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EX-23.2 - EXHIBIT 23.2 - RADIENT PHARMACEUTICALS Corpv300014_ex23-2.htm
EX-23.1 - EXHIBIT 23.1 - RADIENT PHARMACEUTICALS Corpv300014_ex23-1.htm


 

  

As filed with the Securities and Exchange Commission on January 25, 2012                         Registration No.   

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form S-1

Pre-Effective Amendment No. 1

 

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

RADIENT PHARMACEUTICALS CORPORATION

 

(Exact name of Registrant as specified in its charter)

 

Delaware   2835    33-0413161

(State or Other Jurisdiction of Incorporation

or Organization)

 

(Primary Standard Industrial Classification

Code Number)

  (I.R.S. Employer Identification Number)

 

2492 Walnut Avenue, Suite 100

Tustin, California 92780-7039

(714) 505-4460

 (Address, including zip code, and telephone number,

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

 

Copies to:

 

Stephen A. Weiss, Esq.

Rachael Schmierer, Esq.

Hunter Taubman Weiss

17 State Street, Suite 2000

New York, New York 10004

 

Approximate date of commencement of proposed sale to the public: From time to time after this Registration Statement becomes effective.

  

 
 

   

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. x

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

 

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 definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

 

Large accelerated filer   Accelerated filer  
Non-accelerated filer  

Smaller reporting

company 

x

 

(Do not check if a smaller reporting company)

 

CALCULATION OF REGISTRATION FEE

 

Title of each class of securities to be registered(1)  Amount to be
registered (2)
  Proposed
maximum
offering price
per share (3)
  Proposed
maximum
aggregate
offering price
  Amount of
registration fee
                     
Common Stock (4)     16,000,000       0.06     $ 960,000     $ 102.36  

 

(1)  Pursuant to Rule 416 and 457 of the Securities Act of 1933, as amended, the shares of common stock offered hereby also include such presently indeterminate number of shares of our common stock as shall be issued by the Registrant to the selling stockholders under provisions of the warrants covered by this registration statement to prevent dilution resulting from stock splits, stock dividends, issuances of securities at prices below the exercise price of such warrants or similar transactions.

 

(2)  The amounts listed in this table, as well all outstanding share amounts, per share data and related prices stated in this registration statement, to give effect to the consummation of a 1:25 reverse split of the Registrant’s outstanding common stock, which we hope to be consummated on or before February 28, 2012, subject to Financial Industry Regulatory Agency (herein “FINRA”) approval.

 

(3)  Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(c) under the Securities Act of 1933, as amended based upon the closing price of the Registrant’s common stock as quoted on the OTCQX exchange of $0.06 on January 20, 2012. Pursuant to Rule 415(a)(2) of the Securities Act of 1933, as amended, the Registrant is registering under this registration statement an aggregate number of shares of common stock representing one-third of the estimated 48 million shares of common stock that the registrant believes will be held by non-affiliates as at the effective date of this registration, and which the registrant reasonably expects to be offered and sold within two years from the initial effective date of such registration statement.

 

(4) Represents shares of common stock issuable upon exercise of Series A Warrants to purchase common stock issued pursuant to Exchange Agreements the Registrant entered into on November 28, 2011 with certain investors.

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Commission, acting pursuant to said section 8(a), may determine.

 
 

We are filing this amendment to respond to an SEC comment requesting that we include executive compensation for the fiscal year ended December 31, 2011.

 

THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.  THE SELLING STOCKHOLDERS MAY NOT SELL THESE SECURITIES PUBLICLY UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE.  THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.

 

SUBJECT TO COMPLETION, DATED [__]

 

PROSPECTUS

 

RADIENT PHARMACEUTICALS CORPORATION

 

16,000,000 Shares of Common Stock

 

This prospectus relates to the sale by the selling shareholders listed on page 65 of up to 16,000,000 shares of our common stock that are issuable upon exercise of approximately 5.1% of our Series A Warrants entitling the holders to purchase up to approximately 313,500,000 shares of our common stock (subject to adjustment).  We issued the Series A Warrants to each of such selling shareholders in connection with separate exchange agreements entered into on November 28, 2011, that are described elsewhere in this prospectus. The 16,000,000 shares being registered under the Securities Act of 1933, as amended, and offered for sale by the selling stockholders pursuant to this prospectus represents one-third of the estimated 48,000,000 shares of common stock we believe will be outstanding and held by non-affiliates as at the date of this prospectus and which we reasonably expect will be offered and sold within two years from the date of this prospectus. In the event that less than 48,000,000 shares are issued and outstanding on the date of this prospectus, we will proportionally reduce the 16,000,000 shares to which this prospectus relates to an amount equal to one-third of such issued and outstanding shares.

   

The selling stockholders named herein may sell common stock from time to time in the principal market on which the stock is traded at the prevailing market price, at prices related to such prevailing market price, in negotiated transactions or a combination of such methods of sale and pursuant to any other method permitted by applicable law. Unless all or a portion of the 16,000,000 shares of common stock issuable upon exercise of the Series A Warrants, and to which this prospectus relates, are exercised, we will not receive any proceeds from the sales by the selling stockholders.

 

Except as otherwise indicated, when used in this prospectus, all share and per share data gives effect to a 1:25 reverse split of our issued and outstanding shares of common stock, which reverse stock split we hope to effect on or before February 28, 2012, subject to FINRA approval. On January 20, 2012, there were an aggregate of 1,426,123,955 shares of our common stock issued and outstanding before giving effect to the reverse stock split.

 

The number of shares of common stock which may be sold by each of the selling stockholders are subject under certain conditions to certain agreed upon limits described elsewhere in this prospectus.

 

Our shares of common stock are quoted on OTCQX exchange under the symbol “RXPC.” On January 20, 2012, the last reported sale price of our common stock was $0.0024 per share.  On January 20, 2012, the aggregate market value of our outstanding common stock held by non-affiliates was $3,422,697 based on 1,426,123,955 shares of common stock, and a per share price of $0.0024 based on the closing sale price of our common stock on January 20, 2012.  The foregoing shares and per share information do not reflect the 1:25 reverse stock split that we expect to be effective on or before February 28, 2012, subject to FINRA approval.

 

THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK.  YOU SHOULD PURCHASE SHARES ONLY IF YOU CAN AFFORD A COMPLETE LOSS OF YOUR INVESTMENT.  SEE “RISK FACTORS” BEGINNING ON PAGE 12 FOR A DISCUSSION OF RISKS APPLICABLE TO US AND AN INVESTMENT IN OUR COMMON STOCK.

 

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

 

The date of this prospectus is [  ].

  

 
 

  

TABLE OF CONTENTS

 

Summary 2
   
The Offering 7
   
Summary Financial Data 7
   
Notes Regarding Forward-Looking Statements 7
   
Risk Factors 8
   
Selected Financial Information 15
   
Use of Proceeds 16
   
Market for Our Common Stock, Dividends and Related Stockholder Information 16
   
Management’s Discussion and Analysis of Financial Condition and Results of Operations 22
   
Business 38
   
Management 47
   
Security Ownership of Certain Beneficial Owners and Management 52
   
Selling Stockholders  55
   
Plan of Distribution  57
   
Description of Securities  59
   
Disclosure of Commission Position on Indemnification for Securities Act Liabilities  60

  

We have not authorized any person to give you any supplemental information or to make any representations for us. You should not rely upon any information about us that is not contained in this prospectus or in one of our public reports filed with the Securities and Exchange Commission (“SEC”) and incorporated into this prospectus. Information contained in this prospectus or in our public reports may become stale. You should not assume that the information contained in this prospectus, any prospectus supplement or the documents incorporated by reference are accurate as of any date other than their respective dates, regardless of the time of delivery of this prospectus or of any sale of the shares. Our business, financial condition, results of operations and prospects may have changed since those dates. The selling stockholders are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted.

 

Until [ ], all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus.  This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters.

 

SUMMARY

 

This summary highlights selected information appearing elsewhere in this prospectus. While this summary highlights what we consider to be the most important information about us, you should carefully read this prospectus and the registration statement of which this prospectus is a part in their entirety before investing in our common stock, especially the risks of investing in our common stock, which we discuss later in “Risk Factors,” and our financial statements and related notes beginning on page 71. Unless the context requires otherwise, the words “we,” “us,” “our,” “Radient” and the “Company” refer to Radient Pharmaceuticals Corporation.

  

2
 

  

Except as otherwise indicated, all references in this prospectus to our issued and outstanding shares of common stock, the conversion prices of its convertible securities and exercise prices of its warrants and options, and other share and per share data, give effect to the consummation of a 1:25 reverse split of the outstanding common stock which we expect to occur on or before February 28, 2012, subject to FINRA approval.

 

Our Business

 

We are engaged in the research, development, manufacturing, sale and marketing of our Onko-Sure ® test kit, which is a proprietary in-vitro diagnostic (or IVD) cancer test.  We market our Onko-Sure®   test kits in the United States, Canada, Chile, Europe, India, Korea, Japan, Taiwan, Vietnam and other markets throughout the world. Our product is sold either directly to Clinical Laboratory Improvement Amendments (“CLIA”) certified reference laboratories or to third party distributors, who then resell to CLIA certified reference laboratories in the United States as well as clinical reference labs, hospital laboratories and physician operated laboratories in the international market.

 

Our Onko-Sure® IVD test enables physicians and their patients to detect and/or monitor the treatment/recurrence of solid tumors by measuring the accumulation of specific breakdown products in the blood called Fibrin and Fibrinogen Degradation Products (FDP). Onko-Sure® is a simple, non-invasive blood test designed to be used for the detection and/or monitoring of 19 different types of cancer including: lung, breast, tongue, stomach, liver, colon, rectal, bladder, brain, hematological, prostate, ovarian, esophageal, cervical, uterine, liver, trophoblastic, thyroid, malignant lymphoma, and pancreatic cancers. We believe that Onko-Sure® can be a valuable diagnostic tool in the worldwide battle against cancer. Because the Onko-Sure® test kit is a non-invasive blood test, there are no side effects of the administration of the test. As with other cancer diagnostic products, false positive and false negative test results could pose a small risk to patient health if the physician is not vigilant in following up on the Onko-Sure® test kit results with other clinically relevant diagnostic modalities. While the Onko-Sure®, like other blood biomarker tests, could be helpful in cancer detection, the attending physician is required to use other testing methods to confirm the type of cancer.

 

 Onko-Sure® is sold as a blood test for cancer in Europe (CE Mark certified), India, Japan, Taiwan, Korea, Vietnam, and in Chile (research use).  In the United States, it is cleared by the Food and Drug Administration (FDA) for the monitoring of colorectal cancer treatment and recurrence, and is approved in Canada (by Health Canada) for lung cancer detection and treatment/recurrence monitoring.  We believe that Onko-Sure® has the potential to be used as a general cancer screening test. We are involved with research conducted with CLIA laboratories to expand on the clinical utility of Onko-Sure®.

 

We manufacture and distribute our cancer test kits at our licensed manufacturing facility located at 2492 Walnut Avenue, Suite 100, in Tustin, California. We are a United States Food and Drug Administration (“FDA”), “good manufacturing practices” compliant facility. We maintain a current Device Manufacturing License issued by the State of California, Department of Health Services, Food and Drug Branch.

 

On September 25, 2009, we changed our corporate name from “AMDL, Inc.” to Radient Pharmaceuticals Corporation.

 

 

Recent Financial Restructuring Transactions

 

On January 30, 2011 we sold our convertible promissory notes in a private placement to five accredited investors (the “2011 Noteholders”).  We closed the financing on January 31, 2011, and received approximately $7,500,000 in gross proceeds and net proceeds after transaction expenses were approximately $6,820,000.  In connection with the closing of the financing, we issued an aggregate principal amount of $8,437,500 of convertible notes, at a purchase price of $888.88 for each $1,000 of principal amount of notes, which were initially convertible into an aggregate of 562,500 shares of our common stock at an initial conversion price of $15.00 per share.  In addition, the investors also received: (i) 5 year Series A Warrants (the “Original Series A Warrants”) to purchase an aggregate of 562,500 shares of our common stock at an initial exercise price of $16.75 per share and (ii) 5 year Series B Warrants (the “Original Series B Warrants”) to purchase an aggregate of 281,250 shares of our common stock at an initial exercise price of $20.44 per share for their investment.  

 

In May 2011 we defaulted in the performance of certain of our covenants under the January 2011 notes.  On June 29, 2011, we entered into an exchange agreement with each of the 2011 Noteholders in order to settle our obligations to such 2011 Noteholders. Pursuant to the exchange agreement, each 2011 Noteholder exchanged their claims for note and covenant violations on July 1, 2011, for (i) our 4% $4,950,000 aggregate amount of convertible notes (the “4% Notes”)), (ii) shares of our aggregate stated value  $6,701,000 of 4% Series A Convertible Preferred Stock (the “Series A Preferred Stock”), and (iii) a five year warrant to purchase additional shares of our common stock.  On August 26, 2011, we further amended the 4% Notes to change the related installment payment dates under the 4% Notes, and additional waivers were given with respect to the automatic conversion dates under the Series A Preferred Stock.  Additionally, the maturity date of the 4% Notes was changed to December 8, 2011, and waivers were given with respect to the Series A Preferred Stock so that the final automatic conversion would occur on December 8, 2011. 

  

3
 

  

Due to the occurrence of various events of defaults under the 4% Notes and triggering events under the Series A Preferred Stock as well as significant decreases in the market value of our common stock, we sought to restructure the terms of the securities issued to the 2011 Noteholders.  Accordingly, on November 28, 2011, we entered into separate exchange agreements with each of the 2011 Noteholders (the “November 2011 Exchange Agreements”), under which each 2011 Noteholders agreed to exchange all of their securities we issued to them under the June 29, 2011, exchange agreements for the Radient securities described below.  

 

The following Radient securities were issued to the 2011 Noteholders in exchange for all of the securities we issued under the June 29, 2011 exchange agreements:

 

(a)           402,441 shares of our Series B convertible preferred stock (the “Series B Preferred Stock”), which Series B Preferred Stock, in accordance with its stated terms, (i) ranks senior to all of our other equity securities, (ii) has a stated value of $10.00 per share, (iii) is initially convertible into approximately 72.1 million shares of our common stock at an initial conversion price of $0.055825 per share (subject to adjustment as set forth below), (iv) accrues dividends at the rate of 4% per annum which are payable in shares of common stock, in arrears upon each conversion of such stock and (v) contains such other rights, preferences and limitations as are set forth in the certificate of designations of Series B Convertible Preferred Stock;

 

(b)           convertible notes, in the original principal amount of $4,950,000, which notes are initially convertible into approximately 88.7 million shares of common stock at an initial conversion price of $0.055825 per share (subject to adjustment as set forth below), and mature on November 28, 2012  (the “November Notes”);

 

(c)           five year warrants to acquire up to approximately 313.5 million shares of common stock at an initial exercise price of approximately $0.055825 per share (subject to adjustment as set forth below) (the “Series A Warrants”); and

 

(d)           five year warrants, (the “Series B Warrants”) to acquire, for $500,000, an aggregate of 50,000 shares of our preferred stock designated as Series C Convertible Preferred Stock (the “Series C Preferred Stock”), which Series C Preferred Stock, in accordance with its stated terms, (i) ranks junior to the Series B Preferred Stock and senior to all of the Company’s other equity securities, (ii) accrues dividends at the rate of 4% per annum, which are payable in shares of common stock, in arrears upon each conversion of such stock, (iii) has a stated value of $10.00 per shares, (iv) is convertible into shares of common stock, and (v) contains such other rights, preferences and limitations as are set forth in the certificate of designations of Series C Preferred Stock. 

 

By their terms, the Series B Warrants were subject, at our election, to mandatory exercise under certain conditions.  Having satisfied the conditions to elect a mandatory exercise, we submitted a mandatory exercise notice to all of the Series B Warrant holders on November 29, 2011 requiring them to exercise their Series B Warrants in full.  The mandatory exercise date was November 30, 2011.  All of the Series B Warrant holders exercised such warrants for an aggregate exercise price of $500,000, which we received on November 30, 2011.  The Series C Preferred Stock is convertible into approximately 9.0 million shares of common stock at an initial conversion price of $0.056 per share. After paying accrued legal fees, we received net proceeds of $435,000 which we are obligated to use for ongoing working capital for a period of not less than ninety (90) days from November 30, 2011.

 

At the same time we entered into the separate November 2011 Exchange Agreements with each of the 2011 Noteholders, we entered into two separate agreements with the holders of an aggregate of $8,056,258 of our convertible notes that we sold to two accredited investors (unrelated to the 2011 Noteholders) in a registered direct offering in November 2009 (the “RDO Notes”).  The RDO Noteholders waived the mandatory installment payments, which were reset to the maturity date of April 15, 2013.

 

Each of the November Notes, the RDO Notes, the shares of Series B Preferred Stock and shares of Series C Preferred Stock are initially convertible into shares of our common stock at a conversion price equal to the lowest of

 

  (i) $0.055825, (the “Fixed Conversion Price”),

 

  (ii) the price which is equal to the product of (1) 80% multiplied by (2) the quotient of (A) the sum of each of the three lowest daily weighted average prices of our common stock during the 20 consecutive trading day period immediately preceding the date of the conversion (as adjusted for any stock split, stock dividend, stock combination or other similar transaction during any such 20 trading day period) or other applicable date of determination, divided by (B) three, and

 

  (iii) the price which is equal to 80% of the closing bid price of our common stock on the trading day immediately preceding the date of conversion  or other applicable date of determination (as adjusted for any stock split, stock dividend, stock combination or other similar transaction occurring on the applicable date of conversion or other applicable date of determination.  

  

With limited exceptions, if we make certain dilutive issuances, the conversion price of the November Notes and RDO Notes and the shares of November Preferred Stock are subject to “full rachet” anti-dilution adjustments, and will be lowered to the per share price for the dilutive issuances.

   

4
 

   

The convertibility of the November Notes, Series B Preferred Stock, the Series C Preferred Stock and the exercisability of the Series A Warrants may be limited if, upon conversion or exercise thereof, the holder thereof or any of its affiliates would beneficially own more than 1% of our common stock.  Similarly, the convertibility of the RDO Notes may be limited if, upon conversion thereof, the holders thereof or any of its affiliates would together beneficially own more than 4.9% of our common stock.

 

The Series A Warrants are initially exercisable for shares of our common stock at an exercise price of $0.055825 per share; provided however, if we make certain dilutive issuances (with limited exceptions), the exercise price of the Series A Warrants are subject to “full rachet” anti-dilution adjustments, and will be lowered to the per share price for the dilutive issuances.   The Series A Warrants provide that if we fail to file by December 31, 2011 a registration statement with the SEC covering the resale of any shares of common stock issuable upon exercise of the Series A Warrants or fail to cause such registration statement to become effective by March 31, 2012, the holders of the Series A Warrants may exercise such warrants on a “cashless basis.”  In the event we comply with these conditions, any shares of our common stock that are issuable upon exercise of the Series A Warrants (the “Series A Warrant Shares”) at a time when an effective and current registration statement covering such Series A Warrant Shares is in effect may be exercised only for cash.

 

Upon the occurrence of a Triggering Event or Fundamental Transaction (as defined), each holder of our preferred stock has a right to force us to redeem any or all of their shares of preferred stock.  A Triggering Event is essentially the same as an event of default under the November Notes and a Fundamental Transaction is essentially a sale of control of our company

 

We are registering 16,000,000 of the Series A Warrant Shares under the registration statement of which this prospectus is a part.  Such 16,000,000 Series A Warrant Shares represents approximately 5.1% of the approximately 313,500,000 Series A Warrant Shares (subject to adjustment) that could be exercised under all of the Series A Warrants. Pursuant to Rule 415 promulgated under the Securities Act of 1933, as amended, the 16,000,000 Series A Warrant Shares being offered for sale by the selling stockholders pursuant to this prospectus represents one-third of the estimated 48,000,000 shares of common stock we believe will be outstanding and held by non-affiliates as at the date of this prospectus and which we reasonably expect will be offered and sold within two years from the date of this prospectus.  In the event that less than 48,000,000 shares are issued and outstanding on the date of this prospectus, we will proportionally reduce the 16,000,000 shares to which this prospectus relates to an amount equal to one-third of such issued and outstanding shares.

 

We may also register for resale in future registration statements additional Series A Warrant Shares, to the maximum extent permitted by Rule 415 and the SEC, and at such time as the 16,000,000 Series A Warrant Shares to which this prospectus relates have been sold. If our shares of common stock trade in excess of the $0.055825 exercise price of the Series A Warrant Shares, we believe that the holders of the Series A Warrants will elect to exercise all or a significant portion of such 16,000,000 Series A Warrants and sell the Series A Warrant Shares. There can, however, be no assurance that this will be the case.

 

Following February 2012, we will require significant additional working capital to continue our business operations, and are relying in large part upon the cash exercise of the 16,000,000 Series A Warrants being registered under this prospectus and additional Series A Warrant Shares that we may register in the future to provide such additional working capital.  There can, however, be no assurance that we will be able to register sufficient Series A Warrant Shares for resale or that, if registered, that the holders of the Series A Warrants will elect to exercise all or any portion thereof for cash.  See “ Risk Factors – We require significant additional working capital to conduct our business and maintain operations .”

 

Certain Limitations on Sales of Shares

 

Each of the 2011 Noteholders and both of the two holders of the RDO Notes listed under “Selling Stockholders” elsewhere in this prospectus, have each separately agreed with Radient that from and after November 30, 2011, until the occurrence of a Termination Event (as defined in the November Notes) such 2011 Noteholder and such holder of an RDO Note will not sell an aggregate number of shares of common stock currently owned by them or shares of common stock issued upon exercise of the Series A Warrants and upon conversion of the November Note, RDO Notes, Series B Preferred Stock and Series C Preferred Stock (collectively, “Covered Shares”) on any trading day that exceeds an agreed upon percentage of the aggregate daily trading volume of our common stock on such trading day (which initially range from 0.24% to 4.39% for each of the 2011 Noteholders and between 5% and 22.5% for the two holders of our RDO Notes). The initial percentage of the daily trading volume for each of the holders of such warrants and convertible securities increases by 100% if and at such time as our common stock trades for greater than or equal to $1.25 per share (adjusted for stock splits, combinations and other similar transaction), by an additional 50% if and at Such time as our Common Stock trades for greater than or equal to $2.50 per share (adjusted for stock splits, combinations and other similar transaction) and then no longer applies once the Common Stock trades for greater than or equal to $3.75 per share (adjusted for stock splits, combinations and other similar transaction) or another termination event occurs.

 

Upon the occurrence of a Triggering Event or Fundamental Transaction (as defined), each holder of our preferred stock has a right to force us to redeem any or all of their shares of preferred stock.  A Triggering Event is essentially the same as an event of default under the November Notes and a Fundamental Transaction is essentially a sale of control of our company.

  

5
 

   

Accounting Treatment of Securities issued in the November 2011 Financing

 

The November Notes contain an embedded conversion feature that are recorded as derivative liabilities in accordance with relevant accounting guidance due to the anti-dilution provisions and the down-round protection of the conversion price. The fair value on the exchange date of the embedded conversion feature amounted to $9,088,670, as computed using the Binomial Lattice option pricing model.

 

We determined that the Series B Preferred Stock should be recorded as a liability in the amount of the stated value of $4,024,410. The Preferred Stock also contains an embedded conversion feature that was recorded as derivative liability. The fair value on the exchange date of the embedded conversion feature amounts was $7,389,199, as computed using the Binomial Lattice option pricing model.

 

The fair value of the Series A Warrants on the grant date was $32,131,867 computed using the Binomial Lattice option pricing model.

 

We recorded a debt discount of $8,974,410, which represents the fair value of the embedded conversion feature inherent in the November Notes, the Series B Preferred Stock and the Series A Warrants, limited to the face amount of the November Notes and preferred stock.

 

The exchange transaction contemplated by the November 2011 Exchange Agreements was accounted for as an extinguishment of debt and we will record a loss on extinguishment of $ 41,367,261 in the fourth quarter of 2011.

 

The RDO Notes were not changed in substance by the agreements we entered into in November. Therefore, we calculated the change in present value of the RDO Notes with mandatory installments payment and no installments payments, and concluded that the change was less than 10%. Accordingly, the RDO Note payment term change was treated as a modification of debt, with no accounting impact.

 

The Reverse Stock Splits

 

At our November 4, 2011 Special Shareholders Meeting, our shareholders approved (a) an amendment to our certificate of incorporation to increase our authorized common stock from 750.0 million shares to 5.0 billion shares, and (b) the ability of our board of directors to effect up to three reverse stock splits aggregating to a 1:100 basis, without reducing our 5.0 billion shares authorized for issuance.  In connection with the agreements we entered into with the 2011 Noteholders, we agreed to implement the first reverse stock split, on a 1:25 basis, on or before January 15, 2012 (the “Initial Reverse Split”).  Our shareholders also authorized the board of directors to implement up to two additional 1:2 reverse stock splits.  If fully implemented, the 57 million shares of our common stock that are issued and outstanding at January 20, 2012 would be reduced to 14.25 million shares of common stock.

 

We also separately agreed with each of the 2011 Noteholders and the holders of the RDO Notes to reserve a number of shares for each of them to accommodate the full conversion of their outstanding notes and preferred stock and exercise of their warrants as well as any other obligations we have to issue our shares to each of them.  If such initial reverse stock split is not effected on or prior to January 15, 2012, then an event of default (as defined in the November Notes and the RDO Notes) and Triggering Events (as defined in the certificates of designations of our preferred stock) will occur.   

 

Companies listed on the OTC Market, like us, cannot effect a reverse stock split without approval from FINRA. Guidelines require that companies file the related FINRA application at least 10 days prior to the effective date of the requested action, in this case, a reverse stock split. Although we timely submitted our FINRA application, FINRA advised us that their review process is longer than usual. FINRA also maintains the right to deny our request to effect a reverse stock split. As a result of the delayed review time, the Initial Reverse Split was not effected on January 15, 2012. We have promptly responded to FINRA’s initial request for additional information and will continue to do so if they have any additional comments. We shall keep our shareholders informed on the progress of the FINRA application and effectiveness of the Initial Reverse Split through amendments to the Current Report on Form 8-K that we filed on January 3, 2012.

 

The failure to conduct the reverse split by January 15, 2012 constitutes an event of default under certain of our outstanding notes, although none of the note holders have declared a default as of the date of this filing. As of the date of this filing, all of the note holders affected by this delay have informed us that they will not declare a default unless we do not complete the split by February 28, 2012, if we do not file a Current Report on Form 8-K to disclose the delay and their conditional forbearance pre-market, Tuesday, January 17, 2012 (which we did) or if any of the note holders with similar rights declare a default, take any enforcement action or receive a benefit in connection with our failure to consummate the split timely.

 

Risk Factors

 

The securities offered by this prospectus are speculative and involve a high degree of risks associated with our business.  For more discussion of these and other risk factors affecting us and our business, see the “Risk Factors” section beginning on page 12 of this prospectus.

  

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THE OFFERING

 

Issuer   Radient Pharmaceuticals Corporation
     
Common Stock being offered by Selling Stockholders   Up to 16,000,000 shares of common stock, representing 5.1% of the 313,500,000 initial shares issuable upon full exercise of Series A warrants.
     
Selling Stockholders   2011 Noteholders and the other entities or persons listed under “Selling Stockholders” elsewhere in this prospectus.
     
OTCQX Symbol   RXPC
     
Risk Factors   The securities offered by this prospectus are speculative and involve a high degree of risk and should only be purchased by investors prepared to sustain a loss of their entire investment. See “Risk Factors” beginning on page 12.

 

SUMMARY FINANCIAL DATA

 

The following table summarizes the relevant financial data for our business and should be read in conjunction with our consolidated financial statements which are included elsewhere in this prospectus.  The summary set forth below should be read together with our consolidated financial statements and the notes thereto, as well as “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included elsewhere in this prospectus.

 

Consolidated Statement of Operations Data:

 

   For the year ended
December 31,
  For the nine months
ended September 30,
   2010  2009  2011  2010
   (in thousands)  (in thousands)
Net Revenues  $232   $158   $258   $117 
Gross profit   185    120    213    80 
Comprehensive Loss  $(85,712)  $(11,053)   (39,417)  $(38,421)

 

Consolidated Balance Sheet Data:

 

   As of
December 31,
2010
  As of
September
30, 2011
   (in thousands)
Balance Sheet Data:          
           
Current assets  $776   $861 
Total assets   857    937 
Total current liabilities, net of debt discounts   53,752    23,477 
Total liabilities, net of debt discounts   53,752    23,477 
Total stockholders’ deficit  $(52,895)  $(22,540)

   

NOTES REGARDING FORWARD-LOOKING STATEMENTS

 

The statements contained in this prospectus that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. These include statements about the Company’s expectations, beliefs, intentions or strategies for the future, which are indicated by words or phrases such as “anticipate,” “expect,” “intend,” “plan,” “will,” “the Company believes,” “management believes” and similar words or phrases. The forward-looking statements are based on the Company’s current expectations and are subject to certain risks, uncertainties and assumptions. The Company’s actual results could differ materially from results anticipated in these forward-looking statements. All forward-looking statements included in this document are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements.

  

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RISK FACTORS

 

Investing in our securities involves a great deal of risk. Careful consideration should be made of the following factors as well as other information included in this prospectus before deciding to purchase our common stock. Our business, financial condition or results of operations could be affected materially and adversely by any or all of these risks.

 

THE FOLLOWING MATTERS MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION, LIQUIDITY, RESULTS OF OPERATIONS OR PROSPECTS, FINANCIAL OR OTHERWISE. REFERENCE TO THIS CAUTIONARY STATEMENT IN THE CONTEXT OF A FORWARD-LOOKING STATEMENT OR STATEMENTS SHALL BE DEEMED TO BE A STATEMENT THAT ANY ONE OR MORE OF THE FOLLOWING FACTORS MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING STATEMENT OR STATEMENTS.

 

Risks Related to our Financial Condition

 

Our independent registered public accounting firm has included a going concern and “emphasis of a matter” paragraph in their report on our financial statements.

 

Our independent registered public accounting firm expressed an opinion on our consolidated financial statements which includes an explanatory paragraph indicating that there is substantial doubt about our ability to continue as a going concern due to our significant operating loss in 2010, our negative cash flows from operations through December 31, 2010 and our accumulated deficit at December 31, 2010. Our ability to continue as an operating entity currently depends, in large measure, upon our ability to generate additional capital resources. The opinion also includes an “emphasis of a matter” paragraph which refers to our default on debt described in Note 16 to the consolidated financial statements. While we seek ways to continue to operate by securing additional financing resources or alliances or other partnership agreements, we do not at this time have any commitments or agreements that provide for additional capital resources. Our financial condition and the going concern emphasis paragraph may also make it more difficult for us to maintain existing customer relationships and to initiate and secure new customer relationships.

 

We have incurred significant losses and may never generate profits.

 

We incurred net losses of $85,711,853, $11,052,783 and $39,417,159 for the fiscal years ended December 31, 2010 and 2009 and the nine months ended September 30, 2011, respectively, had an accumulated stockholder deficit of $22,540,300 at September 30, 2011.  Non-cash losses from change in derivative liabilities, various penalties, impairment charge related to the note receivable from JPI, impairment of investment in JPI and CIT intangible asset, and losses from the extinguishment of debt contributed to the increase in our accumulated losses and stockholders’ deficit.  There can be no assurance that we will ever be able to achieve our sales goals or earn a profit.

 

We require significant additional working capital to conduct our business and maintain our operations.

 

The current level of our revenues is not sufficient to finance our operations on a long-term basis.  The $435,000 of net proceeds we received on November 30, 2011 from the exercise of the Series B Warrants is expected only to provide us with working capital to maintain our current level of operations through February 2012.  At January 20, 2012, we had cash on hand of approximately $92,000.

 

The Company requires approximately $450,000 per month on an annualized basis for operating expenses to fund the costs associated with our financing activities; SEC reporting; legal and accounting expenses of being a public company; other general and administrative expenses; research and development, regulatory compliance, and distribution activities related to our Onko-Sure® test kit; the operation of a USFDA approved pharmaceutical manufacturing facility; and compensation of executive management and our employees. Based on our current cash position, without additional financing we may not be able to pay our obligations past December 31, 2011.

  

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The monthly cash requirement for operating expenses does not include any extraordinary items or expenditures, payments for research on clinical trials for our Onko-Sure® test kit, and research conducted through CLIA Laboratories.

 

Accordingly, if we do not receive additional financing by the end of the first quarter of 2012, we will likely be unable to increase sales of our Onko-Sure® IVD test kits or otherwise support our operating cash needs.  In such event we may no longer be able to pay our continuing obligations when due or to continue to operate our business.  As a result, we might be required to cease operations or seek protection under the U.S. bankruptcy laws.

