UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

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

Commission File Number 0-6533

 

ALSERES PHARMACEUTICALS, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware		87-0277826
(State or Other Jurisdiction of		(IRS Employer
Incorporation or Organization)		Identification No.)
239 South Street, Hopkinton, Massachusetts		01748
(Address of Principal Executive Offices)		(Zip Code)

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

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

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

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

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

     As of November 12, 2009, there were 25,555,695 shares of the registrant’s Common Stock issued and outstanding.

 

 

ALSERES PHARMACEUTICALS, INC.
FORM 10-Q
TABLE OF CONTENTS

		Page
Part I FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of September 30, 2009 and December 31, 2008			3
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2009 and 2008, and for the period from inception (October 16, 1992) to September 30, 2009			4
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2009 and 2008, and for the period from inception (October 16, 1992) to September 30, 2009			5
Notes to Condensed Consolidated Financial Statements			6
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations			17
Item 3 Quantitative and Qualitative Disclosures About Market Risk			26
Item 4T Controls and Procedures			26
Part II OTHER INFORMATION
Item 1 Legal Proceedings			26
Item 1A Risk Factors			26
Item 6 Exhibits			28
SIGNATURES
EX-10.3 Securities Purchase Agreement dated August 11, 2009
EX-31.1 Section 302 Certification of Chief Executive Officer
EX-31.2 Section 302 Certification of Chief Financial Officer
EX-32.1 Section 906 Certification of Chief Executive Officer
EX-32.2 Section 906 Certification of Chief Financial Officer

     In this report, “we”, “us”, and “our” refer to Alseres Pharmaceuticals, Inc. The following are trademarks of ours that are mentioned in this Quarterly Report on Form 10-Q: Alseres™, Cethrin^®, Altropane^® and Fluoratec™. All other trade names, trademarks or service marks appearing in this Quarterly Report on Form 10-Q are the property of their respective owners and are not the property of Alseres Pharmaceuticals, Inc. or any of our subsidiaries.

Part I — FINANCIAL INFORMATION

Item 1 — Financial Statements

Alseres Pharmaceuticals, Inc.
(A Development Stage Enterprise)
Condensed Consolidated Balance Sheets

		(Unaudited)
		September 30,				December 31,
		2009				2008
ASSETS
Current assets:
Cash and cash equivalents		$	195,179			$	73,974
Security deposits			54,624				79,728
Prepaid expenses and other current assets			285,537				163,706
Total current assets			535,340				317,408
Fixed assets, net			122,378				178,643
Indemnity fund			115,749				115,462
Security deposits and other assets			184,976				233,737
Total assets		$	958,443			$	845,250
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable and accrued expenses		$	3,938,770			$	4,895,799
Notes payable (Note 5)			1,000,000				—
Accrued lease (Note 6)			46,390				45,425
Total current liabilities			4,985,160				4,941,224
Convertible notes payable (Note 5)			33,974,789				33,456,374
Accrued interest payable (Note 5)			3,621,087				2,313,090
Accrued lease, excluding current portion (Note 6)			111,427				147,923
Total liabilities			42,692,463				40,858,611
Commitments and contingencies (Note 8)
Series F convertible redeemable preferred stock, $.01 par value; 200,000 shares designated; 196,000 and 0 shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively (liquidation preference of $4,900,000 at September 30, 2009)			4,980,464				—
Stockholders’ deficit:
Preferred stock, $.01 par value; 1,000,000 shares authorized; 25,000 shares designated Convertible Series A, 500,000 shares designated Convertible Series D and 800 shares designated Convertible Series E; no shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively			—				—
Common stock, $.01 par value; 80,000,000 shares authorized; 23,055,645 and 21,399,123 shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively			230,556				213,991
Additional paid-in capital			145,979,032				143,671,984
Deficit accumulated during development stage			(192,924,072	)			(183,899,336	)
Total stockholders’ deficit			(46,714,484	)			(40,013,361	)
Total liabilities and stockholders’ deficit		$	958,443			$	845,250

The accompanying notes are an integral part of the condensed consolidated financial statements.

Alseres Pharmaceuticals, Inc.
(A Development Stage Enterprise)

Condensed Consolidated Statements of Operations
(Unaudited)

																		From Inception
																		(October 16, 1992)
		Three Months Ended September 30,								Nine Months Ended September 30,								to
		2009				2008				2009				2008				September 30, 2009
Revenues		$	—			$	—			$	—			$	—			$	900,000
Operating expenses:
Research and development			720,505				2,818,398				3,441,041				9,107,664				115,221,089
General and administrative			705,904				1,703,609				3,768,972				5,906,849				63,270,226
Purchased in-process research and development			—				—				—				—				12,146,544
Total operating expenses			1,426,409				4,522,007				7,210,013				15,014,513				190,637,859
Loss from operations			(1,426,409	)			(4,522,007	)			(7,210,013	)			(15,014,513	)			(189,737,859	)
Other income (expense)			—				—				65,000				—				(1,517,878	)
Interest expense, net			(634,679	)			(609,817	)			(1,883,730	)			(1,610,314	)			(9,367,631	)
Investment income			788				20,509				6,007				72,788				7,701,295
Net loss			(2,060,300	)			(5,111,315	)			(9,022,736	)			(16,552,039	)			(192,922,073	)
Preferred stock beneficial conversion feature			—				—				—				—				(8,062,712	)
Accrual of preferred stock dividends and modification of warrants held by preferred stockholders			—				—				—				—				(1,229,589	)
Net loss attributable to common stockholders			(2,060,300	)			(5,111,315	)			(9,022,736	)			(16,552,039	)			(202,214,374	)
Basic and diluted net loss attributable to common stockholders per share		$	(0.09	)		$	(0.25	)		$	(0.39	)		$	(0.80	)
Weighted average common shares outstanding			23,306,250				20,811,819				22,942,538				20,808,966

The accompanying notes are an integral part of the condensed consolidated financial statements.

Alseres Pharmaceuticals, Inc.
(A Development Stage Enterprise)

Condensed Consolidated Statements of Cash Flows
(Unaudited)

										From Inception
										(October 16,
										1992) to
		Nine Months Ended September 30,								September 30,
		2009				2008				2009
Cash flows from operating activities:
Net loss		$	(9,022,736	)		$	(16,552,039	)		$	(192,922,073	)
Adjustments to reconcile net loss to net cash used for operating activities:
Purchased in-process research and development			—				—				12,146,544
Write-off of acquired technology			—				—				3,500,000
Interest expense settled through issuance of notes payable			—				—				350,500
Non-cash interest expense			531,242				469,019				3,039,807
Non-cash charges related to options, warrants and common stock			1,427,265				1,266,161				11,007,060
Amortization and depreciation			56,265				33,502				2,775,211
Changes in operating assets and liabilities:
(Increase) decrease in prepaid expenses and other current assets			(121,831	)			569,456				437,029
(Decrease ) increase in accounts payable and accrued expenses			(1,001,520	)			423,842				3,121,615
Increase in accrued interest payable			1,352,488				1,136,672				3,665,578
(Decrease) increase in accrued lease			(35,531	)			(29,729	)			157,817
Net cash used for operating activities			(6,814,358	)			(12,683,116	)			(152,720,912	)
Cash flows from investing activities:
Cash acquired through Merger			—				—				1,758,037
Purchases of fixed assets			—				(144,057	)			(1,652,114	)
Decrease (increase) in security deposits and other assets			61,038				(4,331	)			(435,459	)
(Increase) in indemnity fund			(287	)			—				(115,749	)
Purchases of marketable securities			—				—				(132,004,923	)
Sales and maturities of marketable securities			—				1,231,233				132,004,923
Net cash provided by (used for) investing activities			60,751				1,082,845				(445,285	)
Cash flows from financing activities:
Proceeds from issuance of common stock			1,000,000				2,541				65,731,339
Proceeds from issuance of preferred stock			4,900,000				—				39,922,170
Preferred stock conversion inducement			—				—				(600,564	)
Proceeds from issuance of promissory notes			1,000,000				10,000,000				52,585,000
Proceeds from issuance of convertible debentures			—				—				9,000,000
Principal payments of notes payable			—				—				(7,146,967	)
Dividend payments on Series E Cumulative Convertible Preferred Stock			—				—				(516,747	)
Payments of financing costs			(25,188	)			—				(5,612,855	)
Net cash provided by financing activities			6,874,812				10,002,541				153,361,376
Net increase (decrease) in cash and cash equivalents			121,205				(1,597,730	)			195,179
Cash and cash equivalents, beginning of period			73,974				2,933,292				—
Cash and cash equivalents, end of period		$	195,179			$	1,335,562			$	195,179
Supplemental cash flow disclosures:
Non-cash transactions (see Notes 5 and 7)
Cash paid for interest		$	—			$	—			$	628,406

The accompanying notes are an integral part of the condensed consolidated financial statements.

