upon conversion of bridge loans/accrd. int
     149,155        11,185        -        2,027,696        -        2,038,881  
Issuance of Common Stock
    19,358       1,452       -       211,048       -       212,500  
Stock options granted to non-employees
    -       -       -       77,344       -       77,344  
Issuance of warrants to purchase shares of Common Stock
     -        -        -        27,367        -        27,367  
Options reissued to adjust exercise term
    -       -       -       64,033       -       64,033  
Beneficial conversion feature of convertible debt
     -        -        -        229,799        -        229,799  
Induced conversion of convertible debt
    -       -       -       1,631,107       -       1,631,107  
Net loss
    -       -       -       -       (4,146,913 )     (4,146,913 )
Balance at December 31, 2001
    515,356       38,651       -       28,719,705       (29,560,783 )     (802,427 )
Issuance of Common Stock upon conversion of bridge loans, accrued interest, other payables and as payment for services
         240,066            18,005            -            1,792,878            -            1,810,883  
Issuance of Common Stock upon conversion of warrants
     5,229        392        -        35,536        -        35,928  
Stock options granted to non-employees
    -       -       -       6,136       -       6,136  
Repurchase of Common Stock
    (777 )     (58 )     (10,614 )     58       -       (10,614 )
Merger between the Company and Molecular Geriatrics Corporation
     830,172        62,263        -       (62,263 )      -        -  
Issuance of warrants to purchase shares of Common Stock
     -        -        -        159,934        -        159,934  
Net loss
    -       -       -       -       (2,929,955 )     (2,929,955 )
Balance at December 31, 2002
    1,590,046       119,253       (10,614 )     30,651,984       (32,490,738 )     (1,730,115 )
Variable accounting for stock options
    -       -       -       604,100       -       604,100  
Stock options granted to non-employees..
    -       -       -       80,975       -       80,975  
Issuance of warrants to purchase shares of common stock…………………………
     -        -        -        193,130        -        193,130  
Net loss…………………………………..
    -       -       -       -       (3,301,420 )     (3,301,420 )
Balance at December 31, 2003
    1,590,046       119,253       (10,614 )     31,530,189       (35,792,158 )     (4,153,330 )
Issuance of units in private placement
    1,066,667       80,000       -       1,483,066       -       1,563,066  
Issuance of placement agent warrants
    -       -       -       875,407       -       875,407  
Issuance of units upon conversion of bridge loans
     348,024        26,102        -        7,292,016        -        7,318,118  
Issuance of common stock for services
    6,667       500       -       64,500       -       65,000  
Issuance of units for services
    13,334       1,000       -       268,426       -       269,426  
Issuance of warrants to purchase shares of common stock
     -        -        -        124,775        -        124,775  
Variable accounting for stock options
    -       -       -       1,535       -       1,535  
Net loss
    -       -       -       -       (2,800,526 )     (2,800,526 )
Balance at December 31, 2004
    3,024,738       226,855       (10,614 )     41,639,914       (38,592,684 )     3,263,471  
Issuance of stock upon exercise of warrants……………………………….
     125,192        9,389        -        667,745        -        677,134  


 
 

33
 


   
Shares
   
Common
Stock
   
Treasury
Stock
   
Additional
Paid in
Capital
   
Deficit Accumulated During the Development Stage
   
Total
Stockholders’
Equity
(Deficit)
 
Issuance of stock options to purchase shares of common stock………………
     -        -        -        77,057        -        77,057  
Variable accounting for stock options…...
    -       -       -       219,952       -       219,952  
Net loss…………………………………...
    -       -       -       -       (2,620,641 )     (2,620,641 )
Balance at December 31, 2005
    3,149,930       236,244       (10,614 )     42,604,668       (41,213,325 )     1,616,973  
Issuance of stock upon conversion of warrants
     67,140        5,036        -        438,419        -        443,455  
Issuance of stock upon conversion of stock options
     17,007        1,275        -        75,256        -        76,531  
Issuance of stock
    46,264       3,470       -       559,054       -       562,524  
Non cash compensation for options FAS123R
     -        -        -        720,322        -        720,322  
Issuance of warrants to purchase shares of common stock
     -        -        -        200,866        -        200,866  
Non cash unrecognized compensation for options granted and cancelled
     -        -        -        197,625        -        197,625  
Net loss
    -       -       -       -       (4,289,327 )     (4,289,327 )
Balance at December 31, 2006
    3,280,341       246,025       (10,614 )     44,796,210       (45,502,652 )     (471,031 )
Issuance of stock upon conversion of warrants
     338,911        25,420        -        1,672,119        -        1,697,539  
Issuance of stock
    721,354       54,102       -       2,845,898       -       2,900,000  
Non cash compensation for options FAS123R
     -        -        -        496,848        -        496,848  
Issuance of warrants to purchase shares of common stock
     -        -        -        39,491        -        39,491  
Net loss
    -       -       -       -       (2,528,363 )     (2,528,363 )
Balance at December 31, 2007
    4,340,606       325,547       (10,614 )     49,850,566       (48,031,015 )     2,134,484  
Non cash compensation for options FAS123R
     -        -        -        301,514        -        301,514  
Issuance of warrants to purchase shares of common stock
     -        -        -        4,500        -        4,500  
Net loss
    -       -       -       -       (2,232,368 )     (2,232,368 )
Balance at December 31, 2008
    4,340,606       325,547       (10,614 )     50,156,580       (50,263,383 )     208,130  
Non cash compensation for options FAS123R
     -        -        -        260,292        -        260,292  
Issuance of stock
    48,394       118       -       (118 )     -       -  
Net loss
    -       -       -       -       (1,107,742 )     (1,107,742 )
Balance at December 31, 2009
    4,389,000     $ 325,665     $ (10,614 )   $ 50,416,754     $ (51,371,125 )   $ (639,320 )


See accompanying notes to consolidated financial statements

 
 

34
 

 
APPLIED NEUROSOLUTIONS, INC.
 
 (a development stage company)
 
CONSOLIDATED STATEMENTS OF CASH FLOWS

   
 
 
Year Ended December 31,
   
Period from March 14, 1992 (inception) to December 31,
 
   
2009
   
2008
   
2009
 
               
(unaudited)
 
Cash flows from operating activities
                 
Net loss
  $ (1,107,742 )   $ (2,232,368 )   $ (51,371,125 )
Adjustments to reconcile net loss to net cash
used in operating activities:
                       
Depreciation and amortization
    8,893       16,484       2,650,791  
Non-cash expense for equity compensation
    -       -       2,379,241  
Non-cash expense for equity compensation
        to employees and directors
     260,292        306,014        3,149,974  
Non-cash interest expense
    64,060       -       398,972  
Amortization of deferred financing costscosts
    -       -       111,000  
Non-cash expense for beneficial conversion
of debt
     -        -        274,072  
Non cash expense for induced conversion
of debt
     -        -        1,631,107