 

We are relying upon investors exercising our Series A Warrants for cash to obtain needed additional financing.

 

We are registering 16,000,000 Series A Warrant Shares, or only 5.1% of the 313,500,000 shares of common stock initially issuable under the Series A Warrant, under the registration statement of which this prospectus is a part.  We may also register for resale in future registration statements additional Series A Warrant Shares, to the maximum extent permitted by the SEC under Rule 415. Following February 2012, we will require significant additional working capital to continue our business operations, and are relying largely upon the cash exercise of the Series A Warrants to provide such additional working capital.  Unless and to the extent that the 16,000,000 Series A Warrant Shares are registered for resale under a current registration statement, following March 31, 2012, all of the Series A Warrants may be exercised on a “cashless” basis; in which event we would not receive any proceeds from the exercise of such Series A Warrants.  There can be no assurance that we will be able to register sufficient Series A Warrant Shares for resale or that, even if registered, that the holders of the Series A Warrants will elect to exercise all or any portion thereof for cash.  Even if all 16,000,000 Series A Warrant Shares being registered under the registration statement of which this prospectus is a part are exercised for cash, at the initial exercise price of $0.055825 per share, we will only receive approximately $893,200 million in proceeds.

 

We have a significant amount of indebtedness that is in default and we are currently unable to satisfy our obligations to pay interest and principal thereon.

 

As of January 20, 2012, we had the following approximate amounts of outstanding short term indebtedness:

 

  · Accrued interest of approximately $584,000;

 

  · Approximately $46,000 in unsecured convertible notes bearing interest at 10% per annum increased to 18% per annum due to failure to pay the Notes by September 29, 2010;

 

  · Approximately $25,000 in senior unsecured convertible promissory notes bearing interest at 18% interest, payable quarterly in cash, which are due between December 2010 and May 2011; and,

 

  · Approximately $4.9 million in outstanding November Notes and $8.1 million RDO Notes and $3.9 million in Series B and $500,000 Series C convertible preferred stock which, unless converted into our common stock, matures or is subject to mandatory redemption on November 29, 2012.

 

Absent full conversion of these debts or the receipt of new financing or series of financings, our current operations do not generate sufficient cash to pay these obligations, when due.  Accordingly, there can be no assurance that we will be able to pay these or other obligations which we may incur in the future.

 

In the event we are unable to convert into equity the balance of the outstanding November Notes, RDO Notes and the outstanding redeemable Series B and Series C Preferred Stock, the holders may obtain judgments against us and seek to enforce such judgments against our assets, in which event we will be required to cease our business activities and the equity of our stockholders will be effectively wiped out.

 

If we are unable to effect the Initial Reverse Split on or before February 28, 2012, our note holders may declare a default on their notes.

 

Pursuant to the terms of the November 2011 Exchange Agreements and the amendment to the settlement agreement with the holders of the RDO Notes, we are required to effect a reverse stock split on a 1:25 ratio on or before January 15, 2012. The failure to do so constitutes an event of default (as defined in the November Notes and the RDO Notes) and Triggering Event (as defined in the certificates of designations of our preferred stock). However, because we timely requested the Initial Reverse Split and the failure for it to occur by the deadline is out of our control due to FINRA’s current review backlog, the 2011 Noteholders and the holders of the RDO Notes have informed us that they do not intend to declare a default unless we do not complete the split by February 28, 2012, if we do not file an a Current Report on Form 8-K to disclose the delay and their conditional forbearance pre-market, Tuesday, January 17, 2012 (which we did) or if any of the note holders with similar rights declare a default, take any enforcement action or receive a benefit in connection with our failure to consummate the split timely.

 

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If we do not meet the revised deadline, the note holders can declare a default and immediately demand payment in full on all of the notes. We do not currently have sufficient cash to pay such debt and therefore, if a default is declared and we are unable to reach a settlement with the note holders, we will be required to cease our business activities and the equity of our stockholders will be effectively wiped out.

 

There are pending lawsuits against us, which if decided in plaintiffs’ favor may result in the payment of cash damages, additional warrants, and liability for certain of our executive officers.

 

On March 11, 2011, a class action suit was filed against us, alleging we violated federal securities laws by misrepresenting the relationship between us and  third parties involved in our clinical studies of Onko-Sure® test. As of the date of this filing, we hired outside defense counsel, but have not submitted our response to the complaint.  We vehemently deny the allegations in the complaint and are proceeding to vigorously defend the suit.  Due to the uncertain nature of litigation and the early stage of this lawsuit, we cannot calculate the potential damages – nor does the complaint seek any specific monetary amount of damages 

 

We were engaged in litigation with AcuVector and with the Governors of the University of Alberta over our CIT technology. Formal orders to dismiss both cases have been approved by all parties and will be filed and served in the near future.  The Court approved an order to dismiss the cases.  However, opposing counsel, who approved the form of order, filed an appeal on December 23, 2011.  We do not have any further details at this time, but we intend to defend the dismissal vigorously as we believe both actions are without merit.  However, it is possible the order will be overturned and then if either AcuVector or the University is successful in their claims, we may be liable for substantial damages, our rights to the technology will be adversely affected and our future prospects for exploiting or licensing the CIT technology will be significantly impaired.

 

On December 8, 2010, Ironridge Global IV, Ltd. (“Ironridge”) filed a complaint against us in the Superior Court of California, Los Angeles County.  Ironridge claims that we breached a contract with them by allegedly discussing and then entering into transactions to settle certain of our outstanding liabilities with our creditors during a 30-day exclusivity period, during which Ironridge claims they had the exclusive right to do so.  Ironridge is seeking damages in excess of $30.0 million.  We believe that the Ironridge claims are totally without merit and intend to defend our position vigorously.

 

If the material weaknesses or other deficiencies in our internal accounting procedures are not remediated,  we will not comply with the rules under the Sarbanes-Oxley Act related to accounting controls and procedures or our stock price could decline significantly.

 

Section 404 of the Sarbanes-Oxley Act required annual management assessments of the effectiveness of our internal controls over financial reporting commencing December 31, 2007.

 

Our management concluded the consolidated financial statements included in our Annual Report on Form 10-K as of December 31, 2010 and 2009 and for the two-years ended December 31, 2010, fairly present in all material respects our consolidated financial condition, results of operations and cash flows in conformity with accounting principles generally accepted in the U.S.

 

Our management evaluated the effectiveness of our internal control over financial reporting as of December 31, 2010 and 2009 based on the control criteria established in a report entitled Internal Control — Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management concluded our internal control over financial reporting was not effective as of December 31, 2010 and 2009. During its evaluation, as of December 31, 2010 our management identified material weaknesses in our internal control over financial reporting and other deficiencies as described in our annual report on Form 10-K for the years then ended. As a result, our investors could lose confidence in us, which could result in a decline in our stock price.

 

We are taking steps to remediate our material weaknesses.  However, if we fail to achieve and maintain the adequacy of our internal controls, we may not be able to ensure that we can conclude in the future that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. Moreover, effective internal controls, particularly those related to revenue recognition, are necessary for us to produce reliable financial reports and are important to helping prevent financial fraud. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our stock could decline significantly. In addition, we cannot be certain that additional material weaknesses or other significant deficiencies in our internal controls will not be discovered in the future.

 

Risks Related to our Products and Development of our Business

 

Limited product development activities; our product development efforts may not result in commercial products.

 

We are limited in the number of additional products we can develop at this time. Successful cancer detection and treatment product development is highly uncertain, and very few research and development projects produce a commercial product. Products like Onko-Sure® appear promising in the early phases of development may fail to reach the market for a number of reasons, such as:

  

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  · the product candidate did not demonstrate acceptable clinical trial results even though it demonstrated positive preclinical trial results;

 

  · the product candidate was not effective in treating a specified condition or illness;

 

  · the product candidate had harmful side effects on humans;

 

  · the necessary regulatory bodies did not approve our product candidate for an intended use;

 

  · the product candidate was not economical for us to manufacture and commercialize; and

 

  · the product candidate is not cost effective in light of existing therapeutics.

 

Of course, there may be other factors that prevent us from marketing a product including, but not limited to, our limited cash resources. We cannot guarantee we will be able to produce commercially successful products. Further, clinical trial results are frequently susceptible to varying interpretations by scientists, medical personnel, regulatory personnel, statisticians and others, which may delay, limit or prevent further clinical development or regulatory approvals of a product candidate. Also, the length of time that it takes for us to complete clinical trials and obtain regulatory approval in multiple jurisdictions for a product varies by jurisdiction and by product. We cannot predict the length of time to complete necessary clinical trials and obtain regulatory approval. 

 

We have limited sales of the Onko-Sure® test kit and are reliant on our distributors for sales of our products.

 

Virtually all of our operating revenues comes from the sale of Onko-Sure® to distributors and research users. Historically, we have not received any substantial orders from any of our customers or distributors of Onko-Sure® test kits. Through December 31, 2011, total sales of Onko-Sure® test kits were $313,559 as compared to $231,662 in total sales of such product in fiscal 2010. Although our distributor network is increasing, any projection of future orders or sales of Onko-Sure® test kits is unreliable. In addition, the amount of Onko-Sure® test kits purchased by our distributors can be adversely affected by a number of factors, including market challenges of commercializing a recently approved biotech product, budget cycles and the amount of resources available for marketing programs, demand creation activities, and outreach to appropriate healthcare professionals and targeted markets.

 

Our current products cannot be sold in certain countries if we do not obtain and maintain regulatory approval.

 

We manufacture, distribute and market our products for their approved indications. These activities are subject to extensive regulation by numerous state and federal governmental authorities in the U.S., such as the USFDA and the Centers for Medicare and Medicaid Services (formerly Health Care Financing Administration) and certain foreign countries, including some in the European Union;. Currently, we (or our distributors) are required in the U.S. and in foreign countries to obtain approval from those countries’ regulatory authorities before we can market and sell our products in those countries. Obtaining regulatory approval is costly and may take many years, and after it is obtained, it remains costly to maintain. The USFDA and foreign regulatory agencies have substantial discretion to terminate any clinical trials, require additional testing, delay or withhold registration and marketing approval and mandate product withdrawals. In addition, later discovery of unknown problems with our products or manufacturing processes could result in restrictions on such products and manufacturing processes, including potential withdrawal of the products from the market. If regulatory authorities determine that we have violated regulations or if they restrict, suspend or revoke our prior approvals, they could prohibit us from manufacturing or selling our products until we comply, or indefinitely.

 

 We have limited product liability insurance.

 

We currently produce products for clinical studies and for investigational purposes. We are producing our products in commercial sale quantities, which will increase as we receive various regulatory approvals in the future. There can be no assurance, however, that users will not claim that effects other than those intended may result from our products, including, but not limited to claims alleged to be related to incorrect diagnoses leading to improper or lack of treatment in reliance on test results. In the event that liability claims arise out of allegations of defects in the design or manufacture of our products, one or more claims for damages may require the expenditure of funds in defense of such claims or one or more substantial awards of damages against us, and may have a material adverse effect on us by reason of our inability to defend against or pay such claims. We carry product liability insurance for any such claims, but only in an amount equal to $2,000,000 per occurrence, and $2,000,000 aggregate liability, which may be insufficient to cover all claims that may be made against us.

  

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If our intellectual property positions are challenged, invalidated or circumvented, or if we fail to prevail in future intellectual property litigation, our business could be adversely affected.

 

The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and often involve complex legal, scientific and factual questions. To date, there has emerged no consistent policy regarding breadth of claims allowed in such companies’ patents. Third parties may challenge, invalidate or circumvent our patents and patent applications relating to our products, product candidates and technologies. In addition, our patent positions might not protect us against competitors with similar products or technologies because competing products or technologies may not infringe on our patents 

 

We face substantial competition, and others may discover, develop, acquire or commercialize products before or more successfully than we do.

 

We operate in a highly competitive environment. Our products compete with other products or treatments for diseases for which our products may be indicated. Additionally, some of our competitors market products or are actively engaged in research and development in areas where we are developing product candidates. Large pharmaceutical corporations have greater clinical, research, regulatory and marketing resources than we do. In addition, some of our competitors may have technical or competitive advantages over us for the development of technologies and processes. These resources may make it difficult for us to compete with them to successfully discover, develop and market new products.

 

We have a limited supply of one of the key components of the Onko-Sure®

 

Although the Company has obtained approval from the USFDA to market the then current formulation of the Onko-Sure® test kit, it has been determined that one of the key components of the Onko-Sure® test kit, the anti-fibrinogen-HRP is limited in supply and additional quantities cannot be purchased. Currently, we have two lots remaining which are estimated to produce approximately 21,000 kits; this is sufficient to fill all current orders.  We have been investigating alternatives and engaging in research and development to produce this component in house so that we can be in a position to have an unlimited supply of Onko-Sure® in the future.  We are hoping to complete the research and development and initial validation studies by the end of the third quarter of fiscal 2012, although there can be no guarantee that we will finish such studies by then or that such studies will provide the intended results.  Without such replacement, we will not be able to produce any additional kits once our current supply is used.

 

We are subject to risks associated with our foreign distributors.

 

Our business strategy includes the continued dependence on foreign distributors for our Onko-Sure® test kits. To date, we have not been successful in generating a significant increase in sales for Onko-Sure® test kits through foreign distribution channels in existing markets or in developing foreign distribution channels in new markets. We are also subject to the risks associated with our foreign distributor’s operations, including: (i) fluctuations in currency exchange rates; (ii) compliance with local laws and other regulatory requirements; (iii) restrictions on the repatriation of funds; (iv) inflationary conditions; (v) political and economic instability; (vi) war or other hostilities; (vii) overlap of tax structures; and (viii) expropriation or nationalization of assets. The inability to manage these and other risks effectively could adversely affect our business.

 

Risks Relating to Our Securities

 

There have been material decreases in the market prices of our common stock.

  

As of January 20, 2012 the closing bid price of our common stock was $0.06 per share.  From January 2011 through January 20, 2012, our common stock has had a trading range with a low price of $0.06 per share and a high price of $41.75 per share.  In contrast, during the two years ending December 31, 2010 and prior to the sales of our securities to the 2011 Noteholders, our common stock has had a trading range with a low price of $5.50 per share and a high price of $54.75 per share.  There can be no assurance that the market prices of our common stock will not materially decrease again following our 1:25 reverse stock split, especially as holders of our convertible notes and convertible preferred stock and warrants sell the underlying shares issuable upon conversion or exercise of such securities, whether in accordance with the sale limits agreed upon or otherwise. From January 2011 through January 20, 2012, our common stock traded an average of approximately 460,107 shares per day.   

 

The interests of our current stockholders in the equity of our company are subject to substantial dilution.

 

We have a significant number of warrants and options outstanding and a large amount of convertible notes and convertible preferred stock which “over hang” the market for our common stock. As of January 20, 2012, we had

 

  · warrants outstanding that are currently exercisable for up to an aggregate of approximately 369 million shares of common stock (subject to adjustment) at a weighted average exercise price of $0.07 per share, including approximately 313,500,000 Series A Warrant Shares (subject to adjustment) initially exercisable at approximately $0.055825 per share (subject to adjustment);

  

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  · options outstanding and vested within sixty day that are currently exercisable for up to an aggregate of approximately 12 million shares of common stock (subject to adjustment) at a weighted average exercise price of $0.46 per share.
  · approximately 282 million shares of common stock (subject to adjustment) potentially issuable on conversion of our outstanding convertible notes;
  · approximately 82  million shares of common stock (subject to adjustment) potentially issuable on conversion of our outstanding Series B Convertible Preferred Stock;
  · approximately 10 million shares of common stock (subject to adjustment) potentially issuable on conversion of our outstanding Series C Convertible Preferred Stock; and
  · approximately 43 million shares of common stock pursuant to settlement and related agreements.

 

If all such shares were issued to the holders of such warrants, options, and convertible securities, at the per share exercise or conversion prices then in effect, ranging between $0.06 to $7.00 (subject to adjustment), the holders of such warrants and convertible securities would own 93% of our 805 million then outstanding shares of common stock, and our current stockholders would own 7% of such common stock. Exercise of these warrants and options, and conversion of these convertible notes and preferred stock will result in immediate substantial dilution in the interests of other stockholders as a result of the additional common stock that would be issued.

 

 Our stock price and ability to finance may be adversely affected by our outstanding convertible securities and warrants.

 

Sales of the shares of our common stock issuable upon exercise of the warrants and upon conversion of our convertible securities, would likely have a depressive effect on the market price of our common stock.  Further, the existence of, and/or potential exercise or conversion of all or a portion of these securities, create a negative and potentially depressive effect on our stock price because investors recognize that they “over hang” the market at this time.  As a result, the terms on which we may obtain additional financing during the period any of these warrants or convertible securities remain outstanding may be adversely affected by the existence of such warrants and convertible securities.  

 

Insiders have substantial control over us, and they could delay or prevent a change in our corporate control even if our other stockholders wanted it to occur.

 

Our executive officers, directors, and principal stockholders beneficially own, in the aggregate, approximately 16% of our outstanding common stock at January 20, 2012.  These stockholders are able to control all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions.  This could delay or prevent an outside party from acquiring or merging with us even if our other stockholders wanted it to occur.

 

On a fully diluted basis, the percentage ownership of our executive officers and directors will be of approximately 1.3%. The percentage of beneficial ownership is based on 57,044,958 shares of common stock outstanding as of January 20, 2012, assuming (i) the conversion of all outstanding notes into 282,406,225 shares of common stock, (ii) conversion of all outstanding preferred stock and accrued dividends into 92,771,729 shares of common stock, (iii) exercise of warrants into 368,906,516 shares of common stock, (iv) exercise of options into 12,345,213 shares of common stock and (v) issuance of 43,072,232 shares of common stock pursuant to settlement and related agreements.

 

Our common stock is a “penny stock” and may be difficult to sell.

 

The SEC has adopted regulations which generally define a “penny stock” to be an equity security that has a market price of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to specific exemptions. The market price of our common stock is less than $5.00 per share and, therefore, it may be designated as a “penny stock” according to SEC rules.  This designation requires any broker or dealer selling these securities to disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities.  These rules may restrict the ability of brokers or dealers to sell our common stock and may affect the ability of investors to sell their shares.

 

The market for penny stocks has experienced numerous frauds and abuses which could adversely impact investors in our stock.

 

Penny stocks are frequent targets of fraud or market manipulation.  Patterns of fraud and abuse include:

 

  · Control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer;

 

  · Manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases;

 

  · “Boiler room” practices involving high pressure sales tactics and unrealistic price projections by inexperienced sales persons;

  

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  · Excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and

 

  · Wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the inevitable collapse of those prices with consequent investor losses.

 

Our management is aware of the abuses that have occurred historically in the penny stock market.

 

Our stock price is volatile, which could adversely affect your investment.

 

Our stock price, like that of other international bio-pharma and/or cancer diagnostic companies, is highly volatile. Our stock price may be affected by such factors as:

 

  · clinical trial results;

 

  · product development announcements by us or our competitors;

 

  · regulatory matters;

 

  · announcements in the scientific and research community;

 

  · intellectual property and legal matters; and

 

  · broader industry and market trends unrelated to our performance.

 

In addition, if our revenues or operating results in any period fail to meet the investment community’s expectations, there could be an immediate adverse impact on our stock price.

 

Our publicly filed reports are subject to review by the SEC, and any significant changes or amendments required as a result of any such review may result in material liability to us and may have a material adverse impact on the trading price of the Company’s common stock.

 

The reports of publicly traded companies are subject to review by the SEC from time to time for the purpose of assisting companies in complying with applicable disclosure requirements, and the SEC is required to undertake a comprehensive review of a company’s reports at least once every three years under the Sarbanes-Oxley Act of 2002. SEC reviews may be initiated at any time. We could be required to modify, amend or reformulate information contained in prior filings as a result of an SEC review. Any modification, amendment or reformulation of information contained in such reports could be significant and result in material liability to us and have a material adverse impact on the trading price of the Company’s common stock.

 

We do not intend to pay dividends on our common stock in the foreseeable future.

 

We currently intend to retain any earnings to support our growth strategy and do not anticipate paying dividends in the foreseeable future.

  

 

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SELECTED FINANCIAL INFORMATION

 

The selected financial information set forth below is derived from our unaudited statement of operations for the comparative nine month periods ended September 30, 2011 and 2010, and the audited financial statements for our fiscal years ended December 31, 2010 and 2009, respectively, which appear elsewhere in this prospectus commencing on page 71 and which include footnotes required under generally accepted accounting principles.  Prospective investors are urged to carefully review such detailed financial statements in their entirety.

 

   Nine Months Ended September 30,
   2011  2010
       
Net revenues  $257,609   $116,840 
Cost of sales   44,712    36,810 
Gross profit   212,897    80,030 
           
Operating expenses:          
Research and development   149,604    340,689 
Selling, general and administrative   5,684,054    6,444,700 
Total operating expenses   5,833,658    6,785,389 
Loss from operations   (5,620,761)   (6,705,359)
Other income (expense):          
Interest expense   (50,449,285)   (33,662,478)
Other income (expense), net   (321)   29,997 
Change in fair value of derivative liabilities   32,145,064    5,681,415 
Impairment on investment in JPI   -    (2,761,993)
Loss on legal settlement   (10,987,055)   - 
Gain (loss) on extinguishment of debt   (3,664,564)   (1,002,270)
Loss on guarantee   (840,237)   - 
Total other income (expense), net   (33,796,398)   (31,715,329)
Loss before provision for income taxes   (39,417,159)   (38,420,688)
Provision for income taxes   -    - 
Net loss  $(39,417,159)  $(38,420,688)

 

   Year Ended December 31,
   2010  2009
Net revenues  $231,662   $158,017 
Cost of sales   46,325    37,671 
Gross profit   185,337    120,346 
Operating expenses:          
Research and development   673,918    552,391 
Selling, general and administrative   9,882,737    6,565,193 
Impairment of receivable from JPI   2,675,000    - 
Impairment of intangible asset   1,058,333    - 
Total operating expenses   14,289,988    7,117,584 
Loss from operations   (14,104,651)   (6,997,238)
Other income (expense):          
Interest expense   (38,485,599)   (2,423,271)
Other expense, net   (13,613)   (328,071)
Change in fair value of derivative liabilities   (9,366,515)   648,313 
Impairment on investment in JPI   (20,500,000)   - 
Loss on extinguishment of debt   (3,241,475)   - 
Loss on deconsolidation of JPI   -    (1,953,516)
Total other expense, net   (71,607,202)   (4,056,545)
Loss from operations before benefit for income taxes   (85,711,853)   (11,053,783)
Benefit for income taxes   -    (1,000)
Net loss  $(85,711,853)  $(11,052,783)

  

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USE OF PROCEEDS

 

We will not receive any net proceeds from sales of shares of our common stock being registered for resale by the Selling Stockholders named in this prospectus.    

 

We may, however, receive proceeds from the issuance of shares of our common stock upon the exercise of the Series A Warrants.

 

If all of the outstanding Series A Warrants were exercised for cash at an exercise price of approximately $0.056 per share (subject to adjustment), we could receive up to a total of approximately $17.4 million.  However, the holders of Series A Warrants are only obligated to exercise such warrants for cash if the underlying Series A Warrant Shares have been registered for resale under a current registration statement declared effective by the SEC under the Securities Act of 1933, as amended.  In addition, none of the outstanding Series A Warrants are exercisable until March 31, 2012, and only 16 million of the maximum 313.5 million Series A Warrant Shares are being registered for resale in the registration statement of which this prospectus is a part.   Even if all such 16 million Series A Warrant Shares are purchased for cash upon the holders’ election to exercise Series A Warrants, we would only receive approximately $896,000 of gross proceeds from such exercises.

 

We intend to use any proceeds we may receive from the cash exercise of the Series A Warrants for working capital and other general corporate purposes. Only a portion of the shares of our common stock, issuable upon exercise of the Series A Warrants are being offered under this prospectus by the selling stockholders. There is no assurance that any or all of the Series A Warrants will ever be exercised or that additional shares underlying the Series A Warrants will be registered for resale.

 

MARKET FOR OUR COMMON STOCK, DIVIDENDS AND

RELATED STOCKHOLDER INFORMATION

 

Since June 23, 2011, our stock has traded on the OTCQX under the symbol RXPC.  As previously disclosed in our other public filings, we were not in compliance with certain criteria for continued listing on the NYSE Amex and were delisted in June 2011.

 

Our stock price, like that of some other cancer diagnostic and pharmaceutical companies, is highly volatile. Our stock price may be affected by a number of factors, and especially significant sales of shares by 2011 Noteholders and holders of our RDO Notes.

In addition, if our revenues or earnings in any period fail to meet the investment community’s expectations, there could be an immediate adverse impact on our stock price.

 

Our common shares are currently listed on the OTCQX under the symbol “RXPC”. On January 20, 2012, the closing price of our common shares on OTCQX was $0.06.

 

Set forth in the following table are the high and low closing prices for the years ended December 31, 2010 and 2009, and through the quarter ended December 31, 2011 for our common stock.

 

    High     Low  
Quarter Ended              
31-Mar-09   $ 34.50     $ 17.50  
30-Jun-09   $ 33.75     $ 18.75  
30-Sep-09   $ 25.25     $ 13.75  
31-Dec-09   $ 15.00     $ 5.50  
Quarter Ended              
31-Mar-10   $ 9.50     $ 5.50  
30-Jun-10   $ 54.75     $ 5.75  
30-Sep-10   $ 25.75     $ 10.00  
31-Dec-10   $ 25.50     $ 7.25  
Quarter Ended              
31-Mar-11   $ 41.75     $ 13.22  
30-Jun-11   $ 12.81     $ 3.25  
30-Sep-11   $ 3.88     $ 0.07  
31-Dec-11   $ 0.30     $ 0.06  

  

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Record Holders.   As of January 20, 2012, there were approximately 1,054 record holders of our common stock.

 

Dividend Policy.  We have not paid any cash dividends since our inception and do not contemplate paying dividends in the foreseeable future. We anticipate that earnings, if any, will be retained for the operation of our business.

 

Securities Authorized for Issuance Under Equity Compensation Plans.  

 

The following provides information concerning compensation plans under which equity securities of the Company were authorized for issuance as of December 31, 2010:

 

Plan Category  Number of Securities to be
Issued Upon Exercise of
Outstanding Options,
Warrants and Rights
   Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
   Number of Securities Remaining
Available for Future Issuance
Under Equity Compensation Plans
(Excluding Securities Reflected in
Column (a))
 
    (a)    (b)    (c ) 
Equity Compensation plans approved by security holders   294,720    18.75    64,650 
Equity Compensation plans not approved by security holders   -    -    - 
Total   294,720    18.75    64,650 

 

On November 4, 2011, our stockholders approved our 2011 stock option plan whereby an aggregate of up to 10% of the total fully diluted issued and outstanding shares of common stock may be issued and awarded to our employees, consultants and directors, up to a maximum of not more than 500 million shares of common stock.  The plan is administered by the Compensation Committee, which will grant equity awards and establish the terms and conditions for vesting and exercise.

 

On November 4, 2011, our board of directors approved the issuance of options to purchase up to 20 million shares of our common stock at an exercise price of $0.11 per share (equal to the greater of $0.11 per share or the closing market price of our common stock on November 4, 2011) to certain executive officers, directors and employees and to our legal counsel.  All of such options, when exercisable, may be exercised by the holder by exchanging option shares at a fair market value on the date of exercise in lieu of cash for payment of the exercise price. See “MANAGEMENT – Stock Options” elsewhere in this prospectus. 

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our financial condition and result of operations contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in the "Risk Factors" section of the other reports we file with the Securities and Exchange Commission. Actual results may differ materially from those contained in any forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” the negative of such terms or other comparable terminology. These statements are only predictions.

 

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

               

The following discussion and analysis of financial condition and results of operations relates to the operations and financial condition reported in the financial statements of Radient Pharmaceuticals Corporation for the  years ended December 31, 2010 and 2009 and the quarter ended September 30, 2011 and should be read in conjunction with such financial statements and related notes included in this report.

 

The Company

 

We are engaged in the research, development, manufacture, sale and marketing of Onko-Sure®, a proprietary in-vitro diagnostic (IVD) cancer test kit.  Onko-Sure® is sold as a blood test for cancer in the Europe (CE Mark certified), India, Japan,, Taiwan, Korea, Vietnam and in Chile (research use).  In the United States, it is cleared by the FDA only for the monitoring of colorectal cancer and is approved in Canada (by Health Canada) for lung cancer detection and lung cancer treatment monitoring.

 

For fiscal year 2010 and 2009, the Company generated approximately $232,000 and $158,000, respectively, in the sales of the Company’s Onko-Sure® IVD cancer diagnostic test kits.  For the nine months ended September 30, 2011 and 2010, the Company generated approximately $258,000 and $117,000 respectively, in the sales of the Company’s Onko-Sure® IVD cancer diagnostic test kits.

   

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Subject to receipt of adequate working capital financing, we believe that revenues from Onko-Sure® will significantly increase in 2012 as a result of initiatives including outreach to healthcare professionals and the negotiation of additional distribution agreements anticipated to expand the IVD cancer diagnostic test into key international markets. In addition to increasing our distribution network, we are also negotiating lab partner agreements with laboratories certified under the Clinical Laboratory Improvement Act (“CLIA”) which will purchase Onko-Sure® for cancer testing. However, the success of our distribution strategy for these products in 2012 and thereafter is dependent upon a number of factors, including obtaining adequate working capital financing. Accordingly, we may not be able to implement our distribution strategy at the rate we anticipate, which will have a materially adverse effect on anticipated 2012 revenues. 

 

We manufacture our proprietary Onko-Sure® cancer test kits at our licensed manufacturing facility located at 2492 Walnut Avenue, Suite 100, in Tustin, California. We are an FDA approved Good Manufacturing Practices manufacturing facility. We maintain a current Device Manufacturing License issued by the State of California, Department of Health Services, Food and Drug Branch.

 

Our Revised Strategic Focus

 

We refocused our business on the development, manufacture and marketing of advanced medical diagnostic products, including our Onko-Sure®, a proprietary in-vitro diagnostic cancer test kit. During the second half of fiscal year 2009, we repositioned various business assets that we believed would enable us to monetize the value of such assets either through new partnerships, separate potential IPO’s, or possible sales. These assets include: (i) our 97.4% ownership in China-based pharmaceuticals business, Jade Pharmaceuticals Inc. (“JPI”); and (ii) our 100% ownership of a proprietary cancer vaccine therapy technology: Combined Immunogene Therapy (“CIT”).  In connection with the deconsolidation of JPI, effective September 29, 2009, we reclassified JPI as a business investment, rather than as a condensed consolidated operating subsidiary. As of December 31, 2010, we wrote off and have fully impaired our investment in JPI.  See accompanying financial statements for the year ended December 31, 2010.

 

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

 

Onko-Sure® Cancer Test Kit

 

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

 

Our Onko-Sure® product is manufactured at our Tustin, California based facility and is sold to third party distributors, who then sell directly to CLIA certified reference laboratories in the United States (“US”) as well as clinical reference labs, hospital laboratories and physician operated laboratories in the international markets.

 

Our Onko-Sure® in- vitro diagnostic test enables physicians and their patients to effectively detect and/or monitor the treatment and recurrence of solid tumors by measuring the accumulation of specific breakdown products in the blood called Fibrin and Fibrinogen Degradation Products (FDP). Onko-Sure® is a simple, non-invasive blood test used for the detection and/or monitoring of 19 different types of cancer including: colon, rectal, lung, stomach, tongue, ovarian, uterine, liver, pancreatic, bladder, brain, esophageal, hematological, breast, prostate, cervical, thyroid, lymphoma and trophoblast cancers. We believe that Onko-Sure® can be a valuable diagnostic tool in the worldwide battle against cancer, the second leading cause of death worldwide. Because the Onko-Sure® test kit is a non-invasive blood test, we believe that there are no side effects of the administration of the test. As with other cancer diagnostic products, false positive and false negative test results could pose a small risk to patient health if the physician is not vigilant in following up on the Onko-Sure® test kit results with other clinically relevant diagnostic modalities. While the Onko-Sure®, like other blood biomarker tests, could be helpful in cancer detection, the attending physician is required to use other testing methods to confirm the type of cancer.

 

We believe that Onko-Sure® has the potential to be used as a general cancer screening test. We are involved with research conducted with CLIA Laboratories to expand on the Clinical utility of Onko-Sure®.

 

In-Vitro Cancer Research and Development

 

During the year ended December 31, 2010, we incurred expenses of $673,918 in research and development related to the Onko-Sure®, as compared to $552,391 for the same period in 2009.  During the nine months ended September 30, 2011, we incurred expenses of $149,604 in research and development related to the Onko-Sure®, as compared to $340,689 for the same period in 2010. These expenditures were incurred as part of our efforts to produce Onko-Sure® components which will increase our manufacturing capacity, improve the existing Onko-Sure®.