Alseres Pharmaceuticals, Inc.
(A Development Stage Enterprise)

Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2009

1. Basis of Presentation

     The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, these financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

     The interim unaudited condensed consolidated financial statements contained herein include, in management’s opinion, all adjustments (consisting of normal recurring adjustments) necessary for a fair statement of the financial position, results of operations, and cash flows for the periods presented. The results of operations for the interim period shown on this report are not necessarily indicative of results for a full year. These financial statements should be read in conjunction with the Company’s consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

     The accompanying condensed consolidated financial statements have been prepared on a basis which assumes that the Company will continue as a going concern which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The uncertainty inherent in the need to raise additional capital and the Company’s recurring losses from operations raise substantial doubt about the Company’s ability to continue as a going concern. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

     As of September 30, 2009, the Company has experienced total net losses since inception of approximately $192,922,000, stockholders’ deficit of approximately $46,714,000 and a net working capital deficit of approximately $4,450,000. For the foreseeable future, the Company expects to experience continuing operating losses and negative cash flows from operations as the Company’s management executes its current business plan. The cash and cash equivalents available at September 30, 2009 will not provide sufficient working capital to meet the Company’s anticipated expenditures for the next twelve months. The Company believes that the approximate $483,000 in cash and cash equivalents available at November 12, 2009 combined with additional operating capital committed by its lead investor and its ability to control certain costs, including those related to clinical trial programs, preclinical activities, and certain general and administrative expenses will enable the Company to meet its anticipated cash expenditures into December 2009. The Company must immediately raise additional funds in order to continue operations.

     In order to continue as a going concern, the Company will therefore need to raise additional capital through one or more of the following: a debt financing, an equity offering or a collaboration, merger, acquisition or other transaction with one or more pharmaceutical or biotechnology companies. The Company is currently engaged in fundraising efforts. There can be no assurance that the Company will be successful in its fundraising efforts or that additional funds will be available on acceptable terms, if at all. The Company also cannot be sure that it will be able to obtain additional credit from, or effect additional sales of debt or equity securities to the Purchasers (Note 5). If the Company is unable to raise additional or sufficient capital or if it violates a debt covenant or defaults under the March 2008 Amended Purchase Agreement or the June 2008 Purchase Agreement (Note 5), it will need to cease operations or reduce, cease or delay one or more of its research or development programs and/or adjust its current business plan and in any such event may not be able to continue as a going concern. Additionally, our common stock was delisted from trading on the NASDAQ Capital Market as a result of our failure to meet continued listing requirements of NASDAQ. On May 8, 2009 we began trading on the Pink Sheets OTC Market. This delisting could have an adverse affect on our ability to obtain future financing and could adversely impact our stock price and the liquidity of our common stock.

     In connection with the common stock financing completed by the Company in March 2005 (the “March 2005 Financing”), the Company agreed with the purchasers in such financing, including Robert Gipson, Thomas Gipson and Arthur Koenig (the “March 2005 Investors”) that, subject to certain exceptions, it would not issue any shares of its common stock at a per share price less than $2.50 without the prior consent of the March 2005 Investors holding at least a majority of the shares issued in the March 2005 Financing. The failure to receive the requisite waiver or consent of the March 2005 Investors could have the effect of delaying or preventing the consummation of a financing by the Company should the price per share in such financing be set at less than $2.50.

Reclassification

     Certain amounts in the prior period condensed consolidated financial statements have been reclassified to conform with the 2009 presentation.

2. Net Loss Per Share

     Basic and diluted net loss per share attributable to common stockholders has been calculated by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding during the period. All potentially dilutive common shares have been excluded from the calculation of weighted average common shares outstanding since their inclusion would be anti-dilutive.

     Stock options and warrants to purchase approximately 4.0 million and 4.2 million shares of common stock were outstanding at September 30, 2009 and 2008, respectively, but were not included in the computation of diluted net loss per common share because they were anti-dilutive. The exercise of those stock options and warrants outstanding at September 30, 2009 could potentially dilute earnings per share in the future.

3. Comprehensive Loss

     The Company had a total comprehensive loss of $2,060,300 and $5,111,315 for the three months ended September 30, 2009 and 2008, respectively. For the nine months ended September 30, 2009 and 2008, total comprehensive loss was $9,022,736 and $16,561,349, respectively. The difference between total comprehensive loss and net loss in the 2008 period is due to unrealized gains and losses on marketable securities.

4. Accounting for Stock-Based Compensation

     The Company has one stock option plan under which it can issue both nonqualified and incentive stock options to employees, officers, consultants and scientific advisors of the Company. At September 30, 2009, the 2005 Stock Incentive Plan (the “2005 Plan”) provided for the issuance of options, restricted stock, restricted stock units, stock appreciation rights or other stock-based awards to purchase 3,450,000 shares of the Company’s common stock. The 2005 Plan contains a provision that allows for an annual increase in the number of shares available for issuance under the 2005 Plan on the first day of each of the Company’s fiscal years during the period beginning in fiscal year 2006 and ending on the second day of fiscal year 2014. The annual increase in the number of shares shall be equal to the lowest of 400,000 shares; 4% of the Company’s outstanding shares on the first day of the fiscal year; and an amount determined by the Board of Directors. On January 1, 2009, the number of shares available for issuance under the 2005 Plan was increased by 400,000 shares.

     The Company also has outstanding stock options in three other stock option plans, the 1998 Omnibus Plan, the Amended and Restated Omnibus Stock Option Plan and the Amended and Restated 1990 Non-Employee Directors’ Non-Qualified Stock Option Plan. These plans have expired and no future issuance of awards is permissible.

     The Company’s Board of Directors determines the term, vesting provisions, price, and number of shares for each award that is granted. The term of each option cannot exceed ten years. The Company has outstanding options with performance conditions which, if met, would accelerate vesting upon achievement of the applicable milestones.

     In January 2009, the Company’s Board of Directors approved the cancellation of options to purchase an aggregate of 2,617,000 shares of the Company’s common stock and the re-grant of options to purchase an aggregate of 2,562,500 shares of the Company’s common stock. The per share exercise prices of the cancelled options ranged from $1.96 to $4.06, with a weighted average exercise price of $2.92. These cancellations were effected under the 2005 Plan and inducement grants pursuant to Nasdaq Marketplace Rule 4350, each of which expressly permitted option exchanges and all re-grants were affected under the 2005 Plan. Each of the re-granted options contains the following terms: (i) an exercise price equal to the fair market value on the grant date which was the last sale price on January 14, 2009 which was $1.15 per share; (ii) exercisable through January 31, 2014; and (iii) 50% vesting on the date of grant, 25% vesting on February 28, 2009, and 25% vesting on March 31, 2009.