 

During the year ended December 31, 2010, the majority of expenses incurred were to fund:

  

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

 

  · Evaluate Onko-Sure® as an additional marker in an existing test to determine if the addition will enhance and improve analytical performance.

  

We expect expenditures for research and development to grow during 2012 due to additional staff and consultants needed to support additional research in different cancer types, support research to continually improve our Onko-Sure® test kit as well as research potential veterinary use of the test.

 

In addition, we will continue to research the validity of our next generation version of our current Onko-Sure® test kit. We anticipate additional costs will be incurred to fund research, to expand on the clinical utility of Onko-Sure® and development costs associated with entry into new markets.

 

Cancer Therapeutics

 

In 2001, we acquired the CIT technology, which forms the basis for a proprietary cancer vaccine. Our CIT technology is a U.S. patented technology (patent issued May 25, 2004). The Cancer Therapeutics division is engaged in commercializing the CIT technology. To date, we have not generated any revenues and incurred minimal expenses, mostly related to patent protection, for this technology. As of December 31, 2010, we fully impaired the value of our intangible asset related to this technology.

 

In December 2010, we formed NuVax Therapeutics, Inc. (“NuVax”) with Javia’s CEO Dr. Umesh Bhatia by creating a platform to expand the planned collaboration to include significantly expanded clinical trials in multiple international locations and in the U.S., and the in-licensing of other novel cancer fighting technologies. All rights to our CIT technology will be transferred to NuVax, currently our 100% wholly-owned subsidiary. All further development and commercialization of CIT and other to-be licensed novel cancer fighting technologies will be made at NuVax.

 

In January 2011, NuVax signed four exclusive license agreements with the University of Florida Research Foundation, Inc. (“UFRF”), for the development and marketing of a cancer therapeutic product developed by the UFRF. In July 2011, the UFRF terminated the agreements due to lack of funding.

 

On August 29, 2011, due to lack of funding and activity, Umesh Batia resigned as CEO and Director of NuVax.  

 

As of the date of this report, we have not generated any revenues and incurred minimal expenses for NuVax. Until we can complete funding for NuVax, we will continue to have minimal activity in NuVax.

 

Critical Accounting Policies

 

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.  The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.  We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis of making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions and the differences could be material.

 

We believe the following critical accounting policies, among others, affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:

 

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

 

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

  

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

 

Valuation of Intangible Assets. We evaluate the carrying value of our long-lived assets for impairment whenever events or changes in circumstances indicate that such carrying values may not be recoverable. We use our best judgment based on the current facts and circumstances relating to our business when determining whether any significant impairment factors exist. We consider the following factors or conditions, among others, that could indicate the need for an impairment review:

 

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

 

  · market projections for cancer research technology;

 

  · our ability to obtain patents, including continuation patents, on technology;

 

  · significant changes in our strategic business objectives and utilization of the assets;

 

  · significant negative industry or economic trends, including legal factors; and

 

  · potential for strategic partnerships for the development of our patented technology.

 

If we determine that the carrying values of long-lived assets may not be recoverable based upon the existence of one or more of the above indicators of impairment, our management performs an undiscounted cash flow analysis to determine if impairment exists. If impairment exists, we measure the impairment based on the difference between the asset’s carrying amount and its fair value, and the impairment is charged to operations in the period in which the long-lived asset impairment is determined by management. Based on our analysis, we determined the intangible asset of the CIT technology was impaired and recorded an impairment charge for the remaining carrying value of this long-lived asset as of December 31, 2010.

  

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The carrying value of our investment in JPI represented our 97.4 % ownership interest in JPI, accounted for under the cost method. The ownership interest is not adjusted to fair value on a recurring basis. Each reporting period we assessed the fair value of our ownership interest in JPI in accordance with FASB ASC 325-20-35 paragraphs 1A and 2. At least annually, we conduct an impairment analysis in accordance with the provisions within FASB ASC 320-10-35 paragraphs 25 through 32.

 

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

 

During 2009 and 2010, we entered into several distribution agreements for various geographic locations with  third parties. Under the terms of some of the agreements, we sell products to the distributor at a base price that is the greater of a fixed amount (as defined in each agreement) or 50% of the distributor’s invoiced Net Sales price (as defined) to its customers. The distributor is required to provide us quarterly reconciliations of the distributor’s actual invoiced prices at which time the price becomes fixed and determinable by us. Until the price is fixed and determinable, we defer the recognition of revenues under these arrangements.

 

 Deferred Taxes. We record a valuation allowance to reduce the deferred tax assets to the amount that is more likely than not to be realized. We have considered estimated future taxable income and ongoing tax planning strategies in assessing the amount needed for the valuation allowance. Based on these estimates, all of our deferred tax assets have been reserved.

 

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

 

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

 

We account for equity instruments issued to consultants and vendors in exchange for goods and services in accordance with ASC 505. The measurement date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor’s performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement.

  

We account for equity awards issued to employees following ASC 718 which requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments, including stock options, based on the grant-date fair value of the award and to recognize the portion expected to vest as compensation expense over the period the employee is required to provide service in exchange for the award, usually the vesting period.

 

Beneficial Conversion Feature.  In certain instances, we enter into convertible notes that provide for an effective or actual rate of conversion that is below market value, and the embedded conversion feature does not qualify for derivative treatment (a “BCF”).  In these instances, we account for the value of the BCF as a debt discount, which is then amortized to expense over the life of the related debt using the straight-line method which approximates the effective interest rate method.

 

Derivative Financial Instruments. We apply the provisions of FASB ASC 815-10, Derivatives and Hedging (“ASC 815-10”). Derivatives within the scope of ASC 815-10 must be recorded on the balance sheet at fair value. During the year ended December 31, 2010, we issued convertible debt with warrants and recorded derivative liabilities related to a reset provision associated with the embedded conversion feature of the convertible debt and a reset provision associated with the exercise price of the warrants. We compute the fair value of these derivative liabilities on the grant date and various measurement dates using the Binomial Lattice option pricing model. Due to the reset provisions within the embedded conversion feature and a reset provision associated with the exercise price of the warrants, we have determined that the Binomial Lattice Model was most appropriate for valuing these instruments. 

 

Accounting for Debt Modifications and Extinguishments.  If a debt modification is deemed to have been accomplished with debt instruments that are substantially different, the modification is accounted for as a debt extinguishment in accordance with FASB ASC 470-50, whereby the new debt instrument is initially recorded at fair value, and that amount is used to determine the debt extinguishment gain or loss to be recognized and the effective rate of the new instrument.  If the present value of the cash flows under the terms of the new debt instrument is at least ten percent different from the present value of the remaining cash flows under the terms of the original instrument, the modification is deemed to have been accomplished with debt instruments that are substantially different. If it is determined that the present values of the original and new debt instruments are not substantially different, then a new effective interest rate is determined based on the carrying amount of the original debt instrument and the revised cash flows. 

  

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Results of Operations

 

Results of Operations for the Nine Months Ended September 30, 2011 Compared to Nine Months Ended September 30, 2010

 

   Nine Months Ended September 30,   Difference 
   2011   2010   $   % 
                 
Net revenues  $257,609   $116,840   $140,769    120.48%
Cost of sales   44,712    36,810    7,902    21.47%
Gross profit   212,897    80,030    132,867    166.02%
                     
Operating expenses:                    
Research and development   149,604    340,689    (191,085)   56.09%
Selling, general and administrative   5,684,054    6,444,700    (760,646)   -11.80%
Total operating expenses   5,833,658    6,785,389    (951,731)   -14.03%
Loss from operations   (5,620,761)   (6,705,359)   (1,084,598)   -16.18%
Other income (expense):                    
Interest expense   (50,449,285)   (33,662,478)   (16,786,807)   49.87%
Other income (expense), net   (321)   29,997    (30,318)   -101.07%
Change in fair value of derivative liabilities   32,145,064    5,681,415    26,463,649    465.79%
Impairment on investment in JPI   -    (2,761,993)   2,761,993    -100.00%
Loss on legal settlement   (10,987,055)   -    (10,987,055)   100.00%
Gain (loss) on extinguishment of debt   (3,664,564)   (1,002,270)   (2,662,294)   265.63%
Loss on guarantee   (840,237)   -    (840,237)   100%
Total other expense, net   (33,796,398)   (31,715,329)   (2,081,069)   6.56%
Loss before provision for income taxes   (39,417,159)   (38,420,688)   (996,471)   2.59%
Provision for income taxes   -    -    -    - 
Net loss  $(39,417,159)  $(38,420,688)  $(996,471)   2.59%

 

Net Revenues

 

Net revenues for the nine months ended September 30, 2011 was $257,609 compared to $116,840 for the same period in 2010. This is an increase of approximately 120% and is due to increased sales activity and orders for the Onko-Sure® test kits and the recognition of $24,750 in deferred revenues. Revenues were earned from the sale of Onko-Sure ® cancer test kits. We increased efforts to develop our distribution networks and marketing of Onko-Sure®.  With USFDA clearance of our Onko-Sure ® product for clinical use, our goal is to enter into additional exclusive or non-exclusive distribution agreements for various regions. Due to our overall commercialization efforts, we expect that sales will increase in 2012.

 

We presently have distribution agreements in place for Onko-Sure® test kits in the U.S., Canada, Puerto Rico, India, Greece, Turkey, Israel, Vietnam, Australia, New Zealand, the United Kingdom, European Union, the Middle East, Russia, Hong Kong, Lao, Cambodia, Taiwan, and for South Korea. We also have a research use only distribution agreement in China.

 

In our effort to make progress in the marketing and distributing our Onko-Sure ® cancer test kit in the India market in April 2010 we executed a distribution agreement with Jaiva Guar Diagno (“JaivaGD”). Due to the inability of JaivaGD to obtain adequate financing, obtain governmental as well as private support for the launch of Onko-Sure ® in India, JaivaGD substantially reduced their purchase forecast for FY 2011. At this time, JaivaGD is unable to forecast the timing or the number, if any, of Onko-Sure ® test kits that will eventually be purchased for the India market. As of the date of this report, we have  received an order from India for 6 kits.

 

 Our expectations concerning future sales represent forward-looking statements that are subject to certain risks and uncertainties which could result in sales below those achieved in previous periods. Sales of Onko-Sure® cancer test kits in 2011 and 2012 could be negatively impacted by potential competing products, lack of adequate supply and overall market acceptance of our products.

 

Although the Company has obtained approval from the USFDA to market the then current formulation of the Onko-Sure® test kit, it has been determined that one of the key components of the Onko-Sure® test kit, the anti-fibrinogen-HRP is limited in supply and additional quantities cannot be purchased. We currently have two lots remaining which are estimated to produce approximately 20,000 test kits. Based on our current and anticipated orders, this supply is adequate to fill all orders in hand. Although we are exploring our ability to produce this component in-house so that we are in a position to have an unlimited supply of Onko-Sure® in the future, at this time we cannot give an estimate of time needed to complete this anti-fibrinogen-HRP replacement.”

  

22
 

   

Gross Profit

 

Gross profit increased approximately 166% to $212,897 for the nine months ended September 30, 2011 from $80,030 for the nine months ended September 30, 2010 due to increase in net revenues, improvement of manufacturing process and management of raw materials.

 

The major components of cost of sales include raw materials, wages and salary and production overhead. Production overhead is comprised of depreciation of manufacturing equipment, utilities and repairs and maintenance.

 

Research and Development

 

All research and development costs are comprised of expanding our research and development of the Onko-Sure® cancer test kit. During the nine months ended September 30, 2011, we incurred $149,604 on research and development expenses related to the Onko-Sure® cancer test kit, compared to $340,689 for the same period in 2010. This is a decrease of approximately 56%.

 

Subject to our ability to raise funding through financings, we expect research and development expenditures to increase during 2012 due to:

 

  · Additional staff and consultants needed to support a sales growth expected as a result of marketing activities;

 

  · Additional costs involved with consultants and the research conducted with CLIA Laboratories to expand on the clinical utility of Onko-Sure®;

 

  · Costs necessary to conduct additional clinical studies;

 

  · Exploring the use  of Onko-Sure® for the veterinary marketplace;

 

  · Research associated with antibody purification,  and

 

  · Additional collaboration costs to cover validation of this product for other types of cancers worldwide.

 

Selling, General and Administrative

 

Selling, general and administrative expenses were $5,684,054 for the nine months ended September 30, 2011 as compared to $6,444,700 in 2010.

 

Selling, general and administrative expenses consist primarily of consulting (including financial consulting) and legal expenses, director fees, regulatory compliance, professional fees related to patent protection, payroll, payroll taxes, investor and public relations, professional fees, and stock exchange and shareholder services expenses. Included in selling, general and administrative expenses were non-cash expenses incurred during the nine months ended September 30, 2011 and 2010, respectively, of $1,526,099 and $2,355,289 for common stock, options and warrants issued to consultants for services and $31,180 and $173,758 for options and common stock issued to employees and directors. The decrease in selling, general and administrative expenses is primarily due to decrease in cash and non-cash expenses of investor relations of approximately $1,308,000 offset by increase of $528,000 in accounting, legal, and other professional fees.

  

23
 

   

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

 

   For the nine months ended         
   September 30,       % 
   2011   2010   Change   Change 
                 
Investor relations (including value of warrants/common stock shares)  $1,541,695    2,849,673   $(1,307,978)   -45.90%
Salary and wages (including value of options)   1,252,225    1,306,297    (54,072)   -4.14%
Accounting and other professional fees   1,875,342    1,346,966    528,376    39.23%
Stock Exchange Fees   102,500    103,318    (818)   -0.79%
Directors fees (including value of options)   144,680    122,968    21,712    17.66%
Rent and office expenses   153,289    138,241    15,048    10.89%
Employee benefits   99,589    96,411    3,178    3.30%
Travel and entertainment   198,581    159,091    39,490    24.82%
Insurance   60,840    42,592    18,248    42.84%
Taxes and licenses   58,306    72,494    (14,188)   -19.57%
Other   197,007    206,649    (9,642)   -4.67%
Total  $5,684,054   $6,444,700   $(760,646)   -11.80%

 

Other Income (Expense)

 

The increase of $2,081,069 in total other expenses, net is primarily due to increase of $26,463,649 in gain due to decrease in fair value of derivatives liabilities, offset by $2,662,294 increase in loss on extinguishment of debt, the $10,987,055 increase in loss on legal settlement expense and the $16,786,807 increase in interest expense from the prior year for the nine months ended September 30, 2011.

 

Interest Expense

 

Interest expense for the nine months ended September 30, 2011 and 2010 was $50,449,285 and $33,662,478, respectively.

 

Interest expense increased due to the issuance of convertible debt instruments with warrants treated as derivative liabilities, penalties related to trigger events and defaults on convertible debt, and the amortization of the related debt discounts and debt issuance costs during the nine months ended September 30, 2011.

 

Interest expense is primarily comprised of (i) $8,179,688 in excess fair value of the debt discount, recorded at origination, for the January 2011 Financing and July Exchanged Notes for the derivatives associated with the conversion feature and warrants, (ii) $4,731,862  in accrued interest and penalties added to derivatives, (iii) $20,208,179 of amortization of debt discounts and debt issuance costs on convertible debt balances, (iv) $485,246 in incremental costs of re-pricing warrants in connection with the exchange of the Senior Notes into convertible debt, and (v) $15,551,761 in registration and default penalties and late fees added to the principal for the January 2011 Financing.

 

The following table describes the components of our interest expense by our debt issuances for the nine months ended September 30, 2011.

 

      Fair Value of 
Derivatives in 
Excess of Debt 
Discounts
   Penalties Added 
To Principal
   Interest and 
Penalties Added 
to Derivatives
   Amortization  
of Debt  
Issuance Cost
   Amortization  
of Debt  
Discount
   Other   Total 
        [1], [6]    [5]    [6]    [7]    [7]           
Convertible Debt:                                       
1st Closing      $-   $-   $1,090   $-   $-   $-   $1,090 
2nd Closing            32,934    45,693    112,613    1,466,391    -    1,657,631 
3rd Closing       -    219,446    100,489    42,006    749,429    -    1,111,370 
4th Closing       -    -    4,214    16,207    199,830    -    220,251 
January and July 2011 Notes       8,179,688    -    1,826,674    1,066,194    16,555,509    -    27,628,065 
Promissory Notes       -    234,553    2,753,702    -    -    -    2,988,255 
Incremental cost of re-pricing of warrants  [2]    -    -    -    -    -    485,246    485,246 
Registration, default, and late payment penalties  [3]    -    15,551,761    -    -    -    -    15,551,761 
Registration penalties paid in cash  [3]    -    -    -    -    -    126,563    126,563 
Interest on debt  [4]    -    -    -    -    -    679,053    679,053 
Total interest expense      $8,179,688   $16,038,694   $4,731,862   $1,237,020   $18,971,159   $1,290,862   $50,449,285 

       

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[1] This amount represents the excess fair value of the derivative liability associated with the embedded conversion feature and warrants beyond the full debt discount taken.

 

[2] This amount represents the incremental costs associated with the re-pricing of warrants issued in connection with the Senior Notes exchanged for convertible debt in January 2011.

 

[3] This amount represents registration penalties of $253,125 due to the registration of the shares underlying the January 2011 Notes not being declared effective as of March 31, 2011, late payment penalties of $326,425, and default penalties of $15,098,774 for the January 2011 Financing.

 

 [4] This amount represents the interest portion of the debt based on the respective interest rates as noted, during the nine months ended September 30, 2011.

 

[5] This represents penalties added to certain note holders in regards to their forbearance agreement and defaults.

 

[6] This represents the fair value of the derivative liability associated with the interest and penalties added to certain convertible  notes.

 

[7] Total amortization of debt discount and debt issuance costs for the nine months ended September 30, 2011 was $20,208,179.

 

In addition, in January 2011 we secured $7,500,000 in gross proceeds pursuant to the sale of convertible notes pursuant to a securities purchase agreement.  Net proceeds from the financing were approximately $6,820,000 and the aggregate principal amount was $8,437,500.  Two required note payments of $843,750 each were made in March and April 2011, leaving a balance of approximately $6.75 million outstanding.  On May 3, 2011, the Company failed to make the third installment and an event of default occurred. Therefore, starting May 2, 2011, the January 2011 Notes will accrue late charges at an interest rate of 24% per annum. As of May 20, 2011, approximately $97,000 was accrued. Currently, all of the five investors have submitted an Event of Default Redemption Notice to the Company.   In addition, the notes include a registration penalty of 1.5% of the outstanding balance per month for the shares which  are not registered.  Approximately $126,500 in registration penalties were paid in April 2011, and $126,500 were accrued for May 2011. The January 2011 Notes contain certain covenants which include a cash reserve covenant whereby the Company shall maintain in its bank accounts no less than $2,250,000 in unrestricted cash at all times.  In addition, the January 2011 Notes agreement restricts the use of proceeds to pay any other debt obligation. See, Recent Financial Restructuring Transactions above for an update on the current status of this transaction and the related securities.

 

Results of Operations for the Three Months Ended September 30, 2011 Compared to Three Months Ended September 30, 2010

 

   Three Months Ended September 30,   Difference 
   2011   2010   $   % 
                 
Net revenues  $102,238   $34,446   $67,792    196.81%
Cost of sales   15,559    6,697   $8,862    132.33%
Gross profit   86,679    27,749    58,930    212.37%
                     
Operating expenses:                    
Research and development   10,541    45,874   $(35,333)   -77.02%
Selling, general and administrative   1,877,851    2,320,540   $(442,689)   -19.08%
Total operating expenses   1,888,392    2,366,414    (478,022)   -20.20%
Loss from operations   (1,801,713)   (2,338,665)   (536,952)   -22.96%
Other income (expense):                    
Interest expense   (8,724,581)   (11,560,549)   2,835,968    -24.53%
Other income (expense), net   (2)   31,874    (31,872)   -99.99%
Change in fair value of derivative liabilities   12,312,333    2,922,826    9,389,507    321.25%
Gain (loss) on extinguishment of debt   1,001,275    (1,002,270)   2,003,545    -199.90%
Loss on guarantee   (840,237)   -    (840,237)   -100.00%
Total other income (expense), net   3,748,788    (9,608,119)   13,356,907    -139.02%
Loss before provision for income taxes   1,947,075    (11,946,784)   13,893,859    -116.30%
Provision for income taxes   -    -    -    - 
Net income (loss)  $1,947,075   $(11,946,784)   13,893,859    -116.30%

  

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 Net Revenues

 

Net revenues for the three months ended September 30, 2011 was $102,238 compared to $34,446 for the same period in 2010. This increase of approximately 197% is due to increased sales activity and orders for the Onko-Sure® test kits. We have increased efforts to develop our distribution networks and increased our sales force in our endeavor to increase commercialization of our product. With USFDA clearance of our Onko-Sure ® product for clinical use, our goal is to enter into additional exclusive or non-exclusive distribution agreements for various regions as well as selling directly to CLIA laboratories. Due to our overall commercialization efforts, we expect sales will continue to increase in 2012.

 

Gross Profit

 

Gross profit increased approximately 212% to $86,679 for the three months ended September 30, 2011 from $27,749 for the three months ended September 30, 2010 due to increased net revenues, improvement of manufacturing process and management of raw materials.

 

The major components of cost of sales include raw materials, wages and salary and production overhead. Production overhead is comprised of depreciation of manufacturing equipment, utilities and repairs and maintenance.

 

 Research and Development

 

All research and development costs are comprised of expanding our research and development of the Onko-Sure® test kit. During the three months ended September 30, 2011, we incurred $10,541 on research and development expenses related to the Onko-Sure® test kit, compared to $45,874 for the same period in 2010. This is a decrease of approximately 77%.

 

Subject to our abilities to raise additional funds through financings, we expect research and development expenditures to increase during 2011 due to:

 

  · Additional staff and consultants needed to support a sales growth expected as a result of marketing activities;

 

  · Additional costs involved with consultants and the research conducted with CLIA Laboratories to expand on the clinical utility ofOnko-Sure®;

 

  · Costs necessary to conduct additional clinical studies;

 

  · The introduction and distribution of Onko-Sure® into the veterinary marketplace; and

 

  · Additional collaboration costs to cover validation of this product for other types of cancers worldwide.

 

Selling, General and Administrative

 

Selling, general and administrative expenses were $1,877,851 for the three months ended September 30, 2011 as compared to $2,320,540 in 2010.

 

Selling, general and administrative expenses consist primarily of consulting (including financial consulting) and legal expenses, director fees, regulatory compliance, professional fees related to patent protection, payroll, payroll taxes, investor and public relations, professional fees, and stock exchange and shareholder services expenses.

 

 Included in selling, general and administrative expenses were non-cash expenses incurred during the three months ended September 30, 2011 and 2010, respectively, of $654,152 for investor relations and $1,018,662 for common stock, options and warrants issued to consultants for services and approximately $33,800 and $11,000 for options and common stock issued to employees and directors. The decrease in selling, general and administrative expenses is primarily due to (i) decrease in cash and non-cash expenses of investor relations of approximately $365,000, (ii) Decrease in accounting, legal, and other professional fees of approximately $149,000, (iii) increase in directors fees of approximately $23,000, (iv) decrease in travel and entertainment of approximately $52,000, and (v) increase in stock exchange fees of approximately $59,000.

 

The decrease the selling, general and administrative expenses is due to management’s continued efforts to manage selling, general and administrative expenses.

   

26
 

  

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

  

   For the three months ended         
   September 30,         
   2011   2010   Change   % Change 
                 
Investor relations (including value of warrants/common stock shares)  $654,152    1,018,662   $(364,510)   -35.78%
Salary and wages (including value of options)   436,681    449,302    (12,621)   -2.81%
Accounting and other professional fees   432,198    581,496    (149,298)   -25.67%
Stock Exchange Fees   20,000    (39,182)   59,182    -151.04%
Directors fees (including value of options)   33,780    11,000    22,780    207.09%
Rent and office expenses   55,908    47,518    8,390    17.66%
Employee benefits   31,116    30,193    923    3.06%
Travel and entertainment   36,699    88,958    (52,259)   -58.75%
Insurance   20,089    1,703    18,386    1079.61%
Taxes and licenses   31,610    31,778    (168)   -0.53%
Other   125,618    99,112    26,506    26.74%
Total  $1,877,851   $2,320,540   $(442,689)   -19.08%

 

Other Income (Expense)

 

The decrease of $13,356,907 in total other income (expense), net is primarily due to decrease in interest expense of $2,835,968, $2,003,545 increase in gain on extinguishment of debt and an increase in change  in fair value of derivative liabilities resulting in a gain of $9,389,507 from the prior year for the three months ended September 30, 2011.

 

Interest Expense

 

Interest expense for the three months ended September 30, 2011 was $8,724,581 as compared to $11,560,549, in 2010.

 

Interest expense decreased in the three months ended September 30, 2011 compared with the three months ended September 30, 2011 is due to lower amortization of the related debt discounts and debt issuance costs   already amortized in previous quarters.  Interest expense is comprised of (i) $158,083 in penalties added to the 2010 Notes in relation to the forbearance agreement, (ii) $234,553 in penalties added to the Promissory Notes for final settlement agreement, (iii) $109,750 in accrued interest and penalties added to derivatives, and $8,118,008 of amortization of debt discounts related to January 2011 Notes and July 2011 exchange of convertible debt.  The following table describes the components of our interest expense by our debt issuances for the three months ended September 30, 2011.

 

   Fair Value 
of
Derivatives in
Excess of
Debt
Discounts
   Penalties
Added To
Principal
   Interest and
Penalties
Added to
Derivatives
   Amortization
of Debt
Issuance Cost
   Amortization
of Debt
Discount
   Other   Total 
         (1)    (2)         (3)    (4)      
Convertible Debt:                                   
3rd Closing  $-   $158,083   $46,707   $-   $-   $-   $204,790 
January and July 2011 Notes   -    -    5,974    -    8,118,008    -    8,123,982 
Promissory Notes   -    234,553    57,069    -    -    -    291,622 
Interest on debt   -    -    -    -    -    104,187    104,187 
Total interest expense  $-   $392,636   $109,750   $-   $8,118,008   $104,187   $8,724,581 

    

(1) This represents penalties added to certain note holders in regard to their forebearance and settlement agreements.

 

(2) This represents the fair trade value of the derivative liability associated with the interest and penalties added to the.

  

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(3) This amount represents total amortization of debt discount for the three months ended September 30, 2011.

 

(4) This amount represents the interest portion of the notes based on the respective interest rates as noted, during the three months ended September 30, 2011.

 

Liquidity and Capital Resources

 

For the nine months ended September 30, 2011, the Company’s cash increased by $276,264 to $329,645, compared to a net increase in cash of $904,368 to $916,513 for the same period in 2010. This was mainly due to the financing completed in the respective periods.

 

Historically, our operations have not been a source of liquidity. At September 30, 2011, we had a significant amount of relatively short term indebtedness, and we may be unable to satisfy our obligations to pay interest and principal thereon. As of September 30, 2011, we had the following approximate amounts of outstanding short term indebtedness:

 

  (i) Accrued interest of approximately $532,000;

 

  (ii) Approximately $46,000 in unsecured convertible notes (2008 Convertible Notes) originally bearing default interest at 10% per annum increased to 18% per annum due to failure to pay the notes by September 29, 2010;

 

  (iii) Approximately $25,000 in senior unsecured convertible notes (Series 2 Senior Notes) bearing interest at 18% interest;

 

  (iv) Approximately $3,481,000 in convertible notes (July 2011 Notes), due in December 2011 bearing interest at 4%;

 

  (v) Approximately $4,712,000 in Series A convertible preferred stock (July 2011 Preferred Liability), due in December 2011, bearing dividend at 4%;

 

  (vi) Approximately $8,056,000 in unsecured convertible promissory notes (Promissory Notes),  due April 15, 2013, bearing an interest rate of 8% per annum, and;

 

There can be no assurance that the convertible indebtedness will be converted into equity, which is at the debt holder’s discretion and limited by the authorized number of  common shares. Absent full conversion of these debts or the receipt of a new financing or series of financings, our current operations do not generate sufficient cash to pay the interest and principal on these obligations when they become due. Accordingly, there can be no assurance that we will be able to pay these or our operating obligations which we may incur in the future.  See, Recent Financial Restructuring Transactions above for updates on the current status of certain of the above mentioned transactions and the related securities.

 

Operating activities

 

We used approximately $4.8 million and $6.1 million for the nine months ended September 30, 2011 and 2010, respectively in our operating activities. The major components are comprised of a net loss of approximately $39.4 million and $38.4 million for the nine months ended September 30, 2011 and 2010. For the nine months ended September 30, 2011, operating activities includes the following non-cash activities such as:

 

  (i) approximately $20,200,000 for the amortization of debt issuance costs and debt discounts,

 

  (ii) approximately $1,526,000 representing the fair market value of common stock, warrants and options expensed for services,

 

  (iii) approximately $485,000 representing the incremental value of re-pricing shares and warrants issued to former note holders,

 

  (iv) approximately $3,665,000 representing loss on extinguishment of debt,

 

  (v) approximately $16,165,000 representing additional principal added for penalties

 

  (vi) approximately $10,987,000 representing legal settlement expenses, and

  

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  (vii) approximately $12,912,000 representing interest expense related to fair value of derivative instruments granted.

 

The effect of the net loss was further offset by an aggregate gain from change in fair value of derivative liabilities of approximately $32,145,000.

 

Investing activities

 

We used net cash of $30,459 in investing activities for the purchase of equipment for the nine months ended September 30, 2011 compared with $124,482 for the same period in 2010 for the purchase of equipment and the advance for a note receivable.

 

Financing activities

 

Net cash provided by financing activities was $5,107,858 for the nine months ended September 30, 2011, primarily consisting of the net proceeds of $6,820,000 from the issuance of convertible debt, net proceeds of $101,920 from the exercise of warrants into common stock and, reduced by payments on the January 2011 Notes of $1,814,062. Net cash provided by financing activities was $7,126,488 for the nine months ended September 30, 2010, primarily consisting of the net proceeds of $6,308,000 from the issuance of convertible debt and net proceeds of $818,488 from the exercise of warrants.  As of September 30, 2011, we had approximately $330,000 of cash on hand.

 

Going Concern

 

The condensed consolidated financial statements have been prepared assuming we will continue as a going concern, which contemplates, the realization of assets and satisfaction of liabilities in the normal course of business. We incurred losses from continuing operations of $39,417,159 and $38,420,688 for the nine months ended September 30, 2011 and 2010, respectively, and had an accumulated deficit of $177,567,565 at September 30, 2011. In addition, we used cash in operating activities of continuing operations of $4,801,135 and had a working capital deficit of approximately $26.1 million, based on the face amount of the current portion of debt. These factors raise substantial doubt about our ability to continue as a going concern.

 

The Company’s monthly cash requirement of $330,000 per month based on the three month history and $450,000 per month on a annualized basis for operating expenses does not include any extraordinary items or expenditures, including cash payments for debt penalties or recurring principal and interest payments, payments for clinical trials for our Onko-Sure® test kit, research conducted through CLIA Laboratories or expenditures related to further development of the CIT technology, as no significant expenditures are anticipated other than recurring legal fees related to outstanding legal proceedings. Based on our current cash position, without additional financing we may not be able to pay our obligations past November 30, 2011.

 

We raised net proceeds of approximately $6.8 million in connection with convertible note and warrant purchase agreements during the nine months ended September 30, 2011.

 

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

 

There are significant risks and uncertainties which could negatively affect our operations. These are principally related to (i) the absence of substantive distribution network for our Onko-Sure® kits, (ii) the absence of any significant commitments or firm orders from our distributors, (iii) existing defaults and potential defaults in existing indebtedness, and (iv) failure to meet operational covenants in existing financing agreements which would trigger additional defaults or penalties. Our limited sales to date for the Onko-Sure ® test kit and the lack of distributors meeting their quarterly minimum purchase requirements make it impossible to identify any trends in our business prospects

 

Our only sources of additional funds to meet continuing operating expenses, fund additional research and development and fund additional working capital are through the sale of securities, and/or debt instruments. We are actively seeking additional debt or equity financing, but no assurances can be given that such financing will be obtained or what the terms thereof will be. We may need to discontinue a portion or all of our operations if we are unsuccessful in generating positive cash flow or financing for our operations through the issuance of securities.

 

 Year Ended December 31, 2010 Compared to Year Ended December 31, 2009

 

Introduction

 

As noted above, we deconsolidated the operations of JPI, located in China, effective September 29, 2009.  All comparative amounts shown below are exclusive of the financial results of operations of JPI in 2009.

 

29
 

   

   Year Ended December 31,  Difference
   2010  2009  $  %
Net revenues  $231,662   $158,017   $73,645    46.61%
Cost of sales   46,325    37,671    8,654    22.97%
Gross profit   185,337    120,346    64,991    54.00%
Operating expenses:                    
Research and development   673,918    552,391    121,527    22.00%
Selling, general and administrative   9,882,737    6,565,193    3,317,544    50.53%
Impairment of receivable from JPI   2,675,000    -    2,675,000    100.00%
Impairment of intangible asset   1,058,333    -    1,058,333    100.00%
Total operating expenses   14,289,988    7,117,584    7,172,404   * 
Loss from operations   (14,104,651)   (6,997,238)   (7,107,413)   * 
Other income (expense):                    
Interest expense   (38,485,599)   (2,423,271)   (36,062,328)   * 
Other expense, net   (13,613)   (328,071)   314,458    -95.85%
Change in fair value of derivative liabilities   (9,366,515)   648,313    (10,014,828)   * 
Impairment on investment in JPI   (20,500,000)   -    (20,500,000)   100.00%
Loss on extinguishment of debt   (3,241,475)   -    (3,241,475)   100.00%
Loss on deconsolidation of JPI   -    (1,953,516)   1,953,516    -100.00%
Total other expense, net   (71,607,202)   (4,056,545)   (67,550,657)   * 
Loss from operations before provision (benefit) for income taxes   (85,711,853)   (11,053,783)   (74,658,070)   * 
Provision (benefit) for income taxes   -    (1,000)   1,000    -100.00%
Net loss  $(85,711,853)  $(11,052,783)  $(74,659,070)   * 

 

* Percentage difference is over 100%

 

Net Revenues

 

Net revenues for the year ended December 31, 2010 was $231,662 compared to $158,017 for the same period in 2009. This increase of 47% is due to increased orders for the Onko-Sure® test kits.  During fiscal 2010 and 2009, we had four and three customers, respectively which represented approximately 94% and 92%, respectively of our net revenues.  For the year ended December 31, 2010 and 2009, two customers were based in the U.S. and represented approximately 59% and 27%, respectively of our net revenues and two customers were based outside the U.S. and represented approximately 35% and 65%, respectively of our net revenues.  Revenues were primarily earned from the sale of Onko-Sure® test kits. Our goal is to enter into additional exclusive or non-exclusive distribution agreements for various regions, and due to our overall commercialization efforts, we expect that sales will increase in 2011. 

 

In our effort to make progress in the marketing and distributing our Onko-Sure test in the India market, we executed a distribution agreement with Jaiva Guar Diagno (“JaivaGD”). Due to the inability of JaivaGD to obtain adequate financing, obtain governmental as well as private support for the launch of Onko-Sure in India, JaivaGD substantially reduced their purchase forecast for FY 2011. At this time, JaivaGD is unable to forecast the timing or the number, if any, of Onko-Sure test kits that will eventually be purchased for the India market.

 

Our expectations concerning future sales represent forward-looking statements that are subject to certain risks and uncertainties which could result in sales below those achieved in previous periods. Sales of Onko-Sure® test kits in 2011 could be negatively impacted by potential competing products, lack of adequate supply and overall market acceptance of our products.

 

We have a limited supply of one of the key components of the Onko-Sure® test kit. The anti-fibrinogen-HRP is limited in supply and additional quantities cannot be purchased. We currently have two lots remaining which are estimated to produce approximately 21,000 kits. Based on our current and anticipated orders, this supply is adequate to fill all orders in hand. We have been investigating alternatives and engaging in research and development to produce this component in house so that we can be in a position to have an unlimited supply of Onko-Sure® in the future.  However, we cannot assure that this anti-fibrinogen-HRP replacement will be completed.

 

Gross Profit

 

Gross profit increased approximately 54% to $185,337 for the year ended December 31, 2010 from $120,346 for the year ended December 31, 2009 due to increased sales volume of the Onko-Sure® test kit.

 

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The major components of cost of sales include raw materials, wages and salary and production overhead.  Production overhead is comprised of depreciation of manufacturing equipment, utilities and repairs and maintenance.

 

Research and Development

 

All research and development costs are comprised of funding the necessary research and development of the Onko-Sure® test kit for the USFDA.  During the year ended December 31, 2010, we incurred $673,918 on research and development expenses related to the Onko-Sure® test kit, compared to $552,391 for the same period in 2009.  This is an increase of approximately 22%, which is primarily due to increased studies of our product.

 

We expect research and development expenditures to increase during 2011 due to:

 

  · Additional staff and consultants needed to support an increase in sales;

 

  · Additional costs involved with consultants and research conducted with CLIA Laboratories to expand on the clinical utility of Onko-Sure®;

 

  · Costs necessary to conduct additional clinical studies;

 

  · Additional collaboration costs to cover validation of this product for other types of cancers worldwide; and

 

  · Additional consultant costs to get a current procedural terminology (“CPT”) code for the test to be covered by insurance policies.

 

Selling, General and Administrative

 

Selling, general and administrative expenses were $9,882,737 for the year ended December 31, 2010 as compared to $6,565,193 in 2009.

 

Selling, general and administrative expenses consist primarily of consulting (including financial consulting) and legal expenses, director and commitment fees, regulatory compliance, patent protection, payroll, payroll taxes, investor and public relations, professional fees, and stock exchange and shareholder services expenses.  Included in selling, general and administrative expenses were non-cash expenses incurred during the years ended December 31, 2010 and 2009, respectively, of $3,222,589 and $593,279 for common stock, options and warrants issued to consultants for services and $2,018,458 and $795,983 for options issued to employees and directors. The increase in selling, general and administrative expenses is primarily due to increase of cash and noncash expenses of investor relations and secondarily due to increased accounting and other professional fees.  The increases in these categories are related to the four closings of convertible debt financings during the year ended December 31, 2010 and the extensive work on SEC correspondence and Registration Statements during fiscal year 2010. The decrease in the remaining categories of the selling, general and administrative expenses is due to management’s continued efforts to manage selling, general and administrative expenses.

 

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

 

     For the year ended December 31,              
     2010     2009     $ Change     %  
Investor relations (including value of warrants/common stock shares)   $ 3,376,842     $ 975,936     $ 2,400,906       246 %
Salary and wages (including value of options)     3,247,653       2,606,330       641,323       25 %
Accounting and other professional fees     2,101,404       1,618,069       483,335       30 %
Directors fees (including value of options)     250,143       378,521       (128,378 )     -34 %
Rent and office expenses     205,198       177,387       27,811       16 %
Employee benefits     134,058       129,612       4,446       3 %
Travel and entertainment     206,743       150,304       56,439       38 %
Insurance     76,350       175,280       (98,930 )     -56 %
Taxes and licenses     87,261       96,476       (9,215 )     -10 %
Other     197,085       257,278       (60,193 )     -23 %
     Total   $ 9,882,737     $ 6,565,193     $ 3,317,544       51 %

 

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Impairments

 

In addition, we fully impaired the carrying value of the intangible asset of $1,058,333 and reserved the remaining balance of the receivable from JPI in amount of $2,675,000 as an impairment on receivable from JPI.

 

Other Income (Expense)

 

The increase of approximately $67.6 million in total other expenses, net is primarily due to approximately $36.1 million increase in interest expense due to the interest penalties, triggering events, issuance of debt instruments and warrants with derivative liabilities and amortization of the related debt discounts and debt issuance costs, approximately $3.2 million increase in loss on extinguishment of debt, loss of approximately $10 million from change in fair value of derivative liabilities, and an impairment on investment of $20.5 million for the year ended December 31, 2010, offset by the non recurring 2009 Loss on deconsolidation of JPI.

 

Interest Expense

 

Interest expense for the years ended December 31, 2010 and 2009 was $38,485,599 and $2,423,271, respectively.

 

Interest expense increased due to contractual obligations of the notes, the issuance of convertible debt instruments with embedded conversion features and warrants treated as derivative liabilities, penalties related to trigger events or defaults on convertible debt, and the amortization of debt discounts and debt issuance costs during the year ended December 31, 2010.

 

The significant increase in interest expense is primarily due to (i) $11,905,244 in excess fair value of the debt discount, recorded at origination, for the four closings in 2010 for the derivatives associated with the conversion feature and warrants, (ii) $2,682,576 related to additional interest and penalties recorded as derivative liabilities for the embedded conversion feature associated with the incremental principal and accrued interest added to the outstanding balance of the convertible debt; (iii) $8,207,030 in penalties added to the principal due to trigger events and penalties related to the forbearance agreement, and (iv) $13,479,950 of amortization of debt discounts and debt issuance costs on convertible debt balances (see the following table).

  

   [1]   [2],[4]       [3]         
   Fair Value 
of
Derivatives 
in Excess
of Debt 
Discounts
   Penalties 
Added 
 To 
Principal
   Interest
 and
Penalties 
added to 
Derivatives
   Amortization
of Debt 
Issuance
Cost
   Amortization 
of Debt
 Discount
   Total 
   [7]       [7]   [8]   [8]     
Senior Notes:                              
December 2008  $-   $-   $-   $169,947   $318,178   $488,125 
January 2009   -    -    -    119,279    327,808    447,087 
May 2009   -    -    -    348,276    782,043    1,130,319 
June 2009   -    -    -    128,386    273,366    401,752 
Other   -    187    -    77,568    140,361    218,116 
                               
Convertible Debt:                              
September 2008   -    113,269    -    410,454    1,741,910    2,265,633 
St. George   -    50,000    12,597    35,000    393,681    491,278 
1st Closing   -    861,817    325,727    112,000    651,165    1,950,709 
2nd Closing   3,968,028    3,953,316    1,240,359    315,221    3,811,792    13,288,716 
3rd Closing   7,414,307    2,748,333    962,113    227,189    2,571,654    13,923,596 
4th Closing   522,909    480,108    141,780    39,331    485,341    1,669,469 
                               
Incremental Cost of Shares and Warrants   [5]                            81,780 
Interest on Debt (excluding amounts added to principal)   [6]                            2,129,019 
Total Interest expense  $11,905,244   $8,207,030   $2,682,576   $1,982,651   $11,487,299   $38,485,599 

 

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[1] This amount represents the excess fair value of the debt discount related to the derivative liability associated with the embedded conversion feature and warrants (see Note 8 of the accompanying consolidated financial statements).

 

[2] This amount represents additional penalty interest and/or accrued interest added directly to the outstanding principal of the convertible debt for trigger events and penalties added related to the forbearance agreement

 

[3] This amount represents additional interest recognized for the increase in principal balance associated with the embedded conversion feature of the First, Second, Third, and Fourth Closings as a result of the Trigger Events.

 

[4] This amount includes $410,000 of additional penalty recognized for the default related to the registration rights agreements as a result of not being declared effective related to the First, Second, Third, and Fourth Closings in 2010.

 

[5] This amount represents the incremental costs associated with the additional shares and warrants issued in connection with the 2008 convertible debt that occurred during Q2 of 2010.

 

[6] This amount represents the interest portion of the debt based on the respective interest rates as noted in Note 8, during the year ended December 31, 2010.

 

Sum of [7] 14,587,820                   Total interest expense related to fair value of derivative instruments granted.

 

Sum of [8] 13,479,950                   Total amortization of debt discount and debt issuance costs.

 

Loss from Discontinued Operations

 

Summarized operating results of discontinued operations for the period January 1, 2009 through June 26, 2009 (date of sale) are as follows:

 

   Period Ended
December 31,
 2009
 
Revenue  $594,839 
Income (loss) before income taxes  $277,743 

 

Included in loss from discontinued operations, net are income tax expenses of $30,717 for the period January 1, 2009 through June 26, 2009 (date of sale). YYB’s tax rate was 15% through 2010 in accordance with the “Western Region Development Concession Policy” of the PRC government.

 

Loss from continuing operations

 

For the year ended December 31, 2010 the Company’s loss from continuing operations was $85,711,853 or ($2.88) per share compared to the year ended December 31, 2009 when the Company’s loss from continuing operations was $12,461,903 or ($0.75) per share.

 

Liquidity and Capital Resources

 

For the year ended December 31, 2010, the Company’s cash increased by $41,236 to $53,381, compared to a net decrease in cash and cash equivalents of $2,275,138 to $12,145 for the same period in 2009.

 

Historically, our operations have not been a source of liquidity. At December 31, 2010, we had a significant amount of relatively short term indebtedness that was in default or past due and we may be unable to satisfy our obligations to pay interest and principal thereon. As of December 31, 2010, we had the following approximate amounts of outstanding short term indebtedness:

 

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(i) Accrued interest of approximately $2,210,000;

 

(ii) Approximately $364,000 in unsecured convertible notes bearing default interest at 10% per annum increased to 18% per annum due to failure to pay the Notes by September 29, 2010. (See Note 8 of the accompanying consolidated financial statements.)  As of May 20, 2011, $317,500 of this amount was converted into shares of our common stock (see Note 16 of the accompanying consolidated financial statements).

 

(iii) Approximately $18.7 million in unsecured convertible notes bearing interest at 12% per annum, increased to 18% per annum upon the occurrence of trigger event, due one year from issuance. During the year ended December 31, 2010, the principal increased by approximately $9.4 million due to trigger events and default. These convertible notes are related to four closings during March and April of 2010.  As of May 20, 2011, approximately $17.7 million of this amount was converted into shares of our common stock ( see, “ 2010 Note and Warrant Purchase Agreements ” below and Note 16 of the accompanying consolidated financial statements).

 

(iv) A $140,000 unsecured bridge loan bearing interest at 12% per annum increased to 18% per annum due to nonpayment which was due October 9, 2009.  During the year ended December 31, 2010, the principal increased by approximately $57,000 due to default.  As of May 20, 2011, this amount was converted into shares of our common stock (see Note 16 of the accompanying consolidated financial statements).

 

(v) Approximately $4.4 million in senior unsecured promissory notes bearing interest at 18% interest, payable quarterly in cash, which are due between December 2010 and May 2011. During the year ended December 31, 2010, the principal increased by approximately $888,000 (which is recorded as loss on extinguishment in accordance with relevant accounting guidance) due to failure to pay interest due on December 1, 2009 or March 1, 2010. In order to resolve the defaults and to preserve as much cash as possible for operations, management put together various exchange agreements (the "Debt Exchanges") to enter into with its the debt holders, which was subject to shareholder approval and NYSE Amex approval of such share issuances, pursuant to which the debt holders would exchange their outstanding Notes or other obligations for shares of the Company's common stock. (See Note 8 of the accompanying consolidated financial statements.)  As of May 20, 2011, approximately $4.39 million of this amount was converted into shares of our common stock (see Note 16 of the accompanying consolidated financial statements).

 

We obtained stockholder approval on December 3, 2010 to restructure and convert a significant portion of the indebtedness referred to in (ii) through (v) above, and NYSE Amex approval on January 3, 2011; however, there can be no assurance that such indebtedness will be restructured or converted into equity, which is at the debt holder’s discretion.  Absent full conversion of these debts or the receipt of a new financing or series of financings, our current operations do not generate sufficient cash to pay the interest and principal on these obligations when they become due. Accordingly, there can be no assurance that we will be able to pay these or other obligations which we may incur in the future.  As of the date of this filing, all outstanding principle on the notes has been converted.

 

2010 Note and Warrant Purchase Agreements

 

During year ended December 31, 2010, the Company completed four closings of convertible note and warrant purchase agreements (“Purchase Agreements”), aggregating to approximately $11 million. The convertible notes issued in the four 2010 Closings, (collectively “2010 Notes”) matured one year from the date of their respective issuance and carried al 20% original issuance discount. The Purchase Agreement for the First closing included a five-year warrant to purchase 1,100,000 shares of the Company’s common stock at an exercise price equal to the higher of: (i) 105% of the VWAP for the five trading days immediately preceding the date the Company issued the Warrants; or (ii) the Floor Price (as defined in the First Closing Note). The Purchase Agreements for the Second, Third, and Fourth closings included a five-year warrant to purchase up to 12,048,668 shares of the Company’s common stock at initial exercise prices ranging from $0.28 to $0.89 per share. The 2010 Notes were convertible, in whole or in part, into shares of the Company’s common stock. The Conversion Price was equal to the greater of the Floor Price (as defined in the Notes) or 80% of the VWAP for the five (5) Trading Days ending on the business day immediately preceding the applicable date of conversion.

 

Interest on the unpaid principal balance of the 2010 Notes originally accrued at the rate of 12% per annum, which would increase to 18% upon the occurrence of a trigger event, as that term is defined in the 2010 Notes. Pursuant to the terms of the First, Second, and Third Closings, a trigger event occurred when the Registration Statement the Company filed on May 3, 2010 was not declared effective by June 1, 2010 and therefore the interest on the notes issued in those three closings increased to 18% per annum. The terms of the Fourth closing required the Company to have the registration statement declared effective by August 31, 2010 and therefore a Trigger Event occurred when the Registration Statement the Company filed on May 3, 2010 was not declared effective by August 31, 2010 with respect to the notes issued in the Fourth Closing.

 

As a result of the Trigger Events, the principal amount of the 2010 Notes was increased from $11,057,365 to $14,081,712. In addition, pursuant to the terms of the Registration Rights Agreement, the Company recorded an additional $410,000 as interest expense which represents the maximum amount of $10,000 payable to each convertible note holder in the four closings due to failure to obtain effectiveness of registration statement.

 

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Additionally, we were required under the terms of the 2010 Notes to obtain stockholder approval, on or before July 15, 2010 for the First Closing and on or before August 31, 2010, for the Second, Third, and Fourth Closings. Due to the SEC review of our proxy statement and periodic reports that we are required to submit to our shareholders with the Proxy Statement, we were unable to file and mail our definitive proxy statement so as to give our shareholders proper notice of an August 31, 2010 meeting and therefore were not able to have a meeting or obtain shareholder approval on such date. This failure constituted an Event of Default under the 2010 Notes, pursuant to which the note holders were entitled to declare the entire principal and interest due on the notes then immediately payable. In light of the default, to maintain good relationships with the investors of the 2010 Notes, we requested the 2010 Notes’ investors to waive the July 15, 2010 and August 31, 2010 shareholder meeting date requirement and instead allow us to hold the meeting on or before November 15, 2010, as well as waive any defaults related thereto, in exchange for which we increased the balance of the notes by 25% (the “Extension”). As a result of the 25% increase from the Extension, the principal amount of such notes was increased to $18,872,264.  As a result of the 25% increase given pursuant to the Extension, we believed that no additional Trigger Events can be applied under the terms of the 2010 Notes, which limit the application of Trigger Events to two. By signing the agreement, the signing investor also agreed to waive any defaults related to our failure to hold a meeting or obtain shareholder approval by July 15 or August 31. We ultimately held the shareholder meeting on December 3, 2010 and all shares issuable pursuant to the 2010 Notes were approved by the shareholders.  On January 3, 2011, the NYSE Amex approved these shares.  

  

On October 14, 2010, the Company entered into a forbearance agreement (“Forbearance Agreement”) with two investors (ISP Holdings, LLC and St. George Investments, LLC) of the 2010 Notes. These investors negotiated the terms of the Forbearance Agreement in lieu of entering into the Extension the other 2010 Notes investors signed. Pursuant to the Forbearance Agreement, the two investors refrained and temporarily forbore from exercising and enforcing their remedies against the Company due to the Event of Default and in return the Company agreed as a compensation for damages to the two investors to increase the outstanding balance of the 2010 Notes to ISP Holdings, LLC by 68% and increase the outstanding balance of the 2010 Notes to St. George Investments, LLC by 25%. In addition, the Company agreed to obtain the required Shareholder Approval to issue the shares underlying the 2010 Notes and warrants on or before November 15, 2010. Since we did not hold the meeting by November 15, 2010 (due to the SEC comment period), these two note holders submitted notice to us that the balance of their note shall increase by another 25% under the terms of the Forbearance Agreement. As of December 31, 2010, we increased the outstanding note balance of these two note holders by $868,522 for the 25% that was contractually due, but were under negotiations. Since we had not entered into any settlement, on May 26, 2011, these two note holders submitted default notices to us demanding payment of the note in full, including principal, interest, penalties and legal fees, accrued up to June 1, 2011 for an aggregate total of $1,306,619. On June 6, 2011, an agreement was reached with these note holders and an aggregate total of additional penalties in the amount of $94,297 were added to the principal of their notes.

 

Due to the trigger events, registration rights related payments and Extension, the total amount of principal on the outstanding Notes was $18,560,993 as of December 31, 2010.

 

In April 2011, the Company entered into a Debt Exchange Agreement whereby the outstanding balance of one of the Convertible Notes, including premiums, was exchanged for shares of the Company’s common stock. As part of this exchange, the note holder of the 2010 Note converted $479,806 of principal and $92,967 of accrued interest, premiums of $121,494 and legal fees of $5,000 into 1,849,819 shares of the Company’s common stock. The premium was recorded as extinguishment of debt.

 

On August 3, 2011, the Company received from one investor (St. George Investments, LLC) of the 2010 closings a Notice of conversion to convert $200,000 into 4,520,796 shares of common stock. At that time, the Company had insufficient authorized number of shares available for issuance. On August 19, 2010, the Company increased its number of authorized shares, and on August 25, 2011, issued the shares due under the conversion.

 

On August 18, 2010, the Company received a forbearance agreement (“Forbearance Agreement”) from the investor, as a proposal of settling the delay in the issuance of the shares in accordance with the conversion terms. The Company, its legal advisers and the investor entered in several discussions which resulted in the investor agreeing to temporarily forbear from exercising and enforcing their remedies against the Company due to the event of default.  In return, the Company agreed to the following compensation for damages.

 

On August 22, 2011, the Company did not execute the Forbearance Agreement, but acknowledged by e-mail the terms stipulated in the agreement the conversion mechanisms of the penalties included in the Forbearance Agreement. This is considered the date of effectiveness of the Forbearance Agreement.

 

As a result of the penalty, the Company increased the debt balance by $158,082, and recorded such amount in interest expense in the accompanying consolidated statement of operations for the nine months ended September 30, 2011.  Also, the Company recorded the fair value of the embedded conversion feature of the debt as additional interest expense for penalties added with a corresponding increase to derivative liability on August 22, 2011 (the date both parties agreed to the proposed penalties). Since the terms of the debt did not change, there was no debt discount associated with this transaction.

 

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On September 29, 2011, one note holder submitted a conversion exercise notice form for $70,000 convertible into 30,172,414 shares of common stock. The Company could not process the conversion, due to insufficient authorized shares of common stock. On December 20, 2011, the Company issued the shares due pursuant to the September 29 th conversion and agreed to accrual of $10,500 penalties for failure to deliver the shares in 3 days and $2,000 in legal fees.

 

As of September 30, 2011, the entire principal amount of the 2010 Notes was converted, and $368,882 of accrued interests was outstanding.

 

Operating activities

 

Net cash in used in operating activities of continuing operations in the year ended December 31, 2010, was $7,112,307 compared with cash used in operating activities of continuing operations of $3,184,870 for the same period in 2009.

 

The primary use of cash in operations during the year ended December 31, 2010 and 2009 was the net loss of approximately $85.7 million and $12.5 million, respectively. The effect of the net loss during the year ended December 31, 2010 was partially offset by significant non-cash activity such as:

 

(i) approximately $13.5 million for the amortization of debt issuance costs and debt discounts,
   
(ii) approximately $2.0 million for the fair value of options granted to employees and directors for servic
   
(iii) approximately $3.2 million representing the fair market value of common stock, warrants and options expensed for services,
   
(iv) approximately $8.2 million related to additional principal added for triggering events, and forbearance agreements,
   
(v) approximately $1.0 million representing impairment of intangible asset,
   
(vi) approximately $2.7 million representing reserve on the loans to JPI,
   
(vii) approximately $20.5 million representing impairment charge on investment in JPI,
   
(viii) approximately $3.2 million representing loss on extinguishment of debt, and
   
(ix) approximately $14.6 million representing interest expense related to fair value of derivative instruments granted, and
   
(x) approximately $9.4 million representing the change in fair value of the derivative liabilities.

   

Investing activities

 

We used $27,990 in investing activities from continuing operations in the year ended December 31, 2010 compared with $1,797,723 for the same period in 2009. The primary reason for the change was less equipment was purchased in 2010 compared to 2009.  For the year ended December 31, 2009, JJB made capital improvements to their facilities and purchased equipment in an effort to regain JJB’s GMP certification for JJB’s small injectible manufacturing lines. Renovations necessary for GMP recertification of the facility at JJB were completed and recertification was received in the second quarter of 2009. In 2009, we also acquired lab and office equipment for the Company’s U.S. facility to support the Company’s Onko-Sure® test kit initiatives.

 

In addition, in 2009 we deconsolidated JPI and had $53,658 of cash used in the divesting from the deconsolidation of the subsidiary and we used $852,955 in investing activities of the discontinued operations.

 

Financing activities

 

Net cash provided by financing activities from continuing operations was $7,181,533 for the year ended December 31, 2010, primarily consisting of the net proceeds of $6,308,000 from the issuance of convertible debt, and net proceeds of $873,533 from the exercise of warrants into common stock. Net cash provided by financing activities was $3,464,468 for the year ended December 31, 2009, primarily consisting of the net proceeds of $520,556 from the issuance of convertible debt, net proceeds of $2,088,592 from the issuance of senior debt, and net proceeds of $812,320 from the issuance of common stock.

 

Our cash position was significantly improved by the January 2011 Convertible Promissory Notes financing in which we raised net proceeds of $6.8 million (see Note 16 of the accompanying consolidated financial statements).

 

As of May 20, 2011, we had $2.21 million of cash on hand.  The 2011 Notes contain certain covenants which include a cash reserve covenant whereby the Company shall maintain in its bank accounts no less than $2,250,000 in unrestricted cash at all times.  In addition, the January 2011 Notes agreement restricts the use of proceeds to pay any other debt obligation

   

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Off-Balance Sheet Arrangements

 

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

 

On February 2, 2011, JPI closed a $900,000 financing (the “Bridge Financing”).  In connection with the closing of the Bridge Financing, JPI issued Convertible Debentures to six accredited investors’ in the aggregate principal amount of $900,000 (the “JPI Debentures”).  As part of the agreement, the Company secured the JPI Debentures with its common stock in the event that the JPI does not complete a reverse merger or other event, which results in its stock becoming publicly traded on a U.S. equity market within one year after the closing of the Bridge Financing (the "Going Public Deadline”).  The JPI Debentures could then be exchanged for common shares of our company at a conversion price of $0.28 per share (the “RPC Conversion Price”) unless a majority of the holders of the Debentures consent in writing to an extension of the Going Public Deadline; provided, however, that the Going Public Deadline shall not be extended for more than six months in total.  The RPC Conversion Price is subject to full ratchet anti-dilution protection.

 

Going Concern

 

The consolidated financial statements have been prepared assuming we will continue as a going concern, which contemplates, the realization of assets and satisfaction of liabilities in the normal course of business. We incurred losses before discontinued operations of $85,711,853 and $12,461,903 for the years ended December 31, 2010 and 2009, respectively, and had an accumulated deficit of $138,150,406 at December 31, 2010. In addition, we used cash from operating activities of continuing operations of $7,112,307 for the year ended December 31, 2010.  These factors raise substantial doubt about our ability to continue as a going concern.

 

Our monthly cash requirement of $550,000 for operating expenses does not include any extraordinary items or expenditures, including cash payments on the 2011 financing, which began in March 2011, payments for research on clinical trials for our Onko-Sure® test kit, research conducted through CLIA Laboratories or expenditures related to further development of the CIT technology, as no significant expenditures are anticipated other than recurring legal fees incurred in furtherance to of patent protection for the CIT technology.

 

We raised net proceeds of approximately $6.3 million in connection with convertible note and warrant purchase agreements during the year ended December 31, 2010. Additionally, in 2010, we formed a new wholly-owned subsidiary, NuVax for the development of our CIT technology. We are actively securing additional distribution agreements in 2011 for our Onko-Sure® test kits.

 

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

 

There are significant risks and uncertainties which could negatively affect our operations. These are principally related to (i) the absence of substantive distribution network for our Onko-Sure® test kits, (ii)  the absence of any commitments or firm orders from our distributors, (iii) existing and possible additional defaults in existing indebtedness, and (iv) failure to meet operational covenants in existing financing agreements which would trigger additional defaults or penalties. Our limited sales to date for the Onko-Sure® test kit make it impossible to identify any trends in our business prospects. Moreover, if either AcuVector and/or the University of Alberta is successful in their claims, we may be liable for substantial damages, our rights to the CIT technology will be adversely affected, and our future prospects for licensing the CIT technology will be significantly impaired.

 

Our only sources of additional funds to meet continuing operating expenses, fund additional research and development and fund additional working capital are through the sale of securities, and/or debt instruments. We are actively seeking additional debt or equity financing, but no assurances can be given that such financing will be obtained or what the terms thereof will be. We may need to discontinue a portion or all of our operations if we are unsuccessful in generating positive cash flow or financing for our operations through the issuance of securities.

 

Future Capital Needs

 

We expect to incur additional capital expenditures at our U.S. facilities in 2011 in the form of potential expansion or move, further development of the Onko-Sure® test kit and upgrading manufacturing lines in Tustin. It is anticipated that these projects will be funded primarily through the issuance of additional debt or equity instruments.

 

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Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

None.

 

BUSINESS

 

 We are engaged in the research, development, manufacturing, sale and marketing of our Onko-Sure TM test kits, which is a proprietary in-vitro diagnostic (or IVD) cancer test.  We market Onko-Sure®   in the United States, Canada, Chile, Europe, India, Japan, Korea, Taiwan, Vietnam and other markets throughout the world. Our product is sold either directly to Clinical Laboratory Improvement Amendments (“CLIA”) certified reference laboratories or to third party distributors, who then resell to CLIA certified reference laboratories in the United States as well as clinical reference labs, hospital laboratories and physician operated laboratories in the international market.

 

Our Onko-Sure® IVD test enables physicians and their patients to monitor and/or detect solid tumor cancers by measuring the accumulation of specific breakdown products in the blood called Fibrin and Fibrinogen Degradation Products (FDP). Onko-Sure® is a simple, non-invasive blood test designed to be used for the detection and/or monitoring of 19 different types of cancer including: lung, breast, stomach, liver, colon, rectal, ovarian, esophageal, cervical, trophoblastic, thyroid, malignant lymphoma, and pancreatic. We believe that Onko-Sure® can be a valuable diagnostic tool in the worldwide battle against cancer. Because the Onko-Sure® test kit is a non-invasive blood test, there are no side effects of the administration of the test. As with other cancer diagnostic products, false positive and false negative test results could pose a small risk to patient health if the physician is not vigilant in following up on the Onko-Sure® test kit results with other clinically relevant diagnostic modalities. While the Onko-Sure® test kit is helpful in diagnosing whether a patient has cancer, the attending physician is required to use other testing methods to determine and confirm the type and kind of cancer involved.

 

Onko-Sure® is sold as a blood test for cancer in Europe (CE Mark certified), India, Japan, Taiwan, Korea, Vietnam, and in Chile (research use).  In the United States, the FDA has cleared the sale of Onko-Sure® for the monitoring of colorectal cancer treatment and reurrence.  It is approved in Canada (by Health Canada) for lung cancer detection and treatment/recurrence monitoring.  We believe that Onko-Sure® has the potential to be used as a general cancer screening test. We are involved with research conducted with CLIA Laboratories to expand on the Clinical utility of Onko-Sure®.

 

We manufacture and distribute our cancer test kits at our licensed manufacturing facility located at 2492 Walnut Avenue, Suite 100, in Tustin, California. We are an FDA good manufacturing practices approved facility. We maintain a current Device Manufacturing License issued by the State of California, Department of Health Services, Food and Drug Branch.

 

IVD Industry and Market

 

During the nine months ended September 30, 2011 and in fiscal 2010 and 2009, we had four, four and three customers which represented approximately 84%, 94% and 92% of our net revenues, respectively.  For the year ended December 31, 2010 and 2009, two customers were based in the U.S. and represented approximately 59% and 27% of our net revenues and two customers were based outside the US and represented approximately 35% and 65% of our net revenues, respectively.