     Stock-based employee compensation expense recorded during the three and nine months ended September 30, 2009 and 2008 is as follows:

		Three months ended								Nine months ended
		September 30,								September 30,
		2009				2008				2009				2008
Research and development		$	—			$	122,819			$	447,612			$	398,517
General and administrative			56,085				242,536				779,654				782,501
		$	56,085			$	365,355			$	1,227,266			$	1,181,018
Impact on basic and diluted net loss attributable to common stockholders per share		$	(0.00	)		$	(0.02	)		$	(0.05	)		$	(0.06	)

     The Company uses the Black-Scholes option-pricing model to calculate the fair value of each option grant on the date of grant. The fair value of stock options granted during the three and nine months ended September 30, 2009 and 2008 was calculated using the following estimated weighted-average assumptions:

		Three months ended								Nine months ended
		September 30,								September 30,
		2009				2008				2009				2008
Expected term			—				—			5 years				5 years
Risk-free interest rate			—				—				1.36	%			2.5% — 3.7%
Stock volatility			—				—				90	%			76%
Dividend yield			—				—				0	%			0%

     Expected term — The Company determined the weighted-average expected term assumption for “plain vanilla” and performance-based option grants based on historical data on exercise behavior.

     Risk-free interest rate — The risk-free interest rate used for each grant is equal to the U.S. Treasury yield curve in effect at the time of grant for instruments with a similar expected term.

     Expected volatility — The Company’s expected stock-price volatility assumption is based on historical volatilities of the underlying stock which is obtained from public data sources.

     Expected dividend yield — The Company has never declared or paid any cash dividends on its common stock and does not expect to do so in the foreseeable future. Accordingly, the Company uses an expected dividend yield of zero to calculate the grant-date fair value of a stock option.

     As of September 30, 2009, there remained approximately $108,000 of compensation costs related to non-vested stock options to be recognized as expense over a weighted-average period of approximately 0.53 years.

     A summary of the Company’s outstanding stock options for the nine months ended September 30, 2009 and 2008 is presented below.

		Nine months ended September 30,
		2009								2008
						Weighted-								Weighted-
						Average								Average
						Exercise								Exercise
		Shares				Price				Shares				Price
Outstanding at beginning of year			4,184,403			$	2.90				4,457,965			$	3.37
Granted			2,732,500				1.15				78,000				2.39
Exercised			—				—				(1,100	)			2.31
Forfeited and expired			(3,214,103	)			2.87				(334,656	)			8.99
Outstanding at end of period			3,702,800			$	1.63				4,200,209			$	2.90
Options exercisable at end of period			3,495,300			$	1.65				2,900,799			$	2.99

     The weighted-average fair value of options granted was $0.80 and $1.52 during the nine months ended September 30, 2009 and 2008, respectively.

     The following table summarizes information about stock options outstanding at September 30, 2009:

		Options Outstanding												Options Exercisable
						Weighted-												Weighted
						Average				Weighted-								Average				Weighted-
						Remaining				Average								Remaining				Average
		Number				Contractual				Exercise				Number				Contractual				Exercise
Range of Exercise Prices		Outstanding				Life				Price				Exercisable				Life				Price
$1.15 — $1.36			2,713,000			4.6 years				$	1.15				2,523,000			4.4 years				$	1.15
$2.00 — $3.00			684,197			5.6 years					2.32				684,197			5.6 years					2.31
$3.10 — $4.65			255,363			7.0 years					3.40				237,863			6.9 years					3.42
$4.99 — $6.96			28,500			4.3 years					5.47				28,500			4.3 years					5.47
$8.95 — $13.06			8,740			2.0 years					10.55				8,740			2.0 years					10.55
$15.62 — $22.36			13,000			0.6 years					17.09				13,000			0.6 years					17.09
			3,702,800			4.9 years				$	1.63				3,495,300			4.8 years				$	1.65

     The was no intrinsic value of outstanding options and exercisable options as of September 30, 2009. The intrinsic value of options vested during the nine months ended September 30, 2009 was $0. The intrinsic value of options exercised during the nine months ended September 30, 2009 and 2008 was $0 and $759, respectively.

As of September 30, 2009, 378,617 shares were available for grant under the 2005 Plan.

5. Notes Payable and Debt

Convertible Notes Payable to Significant Stockholders

     In August 2006, the Company issued to Robert Gipson an unsecured promissory note (the “RG Note”), pursuant to which the Company could borrow up to an aggregate principal amount of $3,000,000 from Robert Gipson. In October 2006, the Company issued an amended and restated unsecured promissory note (the “Amended RG Note”) to Robert Gipson to replace the RG Note. Under the Amended RG Note, (i) the aggregate principal amount that could be borrowed by the Company was increased from $3,000,000 to $4,000,000, and (ii) one of the dates triggering repayment under the definition of Maturity Date (as discussed below) was moved from December 31, 2007 to September 30, 2007.

     In October 2006, the Company issued to Thomas Gipson (together with Robert Gipson, the “Lenders”) an unsecured promissory note, pursuant to which the Company could borrow up to an aggregate principal amount of $4,000,000 (the “TG Note,” together the with Amended RG Note, the “First Amended Notes”). The Company borrowed a total of $8,000,000 pursuant to the First Amended Notes. The outstanding principal amount borrowed under the First Amended Notes was due and payable upon the earliest to occur of: (i) September 30, 2007; (ii) the date on which the Company consummates an equity financing in which the gross proceeds to the Company total at least $10,000,000; and (iii) the date on which a Lender declares an event of default (as defined in the Notes), the first of these three events to occur referred to as the “Maturity Date.” Interest accrued on the outstanding principal amount under the First Amended Notes was initially payable on the Maturity Date at a rate of 9% per annum from the date of the advance to the Maturity Date.

     In February 2007, the Company issued amended and restated unsecured promissory notes to the Lenders to replace the First Amended Notes (the “Second Amended Notes”). Under the Second Amended Notes, the aggregate principal amount that could be collectively borrowed by the Company was increased from $8,000,000 to $10,000,000. The Company borrowed an additional $2,000,000 from the Lenders, or $10,000,000 in the aggregate, pursuant to the Second Amended Notes.

     In March 2007, the Company issued an amended and restated unsecured promissory note of $5,000,000 to each of the Lenders (the “Amended Notes”). The Amended Notes eliminated all outstanding principal and accrued interest due under the Second Amended Notes and the Company’s right to prepay any portion of the Amended Notes. The Amended Notes also required the Lenders to effect a conversion of the outstanding principal under the Amended Notes into shares of the Company’s common stock at a conversion price of $2.50 per share (the “Amended Notes Conversion”) upon approval by the Company’s stockholders of the conversion. The Company recorded a gain related to the forgiveness of interest of approximately $273,000 to net interest expense on the Company’s Consolidated Statement of Operations during the year ended December 31, 2007. On June 7, 2007, the Company’s stockholders approved the Amended Notes Conversion. On June 15, 2007, the Lenders converted the outstanding principal under the Amended Notes into 4,000,000 shares of the Company’s common stock.

March 2008 Amended Purchase Agreement

     In March 2007, the Company entered into a convertible promissory note purchase agreement (the “March 2007 Purchase Agreement”) with Robert Gipson, Thomas Gipson and Arthur Koenig (the “Purchasers” and also referred to as the “March 2007 Note Holders”) pursuant to which the Company could borrow up to $15,000,000 from the March 2007 Note Holders prior to December 31, 2007. In March 2007, the Company issued convertible promissory notes to the March 2007 Note Holders (the “March Notes”) in the aggregate principal amount of $9,000,000 pursuant to the March 2007 Amended Purchase Agreement. Certain of the material terms of the convertible promissory notes are described below.

     In May 2007, the Company amended and restated the March 2007 Purchase Agreement (the “May 2007 Amended Purchase Agreement”) to (i) eliminate the requirement for the March 2007 Note Holders to make further advances under the March 2007 Purchase Agreement and (ii) add Highbridge as a Purchaser. In May 2007, the Company issued a convertible promissory note to Highbridge (the “Highbridge Note”) in the aggregate principal amount of $6,000,000 pursuant to the May 2007 Amended Purchase Agreement.

     In August 2007, the Company amended and restated the May 2007 Amended Purchase Agreement (the “August 2007 Amended Purchase Agreement”) to (i) increase the amount the Company could borrow by $10,000,000 to $25,000,000 and (ii) add Ingalls & Snyder Value Partners LP (“ISVP”) as a Purchaser. In August 2007, the Company issued a convertible promissory note to ISVP (the “2007 ISVP Note”) in the aggregate principal amount of $10,000,000 pursuant to the August 2007 Amended Purchase Agreement.

     In March 2008, the Company amended and restated the August 2007 Amended Purchase Agreement (the “March 2008 Amended Purchase Agreement”) to (i) increase the amount the Company could borrow by $5,000,000 to $30,000,000 and (ii) provide that the Company may incur up to an additional $5,000,000 of indebtedness from the Purchasers upon the same terms and conditions as the March 2008 Amended Purchase Agreement. In March 2008, the Company issued a convertible promissory note to Robert Gipson (the “March 2008 RG Note”) in the aggregate principal amount of $5,000,000 pursuant to the March 2008 Amended Purchase Agreement.

     All terms of the cumulative $30,000,000 in convertible promissory notes remain as originally agreed to. These amounts borrowed by the Company under the March 2008 Amended Purchase Agreement bear interest at the rate of 5% per annum and may be converted, at the option of the Purchasers, into (i) shares of the Company’s common stock at a conversion price per share of $2.50, (ii) the right to receive future payments related to the Company’s molecular imaging products (including Altropane and FLUORATEC) in amounts equal to 2% of the Company’s pre-commercial revenue related to such products plus 0.5% of future net sales of such products for each $1,000,000 of outstanding principal and interest that a Purchaser elects to convert into future payments, or (iii) a combination of (i) and (ii). Any outstanding notes that are not converted into the Company’s common stock or into the right to receive future payments will become due and payable by the earlier of December 31, 2010 or the date on which a Purchaser declares an event of default (as defined in the March 2008 Amended Purchase Agreement). However, each Purchaser is prohibited from effecting a conversion if at the time of such conversion the common stock issuable to such Purchaser, when taken together with all shares of common stock then held or otherwise beneficially owned by such Purchaser exceeds 19.9%, or 9.99% for Highbridge and ISVP, of the total number of issued and outstanding shares of the Company’s common stock immediately prior to such conversion unless and until the Company’s stockholders approve the conversion of all of the shares of common stock issuable thereunder.

June 2008 Amended Purchase Agreement

     In June 2008, the Company entered into a convertible promissory note purchase agreement (the “June 2008 Purchase Agreement”) with Robert Gipson pursuant to which the Company could borrow up to $5,000,000. In June 2008, the Company issued a convertible promissory note to Robert Gipson (the “June 2008 RG Note”) in the aggregate principal amount of $5,000,000 pursuant to the June 2008 Purchase Agreement. The terms of the June 2008 Purchase Agreement are consistent with those of the March 2008 Amended Purchase Agreement described above.

Beneficial Conversion Features

     The Highbridge Note was issued with a conversion price of $2.50 which was below the market price of the Company’s common stock on the date the May 2007 Amended Purchase Agreement was entered into. The Company recorded a beneficial conversion feature (“BCF”) of $480,000 (the “Highbridge BCF”) which was recognized as a decrease in the carrying value of the Highbridge Note and an increase to additional paid-in capital. The value of the Highbridge BCF is being recognized as interest expense using the

effective interest method through December 31, 2010. The Company recorded interest expense related to the Highbridge BCF in the accompanying Condensed Consolidated Statement of Operations of approximately $33,000 and $97,000 during the three and nine months ended September 30, 2009, respectively. The Company recorded interest expense of approximately $31,000 and $92,000 during the three and nine months ended September 30, 2008, respectively.

     The 2007 ISVP Note was issued with a conversion price of $2.50 which was below the market price of the Company’s common stock on the date the August 2007 Amended Purchase Agreement was entered into. Accordingly, the Company recorded a BCF of $1,400,000 (the “ISVP BCF”) which was recognized as a decrease in the carrying value of the 2007 ISVP Note and an increase to additional paid-in capital. The ISVP BCF is being recognized as interest expense using the effective interest method through December 31, 2010. The Company recorded interest expense related to the ISVP BCF in the accompanying Condensed Consolidated Statement of Operations of approximately $110,000 and $321,000 during the three and nine months ended September 30, 2009, respectively. The Company recorded interest expense of approximately $99,000 and $290,000 during the three and nine months ended September 30, 2008, respectively.

     The March 2008 RG Note was issued with a conversion price of $2.50 which was below the market price of the Company’s common stock on the date the March 2008 Amended Purchase Agreement was entered into. Accordingly, the Company recorded a BCF of $380,000 (the “2008 RG BCF”) which was recognized as a decrease in the carrying value of the March 2008 RG Note and an increase to additional paid-in capital. The 2008 RG BCF is being recognized as interest expense using the effective interest method through December 31, 2010. The Company recorded interest expense related to the 2008 RG BCF in the accompanying Condensed Consolidated Statements of Operations of approximately $34,000 and $100,000 during the three and nine months ended September 30, 2009, respectively. The Company recorded interest expense of approximately $31,000 and $67,000 during the three and nine months ended September 30, 2008, respectively.

     In September 2008, Highbridge converted $120,000 of outstanding principal under the Highbridge Note into 48,000 shares of the Company’s common stock. In connection with the conversion, the Company recorded additional interest expense of approximately $6,300 during the year ended December 31, 2008 related to the unamortized portion of the Highbridge BCF.

     At September 30, 2009, the aggregate carrying value of the Highbridge Note, the March Notes, the 2007 ISVP Note, the March 2008 RG Note and the June 2008 RG Note of $33,974,789 and the related accrued interest was classified as a long-term liability.

     The Company is subject to certain debt covenants pursuant to the March 2008 Amended Purchase Agreement and the June 2008 Purchase Agreement (the “Purchase Agreements”). If the Company (i) fails to pay the principal or interest due under the Purchase Agreements, (ii) files a petition for action for relief under any bankruptcy or similar law or (iii) an involuntary petition is filed against the Company, all amounts borrowed under the Purchase Agreements may become immediately due and payable by the Company. In addition, without the consent of the Purchasers, the Company may not (i) create, incur or otherwise, permit to be outstanding any indebtedness for money borrowed, (ii) declare or pay any cash dividend, or make a distribution on, repurchase, or redeem, any class of the Company’s stock, subject to certain exceptions or sell, lease, transfer or otherwise dispose of any of the Company’s material assets or property or (iii) dissolve or liquidate.

Subsidiary Promissory Note

     In February 2009, Neurobiologics, Inc. (the “Subsidiary”), a subsidiary of the Company, issued to Robert Gipson an unsecured promissory note, pursuant to which the Subsidiary borrowed an aggregate principal amount of $1,000,000 (the “Subsidiary Note”). Interest on the Subsidiary Note accrues at the rate of 7% per annum and all principal and accrued interest is due and payable on demand of Mr. Gipson.

     According to a Schedule 13G/A filed with the SEC on April 23, 2009, Robert Gipson beneficially owned approximately 46.4% of the outstanding common stock of the Company on April 16, 2009. Robert Gipson, who serves as a Senior Director of Ingalls & Snyder and a General Partner of ISVP, served as a director of the Company from June 15, 2004 until October 28, 2004. According to a Schedule 13G/A filed with the SEC on January 30, 2009, Thomas Gipson beneficially owned approximately 29.0% of the outstanding common stock of the Company on December 31, 2008. According to a Schedule 13G/A filed with the SEC on January 30, 2009, Arthur Koenig beneficially owned approximately 9.7% of the outstanding common stock of the Company on December 31, 2008. According to a Schedule 13G filed with the SEC on January 30, 2009, ISVP owned approximately 16.5% of the outstanding common stock of the Company on December 31, 2008. According to a Schedule 13G filed with the SEC on February 10, 2009, Highbridge beneficially owned approximately 9.50% of the outstanding common stock of the Company on December 31, 2008.