 

Below is a table showing our major customers and percentage of sales for each:

 

   % of Net Revenues 
Customer  Location   None months
ended
September 30,
  2011
   Year ended December 
31, 2010
   Year ended 
December 31, 2009
 
A   US    21%   35%   * 
B   US    0%   24%   27%
Total US        21%   59%   27%
                     
C   Vietnam    29%   20%   20%
D   Taiwan    12%   15%   45%
E   Korea    22%          
Total Foreign        63%   35%   65%

 

* less than 10% of net revenues for 2009

 

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On July 3, 2008 we received a determination letter from the USFDA approving our application to market Onko-Sure® test kit as an immunology and microbiology device to monitor colorectal cancer under the category “Tumor Associated Antigens Immunological Test System” as a Class II IVD device. The receipt of United States Food and Drug Administration (“USFDA”) clearance for marketing our proprietary Onko-Sure® cancer test kit in July 2008 has given us significant visibility in the in-vitro diagnostics (“IVD”) industry. The growth of the IVD marketplace has been driven by an increase in the incidence of cancer, other chronic and infectious diseases, emerging technologies and increasing patient awareness. Cancer testing is one of the most important growth opportunities for the next three to five years in the diagnostics segment. The National Cancer Institute estimates that about ten million Americans have or have had some form of cancer. Overall costs of the disease are $126 billion annually. (Cancer Diagnostic Testing World Markets, July 2011,      www.reportlinker.com/p089470-summary/Cancer-Diagnostic-Testing-World-Markets.html ).

 

Onko-Sure®

 

In clinical trials, the Onko-Sure® test kit has demonstrated its ability to detect the presence of certain cancers in humans with a high sensitivity between 50% - 100% and specificity  between 57% - 100%.  Onko-Sure® is a simple, non-invasive blood test used for the detection and/or monitoring of  the presence of certain cancers, including: colon, rectal, lung, stomach, tongue, ovarian, uterine, liver, pancreatic, bladder, brain, esophageal, hematological, breast, prostate, cervical, thyroid, lymphoma and trophoblast cancers. A positive Onko-Sure® value is followed with other diagnostic tests to determine the specific type of cancer. Onko-Sure® can be a valuable diagnostic tool in the worldwide battle against cancer, the second leading cause of death worldwide.

 

The Onko-Sure® test kit is a tumor-marker, which is a biochemical substance indicative of neoplasia, potentially specific, sensitive, and proportional to tumor load, used to screen, diagnose, assess prognosis, follow response to treatment, and monitor for recurrence. As Onko-Sure® test kit is a non-invasive blood test, there are no side effects of the administration of the test. As with other cancer diagnostic products, false positive and false negative test results could pose a small risk to patient health if their physician is not vigilant in following up on the Onko-Sure® test kit results with other clinically relevant diagnostic modalities. While the Onko-Sure® test kit is helpful in diagnosing whether a patient has cancer, the attending physician needs to use other testing methods to determine and confirm the type and kind of cancer involved.

 

The Onko-Sure® test kit can be added easily and inexpensively to the pre-existing line of ELISA-based diagnostics performed routinely by clinical laboratories throughout the world. Furthermore, the Onko-Sure® test kit can be used in place of more costly and time consuming diagnostic tests. In clinical trials   in U.S., China, Germany, Taiwan and Turkey, Onko-Sure® has been used as a screen for multiple cancers while only needing a single blood sample.

 

Our Onko-Sure® test kits are currently sold in the form of a 96 well test plate, which, after standards are applied, 41 individual tests can be run in duplicate. These tests are typically run in a reference laboratory with test results determined by using a micro-titer reading analyzer. Results are sent to the attending physician who then relays those results to the patient. Typically, a patient can receive results within 3-5 days from the blood draw date.

 

Onko-Sure® Test Kit Sales and Distribution Strategy

 

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

 

We market our Onko-Sure® cancer test kits through third party distributors, who then resell directly to CLIA certified reference laboratories in the United States, as well as to clinical reference labs, hospital laboratories and physician operated laboratories in international markets.  We are seeking to engage additional distributors who will sell to reference and clinical laboratories in the U.S., and other countries to make the Onko-Sure® test kit available to physicians and patients. Our objectives regarding the development, marketing and distribution of our Onko-Sure® test kit are to:

 

  · obtain international approvals;

 

  · develop new distribution channels in new market;

 

  · distribute greater quantities of kits in approved markets;

 

  · fully utilize our GMP manufacturing facilities in the U.S. to foster worldwide sales;

 

  · automate the Onko-Sure® test kit; and

 

  · eventually create a “rapid test” format of Onko-Sure® test kit to extend sales into rural areas and Physician Owned Labs (“POL”) .

 

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As of January 20, 2011, we had entered into the following distribution agreements:

 

  1. An exclusive five-year distribution agreement with Grifols USA, LLC (“Grifols”).  This distribution agreement allows Grifols USA, LLC to market and sell Onko-Sure® for the monitoring of colorectal cancer to hospitals, clinical laboratories, clinics and other health care organizations in the U.S. and Puerto Rico.

 

  2. Four distinct exclusive five-year distribution agreements, one three-year distribution agreement, and one two-year distribution agreement, with GenWay Biotech, Inc. (“GenWay”). These six distribution agreements allows Genway to market and sell Onko-Sure® for uses other than colorectal cancer to CLIA-certified laboratories in the U.S. as a lung cancer screen to laboratories in Canada, and the marketing and sales of Onko-Sure® in the United Kingdom, European Union, the Middle East, Russia and Greece.

 

  3. An exclusive five-year distribution agreement with Pharmaline Saglik Hzmetleri Tic (“Pharmaline”).  This distribution agreement allows Phamaline to market and sell Onko-Sure® in Turkey.

 

  4. An exclusive five-year distribution agreement with Jaiva Guar Diagno (“Jaiva GD”).  This distribution agreement allows Jaiva GD to market and sell Onko-Sure® in India.

 

  5. An exclusive five-year distribution agreement with AMDL Australia PTY Ltd. (“AMDL Australia”).  This distribution agreement allows AMDL Australia to market and sell Onko-Sure® in Australia and New Zealand.

 

  6. An exclusive five-year distribution agreement with Phu Gia Trading Co. Ltd. (“Phu Gia”).  This distribution agreement allows Phu Gia to market and sell Onko-Sure® in Vietnam, Laos, and Cambodia.

 

  7. An exclusive five-year distribution agreement with Bio-Asia Diagnostics Co. Ltd. (“Bio-Asia”).  This distribution agreement allows Bio-Asia to market and sell Onko-Sure® exclusively in Hong Kong and non-exclusively for research use only in China.

 

  8. An exclusive five-year distribution agreement with Uni-Pharma Taiwan (“Uni-Pharma”).  This distribution agreement allows Uni-Pharma to market and sell Onko-Sure® in Taiwan.

 

  9. An exclusive five-year distribution agreement with TS Pharm Inc. (“TS Pharm”).  This distribution agreement allows TS Pharm to market and sell Onko-Sure® in Caribbean Region.

 

  10. A non-exclusive five-year distribution agreement with Omnimed Inc. (“Omnimed”).  This distribution agreement allows Omnimed to market and sell Onko-Sure® in South Korea.

 

  11. A non-exclusive five-year distribution agreement with Naroo Ditech Inc. (“Naroo”).  This distribution agreement allows Naroo to market and sell Onko-Sure® in Korea

 

In all of our exclusive distribution agreements, the distributor is required to purchase a minimum number of Onko-Sure® test kits during each quarter of the agreement to maintain their exclusivity rights in their assigned territories.  If minimum purchase requirements are not met, we maintain the right to convert the exclusive agreement into a non-exclusive agreement.  The distributor is not legally bound to meet the minimums and in most cases, failure to meet the minimum does not constitute a breach of contract.

 

There may be factors that prevent us from further developing and marketing the Onko-Sure® test kit. We cannot guarantee the Onko-Sure® test kit will be commercially successful in either the U.S. or internationally. Clinical trials results are frequently susceptible to varying interpretations by scientists, medical personnel, regulatory personnel, statisticians and others, which may delay, limit or prevent further clinical development or regulatory approvals of a product candidate. Also, the length of time that it would take for us to complete clinical trials and obtain regulatory approval for product marketing may vary by product and by the intended use of a product. We cannot predict the length of time it would take to complete necessary clinical trials and obtain regulatory approval in any other country.

 

Competition

 

We have only had limited sales of Onko-Sure® test kit to our distributors both inside and outside the United States. We are dependent on our distributors’ financial ability to advertise and market the Onko-Sure® test kit. A number of domestic and international companies are in indirect competition with us in all of these markets. Most of these companies are larger, more firmly established, have significant marketing and development budgets and have greater capital resources than us or our distributors. Therefore, there can be no assurance that we will be able to achieve and maintain a competitive position in the diagnostic test industry.

 

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Many major medical device manufacturers, including Abbott Diagnostics, Baxter Healthcare Corp., Beckman Diagnostics, Boehringer Mannheim, Centocor, Diagnostic Products Corporation, Bio-Rad Laboratories, Roche Diagnostic Systems, Sigma Diagnostics and others, are manufacturers or marketers of other diagnostic products. We are not aware of any efforts currently being devoted to development of products such as our Onko-Sure® test kit; however, there can be no assurance that such efforts are not being undertaken without our knowledge. We believe that most of the diagnostic products currently manufactured by other companies are complementary to our Onko-Sure® test kit. Moreover, such companies could develop products similar to our products and they may be more successful in marketing and manufacturing their products. In addition, there are a number of new technologies in various stages of development at the National Institute of Health, university research centers and at other companies for the detection of various types of cancers, e.g., identification of proteomic patterns in blood serum that distinguishes benign from cancerous conditions, which may compete with our product.

 

Manufacturing

 

We manufacture our Onko-Sure® test kit at our licensed manufacturing facility located at 2492 Walnut Avenue, Suite 100, in Tustin, California.

 

In December 2003, our product Onko-Sure® (also known as AMDL-ELISA DR-70(FDP)) obtained the CE marking approval (the “CE Certificate”) allowing it to be marketed in the European Economic Area (“EEA”). We were issued an “EN ISO 13485:2003 + AC:2007” certificate on September 12, 2008.

 

In November 2004, the USFDA inspected our facilities with six observations listed on the issued FDA-483 Warning Letter. On July 2, 2008, we were audited by TUV Rheinland for ISO 13485 compliance and one observation was reported on the audit report. On May 20, 2008, we were audited by California Department of Public Health (“CDPH”) which is an independent entity from FDA.  We are in compliance with both the USFDA and CDPH as of the date of this Report.  

 

 Regulatory Approval and Clinical Trials

 

The Onko-Sure® test kit is subject to specific USFDA rules applicable to IVD products. Prior to marketing Onko-Sure® test kit in the U.S., we were required to make a pre-market application to prove the safety and efficacy of the products and to comply with specified labeling requirements for IVD products for human use. We received a determination letter on July 3, 2008 from the USFDA approving our application to market Onko-Sure® test kit as an immunology and microbiology device to monitor colorectal cancer under the category “Tumor Associated Antigens Immunological Test System” as a Class II IVD device. USFDA clearance to market was based upon data showing that the Onko-Sure® test kit has the ability to monitor the progression of colorectal cancer post-surgery in patients who are biopsy confirmed with this disease. This announcement marks the first clearance to market a colorectal monitoring product that the USFDA has granted since January 14, 1982 when Carcinoembryonic Antigen (CEA) was approved. Until now, the CEA test has been the only accepted method cleared in the U.S. Thus, Onko-Sure® test kit offers a new test that can monitor colorectal tumors post-surgery.

 

We must abide by the listing rules of the USFDA. We have established our Quality System Regulation in accordance with applicable regulations and were most recently inspected in July 2008. Our Quality System Regulation program contains applicable complaint provisions that we believe meet the USFDA’s requirements for Medical Device Reporting, and we have experienced no incidents or complaints to date. We also implemented procedures for preventive and corrective action and changed our packing and shipping method once in 2002 to improve the protection of our product.

 

We have a limited supply of the horseradish peroxidase (“HRP”)-conjugated anti-fibrin and fibrinogen degradation (“FDP”) antibody component currently used for the approved Onko-Sure® test kit. Because of the limited supply of the current antibody, we have determined it is in our best interest to change to a HRP-conjugated anti-FDP antibody. We are currently screening six commercially available conjugated antibodies to substitute into the current Onko-Sure® test kit and one we produced and conjugated ourselves. The anti-FDP antibody we produced ourselves has performed well in pilot studies and will likely be used in our next generation Onko-Sure® test kit. If the antibody substitution significantly improves Onko-Sure® test kit performance, we will be required to change the reported sensitivity and specificity of the Onko-Sure® test kit. Because of these changes and modifications, we will likely have to submit a new 510(k) premarket notification application, but can continue to sell the existing kit until our current antibody supply is exhausted. If the new antibody does not significantly affect the clinical performance of the test, we can likely substitute it into the currently approved kit without filing a new 510k.  In March 2011, the Company hired a post-Doctoral Fellow and M.D. who formerly worked at the City of Hope Hospital to work on a project to purify the raw antibody serum the Company had stored in order for it to be usable in its test kits.  As of the date of this report, the Company has been able to optimize the antibody purification technique to make an additional 12,000 test kits.  When the raw antibody serum the Company has on-hand is purified it will make approximately 94,000 test kits.  In addition, our test kits require anti-fibrinogen HRP of which we have a limited quantity.  We are investigating alternatives or outsourcing of the anti-fibrinogen HRP to be used in our test kits. Currently we have raw materials on-hand to manufacture approximately 21,000 kits.  Based on our current and anticipated orders, this supply is adequate to fill all such orders.

 

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In addition to the USFDA regulation and approval process, each foreign jurisdiction may have separate and different approval requirements and processes.   Our distribution agreements require our distributors to obtain the requisite approval and clearance in each jurisdiction in which they sell products. In our experience, once a foreign approval is obtained, it is generally renewed on a periodic basis, annually or otherwise. In certain territories, distributors can sell under limited circumstances prior to approval and in other territories no formal approval is required. On December 20, 2000, the Medical Devices Agency of United Kingdom Department of Health issued a letter of no objection to the exportation of our Onko-Sure® test kit from the U.S. to the United Kingdom, allowing our Onko-Sure® test kit to be sold in the United Kingdom. We have also received regulatory approval to market the Onko-Sure® test kit in South Korea and import and market the Onko-Sure® test kit in Australia. In Canada, our Onko-Sure® test kit is approved as a screening device for lung cancer only. Our Onko-Sure® test kit also has the CE mark from the European Union for sale in Europe as a general cancer screen.

 

Obtaining regulatory approval in the U.S. for our Onko-Sure® test kit was costly, and it remains costly to maintain. The USFDA and foreign regulatory agencies have substantial discretion to terminate clinical trials, require additional testing, delay or withhold registration and marketing approval and mandate product withdrawals. In addition, later discovery of unknown problems with our products or manufacturing processes could result in restrictions on such products and manufacturing processes, including potential withdrawal of the products from the market. If regulatory authorities determine that we have violated regulations or if they restrict, suspend or revoke our prior approvals, they could prohibit us from manufacturing or selling our products until we comply, or indefinitely.

 

In the U.S., we were required to make a pre-market application to prove the safety and efficacy of the products and to comply with specified labeling requirements for IVD products for human use. We received a determination letter on July 3, 2008 from the USFDA approving our application to market Onko-Sure® test kit as an immunology and microbiology device to monitor colorectal cancer under the category “Tumor Associated Antigens Immunological Test System” as a Class II IVD device. USFDA clearance to market was based upon data showing that the Onko-Sure® test kit has the ability to monitor the progression of colorectal cancer post-surgery in patients who are biopsy confirmed with this disease. This announcement marks the first clearance to market a colorectal monitoring product that the USFDA has granted since January 14, 1982 when Carcinoembryonic Antigen (CEA) was approved. Until now, the CEA test has been the only accepted method cleared in the U.S. Thus, Onko-Sure® test kit offers a new test that can monitor colorectal tumors post-surgery.

 

 Onko-Sure® Clinical Study with Mayo Validation Support Services (“MVSS”)

 

In March 2011, we concluded a study, “Evaluation of AMDL-ELISA DR-70 (“Onko-Sure®”) in colorectal cancer” to compare the effectiveness of our Onko-Sure® IVD cancer test to the Carcino-Embryonic Antigen (“CEA”) marker in a large population of patients (N=976) including non-cancer patients (normal) and patients in stages I through IV (Dukes A through D) with colorectal cancer. A single study using this many serum samples from colorectal patients has never been conducted, and it is anticipated that this study will further clarify the efficacy of Onko-Sure® as compared to CEA and/or in comparison to potentially combining these two markers.  The study is significant because of the large number of early stage colorectal cancer patients that need an effective tumor marker for early detection of a recurrence of colorectal cancer.

 

MVSS provided 976 biospecimens and annotation that MVSS tested with the standard CEA cancer screening test.  We then took the biospecimens and tested them using the Onko-Sure® cancer screening test on March 4, 2011.  We submitted the data from our Onko-Sure® measurement tests, along with the CEA tests MVSS performed on the same samples to a third party statistical analysis firm. The statistical analysis of the study was completed on April 25, 2011.  Based on the final trial analysis, it was determined Onko-Sure® is a useful tool in the detection of colorectal cancer (“CRC”) in all stages, and specifically, in early Stages I and II where effective diagnosis can lead to better patient prognosis. Additionally, the study demonstrated Onko-Sure® IVD cancer test can be up to 13-17% more effective in detecting and/or monitoring CRC in Stages I and II over CEA.  Furthermore, the study showed that when Onko-Sure® is combined with CEA, the sensitivity of the combined tests delivers additional increased sensitivity to physicians and their patients as opposed to using CEA alone.

 

The trial was performed using retrospective clinical samples from a total of 926 serum samples with 480 healthy volunteers and 446 colorectal cancer patients (approximately 50 of the originally provided biospecimens did not have enough serum to do both tests, so it did not provide any values.  Therefore, the final data set included 926 samples).  We started to draft three manuscripts based on these results, which we intend to submit to a peer-reviewed journal, either independently or with other third party healthcare organizations. Additionally, we have submitted five abstracts for colorectal and lung cancers trials performed in 2010-2011 for presentations to physicians at international oncology conferences and scientific meetings. Two of the abstracts were accepted for presentation in ASCO Gastrointestinal event in San Francisco in January 2012.

 

The final study results will be part of our clinical validation of the Onko-Sure® test and the final study data and the corresponding results was provided to MVSS.  MVSS captured the RPC clinical study data and catalogs for future knowledge related to colon cancer.

 

MVSS was compensated approximately $456,000 for their materials and services under the Collaboration Agreement entered into on December 12, 2008.  Although there is a level of prestige associated with MVSS, which is a service line of Mayo Collaborative Services, Inc., alternative material service providers exist with which we can obtain similar materials and services to accomplish the same product development. Therefore, our business and operations are not dependent upon our agreement with MVSS.

 

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Research and Development

 

During the nine months ended September 30, 2011 and years ended December 31, 2010 and 2009, we incurred expenses of $149,604, $673,918 and $552,391, respectively, in research and development costs related to the clinical testing and study of our Onko-Sure® test kit.

 

Reimbursability of Our IVD Products

 

We recognize health care cost reimbursement under private and government medical insurance programs is critical to gaining market share in any of the markets where we intend to sell our IVD products. We are currently formulating our reimbursement strategy in the U.S.  

 

Cancer Therapeutics

 

In 2001, we acquired the CIT technology, which forms the basis for a proprietary cancer vaccine. Our CIT technology is a U.S. patented technology (patent issued May 25, 2004). The Cancer Therapeutics division is engaged in commercializing the CIT technology. To date, we have not generated any revenues and incurred minimal expenses, mostly related to patent protection, for this technology. As of December 31, 2010, we fully impaired the value of our intangible asset related to this technology.

 

In December 2010, we formed NuVax Therapeutics, Inc. (“NuVax”) with Javia’s CEO Dr. Umesh Bhatia by creating a platform to expand the planned collaboration to include significantly expanded clinical trials in multiple international locations and in the U.S., and the in-licensing of other novel cancer fighting technologies. All rights to our CIT technology will be transferred to NuVax, currently our 100% wholly-owned subsidiary. All further development and commercialization of CIT and other to-be licensed novel cancer fighting technologies will be made at NuVax.

 

In January 2011, NuVax signed four exclusive license agreements with the University of Florida Research Foundation, Inc. (“UFRF”), for the development and marketing of a cancer therapeutic product developed by the UFRF. In July 2011, the UFRF terminated the agreements due to lack of funding.

 

On August 29, 2011, due to lack of funding and activity, Umesh Batia resigned as CEO and Director of NuVax.  As of the date of this report, we have not generated any revenues and incurred minimal expenses for NuVax. Until we can complete funding for NuVax, we will continue to have minimal activity in NuVax.

 

Patents

 

Success in development of our Onko-Sure® patents depends, in part, on our ability to obtain U.S. and foreign patent protection for our products, preserve our trade secrets, and operate without infringing upon the proprietary rights of third parties.

 

The U.S. Patent and Trademark Office (“USPTO”) has issued to us two patents which describe methods for measuring ring-shaped particles in extra-cellular fluid as a means for detecting cancer. Our patent for a method of detecting the tumors using ring shaped particles as a tumor marker was issued on October 17, 1995 and expires on October 17, 2012. Our patent for a method for detecting the presence of ring shaped particles as tumor markers was issued on June 3, 1997 and expires on June 3, 2014. We have three additional patent applications pending in the U.S. with respect to our methodology for the Onko-Sure® tumor-markers as reliable indicators of the presence of cancer. In addition, we have one patent based on our methodology for the Onko-Sure® tumor marker pending in Europe.

 

There can be no assurance however, that any additional patents will be issued to us, or that, if issued, the breadth or degree of protection of these patents will be adequate to protect our interests. In addition, there can be no assurance that others will not independently develop substantially equivalent proprietary information or obtain access to our know-how. Further, there can be no assurance that others will not be issued patents which may prevent the sale of our test kits or require licensing and the payment of significant fees or royalties by us in order for us to be able to carry on our business. Finally, there can be no guarantee that any patents issued to or licensed by us will not be infringed by the products of others. Defense and prosecution of patent claims can be expensive and time consuming, even in those instances in which the outcome is favorable to us. If the outcome is adverse, it could subject us to significant liabilities to third parties, require us to obtain licenses from third parties or require us to cease research and development activities or sales.

 

Employees

 

As of December 27, 2011, we had 10 full-time employees in the U.S. We supplement our permanent staff with temporary personnel. Our employees are neither represented by a union nor subject to a collective bargaining agreement, and we consider our relations with our employees to be favorable. We have entered into certain agreements with our employees regarding their services. We utilize the services of consultants for safety testing, regulatory and legal compliance, and other services.

 

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Executive Offices

 

Our executive offices are located at 2492 Walnut Avenue, Suite 100, Tustin, California 92780, telephone number (714) 505-4460.

 

Legal Proceedings

 

On February 22, 2002, AcuVector Group, Inc. (“AcuVector”) filed a statement of claim in the Court of Queen’s Bench of Alberta, Judicial District of Edmonton relating to the Company’s CIT technology acquired from Dr. Chang in August 2001. The claim alleged damages of $CDN 20 million and sought injunctive relief against Dr. Chang for, among other things, breach of contract and breach of fiduciary duty, and against the Company for interference with the alleged relationship between Dr. Chang and AcuVector. The Company filed a motion to dismiss all claims and the motion was granted in favor of the Company dismissing the action on September 30, 2011. The Company also defended a companion case filed in the same court the Governors of the University of Alberta filed against the Company and Dr. Chang in August 2003.   The Court approved an order to dismiss the cases.  However, opposing counsel, who approved the form of order, filed an appeal on December 23, 2011.  We do not have any further details at this time, but we intend to defend the dismissal vigorously as we believe both actions are without merit.  However, it is possible the order will be overturned and then if either AcuVector or the University is successful in their claims, we may be liable for substantial damages, our rights to the technology will be adversely affected and our future prospects for exploiting or licensing the CIT technology will be significantly impaired.

   

 On June 11, 2010, Hudson Bay Fund, LP. (“Hudson Bay”) filed a statement of claim in the Court of Cook County, County Department, Law Division, State of Illinois relating to their participation in the Second Closing of the Note Financings.  The claim alleges that a Trigger Event occurred, because this registration statement was not declared effective on or before June 1, 2010. As a result of the Trigger Event, the balance was immediately increased to 125% of the outstanding balance; we noted this Trigger Event and recorded same in our accompanied financial statements.   Moreover, the claim alleged that an additional Trigger Event occurred because we did not cure the first Trigger Event within five trading days. As a result of this alleged Second Trigger Event, Hudson Bay alleges that the outstanding balance of the Note should be immediately increased by an additional 125%.  On January 21, 2011 Hudson agreed to exchange the notes for an aggregate of 1,140,357 shares of the Company's common stock pursuant to Section 3(a)(9) of the Securities Act of 1933, as amended.  As a result of the exchange, such notes are no longer outstanding and the Company and Hudson accordingly agreed to execute and file an order dismissing the June 11, 2010 compliant, with prejudice. The dismissal order was filed on January 21, 2011.

 

On March 11, 2011, a putative shareholder class action was filed against the Company and two of its officers alleging that they violated federal securities laws by misrepresenting the relationship between the Company and third parties involved in the Company’s clinical studies of the Onko-Sure® test kit. The trial court granted in part, and denied in part, the defendants’ motions to dismiss the complaint, and the case is now proceeding to discovery. The Company and defendant officers vehemently deny the allegations in the complaint and are vigorously defending the action. Due to the uncertain nature of litigation and the early stage of the lawsuit, we cannot calculate the potential damages – nor does the complaint seek any specific monetary amount of damages.

 

On December 10, 2010, Alpha Capital Anstalt (“Alpha Capital”) and Whalehaven Capital Fund Ltd. (“Whalehaven Capital and with Alpha Capital, the “Plaintiffs”) filed a complaint against us regarding the number of warrants they received in the Registered Direct Offering (“RDO”) that we completed in November 2009 and the shareholder vote obtained at our December 3, 2010 annual shareholder meeting. The Plaintiffs alleged that the effective price of the notes we issued pursuant to the private financing we completed in March and April 2010, and of the shares we later issued to two such note holders in settlement of a lawsuit with same, is lower than what we claim it to be and that such alleged effective price requires a greater reset to the exercise price of the warrants they received in the RDO. Additionally, they allege that we solicited votes against one of the proposals related to the RDO that was proposed at the December 3, 2010 annual shareholder meeting. The Plaintiffs sought relief from the court involving additional shares issuable pursuant to the exercise of the warrants they received in the RDO and cash damages.

 

As reported in the Company’s Form 8-K dated May 17, 2011, on May 10, 2011, we entered into a Settlement Agreement with the Plaintiffs pursuant to which we agreed to issue that number of shares of our common stock equal in value to $10,912,055 at the time of issuance (the “Settlement Amount”). On May 24, 2011 we received court approval to issue such shares pursuant to the provisions of Section 3(a)(10) of the Securities Act of 1933, as amended. Under the terms of the court approved settlement, the parties filed a Stipulation of Discontinuance of the lawsuit with the relevant court. As part of the Settlement Agreement, Alpha Capital and Whalehaven Capital retained all of the warrants the Plaintiffs received in the RDO and in the private financing we closed in March and April 2010. We are obligated to issue to Alpha Capital and Whalehaven Capital as many shares of our common stock as possible to reach the Settlement Amount that the NYSE Amex had previously approved for issuance to the Plaintiffs. On May 25, 2011, we issued an aggregate of 500,000 shares of our common stock in accordance with the Settlement Agreement; 283,000 shares to Alpha Capital and 217,000 shares to Whalehaven. Throughout the term of the note, if we no longer need NYSE Amex or shareholder approval, all shares issuable pursuant to the Settlement Agreement shall be issued. On June 23, 2011, the Company was no longer listed on NYSE Amex; and therefore, on June 29, 2011, we issued an aggregate of 20,500,000 of our common shares; 11,603,000 shares to Alpha Capital and 8,897,000 shares to Whalehaven Capital. In addition, and in order to account for the time it may take to receive shareholder approval to authorize sufficient additional shares that are issuable to them, the Plaintiffs agreed to accept a promissory note for the monetary value of that number of additional shares that would be required to be issued to achieve the Settlement Amount upon Court Approval based on a pre-determined formula set forth in the Notes. The notes bear 8% interest and mature four months after issuance. We maintain the right to pay the note back in cash or shares of common stock based upon a pre-determined formula set forth in the notes. Upon the occurrence of an event of default, the note will become immediately due and payable. Under the Settlement Agreement, Plaintiffs are entitled to entry of judgment in the amount of principal outstanding, if any, on the maturity date. The Settlement Agreement also contemplates the issuance of additional shares to Plaintiffs or the return of shares to us based upon variances in the market price of our common stock between the date we receive Court Approval and sixty days following the maturity date of the notes.

 

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On June 23, 2011, we advised Plaintiffs that due to the fact that each of the convertible notes held by Whalehaven and Alpha Capital are, by their stated terms, immediately convertible at the option of the holders into more than ten percent (10%) of the issued and outstanding shares of common stock of the Company, each of the Plaintiffs is an affiliate of the Company as defined in Rule 144(a) of the Securities Act. As such, any additional Settlement Shares issued to the Plaintiffs under the Settlement Agreement would have to comply with the applicable provisions of the Securities Act and specifically Rule 144 promulgated thereunder with regard to any resale. Accordingly we advised plaintiff’s that the additional 20.5 million shares issued to them pursuant to Section 3(a)(10) may only be resold by Plaintiffs in compliance with Rule 144. These shares are not “restricted securities” within the meaning of Rule 144(a), they are not subject to the holding period limitations of Rule 144(d). However, they are subject to the other relevant provisions of Rule 144, including (i) the limitation of the amount of securities that may be sold by an affiliate pursuant to Rule 144(e)(1) and the manner of sale pursuant to Rule 144(f)

 

On July 19, 2011 Plaintiffs wrote a letter to the Court disputing our position that they are affiliates and seeking judgment in default of the Settlement Agreement. We strongly believe that a default has not occurred; we maintain that we are in compliance with the terms of the Settlement Agreement and we are vigorously defending our position.

 

On August 19, 2011, the Company entered into a Memorandum of Understanding with Alpha Capital and Whalehaven. On August 25, 2011, a Final Settlement Agreement was reached to settle the July 19, 2011 Letter. On August 26, 2011, the Final Settlement Agreement was recorded and approved in the Court. We have since modified certain terms of the Final Settlement to impose a trading limitation on the Plaintiffs sale of our common stock and a lower ownership cap. The Plaintiffs also waived the installment payments owed to them under their notes, although we remain liable for any principal and interest outstanding on the maturity date.

 

As reported in the Company’s Form 8-K dated May 11, 2011, we were in default to each of Iroquois Master Fund Ltd., Cranshire Capital, L.P., Freestone Advantage Partners, L.P., Bristol Investment Fund, Ltd. and Kingsbrook Opportunities Master Fund LP, (collectively, the “2011 Note holders”), the holders of our convertible notes due December 1, 2011 (the “2011 Notes”) in the original principal amount of $8,437,500. As a result of such defaults, our total liabilities (including accrued interest, penalties and default redemption payments) to the 2011 Note holders aggregated $22,301,761. We entered into an exchange agreement on June 29, 2011, with each of the 2011 Note holders (the “Exchange Agreement”) in order to settle our obligations to each of the 2011 Note holders. This transaction was legally consummated and recorded for financial reporting purposes on July 1, 2011.

 

Following a fairness hearing held on September 30, 2011, in the Supreme Court of the State of New York (the “Court”), the Court entered an order approving (i) the fairness of the terms and conditions of the proposed exchange and the transactions contemplated by the Exchange Agreement, (ii) the terms and conditions of the proposed exchange and the transactions contemplated by the Exchange Agreement and (iii) the issuance of the Notes, the shares of Preferred Stock and the Warrants pursuant to the exemption from registration under Section 3(a)(10) of the Securities Act of 1933, as amended (the “3(a)(10) Order”).