6. Exit Activities

Office Relocation

     In September 2005, the Company relocated its headquarters to office space in Hopkinton, Massachusetts. In addition, the Company amended its Lease Agreement (the “Lease Amendment”), dated as of January 28, 2002 by and between the Company and Brentwood Properties, Inc. (the “Landlord”) relating to the Company’s former principal executive offices (the “Premises”) located in Boston, Massachusetts (the “Lease Agreement”). Pursuant to the terms of the Lease Amendment, the Landlord consented to, among other things, the sublease of all rentable square feet of the Premises pursuant to two sublease agreements which run through May 30, 2012, the term of the Lease Agreement. In consideration for the Landlord’s consent, the Company agreed to increase its security deposit provided for under the Lease Agreement from $250,000 to $388,600 subject to periodic reduction pursuant to a predetermined formula. At September 30, 2009, the security deposit under the Lease Agreement was approximately $140,000.

     As a result of the Company’s relocation, an expense was recorded for the cost associated with the exit activity at its fair value in the period in which the liability is incurred. The liability recorded for the Lease Amendment was calculated by discounting the estimated cash flows for the two sublease agreements and the Lease Agreement using an estimated credit-adjusted risk-free rate of 15%. The expense and accrual recorded requires the Company to make significant estimates and assumptions. These estimates and assumptions will be evaluated and adjusted as appropriate on at least a quarterly basis for changes in circumstances. It is reasonably possible that such estimates could change in the future resulting in additional adjustments, and the effect of any such adjustments could be material.

     The activity related to the lease accrual at September 30, 2009, is as follows:

						Cash
						Payments,				Accrual at
		Accrual at				Net of Sublease				September 30,
		December 31, 2008				Receipts 2009				2009
Lease Amendment		$	193,348			$	35,531			$	157,817
Short-term portion of lease accrual			45,425								46,390
Long-term portion of lease accrual		$	147,923							$	111,427

     During the three and nine months ended September 30, 2009, the Company recorded approximately $6,200 and $19,800, respectively of expense related to the imputed cost of the lease expense accrual included in general and administrative expenses in the accompanying condensed consolidated statements of operations. During the three and nine months ended September 30, 2008, the Company recorded approximately $8,100 and $26,700, respectively of expense related to the imputed cost of the lease expense accrual included in general and administrative expenses in the accompanying condensed consolidated statements of operations.

Terminations

     In January 2009, the Company decided to streamline operations and terminated seven employees in order to address its existing cash constraints. Termination benefits were awarded in accordance with each employee’s respective employment arrangement. The Company recognized approximately $81,000 related to one-time termination benefits in the accompanying condensed consolidated statements of operations during the nine months ended September 30, 2009.

7. Stockholders’ Deficit

Common Stock

     In November 2008, the Company completed a private placement with Robert Gipson of 543,478 shares of its common stock which raised $1,000,000 in gross proceeds. In connection with the November 2008 private placement, the Company also issued warrants (the “November 2008 Warrants”) to purchase 543,478 additional shares of common stock that were exercisable at $1.84 per share between six months and two years after the closing. In connection with the private placement, the Company agreed with Mr. Gipson (the “Letter Agreement”) that if the Company sold shares of its common stock at a price below $1.84, subject to certain exceptions, prior to December 31, 2009, Mr. Gipson would be entitled to receive, for no additional consideration, additional shares of common stock and warrants in accordance with a pre-determined formula. In addition, Dawson James Securities, Inc., (“Dawson James”) in its capacity as agent for the private placement, was entitled to a warrant to purchase 38,043 shares of common stock (the “Agent Warrant”). The Agent Warrant had a term of five years and was exercisable at a price equal to $1.84. In February 2009, Dawson James gave up its right to the Agent Warrant.

     In January 2009, the Company completed a private placement with Robert Gipson of 1,000,000 shares of its common stock which raised $1,000,000 in gross proceeds. In addition, the Company issued an additional 456,522 shares of its common stock to Mr. Gipson pursuant to a Letter Agreement. In connection with the January 2009 private placement, Mr. Gipson agreed to the cancellation of the November 2008 Warrants.

     In February 2009, the Company entered into a private placement with Cato Holding Company (“Cato”) of 200,000 shares of its common stock at a purchase price of $1.00 per share. In connection with the February 2009 private placement, the Company agreed with Cato that if the Company sells shares of its common stock, or securities convertible into common stock, prior to September 30, 2009, and the purchaser of such securities receives warrants to purchase additional shares of common stock (a “Qualified Financing”), subject to certain exceptions, Cato shall be entitled to receive, for no additional consideration, a warrant to purchase shares of common stock with the same terms and conditions as those provided to a purchaser in a Qualified Financing.

     In November 2009, the Company entered into a private placement with Robert Gipson of 2,500,000 shares of its common stock which raised $1,000,000 in gross proceeds.

Preferred Stock

     The Company has authorized 1,000,000 shares of preferred stock of which 25,000 shares have been designated as Series A Convertible Preferred Stock, 500,000 shares have been designated as Series D Convertible Preferred Stock, and 800 shares have been designated as Series E Cumulative Convertible Preferred Stock. In March 2009, the Company designated 200,000 shares as Series F Convertible Preferred Stock (“Series F Stock”). The remaining authorized shares have not been designated.

Convertible Preferred Stock

     The Company completed the following sales of Series F Stock to Robert Gipson:

		Number of Shares
Date of Issuance		Issued					Gross Proceeds
March 19, 2009			20,000				$	500,000
March 31, 2009			20,000					500,000
April 16, 2009			20,000					500,000
May 12, 2009			40,000					1,000,000
June 10, 2009			20,000					500,000
July 9, 2009			12,000					300,000
July 23, 2009			12,000					300,000
August 11, 2009			12,000					300,000
August 26, 2009			12,000					300,000
September 10, 2009			12,000					300,000
September 28, 2009			16,000					400,000
			196,000				$	4,900,000

     The key terms of the Series F Stock are summarized below:

     Dividend. The Series F Stock is entitled to receive any dividend that is paid to holders of the Company’s common stock. Any subdivisions, combinations, consolidations or reclassifications to the common stock must also be made accordingly to Series F Stock, respectively.

     Liquidation Preference. In the event of the Company’s liquidation, dissolution or winding up, before any payments are made to holders of the Company’s common stock or any other class or series of the Company’s capital stock ranking junior as to liquidation rights to the Series F Stock, the holders of the Series F Stock will be entitled to receive the greater of (i) $25.00 per share (subject to adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization affecting such shares) plus any outstanding and unpaid dividends thereon and (ii) such amount per share as would have been payable had each share been converted into common stock. After such payment to the holders of Series F Stock and the holders of shares of any other series of our preferred stock ranking senior to the common stock as to distributions upon liquidation, our remaining assets will be distributed pro rata to the holders of our common stock.

     Voting Rights. Each share of Series F Stock shall entitle its holder to a number of votes equal to the number of shares of the Company’s common stock into which such share of Series F Stock is convertible.

     Conversion. Each share of Series F Stock is convertible at the option of the holder thereof at any time. Each share of Series F Stock is initially convertible into 25 shares of common stock, subject to adjustment in the event of certain dividends, stock splits or stock combinations affecting the Series F Stock or the common stock, and subject to adjustment on a weighted-average basis in the event of certain issuances by the Company of securities for a price less than the then-current price at which the Series F Stock converts into common stock.

     Redemption. At any time after September 1, 2011, any holder of Series F Stock may elect to have some or all of such shares redeemed by the Company at a price equal to the aggregate of (i) $25 per share (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization affecting such shares), (the “Original Issue Price”), plus (ii) all declared but unpaid dividends thereon, plus (iii) an amount computed at a rate per annum of 7% of the Original Issue Price from the Original Issue Date until the redemption date.

     The April 2009 Series F Stock issuance was issued with a conversion price below the market price of the Company’s common stock. Accordingly, the Company recorded $2,000 as a deemed dividend and an increase in additional paid-in capital related to the total of the intrinsic value of the beneficial conversion feature.

     The terms of the Series F Stock contain provisions that may require redemption in circumstances that are beyond the Company’s control. Therefore, the shares have been recorded, net of issuance costs of approximately $25,000, as convertible, redeemable stock outside of permanent equity. The Series F Stock was recorded at fair value on the date of issuance. As of September 30, 2009, the Company recorded approximately $106,000 in accretion on the Series F Stock.

8. Commitments and Contingencies

     The Company recognizes and discloses commitments when it enters into executed contractual obligations with third parties. The Company accrues contingent liabilities when it is probable that future expenditures will be made and such expenditures can be reasonably estimated.

License Agreements

     The Company has entered into two license agreements (the “CMCC Licenses”) with Children’s Medical Center Corporation (also known as Children’s Hospital Boston) (“CMCC”) to acquire the exclusive worldwide rights to certain axon regeneration technologies and to replace the Company’s former axon regeneration licenses with CMCC. The CMCC Licenses provide for future milestone payments of up to an aggregate of approximately $425,000 for each product candidate upon achievement of certain regulatory milestones.

     The Company has entered into license agreements (the “Harvard License Agreements”) with Harvard University and its affiliated hospitals (“Harvard and its Affiliates”) to acquire the exclusive worldwide rights to certain technologies within its molecular imaging and neurodegenerative disease programs. The Harvard License Agreements obligate the Company to pay up to an aggregate of approximately $2,520,000 in milestone payments in the future. The future milestone payments are generally payable only upon achievement of certain regulatory milestones.

     The Company’s license agreements with Harvard and its Affiliates and CMCC generally provide for royalty payments equal to specified percentages of product sales, annual license maintenance fees and continuing patent prosecution costs.

     In December 2006, the Company entered into a license agreement (the “Cethrin License”) with BioAxone Therapeutic Inc., a Canadian corporation (“BioAxone”), pursuant to which the Company was granted an exclusive, worldwide license to develop and commercialize specified compounds including, but not limited to, Cethrin, as further defined in the Cethrin License. Under the Cethrin License, the Company agreed to pay $10,000,000 in up-front payments, of which it paid BioAxone $2,500,000 upon execution of the Cethrin License and $7,500,000 in March 2007. The Company has also agreed to pay BioAxone up to $25,000,000 upon the achievement of certain milestone events and royalties based on the worldwide net sales of licensed products, subject to specified minimums, in each calendar year until either the expiration of a valid claim covering a licensed product or a certain time period after the launch of a licensed product, in each case applicable to the specific country. The Cethrin License provides for a series of performance milestones any of which, if not achieved by the Company in the timeframes agreed in the Cethrin License, could form

the basis of a claim for compensation to BioAxone and possibly the termination of some or all of the Company’s rights under the Cethrin License. The Cethrin License further provides the Company with relief from its performance obligations in the event that such performance is effectively rendered impossible due to safety or efficacy issues with Cethrin during its development. Additionally, the Cethrin License provides a warranty that all of the clinical materials provided to the Company in connection with the Cethrin License were manufactured in accordance with current Good Manufacturing Practices.

     On April 24, 2009, the Company entered into an agreement, (the “Amendment Agreement”), with BioAxone pursuant to which the Cethrin License was amended to provide that during a specified period, the SubLicense Period, the Company will use reasonable commercial efforts to enter into a sublicense agreement for the technology licensed to us under the Cethrin License. The Amendment Agreement further provides that all of the pre-commercial financial milestones, and the performance-related milestones contained in the Cethrin License are eliminated and replaced with a formula-based approach to sharing any and all sublicense income with BioAxone. The Amendment Agreement provides that, in the event the Company executes a sublicense agreement within the SubLicense Period that meets certain specified minimum terms, the Company will be entitled to receive a fixed percentage of all sublicense consideration in any and all forms and the remainder will be paid to BioAxone. If the Company fails to execute a sublicense agreement during the SubLicense Period, the Cethrin License and the Company’s right to sublicense it will terminate and the Company will instead be entitled to receive a lower fixed percentage of any and all income received by BioAxone if and when they enter into a future third party license agreement for the Cethrin technology. The Amendment Agreement includes a mutual release of all of the claims that each party had previously alleged against the other under the Cethrin License. Certain terms of the Amendment Agreement for which the Company has been granted Confidential Treatment are not disclosed herein. Under the terms of the Amendment Agreement, our right to sublicense Cethrin has expired. BioAxone has not indicated whether or not an extension of this right is or could be available.

Contingencies

     The Company is subject to legal proceedings in the ordinary course of business. One such matter involves a contract manufacturing organization (the “CMO”) for the Cethrin product. The Company was not satisfied with the services rendered by the CMO. The two companies have had a number of meetings to resolve the issues but have been unsuccessful. The Company informed the CMO that the agreement between the parties is considered terminated as the Company believes the CMO materially breached the agreement. Based on the terms of the agreement, the Company requested that the advance payment held by the CMO be offset by the amount payable for work performed to date. The CMO responded claiming they do not believe they breached the agreement and therefore does not accept the termination. In addition, the CMO has demanded the Company pay them for the work performed to date. As of September 30, 2009, no amounts under the agreement with the CMO are accrued in the accompanying Condensed Consolidated Balance Sheet relating to a potential settlement of this matter. Included in the accompanying Condensed Consolidated Balance Sheet is approximately $561,000 payable to the CMO for work performed as of December 31, 2008. The Company expensed the advance payment of $592,000 during the year ended December 31, 2008. The Company was informally notified in June 2009 that the CMO had ceased operations and terminated its staff. The Company has received no formal notification of such closure or any kind of demand for payment from the CMO or any successor in interest to its assets. The Company is prepared to continue negotiations with the CMO but there can be no assurance as to the outcome of this matter.

     On January 9, 2009, we announced that Frank Bobe, Executive Vice President and Chief Business Officer, left our employ. On March 4, 2009, Mr. Bobe filed a lawsuit in the state Superior Court in Middlesex County, Massachusetts naming us as defendant alleging breach of his employment agreement. The complaint alleges damages in the amount of $349,063 for severance and other benefits, plus additional attorney’s fees. On November 4, 2009, the Company entered into a Settlement and Release Agreement with Mr. Bobe pursuant to which all claims of Mr. Bobe against the Company and all claims of the Company against Mr. Bobe were released in exchange for a cash payment from the Company to Mr. Bobe, the amount of which is subject to the confidentiality provisions of the Settlement and Release Agreement. The Company adjusted its accrued liabilities in the accompanying statements of operations at September 30, 2009 to reflect the outcome of this matter. In addition, included in prepaid expenses and other current assets on the accompanying balance sheet at September 30, 2009 includes amounts due from the Company’s insurance company representing reimbursement for a portion of the settlement and legal fees.

9. Income taxes

     The Company is subject to both federal and state income tax for the jurisdictions within which it operates, which are primarily focused in Massachusetts. Within these jurisdictions, the Company is open to examination for tax years ended December 31, 2005 through December 31, 2008. However, because we are carrying forward income tax attributes, such as net operating losses from 2004

and earlier tax years, these attributes can still be audited when utilized on returns filed in the future. There are currently no tax audits that have commenced with respect to income tax returns in any jurisdiction. The Company’s practice is to recognize interest and penalties related to income tax matters in income tax expense. The Company has no accrual for interest and penalties as of September 30, 2009.

10. Fair Value Measurements

     The Company adopted certain provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820 to evaluate the fair value of certain of its financial assets required to be measured on a recurring basis. FASB ASC Topic 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Fair value is determined based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants exclusive of any transaction costs.

     FASB ASC Topic 820 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, described below:

     Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. The fair value hierarchy gives the highest priority to Level 1 inputs.

     Level 2: Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.

     Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

     The following table sets forth our financial assets that were measured at fair value on a recurring basis at September 30, 2009 by level within the fair value hierarchy. We did not have any non-financial assets or liabilities that were measured or disclosed at fair value on a recurring basis at September 30, 2009. Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

						Fair Value Measurement at Reporting Date Using
						Quoted Prices in
						Active Markets for				Significant Other				Significant
		Carrying Value at				Identical Assets				Observable Inputs				Unobservable Inputs
Description		September 30, 2009				(Level 1)				(Level 2)				(Level 3)
Assets:
Money market funds — current assets		$	189,511			$	189,511			$	—			$	—
Money market funds — long term assets			115,749				115,749				—				—
Total		$	305,260			$	305,260			$	—			$	—

     Money market funds are measured at fair value using quoted market prices and are classified within Level 1 of the valuation hierarchy.

     It is not practicable to estimate the fair value of the Company’s convertible debt. However, it is likely that the fair value of the debt would be materially less than the carrying value of the debt because the conversion price of $2.50 is higher than the Company’s stock price of $0.75 as of September 30, 2009.

11. New Accounting Pronouncements

     In April 2009, FASB issued FASB ASC 825-10-65, “Interim Disclosures about Fair Value of Financial Instruments.” ASC 825-10-65 amends ASC 825-10 to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. The ASC requires a publicly traded company to include disclosures about the fair value of its financial instruments whenever it issues summarized financial information for interim reporting periods. Such entity is required to disclose in the body or in the accompanying notes of its summarized financial information for interim reporting periods and in its financial statements for annual reporting periods the fair value of all financial instruments for which it is practicable to estimate that value, whether recognized or not recognized in the statement of financial position. Fair value information disclosed in

the notes must be presented together with the related carrying amount in a form that makes it clear whether the fair value and carrying amount represent assets or liabilities and how the carrying amount relates to what is reported in the statement of financial position. Such entity also must disclose the methods and significant assumptions used to estimate the fair value of financial instruments and describe changes in methods and significant assumptions during the period. This FSP is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company adopted this ASC for the quarter ended June 30, 2009 and the adoption did not have a material impact on the Company’s consolidated results of operations and financial position.

     In April 2009, FASB issued ASC 820-10-65, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.” This ASC provides additional guidance for estimating fair value in accordance with ASC 820, “Fair Value Measurements,” when the volume and level of activity for the asset or liability have significantly decreased. This ASC also includes guidance on identifying circumstances that indicate a transaction is not orderly. This ASC emphasizes that even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation technique(s) used, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. This ASC is effective for interim and annual reporting periods ending after June 15, 2009, and will be applied prospectively. The Company adopted this ASC for the quarter ended June 30, 2009 and the adoption did not have a material impact on the Company’s consolidated results of operations and financial position.

     In May 2009, the FASB issued ASC 855-10, “Subsequent Events” to establish accounting and disclosure standards for events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It defines financial statements as available to be issued, requiring the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, whether it be the date the financial statements were issued or the date they were available to be issued. The Company adopted this pronouncement upon issuance. This standard had no material impact on the Company’s financial position, results of operations or cash flows.

     In June 2009, the FASB issued ASC 105-10, “The FASB Accounting Standards Codification (the “Codification”) and the Hierarchy of Generally Accepted Accounting Principles,” as the single source of authoritative nongovernmental Generally Accepted Accounting Principles in the United States. The Codification is effective for interim and annual periods ending after September 15, 2009. Upon the effective date, the Codification will be the single source of authoritative accounting principles to be applied by all nongovernmental U.S. entities. All other accounting literature not included in the Codification will be nonauthoritative. The adoption of the Codification had no material impact on the Company’s financial position or results of operations.

12. Subsequent Events

     The Company evaluated subsequent events through November 16, 2009, when the financial statements were issued.

Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations

     Our management’s discussion and analysis of our financial condition and results of operations include the identification of certain trends and other statements that may predict or anticipate future business or financial results that are subject to important factors that could cause our actual results to differ materially from those indicated. See Item 1A, “Risk Factors” and also carefully review the risks outlined in other documents that we file from time to time with the SEC.

Overview

Description of Company

     We are a biotechnology company engaged in the development of therapeutic and diagnostic products primarily for disorders in the central nervous system, or CNS. Our clinical and preclinical product candidates are based on three proprietary technology platforms:

•

Molecular imaging program focused on the diagnosis of i) Parkinsonian Syndromes, or PS, including Parkinson’s Disease, or PD, and ii) Dementia with Lewy Bodies, or DLB;

	•		Regenerative therapeutics program, primarily focused on nerve repair and restoring movement and sensory function in patients who have had significant loss of CNS function resulting from trauma such as spinal cord injury, or SCI, stroke, and optic nerve damage utilizing technology referred to as axon regeneration; and
	•		Neurodegenerative disease program focused on treating the symptoms of PD and slowing or stopping the progression of PD.

     At September 30, 2009, we were considered a “development stage enterprise” as defined in Financial Accounting Standards Board Accounting Standards Codification Topic 915, OR ASC 915.

     As of September 30, 2009, we have experienced total net losses since inception of approximately $192,922,000, stockholders’ deficit of approximately $46,714,000 and a net working capital deficit of approximately $4,450,000. The cash and cash equivalents available at September 30, 2009 will not provide sufficient working capital to meet our anticipated expenditures for the next twelve months. We believe that the approximate $483,000 in cash and cash equivalents available at November 12, 2009 combined with additional operating capital committed from its lead investor and its ability to control certain costs, including those related to clinical trial programs, preclinical activities, and certain general and administrative expenses will enable us to meet our anticipated cash expenditures into December 2009. We must immediately raise additional funds in order to continue operations.

     In order to continue as a going concern, we will need to raise additional capital through one or more of the following: a debt financing, an equity offering, or a collaboration, merger, acquisition or other transaction with one or more pharmaceutical or biotechnology companies. We are currently engaged in fundraising efforts. There can be no assurance that we will be successful in our fundraising efforts or that additional funds will be available on acceptable terms, if at all. We also cannot be sure that we will be able to obtain additional credit from, or effect additional sales of debt or equity securities to certain of our existing investors described below in Liquidity and Capital Resources. If we are unable to raise additional or sufficient capital, we will need to cease operations or reduce, cease or delay one or more of our research or development programs, adjust our current business plan and may not be able to continue as a going concern. If we violate a debt covenant or default under the March 2008 Amended Purchase Agreement or the June 2008 Purchase Agreement (described below in Liquidity and Capital Resources) we may need to cease operations or reduce, cease or delay one or more of our research or development programs, adjust our current business plan and may not be able to continue as a going concern. Additionally, our common stock was delisted from trading on the NASDAQ Capital Market as a result of our failure to meet continued listing requirements of NASDAQ. On May 8, 2009 we began trading on the Pink Sheets OTC Market. This delisting could have an adverse affect on our ability to obtain future financing and could adversely impact our stock price and the liquidity of our common stock. See the risk factor entitled “Our common stock has been delisted from the NASDAQ Capital Market.”

     In connection with the common stock financing completed by us in March 2005, or the March 2005 Financing, we agreed with the purchasers in such financing, including Robert Gipson, Thomas Gipson, and Arthur Koenig, or the March 2005 Investors, that, subject to certain exceptions, we would not issue any shares of our common stock at a per share price less than $2.50 without the prior consent of the March 2005 Investors holding at least a majority of the shares issued in the March 2005 Financing. On November 12, 2009, the closing price of our common stock was $0.37. The failure to receive the requisite waiver or consent of the March 2005 Investors could have the effect of delaying or preventing the consummation of a financing by us should the price per share in such financing be set at less than $2.50.

     Our ability to continue to advance our clinical programs, including the development of Altropane and Cethrin, is affected by the availability of financial resources to fund each program. Financial considerations have caused us to cease or significantly delay planned development activities for our clinical programs and we have decided to suspend development of our preclinical programs until we are able to secure additional working capital. If we are not able to raise additional capital, we will not have sufficient funds to complete the clinical trial programs for the Altropane molecular imaging agent or Cethrin.