 

As reported in the Company’s Form 8-K dated November 28, 2011, on November 28, 2011, we entered into separate exchange agreements with each of the 2011 Noteholders (the “November Exchange Agreements”), the form of which is attached hereto as Exhibit 10.3, pursuant to which each 2011 Noteholder agreed to exchange all of its respective Initial Settlement Securities for the securities described below. Due to the occurrence of various events of defaults under the 4% Notes and triggering events under the Preferred Stock, the Company determined it was in its best interest to enter into the November Exchange Agreement. The following securities of the Company will be issued in exchange for the Initial Settlement Securities:

 

(a) 402,411 shares of the Company’s preferred stock designated as “Series B Convertible Preferred Stock” (the “Series B Preferred Stock”), which Series B Preferred Stock shall, in accordance with its terms, (i) rank senior to all of the Company’s other equity securities, (ii) be initially convertible into approximately 1.8 billion shares of the Company’s common stock, $0.001 par value per share, (iii) have a par value of $0.001 per share, (iv) have a stated value of $10.00 per share, (v) accrue dividends at the rate of 4% per annum which shall be payable in shares of common stock, in arrears upon each conversion of such stock and (vi) contain such other rights, preferences and limitations as are set forth in the Certificate of Designations of Series B Convertible Preferred Stock, which is attached as Exhibit 10.4 attached hereto (the “Series B Certificate of Designations”);

 

(b) convertible notes, in the form attached hereto as Exhibit 10.5, in the original principal amount of $4,950,000, which notes shall be initially convertible into approximately 88.7 million shares of Common Stock, in accordance with the terms thereof (the “November Notes”) and mature on November 28, 2012;

 

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(c) warrants to acquire up to approximately 313.5 million shares of Common Stock, in the form attached hereto as Exhibit 10.6 (the “Series A Warrants”), in accordance with the terms of the Series A Warrants; and

 

(d) warrants, in the form attached hereto as Exhibit 10.7 (the “Series B Warrants,” together with the Series A Warrants, the “November Warrants”), to acquire 50,000 shares of the Company’s preferred stock designated as Series C Convertible Preferred Stock (the “Series C Preferred Stock,” together with the Series B Preferred Stock, the “November Preferred Stock”), which Series C Preferred Stock shall, in accordance with its terms, (i) rank junior to the Series B Preferred Stock and senior to all of the Company’s other equity securities, (ii) accrue dividends at the rate of 4% per annum, which shall be payable in shares of common stock, in arrears upon each conversion of such stock, (iii) are convertible into shares of Common Stock, (iv) have a par value of $0.001 per share, (v) have a stated value of $10.00 per share and (vi) contain such other rights, preferences and limitations as are set forth in the Certificate of Designations of Series C Convertible Preferred Stock attached hereto as Exhibit 10.8 (the “Series C Certificate of Designations”).

 

Each of the November Notes, shares of Series B Preferred Stock and shares of Series C Preferred Stock are initially convertible into shares of our common stock at a conversion price equal to the lowest of (i) $0.055825, (the “Fixed Conversion Price”), (ii) the price which is equal to the product of (1) 80% multiplied by (2) the quotient of (A) the sum of each of the three (3) lowest daily weighted average prices of our common stock during the twenty (20) consecutive trading day period immediately preceding the date of the conversion or other applicable date of determination (as applicable) divided by (B) three (3) (as adjusted for any stock split, stock dividend, stock combination or other similar transaction during any such twenty (20) trading day period) and (iii) the price which is equal to 80% of the closing bid price of our common stock on the trading day immediately preceding the date of conversion or other applicable date of determination (as applicable) (as adjusted for any stock split, stock dividend, stock combination or other similar transaction occurring on the applicable date of conversion or other applicable date of determination (as applicable)). However, if we make certain dilutive issuances (with limited exceptions), the conversion price of the November Notes and the shares of November Preferred Stock will be lowered to the per share price for the dilutive issuances. The Series A Warrants are initially exercisable for shares of our common stock at an exercise price of $0.055825 per share; provided however, if we make certain dilutive issuances (with limited exceptions), the exercise price of the Series A Warrants will be lowered to the per share price for the dilutive issuances. The Series A Warrants may also be exercised on a “cashless basis” under various circumstances. The Series B Warrants are exercisable for shares of our Series C Preferred Stock at an exercise price of $10.00 per share. The conversion prices of the Notes, the shares of the November Preferred Stock and the exercise price of the Series A Warrants are also subject to adjustment in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions; the exercise price of the Series B Warrants are only subject to adjustment in the case of stock splits, stock dividends or combinations of the Series C Preferred Shares. The convertibility of the November Notes, November Preferred Stock and the exercisability of the Series A Warrants may be limited if, upon conversion or exercise thereof, the holder thereof or any of its affiliates would beneficially own more than 1% of our common stock.

 

Pursuant to the terms of the Series B Warrants, the Company has the right upon satisfaction of certain conditions (the filing by the Company of this Current Report on Form 8-K with the SEC and the filing by the Company of the Series C Certificate of Designations with the Delaware Secretary of State) to require each of the holders of the Series B Warrants to exercise, on no less than one (1) trading day’s notice, all of their respective Series B Warrant for shares of Series C Preferred Stock. If the Company requires one holder of a Series B Warrant to so exercise its Series B Warrant, the Company is required to take the same action under all of the other Series B Warrants. If any shares of Series C Preferred Stock are issued upon exercise of any Series B Warrants, the Company will use all the proceeds therefrom solely to (a) pay accrued and unpaid legal fees to our legal counsel (not to exceed $65,000 in the aggregate) and (b) provide ongoing working capital for the Company for a period of not less than ninety (90) days following the first date of issuance of any shares of Series C Preferred Stock.

 

The November Notes accrue interest at the rate of 4% per annum and shall be paid in arrears, in shares of our common stock upon each conversion of the November Note. Upon the occurrence of an event of default and until it is cured, the November Notes shall accrue interest at the rate of 18%. If an event of default occurs or change in control transaction occurs we must redeem in cash any Notes submitted to us for redemption upon the terms set forth in the Notes.

 

Each of the 2011 Noteholders agreed separately with the Company in its respective November Note that from and after the issuance of its respective November Note until the occurrence of a Termination Event (as defined in its November Note) such 2011 Noteholder will not sell an aggregate number of Covered Shares (as defined in its November Note) (i.e. shares of Common Stock issued upon exercise of such 2011 Noteholder’s Series A Warrants and upon conversion of such Noteholder’s November Note, shares of Series B Preferred Stock and Series C Preferred Stock (if any shares of Series C Preferred Stock are issued to such Noteholder) on any trading day that exceed an agreed upon percentage of the aggregate daily trading volume of the Common Stock on such trading day (which initially range from 0.24% to 4.39% for each of the 2011 Noteholders). The initial percentage of the daily trading volume in such Noteholder’s November Note increases by 100% once the Common Stock trades for greater than or equal to $1.25 per share (adjusted for stock splits, combinations and other similar transaction), by an additional 50% once the Common Stock trades for greater than or equal to $2.50 per share (adjusted for stock splits, combinations and other similar transaction) and then no longer applies once the Common Stock trades for greater than or equal to $3.75 per share (adjusted for stock splits, combinations and other similar transaction) or another Termination Event occurs.

 

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Although the November Notes rank senior to all of the Company’s outstanding and future debt, with a few exceptions, they rank pari passu with the notes held by the Plaintiffs. However, neither of the notes issued to the Plaintiffs may be amended, waived, extended or otherwise modified in any manner or respect without the prior written consent of the holders of the November Notes.

 

Upon the occurrence of a Triggering Event or Fundamental Transaction, as such terms are defined in the Series B Certificate of Designations and the Series C Certificate of Designations, each holder of shares of the November Preferred Stock has a right to force us to redeem any or all of their shares November Preferred Stock then held by such holder. The transactions contemplated by the November Exchange Agreements were consummated on November 28, 2011.

 

On December 8, 2011, Ironridge Global IV, Ltd. (“Ironridge”) filed a complaint against us in the Superior Court of California, Los Angeles County.  Ironridge claims that we breached a contract with them by allegedly discussing and then entering into transactions to settle certain of our outstanding liabilities with holders of our convertible securities during a 30-day exclusivity period, during which Ironridge claims it had the exclusive right to do so.  Ironridge is seeking damages in excess of $30.0 million.  We believe that the Ironridge claims are totally without merit, that Ironridge met with substantially all of the holders of such convertible notes and related securities and, in fact, did business with certain of such creditors who elected to deal with Ironridge.  As such, we believe that we performed all of our obligations under such contract and intend to defend our position vigorously.

  

Other than the above mentioned litigation matters, neither we nor any of our direct or indirect subsidiaries is a party to, nor is any of our property the subject of, any legal proceedings other than ordinary routine litigation incidental to their respective businesses. There are no proceedings pending in which any of our officers, directors or 5% shareholders are adverse to us or any of our subsidiaries or in which they are taking a position or have a material interest that is adverse to us or any of our subsidiaries.

 

From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business.

 

Available Information

 

We are subject to the informational requirements of the Securities Exchange Act of 1934 and, in accordance therewith, file reports and other information with the SEC. Our reports and other information filed pursuant to the Securities Exchange Act of 1934 may be inspected and copied at the public reference facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. Copies of such material can also be obtained from the Public Reference Room of the SEC at 100 F Street, N.E., Washington, D.C. 20549, at prescribed rates. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a Web site that contains reports and other information regarding registrants that file electronically with the SEC. The address of the SEC’s Web site is http://www.sec.gov.

 

We have filed with the SEC a registration statement on Form S-1 under the Securities Act of 1933 with respect to the common stock offered hereby. As permitted by the rules and regulations of the SEC, this prospectus, which is part of the registration statement, omits certain information, exhibits, schedules and undertakings set forth in the registration statement. Copies of the registration statement and the exhibits are on file with the SEC and may be obtained from the SEC’s Web site or upon payment of the fee prescribed by the SEC, or may be examined, without charge, at the offices of the SEC set forth above. For further information, reference is made to the registration statement and its exhibits.  Information located on, or accessible through, our website is not incorporated into this filing unless this filing specifically indicates otherwise.  

  

MANAGEMENT

 

Directors And Executive Officers

 

The following table and text set forth the names and ages of all directors and executive officers as of January 20, 2012.  We have three classes of directors and the term of the Class I directors will expire at the 2012 Annual Meeting of Stockholders. There are no family relationships among our directors and executive officers. Also provided herein are brief descriptions of the business experience of each director, executive officer and advisor during the past five years and an indication of directorships held by each director in other companies subject to the reporting requirements under the Federal securities laws. None of our officers or directors is a party adverse to us or has a material interest adverse to us.

 

On August 19, 2011, the Board of Directors approved appointing Leonard M. J. Reyno, M.D. as a Class I Director, effective on August 22, 2011. Dr. Reyno replaced Minghui Jia, who resigned from the Company’s Board of Directors effective August 19, 2011.

   

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        Year First    
Name   Age   Elected   Position(s)
             
Douglas C. MacLellan   56   1992   Executive Chairman and Chief Executive Officer
Akio Ariura   53   2006   Chief Financial Officer and Secretary
Michael Boswell   42   2008   Director
             
Dr. Robert Beart   66   2010   Director
Dr. Leonard M. J. Reyno, MD   49   2011   Director
Dr. Robert Rooks, DVM   57   2011   Director

 

Mr. MacLellan, in November 2008, was appointed Chairman and CEO.   He was originally appointed to the Board in 1992 and became Chairman of the Audit and Governance committees in 2001. Since November 2009 through the present, Mr. MacLellan has been a director of China Net Online Holdings, Inc., (NASDAQ:CNET), a leading Chinese media development, advertising, and communications company.  Mr. MacLellan is also currently President and CEO of MacLellan Group, Inc., a privately held business incubator and financial advisory firm since May 1992.  From August 2005 to May 2009, Mr. MacLellan was a member of the Board of Directors of Edgewater Foods, International, Inc.  Mr. MacLellan was, until September 2005, formally vice-chairman of the Board of Directors of AXM Pharma, Inc. (AXMP.PK) and its predecessors.  AXM is a China based bio-pharmaceutical company.  From January 1996 through August 1996, Mr. MacLellan was also the Vice-Chairman of Asia American Telecommunications (Metromedia China Corporation), a majority owned subsidiary of Metromedia International Group, Inc.  From November 1996 until March 1998, Mr. MacLellan was co-Chairman and investment committee member of the Strategic East European Fund.  From November 1995 until March 1998, Mr. MacLellan was President, Chief Executive Officer and a director of PortaCom Wireless, Inc., a company engaged as a developer and operator of cellular and wireless telecommunications ventures in selected developing world markets.  Mr. MacLellan is a former member of the Board of Directors and co-founder of FirstCom Corporation, an international telecommunications company that operates a competitive access fiber and satellite network in Latin America, which became AT&T Latin America, Inc. in August 2000.  From 1993 to 1995, Mr. MacLellan was a principal and co-founder of Maroon Bells Capital Partners, Inc., a U.S. based merchant bank, which specializes in providing corporate finance services to companies in the international and domestic telecommunications and media industries.  Mr. MacLellan was educated at the University of Southern California in economics and finance, with advanced training in classical economic theory.

 

Mr. Ariura was appointed as our Chief Financial Officer as of August 21, 2006. From September 2004 until joining the Company, Mr. Ariura was employed by Resources Global Professionals, providing both public and private companies with consulting services on Sarbanes-Oxley compliance, SEC filings and special project financial and management services in connection with preparation of financial statements, tax reporting and mergers and acquisitions. From January 2001 to December 2003, Mr. Ariura was Vice President of Sunvest Industries, LLC in charge of preparation of financial statements, budgets and other financial reports. In light of Mr. Ariura’s financial and regulatory experience, we determined that he should serve as the company’s Chief Financial Officer. Mr. Ariura received a B.S. in Business Administration from University of Southern California in 1980. Mr. Ariura has had no prior affiliation or relationship with the Company.

 

 

Mr. Boswell was elected to the Board in 2008. Mr. Boswell is President, COO and Chief Compliance Officer for TriPoint Global Equities, LLC, a FINRA member firm that maintains ,specialty practices in institutional private placements, mergers and acquisitions and corporate finance. He provides high-level financial services to start-up businesses and small-to-mid-sized companies including holding executive and CFO positions with client companies. Mr. Boswell is also Managing Director of TriPoint Capital Advisors, LLC a merchant bank and financial advisory affiliate of TriPoint Global. With TriPoint Capital Advisors he has assisted numerous companies by providing high-level advice regarding corporate finance, corporate structure, corporate governance, mergers and acquisitions, SOX 404 compliance, implications of various SEC rules and FASB Emerging Issues Task Forces issues as they relate to private placements, SEC reporting and disclosure requirements, employee option programs, and the overall reverse merger process. Mr. Boswell is currently a member of the board of directors and chairman of the audit committee of AMDL, Inc. (AMEX: ADL), a publicly held biotechnology firm and a Director and Acting Chief Accounting Officer for Ocean Smart, Inc. (OTC BB: OCSM). Prior to the founding of TriPoint Global, Mr. Boswell had a number of executive positions focusing on business development and management consulting. He also spent eight years as a senior analyst and/or senior engineer for various branches of the United States Government. Mr. Boswell earned a MBA from John Hopkins University and a BS degree in Mechanical Engineering from University of Maryland; he holds the Series 24, 82 and 63 licenses.

 

Dr. Beart currently leads the Colorectal Surgery Institute at the Glendale Memorial Hospital and Health Center in Glendale, California. Dr. Beart’s main research interests include continence preservation, colostomy avoidance and the management of recurrent colorectal cancer. His clinical involvement in colorectal diseases covers the spectrum, from chronic constipation and diarrhea, anorectal problems and diverticulitis, to fecal incontinence, inflammatory bowel disease and polyps. His interests also extend to cancer, not only the primary treatment of disease, but the management of unusual cancer problems and recurrent cancer. Dr. Beart worked at the Mayo Clinic from 1976 to 1992 and has been at the University of Southern California since 1992. Dr. Beart, who pioneered the ileal pouch-anal anastomosis at the Mayo Clinic in Rochester, Minnesota, has established the Division of Colorectal Surgery in the USC Department of Surgery, and launched the USC Center for Colorectal Diseases at USC University Hospital and USC/Norris Cancer Center and Hospital. His special areas of interest include the management of colon and rectal cancer and recurrent colon and rectal cancer as well as inflammatory bowel disease and preservation of intestinal continence. He graduated from Harvard Medical School and is a past president of the American Society of Colon and Rectal Surgeons. He had his surgical training at the University of Colorado and the Mayo Clinic. He is Board certified and recertified in General and Colorectal Surgery.0

 

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Dr. Rooks, DVM was appointed to our board in February 2011 to fill the vacancy of the resignation of Mr. Thompson.  Dr. Rooks is the founder, and retired director of VCA All-Care Animal Referral Center, in Fountain Valley, CA. Under his leadership, VCA has grown into an organization comprised of three subsidiaries that include the All-Care Animal Referral Center, the Animal Orthopedic Care Center, and the Animal Cancer Care Center. Collectively, these centers are staffed by more than 25 veterinarians and 65 technicians who see over 30,000 patient cases annually under Dr. Rooks' guidance.  Dr. Rooks is a 1978 graduate of Iowa State University and a Diplomate of both the American Board of Veterinary Practitioners and the American College of Veterinary Surgeons. Dr. Rooks developed a surgical procedure and specialized implant for the treatment for hip dysplasia in dogs and is co-author of Canine Orthopedic and the Veterinary Cancer Therapy Handbook: Chemotherapy, Radiation Therapy, and Surgical Oncology for the Practicing Veterinarian. He is the past president of the Orange County Chapter of The Southern California Veterinary Medical Association and of the Animal Health Foundation and recipient of the Iowa State University Outstanding Young Alumnus Award, AAHA EXCEL Award, and highly prestigious Charles E. Bild Practitioner of the Year Award.

 

Dr. Reyno was appointed to our board in August 2011.  Dr. Reyno has extensive executive experience in the biotech industry, as well as having served as a professor of medicine and oncology, and in his own oncology practice. Dr. Reyno has received numerous awards and honors in oncology, has served as a reviewer for several key scientific journals, and has published numerous papers in peer reviewed journals and abstracts, as well as having been a guest presenter and lecturer at dozens of medical and biotech conferences. As a biotech executive, Dr. Reyno currently serves as the Senior Vice President and Chief Medical Officer for Clinical Research and Development at Agensys, Inc. and Chief Medical Officer for Oncology at Astellas Pharma. Agensys is a wholly-owned subsidiary of Astellas Pharma US, the US affiliate of Astellas Pharma Inc., Japan’s second largest pharmaceutical company. Astellas Pharma currently has a $17 billion market capitalization and is ranked within the top 20 pharmaceutical companies in the global market. Prior to Astellas Pharma, Dr. Reyno was Senior Director of Clinical Development at Novacea; was Medical Director, Lead Clinical Scientist on the Herceptin Team, Bio-Oncology at Genentech; and served as Global Director, Oncology Therapeutic Area for Aventis.

  

Executive Compensation

 

The following table sets forth all compensation received during the two years ended December 31, 2011 by our Chief Executive Officer and Chief Financial Officer. Upon Mr. MacLellan’s appointment in October 2008, we agreed to pay him an annual base salary of $360,000, to be paid in equal monthly installments, and he is also entitled to certain bonuses subject to our Compensation Committee’s recommendation and approval.

 

Summary Compensation Table

 

Name 
 and 
 Principal
Position
  Year     Salary  
($)
    Bonus ($)     Stock 
Awards ($)
    Option 
Awards 
($)(1)
    Non-Equity  
Incentive 
Plan 
 Compensation 
Earnings 
  ($)
    Non- qualified 
Deferred 
Compensation 
Earnings
($)
    All Other 
Compensation 
($)
    Total
($)
 
Douglas MacLellan, President, CEO, & Chairman     2011     $ 345,000     $ -     $ -     $ 506,832     $ -     $ -     $ -     $ 851,832  
Douglas MacLellan, President, CEO, & Chairman     2010     $ 360,000     $ 238,000     $ -     $ 894,860     $ -     $ -     $ -     $ 1,492,860  
Akio Ariura, CFO     2011     $ 300,000     $ -     $ -     $ 385,192     $ -     $ -     $ -     $ 685,192  
Akio Ariura, CFO     2010     $ 300,000     $ 144,000     $ -     $ 676,240     $ -     $ -     $ -     $ 1,120,240  

  

49
 

  

(1) Represents the fair value of the options issued during 2010 and 2011.

 

Employment Agreements

 

On November 4, 2008 Douglas C. MacLellan was appointed as our President and Chief Executive Officer.  Mr. MacLellan does not have an employment agreement and is compensated at a base salary of $30,000 per month and he participates in the Company’s health insurance and other benefits available to executive officers.  During the year ended December 31, 2010, Mr. MacLellan earned a bonus of $238,000.

 

Outstanding Equity Awards at December 31, 2011

Name   Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
    Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
    Equity
Incentive 
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#)
    Option
Exercise
Price
($/Sh)
    Option
Expiration
Date
 
Douglas MacLellan     3,600       -       -     $ 18.75     5/31/2012  
      8,000       -       -     $ 18.75     3/3/2013  
      100,000       -       -     $ 9.75     12/2/2015  
      5,000,000                     $ 0.11     11/4/2016  
                                       
Akio Ariura     2,000       -       -     $ 18.75     5/31/2012  
      2,000       -       -     $ 18.75     3/3/2013  
      80,000       -       -     $ 9.75     12/2/2015  
      3,800,000                     $ 0.11     11/4/2016  

 

Name   Number 
of 
Shares 
or 
Units of 
Stock 
That 
Have 
Not 
Vested 
(#)
    Market 
Value of 
Shares 
or 
Units of
 Stock 
That 
Have 
Not 
Vested 
($)
    Equity 
Incentive 
Awards:
 Number
 of 
Unearned 
Shares,
 Units, or 
Other 
Rights 
That 
Have 
Not 
Vested 
(#)
    Equity 
Incentive 
Awards:
 Market 
or 
Payout 
Value of 
Unearned 
Shares,
 Units, or 
Other 
Rights 
That 
Have 
Not 
Vested 
(#)
 
Douglas MacLellan   -     $ -       -     $ -  
Akio Ariura   -     $ -       -     $ -  

 

50
 

 

2010 Performance and Equity Incentive Plan

 

On December 3, 2010, our stockholders approved the 2010 Performance and Equity Incentive Plan (the “2010 Plan”). Under the terms of the 2010 Plan, the Compensation Committee or our Board of Directors may suspend or terminate the 2010 Plan at any time.

 

The 2010 Plan provides for the grant to employees, including executive officers, of restricted common stock, as well as cash or other stock-based awards and other benefits. The purpose of the 2010 Plan is to enable us to attract and retain qualified persons as employees, officers and directors and others, whose services are required by us, and to motivate such persons by providing them with equity participation in us.

 

A maximum of 240,000 shares of common stock may be issued and awarded under the 2010 Plan; however, as of January 1 of each year, commencing with the year 2011 and ending with the year 2013, the aggregate number of shares available for granting awards under the 2010 Plan shall automatically increase by a number of shares equal to the lesser of (x) 5% of the total number of shares of our common then outstanding or (y) 120,000. The maximum number of shares of common stock that may be subject to stock awards granted to any one participant during any single year period is 3,000,000.  As of December 31, 2010, 223,600 options were granted under the 2010 Plan.

  

The 2010 Plan is administered by the Compensation Committee, which has, subject to specified limitations, the full authority to grant equity awards and establish the terms and conditions for vesting and exercise thereof. Awards of restricted stock under the 2010 Plan may qualify for the “performance-based compensation” exception under the Internal Revenue Code of 1986 (the “IRC”) Section 162(m) pursuant to their expected terms. Cash-based awards and awards of restricted stock, performance units and stock may qualify under Section 162(m) of the IRC if the terms of the award state, in terms of an objective formula or standard, the method of computing the amount of compensation payable under the award and preclude discretion to increase the amount of compensation payable under the terms of the award.

 

2011 Stock Option Plan

 

Our Board of Directors unanimously approved the 2011 Stock Option Plan (the “2011 Plan”) via unanimous written consent on September 26, 2011 and our shareholders approved it at the November 4, 2011 Special Shareholder Meeting. The Compensation Committee or our Board of Directors may suspend or terminate the 2011 Plan at any time.

 

The 2011 Plan provides for the grant to employees, including executive officers, consultants and directors of restricted common stock, as well as cash or other stock-based awards and other benefits. The purpose of the 2011 Plan is to enable us to attract and retain qualified persons as employees, officers and directors and others, whose services are required by us, and to motivate such persons by providing them with equity participation in us.

 

Under the 2011 Plan, an aggregate of up to 10% of the total fully diluted issued and outstanding shares of common stock may be issued and awarded, up to a maximum of not more than 20 million shares of common stock.

 

The 2011 Plan is administered by the Compensation Committee, which has, subject to specified limitations, the full authority to grant equity awards and establish the terms and conditions for vesting and exercise thereof. Awards of restricted stock under the 2011 Plan may qualify for the “performance-based compensation” exception under the Internal Revenue Code of 1986 (the “IRC”) Section 162(m) pursuant to their expected terms. Cash-based awards and awards of restricted stock, performance units and stock may qualify under Section 162(m) of the IRC if the terms of the award state, in terms of an objective formula or standard, the method of computing the amount of compensation payable under the award and preclude discretion to increase the amount of compensation payable under the terms of the award.

 

For further information about the 2011 Plan, please see the Definitive Information Statement on Schedule 14A that we filed with the SEC on October 14, 2011.

 

As of the date of this prospectus, 13,040,000 options were granted under the 2011 Plan by the compensation committee on November 4, 2011; 10,600,000 of which were granted to our executive officers and directors, 1,640,000 of which were granted to key employees, and 800,000 of which were granted to our outside securities counsel.  All such options were granted at an exercise price equal to $0.11 per share, being the greater of $0.11 or 100% of the closing price of our common stock as at November 4, 2011. 

 

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Director Compensation

 

The following table contains information regarding the compensation of our directors for the fiscal year ending December 31, 2011:

  

Name   Fees
Earned
or Paid
in Cash
($)
    Stock
Awards
($) (1)
    Option
Awards
($) (2)
    Non-equity
Incentive Plan
Compensation
($)
    Nonqualified
Deferred
Compensation
Earnings ($)
    All Other
Compensation
($)
    Total
($)
 
                                           
Michael Boswell (3)   $ 104,000     $ -     $ 81,093     $ -     $ -     $ -     $ 185,093  
Robert M. Beart, MD (4)   $ 1,750     $ 15,200     $ 40,547     $ -     $ -     $ -     $ 57,497  
Dr. Robert Rooks(5)   $ 1,393     $ 15,200     $ 40,547     $ -     $ -     $ -     $ 57,497  
Dr. Leonard M. Reyno (6)   $ 12,000     $ 780     $ 20,273     $ -     $ -     $ -     $ 33,053  

  

  (1) Represents the fair value of the common stock issued in 2011.
  (2) Represents the fair value of the common stock options granted in 2011.
  (3) Mr. Boswell was elected to the Board in 2008. Currently his compensation is of $10,000 monthly.
  (4) When the Board appointed Dr. Beart to serve on our Board, they approved issuing him 1,600 shares of our common stock and to pay Dr. Beart the same compensation paid to our other independent directors, which is $1,500 for each in person meeting and $500 for each telephonic meeting he attends. The shares of common stock were issued in May 2011.
  (5) When the Board appointed Mr. Rooks to serve on our Board, they approved issuing him 1,600 shares of our common stock and to pay Mr. Rooks the same compensation paid to our other independent directors, which is $1,500 for each in person meeting and $500 for each telephonic meeting he attends. The shares of common stock were issued in May 2011.
  (6) When the Board appointed Mr. Reyno to serve on our Board, they approved issuing him 1,600 shares of our common stock and to pay Mr. Reyno $3,000 monthly. The shares of common stock were issued in August 2011.

 

We indemnify our directors and officers to the fullest extent permitted by law so that they will be free from undue concern about personal liability in connection with their service to us. This is permitted by our Certificate of Incorporation and our Bylaws.

  

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The following table shows the beneficial ownership of our shares of Common Stock as of January 20, 2012 by (i) each person who is known by us to be the beneficial owner of more than five percent (5%) of our Common Stock, (ii) each of our directors and executive officers and (iii) all directors and executive officers as a group. Except as otherwise indicated, the beneficial owners listed in the table have sole voting and investment powers of their shares.

 

Name and Address (1)   Number of
Shares
    Percentage
Owned (2)
 
             
Douglas C. MacLellan     5,111,600 (3)     8.22 %
Akio Ariura     3,884,000 (4)     6.37 %
Michael Boswell                
400 Professional Drive                
Suite 310                
Gaithersburg, MD 20879     809,600 (5)     *  
Robert Beart                
445 S. Grand Ave                
Pasadena, CA 91105     407,600 (6)     *  
Robert Rooks                
1912 Pine St.                
Huntington Beach, CA 92648     401,600 (7)     *  
Leonard Reyno                
607 North Las Palmas Ave                
Los Angeles, CA 90004     201,600 (8)     *  
All Directors and Officers as a group (6 persons)     10,816,000       15.94 %

 

denotes ownership that does not exceed one percent. 

52
 

 

(1) Unless otherwise indicated, address is 2492 Walnut Avenue, Suite 100, Tustin, California, 92780.

 

(2) In accordance with SEC rules, beneficial ownership includes sole or shared voting or investment power with respect to securities and includes the shares issuable pursuant to convertible securities that are exercisable within 60 days of the determination date, which in the case of the following table is January 20, 2012. Shares issuable pursuant to convertible securities are deemed outstanding for computing the percentage of the person holding such securities but are not outstanding for computing the percentage of any other person. Under these rules, one or more persons may be a deemed beneficial owner of the same securities and a person may be deemed a beneficial owner of securities to which such person has no economic interest. Unless otherwise indicated, the persons or entities identified in this table have sole voting and investment power with respect to all shares shown as beneficially owned by them, subject to applicable community property laws.

 

(3) Includes, 11,600 shares of common stock issuable upon the exercise of options at $18.75 per share,100,000 shares of common stock issuable upon the exercise of options at $9.75 per share, and 5,000,000 shares of common stock issuable upon the exercise of options at $0.11 per share.

 

(4) Includes 4,000 shares of common stock issuable on exercise of options at $18.75 per share, 80,000 shares of common stock issuable upon the exercise of options at $9.75 per share, and 3,800,000 shares of common stock issuable upon the exercise of options at $0.11 per share.

 

(5) Includes 8,000 shares of common stock issuable upon the exercise of options at $9.75 per  share, 800,000 shares of common stock issuable upon the exercise of options at $0.11 per share, and 1,600 shares of common stock granted in August 2009.

 

(6) Includes 6,000 shares of common stock issuable upon the exercise of options at 9.75 per share, 400,000 shares of common stock issuable upon the exercise of options at $0.11 per share, and 1,600 shares of common stock granted on August 5, 2010, and issued in May 2011.

 

(7) Includes 400,000 shares of common stock issuable upon the exercise of options at $0.11 per share and 1,600 shares of common stock granted on February 22, 2011, and issued in May 2011.

 

(8) Includes 200,000 shares of common stock issuable upon the exercise of options at $0.11 per share and 1,600 shares of common stock granted on August 19, 2011, and issued in August 25, 2011.

 

 Transactions With Related Persons, Promoters And Certain Control Persons

 

Other than the relationships and transactions discussed below, we are not a party to, nor are we proposed to be a party, to any transaction during the last fiscal year involving an amount exceeding $120,000 and in which a related person, as such term is defined by Item 404 of Regulation S-K, had or will have a direct or indirect material interest.

 

During the year ended December 31, 2010, Minghui Jia, a member of our board of directors, paid for certain JPI related expenses, totaling approximately $120,000, for which we reimbursed him.

 

53
 

 

Review, Approval and Ratification of Related Party Transactions

 

In September 2008, our board approved the Related Party Transaction Policy and Procedures.  Pursuant thereto, it is our policy to discourage interested transactions with related parties unless they are determined to be in our best interests and they have been approved in accordance with the terms and conditions of the Policy. Accordingly, except as otherwise provided in the Policy, all Interested Transactions with Related Parties (as those terms are defined in the Policy) require prior approval of (a) our Board of Directors, President and CEO. (acting in each case by a majority of the directors then in office who have no interest in a proposed Interested Transaction) or (b) the Board of Directors (acting as above) and a committee of not less than two Independent Directors appointed by the Board of Directors who have no interest in the proposed Interested Transaction being considered, in each case.  Under the Policy, the Board of Directors and either the President and CEO shall review the material facts of all Interested Transactions that require approval in accordance with the Policy and either approve or disapprove of the entry into the Interested Transaction, subject to certain pre-approved transactions (i.e. executive officer or director compensation specifically approved by our CEO and/or Compensation Committee, awards granted pursuant to a shareholder approved stock option plan) that are included in the Policy. In determining whether to approve an Interested Transaction, the Board of Directors, the President and CEO, as applicable, will take into account, among other factors each deems appropriate, whether the Interested Transaction is on terms no less favorable than terms generally available to an unaffiliated third-party under the same or similar circumstances and the extent of the Related Party’s interest in the transaction.

 

In connection with each regularly scheduled meeting of the Board of Directors, a summary of each new Interested Transaction deemed pre-approved pursuant to the policy is provided to the Board of Directors for its review.  If an Interested Transaction will be ongoing, the Board of Directors may establish guidelines for our management to follow in its ongoing dealings with the Related Party. Thereafter, the Board of Directors shall periodically review and assess ongoing relationships with the Related Party to see that they are in compliance with such guidelines and that the Interested Transaction remains appropriate.

 

Promoters and Certain Control Persons

 

None of our management or other control persons were “promoters” (within the meaning of Rule 405 under the Securities Act), and none of such persons took the initiative in the formation of our business or received any of our debt or equity securities or any of the proceeds from the sale of such securities in exchange for the contribution of property or services, during the last five years.

 

Director Independence

 

Under the Company’s corporate governance principles (the “Corporate Governance Principles”), a majority of the Board will consist of independent directors. Although we are no longer listed on the NYSE Amex, we still use their definition of “independent” to determine if a director is independent, along with other applicable independence standards under SEC guidelines, as determined by the Board. The Corporate Governance and Nominating Committee conducts an annual review of the independence of the members of the Board and its Committees and reports its findings to the full Board. Based on the report and recommendation of the Corporate Governance Committee, the Board has determined that each of the non-employee directors — Dr. Beart, Dr. Rooks, Mr. Boswell, and Dr. Reyno — satisfies the independence criteria (including the enhanced criteria with respect to members of the Audit Committee) set forth  by the NYSE Amex and SEC rules. Each Board Committee consists entirely of independent, non-employee directors.

 

For a director to be considered independent, the Board must determine that the director does not have any direct or indirect material relationships (including vendor, supplier, consulting, legal, banking, accounting, charitable and family relationships) with Radient, other than as a director and shareholder.

 

The Board considered all relevant facts and circumstances in making its determinations, including the following:

   

  · No non-employee director receives any direct compensation from Radient other than under the director compensation program described in this proxy statement.

  

  · No immediate family member (within the meaning of the Amex listing standards) of any non-employee director is an employee of Radient or otherwise receives direct compensation from Radient.

  

  · No non-employee director (or any of their respective immediate family members) is affiliated with or employed in a professional capacity by Radient’s independent accountants.

 

  · No non-employee director is a member, partner, or principal of any law firm, accounting firm or investment banking firm that receives any consulting, advisory or other fees from Radient.

 

54
 

  

  · No Radient executive officer is on the compensation committee of the board of directors of a company that employs any of our non-employee directors (or any of their respective immediate family members) as an executive officer.

  

  · No non-employee director (or any of their respective immediate family members) is indebted to Radient, nor is Radient indebted to any non-employee director (or any of their respective immediate family members).

  

  · No non-employee director serves as an executive officer of a charitable or other tax-exempt organization that received contributions from Radient.

 

Non-management members of the Board of Directors conduct at least one regularly-scheduled meeting per year without members of management being present. Mr. Boswell serves as the presiding director of such meetings. Following an executive session of non-employee directors, the presiding director may act as a liaison between the non-employee directors and the Chairman, provide the Chairman with input regarding agenda items for Board and Committee meetings, and coordinate with the Chairman regarding information to be provided to the non-employee directors in performing their duties

  

SELLING STOCKHOLDERS

 

Other than as described below, none of the Selling Stockholders nor any of their affiliates has held any position or office with, been employed by or otherwise has had any material relationship with us or our affiliates during the three years prior to the date of this prospectus.  Unless otherwise indicated below, none of the Selling Stockholders are broker-dealers or affiliates of a broker-dealer within the meaning of Section 3 of the Securities Exchange Act.

 

This prospectus relates to the offering and sale, from time to time, of up to 16,000,000 shares of our common stock held by the stockholders named in the table below.

 

The shares of common stock being offered by the selling stockholders are those issuable to the selling stockholders upon exercise of the Series A Warrants issued pursuant to the November Exchange Agreements.  For additional information regarding the issuance of those warrants, see “November 2011 Exchange” above.  We are registering the shares of common stock in order to permit the selling stockholders to offer the shares for resale from time to time.  The selling stockholders originally invested in our company pursuant to a private financing we closed in January 2011.  In June 2011, we entered into an initial exchange agreement with the selling stockholders pursuant to which they exchanged the respective original securities they received pursuant to the January 2011 financing for new securities. Subsequently, in November 2011, we entered into separate new exchange agreements with each of the selling stockholders pursuant to which they exchanged the respective securities they received in June 2011 for new securities, including the Series A Warrants, the common stock underlying which we seek to register pursuant hereto.  Pursuant to those November 2011 exchange agreements, we also issued Notes (“November Notes”) in the aggregate amount of approximately $4,950,000 convertible into 88,669,951 shares of our common stock, shares of Series B Convertible Preferred Stock (“Series B Preferred Stock”) convertible into 72,089,815 shares of our common stock and warrants to purchase up to a total of 322,438,191 shares of our common stock, assuming all of the Series C Preferred Stock (“Series C Preferred Stock”) underlying the Series B Warrants are converted. As of the date of this filing, all of the Series B Warrants were exercised and therefore the Series C Preferred Stock was issued, but none of the Series C Preferred Stock has been converted. Unless otherwise noted in the footnotes, the selling stockholders have not had any material relationship with us within the past three years.

  

The table below lists the selling stockholders and other information regarding the beneficial ownership (as determined under Section 13(d) of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder) of our common stock with respect to the securities held by each of the selling stockholders.

 

The second column lists the number of shares of common stock beneficially owned by each of the selling stockholders as of January 20, 2012, including assuming exercise of the Series A Warrants held by each such selling stockholder on that date but taking account of any limitations on exercise set forth therein. Under the terms of the Series A Warrants, a selling stockholder may not exercise the warrants to the extent (but only to the extent) such selling stockholder or any of its affiliates would beneficially own a number of shares of our common stock which would exceed 1%. Each of the other securities each selling stockholder received pursuant to their respective November 2011 exchange agreements, namely the Notes, the Series B Convertible Preferred Stock and Series C Convertible Preferred Stock contain similar blockers, pursuant to which the holder thereof does not have the right to convert or exercise such security to the extent (but only to the extent) that such conversion or exercise would result in beneficial ownership by the holder thereof or any of its affiliates, of more than 1.0% of the common stock (the “Ownership Limitation”). The number of shares in the second column reflects these limitations and therefore, the numbers included in this column represent 1% of our common stock outstanding as of January 20, 2012. As of such date, we had 57,044,958 shares of common stock outstanding. . The selling stockholders may sell all, some or none of their shares in this offering.  See “Plan of Distribution.”

 

The third column lists the shares of common stock underlying the Series A Warrants being offered by this prospectus by the selling stockholders and does not take into account any limitations on exercise of the Series A Warrants set forth therein.

 

This prospectus generally covers the resale of 16,000,000 shares of common stock issuable upon exercise of the Series A Warrants (without regard to any limitations on exercise contained therein), which represents approximately 5.1% of the total number of shares that are issuable upon exercise of the Series A Warrants. The fourth column assumes the sale of all of the shares offered by the selling stockholders pursuant to this prospectus.

 

We estimate that our costs and expenses of registering the shares listed herein for resale will be approximately $45,602.36.

 

55
 

 

Name of Selling Stockholder   Number of Shares of Common Stock Owned Prior to Offering     Maximum Number of Shares of Common Stock to be Sold Pursuant to this Prospectus     Number of Shares of Common Stock Owned After Offering  
Kingsbrook Opportunities Master Fund LP (1)     576,212  (2)     5,614,900       576,212  
Bristol Investment Fund, Ltd. (3)     575,705  (4)     5,104,455       575,705  
Iroquois Master Fund, Ltd. (5)     573,070  (6)     3,238,863       573,070  
Cranshire Capital, L.P. (7)     570,250  (8)     1,735,515       570,250  
Freestone Advantage Partners, L.P  (7)     5,593  (9)     306,267       5,593  

 

 

(1) Kingsbrook Partners LP (“Kingsbrook Partners”) is the investment manager of Kingsbrook Opportunities Master Fund LP (“Kingsbrook Opportunities”) and consequently has voting control and investment discretion over securities held by Kingsbrook Opportunities. Kingsbrook Opportunities GP LLC (“Opportunities GP”) is the general partner of Kingsbrook Opportunities and may be considered the beneficial owner of any securities deemed to be beneficially owned by Kingsbrook Opportunities. KB GP LLC (“GP LLC”) is the general partner of Kingsbrook Partners and may be considered the beneficial owner of any securities deemed to be beneficially owned by Kingsbrook Partners. Ari J. Storch, Adam J. Chill and Scott M. Wallace are the sole managing members of Opportunities GP and GP LLC and as a result may be considered beneficial owners of any securities deemed beneficially owned by Opportunities GP and GP LLC. Each of Kingsbrook Partners, Opportunities GP, GP LLC and Messrs. Storch, Chill and Wallace disclaim beneficial ownership of these securities.

 

(2)

This number reflects the number of shares available under the Ownership Limitation described above, with 0 shares of common stock Kingsbrook held as of January 20, 2012.  Although Kingsbrook cannot beneficially own more than the Ownership Limit, it does hold the following securities: (i) $1,737,110 principal amount of the November Note, which is convertible into up to 36,402,904 shares of common stock, subject to adjustment (plus accrued and unpaid interest thereon); (ii) 142,021 shares of Series B Preferred Stock, convertible into up to 29,761,893 shares of common stock, subject to adjustment (plus accumulated and unpaid dividends thereon); (iii) 17,547 shares of Series C Preferred Stock, convertible into up to 3,676,249 shares of common stock, subject to adjustment (plus accumulated and unpaid dividends thereon) and (iv)  127,944,507 Series A Warrants, subject to adjustment.

 

(3) Bristol Capital Advisors, LLC (“BCA”) is the investment advisor of Bristol Investment Fund, Ltd. (“Bristol”).  Paul Kessler is the manager of BCA and as such has voting and investment control over the securities held by Bristol.  Mr. Kessler disclaims beneficial ownership of these securities.

 

(4) This number reflects the number of shares available under the Ownership Limitation described above, including 50,210 number of shares of common stock Bristol held as of January 20, 2012.  Although Bristol cannot beneficially own more than the Ownership Limit, it does hold the following securities: (i) $1,546,718 principal amount of the November Note, which is convertible into up to 32,413,054 shares of common stock, subject to adjustment (plus accrued and unpaid interest thereon); (ii) 134,202 shares of Series B Preferred Stock, convertible into up to 28,123,396 shares of common stock, subject to adjustment (plus accumulated and unpaid dividends thereon); (iii) 15,951 shares of Series C Preferred Stock, convertible into up to 3,342,044 shares of common stock, subject to adjustment (plus accumulated and unpaid dividends thereon) and (iv)  116,313,189 Series A Warrants, subject to adjustment.

 

(5) Iroquois Capital Management L.L.C (“Iroquois Capital”) is the investment manager or Iroquois Master Fund, Ltd. (“IMF”).  Consequently, Iroquois Capital has voting control and investment discretion over securities held by IMF.  As managing members of Iroquois Capital, Joshua Silverman and Richard Abbe make voting and investment decisions on behalf of Iroquois Capital in its capacity as investment manager to IMF.  As a result of the foregoing, Mr. Silverman and Mr. Abbe may be deemed to have beneficial ownership (as determined under Section 13(d) of the Securities Exchange Act of 1934, as amended) of the securities held by IMF.  Notwithstanding the foregoing, Mr. Silverman and Mr. Abbe disclaim such beneficial ownership.

 

(6) This number reflects the number of shares available under the Ownership Limitation described above, including 311,005 number of shares of common stock IMF held as of January 20, 2012.  Although IMF cannot beneficially own more than the Ownership Limit, it does hold the following securities: (i) $994,411 principal amount of the November Note, which is convertible into up to 20,838,892 shares of common stock, subject to adjustment (plus accrued and unpaid interest thereon); (ii) 65,260 shares of Series B Preferred Stock, convertible into up to 13,675,983 shares of common stock, subject to adjustment (plus accumulated and unpaid dividends thereon); (iii) 10,122 shares of Series C Preferred Stock, convertible into up to 2,120,584 shares of common stock, subject to adjustment (plus accumulated and unpaid dividends thereon) ,and (iv)  73,802,696 Series A Warrants, subject to adjustment.

 

(7)

Cranshire Capital Advisors, LLC (“CCA”) is the investment manager of Cranshire Capital, LP (“Cranshire Capital”) and has voting control and investment discretion over securities held by Cranshire Capital. Mitchell P. Kopin (“Mr. Kopin”), the president, the sole member and the sole member of the Board of Managers of CCA, has voting control over CCA. As a result, each of Mr. Kopin and CCA may be deemed to have beneficial ownership (as determined under Section 13(d) of the Securities Exchange Act of 1934, as amended) of the securities held by Cranshire Master Fund.

 

CCA is also the investment manager for a managed account for Freestone Advantage Partners, LP (“Freestone”) and CCA has voting control and investment discretion over securities held by Freestone. Mr. Kopin, the president, the sole member and the sole member of the Board of Managers of CCA, has voting control over CCA. As a result, each of Mr. Kopin and CCA also may be deemed to have beneficial ownership (as determined under Section 13(d) of the Securities Exchange Act of 1934, as amended) of the securities held in the managed account by Freestone.

 

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(8) This number reflects the number of shares available under the Ownership Limitation described above, including 31,097 number of shares of common stock Cranshire Capital held as of January 20, 2012.  Although Cranshire Capital cannot beneficially own more than the Ownership Limit, it does hold the following securities: (i) $536,925 principal amount of the November Note, which is convertible into up to 11,251,807 shares of common stock, subject to adjustment (plus accrued and unpaid interest thereon); (ii) 43,541 shares of Series B Preferred Stock, convertible into up to 9,124,565 shares of common stock, subject to adjustment (plus accumulated and unpaid dividends thereon); (iii) 5,423 shares of Series C Preferred Stock, convertible into up to 1,136,295 shares of common stock, subject to adjustment (plus accumulated and unpaid dividends thereon), and (iv)  39,546,484 Series A Warrants, subject to adjustment. Additionally, Cranshire Capital still holds a warrant exercisable into 3,870 shares of common stock, subject to adjustment, from its investment in the private financing we completed in March and April of 2010.

  

(9) This number reflects the number of shares available under the Ownership Limitation described above, including 5,389 number of shares of common stock Freestone held as of January 20, 2012.  Although Freestone cannot beneficially own more than the Ownership Limit, it does hold the following securities: (i) $94,751 principal amount of the November Note, which is convertible into up to 1,985,613 shares of common stock, subject to adjustment (plus accrued and unpaid interest thereon); (ii) 7,684 shares of Series B Preferred Stock, convertible into up to 1,610,217 shares of common stock, subject to adjustment (plus accumulated and unpaid dividends thereon); (iii) 957 shares of Series C Preferred Stock, convertible into up to 200,523 shares of common stock, subject to adjustment (plus accumulated and unpaid dividends thereon), and (iv)  6,978,791 Series A Warrants, subject to adjustment. Additionally, Freestone still holds a warrant exercisable into 204 shares of common stock, subject to adjustment, from its investment in the private financing we completed in March and April of 2010.

 

Except as otherwise indicated above or in the footnotes to the table, the selling stockholders have not held any position or office or had any material relationship with us or any of our subsidiaries within the past three years and possess sole voting and investment power with respect to the shares shown.

 

 

PLAN OF DISTRIBUTION

 

We are registering 16,000,000 of the Series A Warrant Shares under the registration statement of which this prospectus is a part.  Such 16,000,000 Series A Warrant Shares represents approximately 5.1% of the approximately 313.5 million Series A Warrant Shares (subject to adjustment) that could be exercised under all of the Series A Warrants.  Pursuant to Rule 415 promulgated under the Securities Act of 1933, as amended, the 16,000,000 Series A Warrant Shares being offered for sale by the selling stockholders pursuant to this prospectus represents one-third of the estimated 48,000,000 shares of common stock we believe will be outstanding and held by non-affiliates as at the date of this prospectus and which we reasonably expect will be offered and sold within two years from the date of this prospectus.  In the event that less than 48,000,000 shares our issued and outstanding on the date of this prospectus, we will proportionally reduce the 16,000,000 shares to which this prospectus relates to an amount equal to one-third of such issued and outstanding shares.

 

We have also agreed with the 2011 Noteholders to register for resale in future registration statements additional Series A Warrant Shares, to the maximum extent permitted by Rule 415 and the SEC, and at such time as the 16,000,000 Series A Warrant Shares to which this prospectus relates have been sold.  If our shares of common stock trade in excess of the $0.055825 exercise price of the Series A Warrant Shares, we believe that the holders of the Series A Warrants will elect to exercise all or a significant portion of such 16,000,000 Series A Warrants and sell the Series A Warrant Shares.  There can, however, be not assurance that this will be the case. Following February 2012, we will require significant additional working capital to continue our business operations, and are relying in large part upon the exercise for cash of the 16,000,000 Series A Warrants being registered under this prospectus and additional Series A Warrant Shares that we may register in the future to provide such additional working capital.  There can, however, be no assurance that we will be able to register sufficient Series A Warrant Shares for resale or that, if registered, that the holders of the Series A Warrants will elect to exercise all or any portion thereof for cash.  See “ Risk Factors – We require significant additional working capital to conduct our business and maintain operations .”

 

We will bear all fees and expenses incident to our obligation to register the shares of common stock.

 

The selling stockholders may sell all or a portion of the shares of common stock beneficially owned by them and offered hereby from time to time directly or through one or more underwriters, broker-dealers or agents.  If the shares of common stock are sold through underwriters or broker-dealers, the selling stockholders will be responsible for underwriting discounts or commissions or agent's commissions.  The shares of common stock may be sold in one or more transactions at fixed prices, at prevailing market prices at the time of the sale, at varying prices determined at the time of sale, or at negotiated prices.  These sales may be effected in transactions, which may involve crosses or block transactions,

 

  · on any national securities exchange or quotation service on which the securities may be listed or quoted at the time of sale;

 

  · in the over-the-counter market;

 

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  · in transactions otherwise than on these exchanges or systems or in the over-the-counter market;
     
  · through the writing of options, whether such options are listed on an options exchange or otherwise;
     
  · ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;
     
  · block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;
     
  · purchases by a broker-dealer as principal and resale by the broker-dealer for its account;
     
  · an exchange distribution in accordance with the rules of the applicable exchange;
     
  · privately negotiated transactions;
     
  · short sales;
     
  · sales pursuant to Rule 144;
     
  · broker-dealers may agree with the selling security holders to sell a specified number of such shares at a stipulated price per share;
     
  · a combination of any such methods of sale; and
     
  · any other method permitted pursuant to applicable law.

 

If the selling stockholders effect such transactions by selling shares of common stock to or through underwriters, broker-dealers or agents, such underwriters, broker-dealers or agents may receive commissions in the form of discounts, concessions or commissions from the selling stockholders or commissions from purchasers of the shares of common stock for whom they may act as agent or to whom they may sell as principal (which discounts, concessions or commissions as to particular underwriters, broker-dealers or agents may be in excess of those customary in the types of transactions involved).  In connection with sales of the shares of common stock or otherwise, the selling stockholders may enter into hedging transactions with broker-dealers, which may in turn engage in short sales of the shares of common stock in the course of hedging in positions they assume.  The selling stockholders may also sell shares of common stock short and deliver shares of common stock covered by this prospectus to close out short positions and to return borrowed shares in connection with such short sales.  The selling stockholders may also loan or pledge shares of common stock to broker-dealers that in turn may sell such shares.

 

The selling stockholders may pledge or grant a security interest in some or all of the Series A Warrants or Series A Warrant Shares owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the shares of common stock from time to time pursuant to this prospectus or any amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act of 1933, as amended, amending, if necessary, the list of selling stockholders to include the pledgee, transferee or other successors in interest as selling stockholders under this prospectus.  The selling stockholders also may transfer and donate the shares of common stock in other circumstances in which case the transferees, donees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus.

 

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The selling stockholders and any broker-dealer participating in the distribution of the shares of common stock may be deemed to be “underwriters” within the meaning of the Securities Act, and any commission paid, or any discounts or concessions allowed to, any such broker-dealer may be deemed to be underwriting commissions or discounts under the Securities Act.  At the time a particular offering of the shares of common stock is made, a prospectus supplement, if required, will be distributed which will set forth the aggregate amount of shares of common stock being offered and the terms of the offering, including the name or names of any broker-dealers or agents, any discounts, commissions and other terms constituting compensation from the selling stockholders and any discounts, commissions or concessions allowed or reallowed or paid to broker-dealers.

  

Under the securities laws of some states, the shares of common stock may be sold in such states only through registered or licensed brokers or dealers.  In addition, in some states the shares of common stock may not be sold unless such shares have been registered or qualified for sale in such state or an exemption from registration or qualification is available and is complied with.

   

There can be no assurance that any selling stockholder will sell any or all of the shares of common stock registered pursuant to the registration statement, of which this prospectus forms a part.

 

The selling stockholders and any other person participating in such distribution will be subject to applicable provisions of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder, including, without limitation, Regulation M of the Exchange Act, which may limit the timing of purchases and sales of any of the shares of common stock by the selling stockholders and any other participating person.  Regulation M may also restrict the ability of any person engaged in the distribution of the shares of common stock to engage in market-making activities with respect to the shares of common stock.  All of the foregoing may affect the marketability of the shares of common stock and the ability of any person or entity to engage in market-making activities with respect to the shares of common stock.

 

We will pay all expenses of the registration of the shares of common stock pursuant to the registration statement of which this prospectus is a part, estimated to be $45,602.36 in total, including, without limitation, Securities and Exchange Commission filing fees and expenses of compliance with state securities or “blue sky” laws; provided, however, that a selling stockholder will pay all underwriting discounts and selling commissions, if any.  We may be indemnified by the selling stockholders against civil liabilities, including liabilities under the Securities Act, that may arise from any written information furnished to us by the selling stockholder specifically for use in this prospectus, in accordance with the related registration rights agreement, or we may be entitled to contribution.

  

Once sold under the registration statement, of which this prospectus forms a part, the shares of common stock representing Series A Warrant Shares will be freely tradable in the hands of persons other than our affiliates.

 

DESCRIPTION OF SECURITIES

 

 Common Stock

 

As of January 20, 2012, our authorized capital consists of 5,000,000,000 shares of common stock , $0.001 par value per share and 25,000,000 shares of preferred stock, $0.001 par value, 2,000,000 of which are designated as Series A Preferred Stock, $0.001 par value per share, 402,441 of which are designated as Series B Preferred Stock, $0.001 par value per shares and 50,000 of which are designated as Series C Preferred Stock.   As of January 20, 2012, there were 57,044,958 shares of our common stock outstanding, 0 shares of our Series A Preferred Stock outstanding, 392,708 shares of our Series B Preferred Stock outstanding and 500,000 shares of our Series C Preferred Stock outstanding.

 

Each outstanding share of common stock entitles the holder thereof to one vote per share on matters submitted to a vote of shareholders.  Stockholders do not have preemptive rights to purchase shares in any future issuance of our common stock.

 

The holders of shares of our common stock are entitled to dividends out of funds legally available when and as declared by our board of directors. Our board of directors has never declared a dividend. Should we decide in the future to pay dividends, it will be at the discretion of the Board of Directors and will be dependent upon then existing conditions, including the company’s financial condition and the results of operations, capital requirements, contractual restrictions, business prospects, and other factors that the Board of Directors considers relevant.  Each share shall be entitled to the same dividend.  In the event of our liquidation, dissolution or winding up, holders of our common stock are entitled to receive, ratably, the net assets available to stockholders after payment of all creditors.

 

All of the issued and outstanding shares of our common stock are duly authorized, validly issued, fully paid and non-assessable. To the extent that additional shares of our common stock are issued, the relative interests of existing stockholders will be diluted.

 

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Convertible Notes, Preferred Stock and Warrants

 

Please see the section “Transactions requiring current registration” included in Item 3 above for details about the Convertible Notes, Preferred Stock and Warrants, as well as the registration rights granted for same.

 

Transfer Agent

 

The transfer agent for our common stock is Corporate Stock Transfer, Inc. Denver, Colorado.

 

Interest of Named Experts and Counsel

 

The validity of the securities offered hereby have been passed upon for us by Hunter, Taubman Weiss LLP, New York, New York.  Members of such law firm hold options to purchase 800,000 shares of common stock of our company at an exercise price of $0.11 per share.  The consolidated financial statements as of and for the years ended December 31, 2010 and 2009 included in this prospectus and in the registration statement have been audited by KMJ Corbin & Company LLP, an independent registered public accounting firm, as stated in their report appearing herein.

 

DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES

 

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by us of expenses incurred or paid by one of our directors, officers or controlling persons in the successful defense of any action, suit or proceeding) is asserted by that director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether that indemnification by us is against public policy as expressed in the Securities Act and will be governed by the final adjudication of that issue.

 

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 RADIENT PHARMACEUTICALS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

  

   September 30,   December 31, 
   2011   2010 
   (Unaudited)   (Audited) 
ASSETS          
Current assets:          
Cash  $329,645   $53,381 
Cash held in escrow   159,763    - 
Accounts receivable   101    2,603 
Inventories   87,607    82,904 
Prepaid expenses and other current assets   88,724    134,915 
Prepaid consulting   195,162    330,998 
Debt issuance cost   -    170,827 
Total current assets   861,002    775,628 
Property and equipment, net   76,187    75,962 
Other assets   -    5,370 
Total assets  $937,189   $856,960 
           
LIABILITIES AND STOCKHOLDERS’ DEFICIT          
Current liabilities:          
Accounts payable and accrued expenses  $2,340,951   $1,065,768 
Accrued salaries and wages   106,502    294,604 
Accrued interest expense   532,180    2,209,733 
Derivative liabilities   7,710,706    29,065,864 
Deferred revenue   -    24,750 
Convertible notes and preferred stock, net of discounts of $3,532,989 and $2,415,647, respectively   12,787,150    16,509,288 
Current portion of notes payable   -    4,581,923 
Total current liabilities   23,477,489    53,751,930 
           
Commitments and contingencies   -    - 
           
Stockholders’ deficit:          
Preferred stock, $0.001 par value; 25,000,000 shares authorized; 670,100 and 0 issued and outstanding at September 30, 2011 and December 31, 2010, respectively   -    - 
Common stock, $0.001 par value; 750,000,000 shares authorized; 647,390,057 and 38,402,173 shares issued at September 30, 2011 and December 31, 2010 respectively; 647,290,057 and 37,502,173 shares outstanding at September 30, 2011 and December 31, 2010, respectively   647,291    37,503 
Additional paid-in capital   154,379,974    85,217,933 
Accumulated deficit   (177,567,565)   (138,150,406)
Total stockholders’ deficit   (22,540,300)   (52,894,970)
Total liabilities and stockholders’ deficit  $937,189   $856,960 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

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RADIENT PHARMACUETICALS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2011   2010   2011   2010 
                 
Net revenues  $102,238   $34,446   $257,609   $116,840 
Cost of sales   15,559    6,697    44,712    36,810 
Gross profit   86,679    27,749    212,897    80,030 
                     
Operating expenses:                    
Research and development   10,541    45,874    149,604    340,689 
Selling, general and administrative   1,877,851    2,320,540    5,684,054    6,444,700 
Total operating expenses   1,888,392    2,366,414    5,833,658    6,785,389 
Loss from operations   (1,801,713)   (2,338,665)   (5,620,761)   (6,705,359)
Other income (expense):                    
Interest expense   (8,724,581)   (11,560,549)   (50,449,285)   (33,662,478)
Other income (expense), net   (2)   31,874    (321)   29,997 
Change in fair value of derivative liabilities   12,312,333    2,922,826    32,145,064    5,681,415 
Impairment on investment in JPI   -    -    -    (2,761,993)
Loss on legal settlement   -    -    (10,987,055)   - 
Gain (loss) on extinguishment of debt   1,001,275    (1,002,270)   (3,664,564)   (1,002,270)
Loss on guarantee   (840,237)   -    (840,237)   - 
Total other income (expense), net   3,748,788    (9,608,119)   (33,796,398)   (31,715,329)
Income (loss) before provision for income taxes   1,947,075    (11,946,784)   (39,417,159)   (38,420,688)
Provision for income taxes   -    -    -    - 
Net income (loss)  $1,947,075   $(11,946,784)  $(39,417,159)  $(38,420,688)
                     
Basic and diluted income (loss) per common share:                    
Net income (loss)  $0.01   $(0.39)  $(0.24)  $(1.38)
                     
Weighted average common shares outstanding basic and diluted   282,898,894    30,809,860    164,363,750    27,836,210 

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

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RADIENT PHARMACUETICALS CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT

(Unaudited)

For The Nine Months Ended September 30, 2011

 

   Common
Stock
       Additional Paid-in   Accumulated   Total
Stockholders’
 
   Shares   Amount   Capital   Deficit   Deficit 
Balance, January 1, 2011   37,502,173   $37,503   $85,217,933   $(138,150,406)  $(52,894,970)
                          
Common stock issued for consulting services   1,442,857    1,443    585,697    -    587,140 
Stock-based employee and director compensation   120,000    120    31,060    -    31,180 
Common stock issued for legal settlement   500,000    500    139,900    -    140,400 
Common stock issued for conversion of debt, preferred stock and accrued interest   583,186,860    583,187    32,092,868    -    32,676,055 
Common stock issued for the exercise of warrants, net of commission of $10,080   24,538,167    24,538    77,382    -    101,920 
Reclassification of derivative liabilities due to conversion of debt and exercise of warrants   -    -    32,832,956    -    32,832,956 
Beneficial conversion feature   -    -    4,441,563    -    4,441,563 
Repricing of warrants   -    -    485,246    -    485,246 
Reclassification of warrants and beneficial conversion feature not previously classified as derivatives   -    -    (1,524,631)   -    (1,524,631)
Net loss   -    -         (39,417,159)   (39,417,159)
Balance, September 30, 2011   647,290,057   $647,291   $154,379,974   $(177,567,565)  $(22,540,300)

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

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RADIENT PHARMACEUTICALS CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) 

 

   Nine Months Ended September 30, 
   2011   2010 
Cash flow from operating activities          
Net loss  $(39,417,159)  $(38,420,688)
           
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   30,234    102,180 
Amortization of debt discount and debt issuance costs   20,208,179    10,762,676 
Impairment on investment in JPI   -    2,761,993 
Interest expense related to fair value of derivative instruments granted   12,911,550    13,830,523 
Interest income from note receivable   -    (26,937)
Interest expense related to re-pricing of warrants issued to note holders   485,246    - 
Interest expense related to incremental value of shares and warrants issued to note holders   -    81,780 
Additional principal added for penalties and triggering events   16,165,257    7,978,167 
Loss on extinguishment of debt   3,664,564    1,002,270 
Loss on settlement   10,987,055    - 
Loss on guarantee   840,237    - 
Share-based compensation related to options granted to employees and directors for services   31,180    173,758 
Share-based compensation related to common stock and warrants expensed for services   1,526,099    2,355,289 
Change in fair value of derivative instruments   (32,145,064)   (5,681,415)
Changes in operating assets and liabilities:          
Accounts receivable   2,502    - 
Inventories   (4,702)   5,846 
Prepaid expenses and other assets   51,562    109,623 
Accounts payable and other accrued expenses   (113,125)   (1,132,703)
Deferred revenue   (24,750)   - 
Net cash used in operating activities   (4,801,135)   (6,097,638)
           
Cash flows from investing activities:          
Purchase of property and equipment   (30,459)   (24,482)
Advances for note receivable   -    (100,000)
Net cash used in investing activities   (30,459)   (124,482)
           
Cash flows from financing activities:          
Payments on convertible debt, January 2011 financing   (1,814,062)   - 
Proceeds from issuance of convertible debt, net of original issue discount and cash offering costs   6,820,000    6,308,000 
Proceeds from the exercise of warrants and options, net of commission and expenses   101,920    818,488 
Net cash provided by financing activities   5,107,858    7,126,488 
Net change in cash   276,264    904,368 
Cash, beginning of period   53,381    12,145 
Cash, end of period  $329,645   $916,513 

  

See Accompanying Notes to Condensed Consolidated Financial Statements

 

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RADIENT PHARMACEUTICALS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

For the Nine Months Ended September 30, 2011 and 2010

 

NOTE 1 — MANAGEMENT’S REPRESENTATION

 

The accompanying condensed consolidated financial statements of Radient Pharmaceuticals Corporation (the “Company”, “Radient”, “We”, “Us”, or “Our”), (formerly AMDL, Inc.), have been prepared in accordance with accounting principles generally accepted in the United States, or (“GAAP”). In the opinion of the Company’s management, the unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements in the Annual Report on Form 10-K for the year ended December 31, 2010 and include all normal recurring adjustments necessary for the fair presentation of the Company’s statement of financial position as of September 30, 2011, and its results of operations for the three and nine months ended September 30, 2011 and 2010, the statement of stockholders’ deficit for the nine months ended September 30, 2011, and cash flows for the nine months ended September 30, 2011 and 2010. The condensed consolidated balance sheet as of December 31, 2010 has been derived from the December 31, 2010 audited consolidated financial statements. The interim financial information contained in this quarterly report is not necessarily indicative of the results to be expected for any other interim period or for the entire year.

 

It is suggested that these condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2010 included in the Company’s Annual Report on Form 10-K. The report of the Company’s independent registered public accounting firm on the consolidated financial statements included in Form 10-K contains a qualification regarding the substantial doubt about the Company’s ability to continue as a going concern and a separate modification for an emphasis of matter related to an event of default.

 

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

 

NOTE 2 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Business

 

Since inception, Radient, a Delaware Corporation, has been engaged in the commercial development of and obtaining various governmental regulatory approvals for o proprietary diagnostic tumor-marker test kit, Onko-Sure®, which detects the presence of multiple types of cancer.

 

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

 

Until September 2009, the Company was focused on the production and distribution of pharmaceutical products through Jade Pharmaceuticals Inc. (“JPI”) our deconsolidated subsidiary located in the People’s Republic of China. In 2009, the Company refocused its business on the development, manufacture and marketing of advanced, pioneering medical diagnostic products, including Onko-Sure®, a proprietary In-Vitro Diagnostic (“IVD”) Cancer Test.

 

Due to several factors including deterioration in its relationship with local management of JPI, the Company relinquished control over JPI and converted its interest in JPI to that of an investment to be accounted for under the cost method, effective September 29, 2009. Accordingly, since September 29, 2009, the accounts and operations of JPI have been deconsolidated from our condensed consolidated financial statements. In connection with the deconsolidation of JPI, effective September 29, 2009, we reclassified JPI as a business investment, rather than as a consolidated operating subsidiary. Based on an evaluation performed by a third party valuation firm using Radient’s management’s assessment of the current and projected operations of JPI as of December 31, 2010, we determined that our investment in JPI was impaired. In consideration of the significant problems that management has had in obtaining the cooperation of JPI on a variety of matters, the Company deemed that there was substantial uncertainty as to whether any amounts from their investment in JPI would be realized. Accordingly, the Company decided to impair its investment to zero, as of December 31, 2010. The Company will, however, pursue an action plan to recover a portion or all of its investment.

  

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During the third and fourth quarters of 2009, the Company repositioned various business assets in order to monetize the value of such assets through either new partnership, separate reverse mergers, or sale. These special assets include: (i) our 97.4% ownership in China-based pharmaceuticals business, JPI; and (ii) our 100% ownership of a proprietary cancer vaccine therapy technology, Combined Immunogene Therapy (“CIT”).

 

In December 2010, we formed NuVax Therapeutics, Inc. (“NuVax”), a wholly-owned subsidiary, to expand clinical trials in multiple international locations and in the U.S., and the in-licensing of other novel cancer fighting technologies. All rights to our CIT technology will be transferred to NuVax, currently our 100% wholly-owned subsidiary. All further development and commercialization of CIT and other to-be licensed novel cancer fighting technologies will be made at NuVax.

 

We continue to have 100% ownership of the Elleuxe brand of advanced skin care products with proprietary formulations; however, we currently intend to license or sell off our Elleuxe brand of cosmetic products because our focus is on the development and marketing of our Onko-Sure® test kit product and our CIT technology.

 

The Company is actively engaged in the research, development, manufacturing, sale and marketing of Onko-Sure®, a proprietary IVD Cancer Test in the United States, Canada, China, Chile, Europe, India, Korea, Taiwan, Vietnam, Japan  and other markets throughout the world. The Company manufactures and distributes Onko-Sure® at the Company’s licensed manufacturing facility located at 2492 Walnut Avenue, Suite 100, in Tustin, California. The Company is a United States Food and Drug Administration (“USFDA”) Good Manufacturing Practices (“GMP”) approved manufacturing facility. The Company maintains a current Device Manufacturing License issued by the State of California, Department of Health Services, Food and Drug Branch.

 

Going Concern

 

The condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates, the realization of assets and satisfaction of liabilities in the normal course of business. The Company incurred losses of $39,417,159 and $38,420,688 for the nine months ended September 30, 2011 and 2010, respectively, and had an accumulated deficit of $177,567,565 at September 30, 2011. In addition, the Company used cash from operating activities of $4,801,135 for the nine months ended September 30, 2011. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

 

On September 30, 2011, the Company had cash on hand in the U.S. of approximately $330,000. The Company requires approximately $330,000 per month based on the three month history and $450,000 per month on an annualized basis for operating expenses to fund the costs associated with our financing activities; SEC reporting; legal and accounting expenses of being a public company; other general and administrative expenses; research and development, regulatory compliance, and distribution activities related to our Onko-Sure® test kit; the operation of a USFDA approved pharmaceutical manufacturing facility; and compensation of executive management and our employees. Based on our current cash position, without additional financing we may not be able to pay our obligations past November 30, 2011.

 

The monthly cash requirement for operating expenses does not include any extraordinary items or expenditures, payments for research on clinical trials for our Onko-Sure® test kit, and research conducted through CLIA Laboratories.

 

The Company raised net proceeds of approximately $6.8 million in a closing of convertible note and warrant purchase agreements in January 2011 (“January 2011 Notes”) (see Note 8). On May 2, 2011, the Company failed to make the third required installment payment under such notes and an event of default occurred. Therefore, starting May 2, 2011, the January 2011 Notes began accruing interest at a rate of 24% per annum. As of May 6, 2011, all of the five investors submitted an Event of Default Redemption Notice to the Company. As a result of the default, the Company entered into an agreement to exchange the original notes for new convertible notes and convertible preferred shares “July 2011 Exchange Notes”. Due to lack of authorized unissued  shares of common stock, the Company was unable to issue  shares of common stock to satisfy the 2nd Installment  and 3rd Pre-installment due at October 4 and October 7, 2011, respectively.  Due to such limitation, and in accordance with the exchange agreement, the July 2011 Exchange Notes are in default. As of the date of this report, only one of the five investors submitted an Event of Default Notice without pursuing any further rights of redemption and remedies.

 

Management’s plans include seeking financing, conversion of certain existing notes payable to preferred and common stock, alliances or other partnership agreements with entities interested in the Company’s technologies, or other business transactions that would generate sufficient resources to assure continuation of the Company’s operations and research and development programs. On June 23, 2011, we were delisted from the NYSE Amex and subsequently our stock has traded on the OTCQX exchange.

  

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There are significant risks and uncertainties which could negatively affect the Company’s operations. These are principally related to (i) the absence of substantive distribution network for the Company’s Onko-Sure® test kits, (ii) the absence of any commitments or firm orders from the Company’s distributors, and (iii) failure to meet operational covenants in existing financing agreements which would trigger additional defaults or penalties. The Company’s limited sales to date for the Onko-Sure® test kit make it impossible to identify any trends in the Company’s business prospects. If we are unable to obtain additional financing and are unable to restructure our current indebtedness or convert such into equity, cash generated at our current operating level is not sufficient to pay interest and principal on these obligations as they become due. Accordingly, there can be no assurance that we will be able to pay these or other obligations which we may incur in the future. In the event we are unable to restructure or convert into equity the balance of our outstanding indebtedness, the holders may obtain judgments against us and seek to enforce such judgments against our assets, in which event we will be required to cease our business activities and the equity of our stockholders will be effectively eliminated.

 

The Company’s only sources of additional funds to meet continuing operating expenses, fund additional research and development and fund additional working capital are through the sale of securities, and/or debt instruments. We are actively seeking additional debt or equity financing, but no assurances can be given that such financing will be obtained or what the terms thereof will be. The Company may need to discontinue a portion or all of our operations if the Company is unsuccessful in generating positive cash flow or financing the Company’s operations through the issuance of securities.

 

Principles of Consolidation

 

The accompanying condensed consolidated financial statements include the accounts of Radient and its wholly-owned subsidiary, NuVax. All intercompany accounts and transactions have been eliminated. NuVax had no operations for the nine months ended September 30, 2011.

 

Use of Estimates

 

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

 

Revenue Recognition

 

Revenues from the sales of the Company’s products are recognized when persuasive evidence of an arrangement exists, title and risk of loss have passed to the buyer, the price is fixed or readily determinable and collection is reasonably assured.

 

The Company has entered into several distribution agreements for various geographic locations with third parties. Under the terms of some of the agreements, the Company sells product to the distributor at a base price that is the greater of a fixed amount (as defined in each agreement) or 50% of the distributor’s invoiced Net Sales price (as defined) to its customers. The distributor is required to provide the Company quarterly reconciliations of the distributor’s actual invoiced prices at which time the price becomes fixed and determinable by the Company. Until the price is fixed and determinable, the Company defers the recognition of revenues under these arrangements. As of September 30, 2011, the Company had no deferred revenue related to these arrangements recorded in the accompanying condensed consolidated balance sheet. During the nine months ended September 30, 2011, we recognized $24,750 of deferred revenues under this agreement.

 

Any provision for sales promotion discounts and estimated returns are estimated and accounted for in the period the related sales are recorded. Buyers generally have limited rights of return, and the Company provides for estimated returns at the time of sale based on historical experience. Returns from customers historically have not been material. Actual returns and claims in any future period may differ from the Company’s estimates.

 

Accounting for Shipping and Handling Revenue, Fees and Costs

 

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

 

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Product Research and Development

 

Internal product research and development costs are expensed as incurred. Non-refundable third party research and development costs are expensed when the contracted work has been performed. Product research and development costs were $149,604 and $340,689 for the nine months ended September 30, 2011 and 2010, respectively.

 

Allowance for Doubtful Accounts

 

The Company evaluates the collectability of accounts receivable based on a combination of factors. In cases where the Company is aware of circumstances that may impair a specific customer’s ability to meet its financial obligations subsequent to the original sale, the Company will record an allowance against amounts due, and thereby reduce the net recognized receivable to the amount the Company reasonably believes will be collected. For all other customers, the Company records allowances for doubtful accounts based primarily on the length of time the receivables are past due based on the terms of the originating transaction, the current business environment, and its historical experience. Uncollectible accounts are charged against the allowance for doubtful accounts when all cost effective commercial means of collection have been exhausted.

 

Inventories

 

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

 

Property and Equipment

 

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

 

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

 

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

 

Intangible Assets

 

The Company owns intellectual property rights and an assignment of a US patent application for its CIT technology. The technology was purchased from Dr. Lung-Ji Chang, who developed it while at the University of Alberta, Edmonton, Canada. The purchase price was originally being amortized over the expected useful life of the technology, which the Company determined to be 20 years, based upon an estimate of three years to perfect the patent plus 17 years of patent life. The CIT technology was fully impaired as of December 31, 2010 due to the lack of any potential future revenue and future cash flows, the high cost of future clinical studies, and limited time remaining on the patent.

 

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Impairment of Long-Lived Assets

 

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

 

  · Significant under performance relative to expected historical or projected future operating results;

 

  · Market projections for cancer research technology;

 

  · Its ability to obtain patents, including continuation of patents, on technology; and

 

  · Significant negative industry or economic trends, including legal factors.

 

If the Company determines that the carrying values of long-lived assets may not be recoverable based upon the existence of one or more of the above indicators of impairment, the Company’s management performs an undiscounted cash flow analysis to determine if impairment exists. If impairment exists, the Company measures the impairment based on the difference between the asset’s carrying amount and its fair value, and the impairment is charged to operations in the period in which the long-lived asset impairment is determined by management. Based on its analysis, the Company fully impaired the carrying value of its investment in JPI as of December 31, 2010.

 

Fair Value of Financial Instruments

 

The carrying amounts of the Company’s cash, accounts receivable, accounts payable and accrued expenses approximate their estimated fair values due to the short-term maturities of those financial instruments. The Company believes the carrying amount of its notes payable approximates its fair value based on rates and other terms currently available to the Company for similar debt instruments.

 

Beneficial Conversion Feature

 

In certain instances, the Company enters into convertible notes that provide for an effective or actual rate of conversion that is below market value, and the embedded conversion feature does not qualify for derivative treatment (a “BCF”). In these instances, the Company accounts for the value of the BCF as a debt discount, which is then amortized to expense over the life of the related debt using the straight-line method which approximates the effective interest method.

 

Derivative Financial Instruments

 

The Company applies the provisions of FASB ASC 815-10, Derivatives and Hedging (“ASC 815-10”). Derivatives within the scope of ASC 815-10 must be recorded on the balance sheet at fair value. During the nine months ended September 30, 2011, the Company issued convertible debt with warrants and recorded derivative liabilities related to a reset provision associated with the embedded conversion feature of the convertible debt and a reset provision associated with the exercise price of the warrants. The fair value of these derivative liabilities on the issuance date was $18,822,734 computed using the Binomial Lattice option pricing model. Due to the reset provisions within the embedded conversion feature and a reset provision associated with the exercise price of the warrants, the Company determined that the Binomial Lattice Model was most appropriate for valuing these instruments.

 

During the nine months ended September 30, 2011, certain convertible debt holders from the 2010 Closings and the Promissory Notes converted a total of $20,142,149 which represented principal, penalties and accrued interest. This along with the exchange of old notes of $22,301,761 of the January 2011 financing and the two cash installment payments of $1,687,500 of the Exchanged July 2011 notes and the automatic conversions associated with the Exchanged July 2011 Notes of $3,458,561 in principal balance resulted in a decrease of $12,296,281 in the derivative liabilities related to the embedded conversion feature of the converted debt and preferred stock liability. In addition, during the nine months ended September 30, 2011, 18,383,888 warrants were exercised by warrant holders. This and the exchange of the warrants related to January 2011 financing, resulted in a decrease of $20,536,674, representing the fair value of the warrants reclassified to additional paid-in capital for the nine months ended September 30, 2011.

 

In addition, under the provisions of FASB ASC 815-40, Contract’s in Entity Own Equity, specifically ASC 815-40-35-8, the warrants and embedded conversion features not previously recorded as derivative liabilities were reevaluated as the number of authorized but unissued shares was insufficient to satisfy the maximum number of shares that could be required to net share settle the contract. On May 24, 2011, it was determined that the Company had insufficient authorized shares and reclassified the conversion features of the remaining convertible debt, non-employee options, and warrants as derivative liabilities. As these instruments carried standard terms, the Company determined it was appropriate to use the Black-Scholes valuation model to value these options, warrants and conversion features. On May 24, 2011, the fair value of the options and warrants was $1,476,775 and the conversion features was $47,856.

 

 

 

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The Company re-measures the fair values of all of its derivative liabilities as of each period end and records the net aggregate change due to the change in the fair value of the derivative liabilities as a component of other expense, net in the accompanying condensed consolidated statement of operations. The Company recorded an aggregate gain of $32,145,064 and $5,681,415 due to change in the fair value of the derivative liabilities as a component of other expense, net during the nine months ended September 30, 2011 and 2010, respectively.

 

Fair Value Measurement of Derivative Instruments

 

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

 

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

 

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

 

Level 3 — Valuations based on inputs that are unobservable and significant to the overall fair value measurement, and involve management judgment. We valued warrants and embedded conversion features that were issued without observable market values and the valuation required a high level of judgment to determine fair value (level 3 inputs).

 

Accounting for Debt Modifications and Extinguishments

 

If a debt modification is deemed to have been accomplished with debt instruments that are substantially different, the modification is accounted for as a debt extinguishment in accordance with FASB ASC 470-50, whereby the new debt instrument is initially recorded at fair value, and that amount is used to determine the debt extinguishment gain or loss to be recognized and the effective rate of the new instrument. If the present value of the cash flows under the terms of the new debt instrument is at least ten percent different from the present value of the remaining cash flows under the terms of the original instrument, the modification is deemed to have been accomplished with debt instruments that are substantially different. If it is determined that the present values of the original and new debt instruments are not substantially different, then a new effective interest rate is determined based on the carrying amount of the original debt instrument and the revised cash flows.

 

Income Taxes

 

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

 

Under ASC Topic 270, Interim Reporting (“ASC 270”), the Company is required to adjust it effective tax rate each quarter to be consistent with the estimated annual effective tax rate.  The Company is also required to record the tax impact of certain discrete items, unusual or infrequently occurring, including changes in judgment about valuation allowances and effects of changes in tax laws or rates, in the interim period in which they occur.  In addition, jurisdictions with a projected loss for the year or a year-to-date loss where no tax benefit can be recognized are excluded from the estimated annual effective tax rate.  The impact of such an exclusion could result in higher or lower effective tax rate during a particular quarter, based upon the mix and timing of actual earnings versus annual projections.

 

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

 

 

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The company estimated its effective tax rate for the nine months ended September 30, 2011 at 40% based on the estimated annual loss and the related computed estimated annual tax provision. The related income tax benefit from the loss is offset by a full valuation allowance. There were no changes to the amount of unrecognized tax benefits as disclosed in the annual Form 10-K as of and for the year ended December 31, 2010. As of September 30, 2011, the Company is not currently under Internal Revenue Service or state tax examinations.

 

Share-Based Compensation

 

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

 

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

 

Basic and Diluted Loss Per Share

 

Basic net loss per common share from operations is computed based on the weighted-average number of shares outstanding for the period. Diluted net loss per share from operations is computed by dividing net loss by the weighted-average shares outstanding assuming all dilutive potential common shares were issued. In periods of losses from operations, basic and diluted loss per share are the same as the effect of shares issuable upon the conversion of debt and issuable upon the exercise of stock options and warrants is anti-dilutive.

 

The following table sets forth the computation of basic and diluted net loss per share, including the reconciliation of the numerator and denominator used in the calculation of basic and diluted net loss per share:

 

   Three months ended
September 30,
  Nine months ended
September 30,
   2011  2010  2011  2010
Basic and diluted net loss per share:            
Numerator:  Net income (loss)  $1,947,075   $(11,946,784)  $(39,417,159)  $(38,420,688)
Denominator:  Weighted-average common shares outstanding, basic and diluted   282,898,894    30,809,860    164,363,750    27,836,210 
Basic and diluted net loss per share  $0.01   $(0.39)  $(0.24)  $(1.38)

 

As of September 30, 2011 and 2010, the potentially dilutive effect of 8,424,089,028 and 91,589,703, representing common share equivalents consisting of options, warrants, and convertible debt with accrued interest computed using the treasury stock method have been excluded from the diluted net loss per share calculations above as their effect would be anti-dilutive.

 

The above common share equivalents would have been included in the calculation of diluted earnings per share had the Company reported net income for the three and nine months ended September 30, 2011 and 2010, respectively.

 

Based on management's analysis of the total number of shares issuable on an as-if converted or exercised basis, and the removal of the related gain on change in fair value of derivative liabilities associated with certain convertible instruments and warrants, the net income would revert back to a net loss position for the three months ended September 30, 2011.

 

Advertising Costs

 

Advertising costs are expensed as incurred. Advertising costs were $70,640 and $17,724 for the nine months ended September 30, 2011 and 2010, respectively.

 

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 Risks and Uncertainties

 

The Company’s proprietary test kit is deemed a medical device or biologic, and as such is governed by the United States Federal Food and Drug Administration (“USFDA”) and by the regulations of state agencies and various foreign government agencies.

 

On July 3, 2008, the Company received a letter of determination from the USFDA that the Onko-Sure® test kit was “substantially equivalent” to the existing predicate device being marketed. The letter grants the Company the right to market the Onko-Sure® test kit as a device to monitor patients who have been previously diagnosed with colorectal cancer. The Company has received regulatory approval from various foreign governments to sell its products and is in the process of obtaining regulatory approval in other foreign markets. There can be no assurance that the Company will maintain the regulatory approvals required to market its Onko-Sure® test kit or that they will not be withdrawn.

 

Although the Company has obtained approval from the USFDA to market the then current formulation of the Onko-Sure® test kit, it has been determined that one of the key components of the Onko-Sure® test kit, the anti-fibrinogen-HRP is limited in supply and additional quantities cannot be purchased. We currently have two lots remaining which are estimated to produce approximately 20,000 test kits. Based on our current and anticipated orders, this supply is adequate to fill all orders in hand. Although we are investigating to produce this component in house so that we are in a position to have an unlimited supply of Onko-Sure® in the future, at this time we cannot give an estimate of time needed to complete this anti-fibrinogen-HRP replacement.”

 

The Company is subject to the risk of failure in maintaining its existing regulatory approvals, in obtaining other regulatory approval, as well as the delays until receipt of such approval, if obtained. Therefore, the Company is subject to substantial business risks and uncertainties inherent in such an entity, including the potential of business failure.

 

Concentrations of Credit Risk

 

Cash

 

The Company maintains cash balances at financial institutions that are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. In addition to the basic insurance coverage, effective December 31, 2010, the FDIC is providing temporary unlimited coverage for noninterest bearing transaction accounts through December 31, 2012. At September 30, 2011, the Company had approximately $80,000 in these accounts in excess of the FDIC insurance limit. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk related to these deposits.

 

Customers

 

During the nine months ended September 30, 2011 and 2010, we had four and three customers which represented approximately 84% and 91% of our total net revenues, respectively. Of these, one customer was based in the U.S. and represented approximately 21% and 39% of our net revenues and three and two customers were based outside the U.S. and represented approximately 63% and 52% of our net revenues, for the nine months ended September 30, 201, respectively.

 

Below is a table showing our major customers and percentage of net revenues for the nine months ended September 30, 2011 and 2010:

 

       % of Net Revenues 
Customer  Location   2011   2010 
A   U.S    21%   0%
B   U.S    0%   39%
Total U.S.        21%   39%
                
C   Taiwan    29%   22%
D   Vietnam    12%   30%
E   Korea    22%   0%
Total Foreign        63%   52%

  

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Supplemental Cash Flow Information

 

   Nine Months Ended September 30, 
   2011   2010 
         
Supplemental disclosure of cash flow information:          
Cash paid during the period for interest  $127,600    - 
Cash paid during the period for taxes  $22,596    - 
           
Supplemental disclosure of non-cash activities:          
Voluntary conversion of convertible debt, preferred stock and accrued interest  $32,676,055   $2,905,880 
Fair value of stock issued in connection to legal settlement  $140,400      
Fair value of stock and warrants recorded as prepaid consulting  $106,000   $1,721,089 
Reclassification to derivative liabilities due to insufficient authorized shares  $1,524,631    - 
Reclassification of derivative liabilities to equity due to conversion  and payments of convertible debt and accrued interest and exercise of warrants  $32,832,956   $438,702 
Amount paid directly from proceeds in connection with 2010 Convertible Debt unrelated to the financing  $-   $35,000 
Conversion of warrants to common stock (cashless)  $24,138    - 
Debt discounts related to derivative liabilities  $19,537,194   $6,181,165 
Debt issuance costs and OID related to January 2011 Notes  $1,617,500    - 
Debt issuance costs included in accounts payable  $-   $876,501 
Additional derivative liability for penalty on St. George debt  $-   $19,430 
Conversion of accounts payable to shares of common stock  $-   $45,000 
Cash held in escrow for JPI guarantee  $159,763    - 
January 2011 financing debt exchange  $22,301,761    - 
Beneficial conversion feature  $4,441,563   $275,150 

 

Recent Accounting Pronouncements

 

In May 2011, the FASB issued ASU No. 2011-4, Fair Value Measurement (“ASU 11-4”). ASU 11-4 amends existing guidance to achieve convergence in measurement and disclosure between U.S. Generally Accepted Accounting Standards (“GAAP”) and International Financial Reporting Standards (“IFRS”). ASU 11-4 is effective for fiscal year 2012. We are currently evaluating the impact that ASU 11-4 will have on our consolidated financial statements.

 

NOTE 3 — INVENTORIES

 

Inventories consist of the following:

 

   September 30,   December 31, 
   2011   2010 
   (Unaudited)   (Audited) 
Raw materials  $67,632   $70,402 
Work-in-process   19,975    6,562 
Finished goods   -    5,940 
   $87,607   $82,904 

  

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NOTE 4 — PROPERTY AND EQUIPMENT

 

Property and equipment consists of the following:

 

   September 30,   December 31, 
   2011   2010 
   (Unaudited)   (Audited) 
Office equipment  $151,867   $140,132 
Lab equipment   98,193    79,467 
    250,060    219,599 
Less accumulated depreciation   (173,873)   (143,637)
   $76,187   $75,962 

 

Depreciation expense was $30,234 and $27,344 for the nine months ended September 30, 2011 and 2010, respectively.

 

NOTE 5 — INTANGIBLE ASSETS

 

Intangible assets consist of the following at December 31, 2010:

 

   As of 
   December 31, 
   2010 
   (Audited) 
Intellectual Property  $2,000,000 
Impairment   (1,058,333)
Accumulated Amortization   (941,667)
Net balance at end of period  $- 

 

 In August 2001, the Company acquired intellectual property rights and an assignment of a US patent application for combination immunogene therapy (“CIT”) technology for $2,000,000. The technology was purchased from Dr. Lung-Ji Chang, who developed it while at the University of Alberta, Edmonton, Canada. During 2003, two lawsuits were filed challenging the Company’s ownership of this intellectual property. In October 2011 these lawsuits were dismissed.

 

As part of the acquisition of the CIT technology, the Company agreed to pay Dr. Chang a 5% royalty on net sales of combination gene therapy products. The Company has not paid any royalties to Dr. Chang to date as there have not been any sales of combination gene therapy products.

 

Based on a valuation analysis, and due to the lack of any potential future revenue and future cash flows, the high cost of future clinical studies, and limited time remaining on the patent, the Company determined that the carrying value of the intangible asset had been impaired and accordingly recorded an impairment of the intangible asset of $1,058,333 as of December 31, 2010.

 

During the nine months ended September 30, 2011 and 2010, amortization expense totaled $0 and $75,000 respectively.

 

NOTE 6 — PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets consist of the following:

 

   September 30,   December 31, 
   2011   2010 
   (Unaudited)   (Audited) 
Prepaid insurance  $18,010   $54,133 
Legal retainers   47,956    44,430 
Accounting and other consulting expenses   22,758    36,352 
Total prepaid expenses  $88,724   $134,915 


 

 

74
 

 

 

NOTE 7 — DERIVATIVE INSTRUMENTS

 

The Company estimates the fair value of common stock purchase warrants that contains down-round protection features and embedded conversion features of its convertible debt that contains down-round protection features using the Binomial Lattice model. On May 24, 2011, it was determined that the Company had insufficient authorized shares and reclassified the conversion features of the remaining convertible debt, non-employee options, and warrants as derivative liabilities. As these instruments carried fixed conversion features and exercise prices, the Company determined it was appropriate to use the Black-Scholes valuation model to value these options, warrants and conversion features.

 

In applying the Binomial Lattice model, the Company used the following assumptions to value its derivative liabilities during the nine months ended September 30, 2011:

 

    For the nine months 
    ended September 30, 2011 
Annual dividend yield    
Expected life (years)   0.02 – 5.86 
Risk-free interest rate   0.01% — 2.5%
Expected volatility   104.4% — 310.1%

 

In applying the Black-Scholes valuation model, the Company used the following assumptions during the nine months ended September 30, 2011:

 

    For the nine months 
    ended September 30, 2011 
Annual dividend yield   -
Expected life (years)   0.02 – 4.26
Risk-free interest rate   0.02% — 0.96%
Expected volatility   121.5% — 303%

 

For the warrants that include optional cashless exercise provisions, the Company applied a 90%/10% and 0%/100% (the most profitable exercise provision to the holder) probability that the holder will exercise under either the cashless exercise or the cash exercise scenario, for the warrants related to 2010 and 2011 closings, respectively. The cashless exercise provision expires once the underlying the warrants’ shares are registered.

 

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

 

The following table presents the Company’s non-employee options, warrants, and embedded conversion features of its convertible debt measured at fair value on a recurring basis as of September 30, 2011:

 

   Level 3 
   Carrying Value at 
   September 30,   December 31, 
   2011   2010 
   (Unaudited)   (Audited) 
Derivative liabilities:          
Embedded conversion features  $6,115,015   $7,912,388 
Warrants and non-employee options   1,595,691    21,153,476 
Total derivative liability  $7,710,706   $29,065,864 

 

   For the three months ended   For the nine months ended 
   September 30,   September 30,   September 30,   September 30, 
   2011   2010   2011   2010 
Decrease in fair value included in other income (expense), net  $12,312,333   $2,922,826   $32,145,064   $5,681,415 

 

 

  

75
 

 

The following table provides a reconciliation of the beginning and ending balances for the Company’s derivative liabilities measured at fair value using Level 3 inputs:

 

   For the nine months ended 
   September 30, 
   2011   2010 
   (Unaudited)   (Unaudited) 
         
Embedded Conversion Features:          
Balance at beginning of year  $7,912,389   $44,358 
Derivative liabilities added   17,776,544    5,775,266 
Reclassification to equity in connection with conversion of underlying debt to equity   (12,296,281)   (354,830)
Net change in fair value included in net loss   (7,277,637)   (1,656,998)
Ending balance  $6,115,015   $3,807,796 
           
Warrants and non-employee options:          
Balance at beginning of year  $21,153,475   $310,400 
Derivative liabilities added   25,846,317    14,155,780 
Reclassification to equity in connection with exercise of underlying stock warrants   (20,536,674)   (83,872)
Net change in fair value included in net loss   (24,867,427)   (4,024,417)
Ending balance  $1,595,691   $10,357,891 

 

NOTE 8 — DEBT

 

Debt consists of the following:

 

   September 30,   December 31, 
   2011   2010 
   (Unaudited)   (Audited) 
Debt:          
Convertible Notes issued September 2008, net of unamortized discount of $0  at September 30, 2011 and December 31, 2010, respectively  $46,442   $363,942 
           
First Closing of 2010 Convertible Note, issued March 22, 2010, including additional $1,410,422 principal and interest for trigger events, forbearance penalty, and debt extinguishment; net of unamortized discount of $0 at  December 31, 2010   -    472,937 
           
Second Closing of 2010 Convertible Note, issued April 8, 2010, including additional $4,181,576 principal and interest for trigger events, forbearance penalty, and debt extinguishment; net of unamortized discount of $1,466,389 at December 31, 2010   -    8,172,418 
           
Third Closing of 2010 Convertible Note, issued April 13, 2010, including additional $3,546,386 principal and interest for trigger events, forbearance penalty, and debt extinguishment; net of unamortized discount of $0 and $749,428 at September 30, 2011 and December 31, 2010, respectively   -    6,534,543 
           
Fourth Closing of 2010 Convertible Note, issued April 26, 2010, including additional $480,108 principal and interest for trigger events, net of unamortized discount of $199,828 at December 31, 2010   -    965,448 
           
Senior Notes, net of unamortized discount of $0 at September 30, 2011 and December 31, 2010, respectively   25,000    4,441,563 
           
Bridge note, including additional $104,138 principal and interest for penalties, net of unamortized discount of $0 at December 31, 2010   -    140,360 
           
Legal Settlement Promissory Notes, issued May 24, 2011, including additional $234,554 principal for settlement, net of unamortized discount of $0 at September 30, 2011   8,056,258    - 
           
July 2011 Convertible Notes, issued July 1, 2011 in connection with the Exchange Agreement,  net of unamortized discount of $1,501,012 at September 30, 2011   1,979,597    - 
           
July 2011 Series A Convertible Preferred Stock, issued July 1, 2011 in connection with the Exchange Agreement,  net of unamortized discount of $2,031,977 at September 30, 2011   2,679,853    - 
           
Total debt,  net of unamortized discount, all current  $12,787,150   $21,091,211 

   

76
 

 

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

 

On January 3, 2011, the shares underlying the Exchange Agreements (see below) with the Senior Note holders and the Bridge Loan were approved by the NYSE Amex and these notes became convertible into the Company’s common stock.

 

During the nine months ended September 30, 2011, convertible note holders converted an aggregate of $30,096,308 of principal, representing 63% of the total outstanding balance, and $2,579,747 of accrued interest, into a total of 583,186,860 shares of the Company’s common stock. The following table summarizes the conversion of the notes:

 

Debt  Gross
Principal
Balance @
12/31/10
   Principal
Additions
   Interest
Accrued to
conversion or
YTD
   Principal
Conversion
Amount
   Interest
Conversion
Amount
   Gross
Principal
Balance Due
   Interest
Balance
Due
   Principal
%
Converted
   Number of
Shares
Issued
 
2008 Convertible 10% Debt  $363,942   $-   $67,529   $(317,500)  $(53,555)  $46,442   $13,974    87.24%   476,692 
                                              
2010 Financings:                                             
1st Close   472,937    -    41,722    (472,937)   (41,722)   -    -    100.00%   1,029,248 
2nd Close   9,638,807    32,934    727,626    (9,671,741)   (697,842)   -    29,784    100.00%   30,381,442 
3rd Close   7,283,971    219,446    842,589    (7,503,417)   (509,170)   -    333,419    100.00%   14,505,363 
4th Close   1,165,278    -    85,721    (1,165,278)   (80,042)   -    5,679    100.00%   67,464,928 
    18,560,993    252,380    1,697,658    (18,813,373)   (1,328,776)   -    368,882    100.00%   113,380,981