Cost Reduction

     In light of current conditions in the global financial markets and our severe cash constraints we have taken steps to reduce our on-going cash expenses. In January and September 2009, we terminated a total of ten employees, reduced the salary of most of the remaining employees and cut back certain employee benefits. The costs related to these actions consist primarily of one-time termination costs. The terminations and salary reductions are expected to reduce compensation costs by approximately $1,500,000 annually.

Product Development

Molecular Imaging Program

     The Altropane molecular imaging agent is being developed for the differential diagnosis of PS, including PD, and non-PS in patients with an upper extremity tremor. In July 2007, we completed enrollment in a study that optimized Altropane’s image acquisition protocol which we believe will enhance Altropane’s commercial use. After a series of discussions with the U.S. Food and Drug Administration, or FDA, and our expert advisors, the POET-2 program was designed as a two-part Phase III program using the optimized Altropane image acquisition protocol. The first part of the program enrolled 54 subjects in a multi-center clinical study to acquire a set of Altropane images which will be used to train the expert readers, as is the customary process for clinical trials of molecular imaging agents. Enrollment in the first part of POET-2 was completed in January 2009. In April 2009 we reached agreement with the FDA under the Special Protocol Assessment, or SPA, process for the second part of the Phase III clinical trial program of Altropane. A SPA is a process by which sponsors and the FDA reach an agreement on the size, design and analysis of clinical trials that will form the primary basis of approval. The Phase III program is designed to confirm the diagnostic utility of the agent in anticipation of drug registration. The second portion of the Phase III, POET-2 program consists of two clinical trials in up to 480 subjects in total to be conducted in parallel at up to 40 medical facilities throughout the US. The subjects to be tested will be 40-80 years of age and have had a tremor in their hand(s) or arm(s) for less than three years. Each subject will be assessed by a general neurologist, an Altropane imaging procedure and a Movement Disorder Specialist considered the “gold standard”. The success of the trial will be determined by measuring the diagnostic efficacy of the neurologist diagnosis compared with the diagnosis determined by the Altropane scan versus the MDS gold standard diagnosis.

     We believe in the current environment that, due to their proximity to commercialization and return on investment, late stage development programs may continue to be of significant interest to potential partners and investors. To maximize the value of our molecular imaging program, we are focusing on obtaining the funding necessary to execute the Altropane Phase III registration program. We are pursuing financing necessary to enable us to advance the Altropane program through our own means. In parallel, we are seeking to partner our molecular imaging program with a firm or firms with the resources necessary for the completion of the Phase III clinical program, for the manufacturing and supply of Altropane, and for the launch and commercialization of Altropane. We can provide no assurances that a partnership transaction will occur. We believe that the expansion of the program into other indications such as DLB and other countries including those in Europe could increase the value of the program for the partner and us. All of these activities require additional funding and as such are proceeding, if at all, only as rapidly as available resources permit. There can be no assurance that the required funding to advance the Altropane program will be available on acceptable terms if at all.

Regenerative Therapeutics Program — Nerve Repair

     Our nerve repair program is focused on restoring movement and sensory function in patients who have had significant loss of CNS function resulting from traumas such as SCI, stroke, traumatic brain injury, or TBI, and optic nerve damage. Our efforts are aimed at the use of proprietary regenerative drugs and/or methods to induce nerve fibers to regenerate and form new connections that restore compromised abilities. Licensing or acquiring the rights to the technologies of complementary approaches for nerve repair is part of our strategy of creating competitive advantages by assembling a broad portfolio of related technologies and intellectual property.

     Our lead product candidate for nerve repair is Cethrin. Cethrin contains a proprietary protein which studies indicate inactivates a key enzyme called Rho resulting in the promotion of nerve repair. Cethrin is currently being investigated to determine its effectiveness in facilitating the restoration of movement and sensory function following a major injury to the spinal cord. After an SCI, approximately two-thirds of patients undergo decompression/stabilization surgery. During surgery, Cethrin is delivered in a single application to the injured region of the spinal cord using a fibrin sealant as a carrier.

     In April 2009 we announced that we entered into an Amendment Agreement, or the Amendment, with BioAxone Therapeutic, Inc., pursuant to which the license agreement between the Company and BioAxone originally executed in December 2006, or the Cethrin License, was amended. The Amendment replaces all of the pre-commercial financial and performance-related milestones contained in the Cethrin License with a formula-based approach to sharing of any and all income under a sub-license. The Amendment establishes provisions under which we would use reasonable commercial efforts to enter into a Sub-license Agreement for the technology covered by the Cethrin License. The Amendment also provides for the mutual release of claims that each party had previously alleged against the other under the Cethrin License. Current development for Cethrin, including the manufacturing of additional Cethrin drug product, has been suspended until such time that we have secured a strategic partnership for the program. We have ceased our clinical development effort for Cethrin. Our efforts are focused on identifying and negotiating with appropriate sublicensing candidates. We may not be able to sublicense Cethrin during the time period under, or on terms compliant with, the Amendment Agreement, in either of which events we will not be entitled to any sublicense income as provided for in the Amendment Agreement. Under the terms of the Amendment Agreement, our right to sublicense Cethrin has expired. BioAxone has not indicated whether or not an extension of this right is or could be available. In the event that no such extension is possible, it is unclear if or when BioAxone will license the Cethrin technology to a third party, so we may not realize any revenue at all under the Amendment Agreement.

Sales and Marketing and Government Regulation

     To date, we have not marketed, distributed or sold any products and, with the exception of Altropane and Cethrin, all of our other product candidates are in preclinical development. Our product candidates must undergo a rigorous regulatory approval process which includes extensive preclinical and clinical testing to demonstrate safety and efficacy before any resulting product can be marketed. The FDA has stringent standards with which we must comply before we can test our product candidates in humans or make them commercially available. Preclinical testing and clinical trials are lengthy and expensive and the historical rate of failure for product candidates is high. Clinical trials require sufficient patient enrollment which is a function of many factors. Delays and difficulties in completing patient enrollment can result in increased costs and longer development times. The foregoing uncertainties and risks limit our ability to estimate the timing and amount of future costs that will be required to complete the clinical development of each program. In addition, we are unable to estimate when material net cash inflows are expected to commence as a result of the successful completion of one or more of our programs.

Research and Development

     Following is information on the direct research and development costs incurred on our principal scientific technology programs currently under development. These amounts do not include research and development employee and related overhead costs which total approximately $30,169,000 on a cumulative basis.

		For the Three				For the Nine				From Inception
		Months Ended				Months Ended				(October 16, 1992) to
Program		September 30, 2009				September 30, 2009				September 30, 2009
Molecular imaging		$	125,000			$	627,000			$	27,278,000
Regenerative therapeutics		$	(30,000	)		$	306,000			$	28,892,000
Neurodegenerative disease		$	—			$	20,000			$	1,131,000

     Estimating costs and time to complete development of a specific program or technology is difficult due to the uncertainties of the development process and the requirements of the FDA which could require additional clinical trials or other development and testing. Results of any testing could lead to a decision to change or terminate development of a technology, in which case estimated future costs could change substantially. In the event we were to enter into a licensing or other collaborative agreement with a corporate partner involving sharing or funding by such corporate partner of development costs, the estimated development costs incurred by us could be substantially less than estimated. Additionally, research and development costs are extremely difficult to estimate for early-stage technologies due to the fact that there are generally less comprehensive data available for such technologies to determine the development activities that would be required prior to the filing of a New Drug Application, or NDA. As a result, we cannot reasonably estimate the cost and the date of completion for any technology that is not at least in Phase III clinical development due to the uncertainty regarding the number of required trials, the size of such trials and the duration of development. Even in Phase III clinical development, estimating the cost and the filing date for an NDA can be challenging due to the uncertainty regarding the number and size of the required Phase III trials. Based on the trial design and scope covered by the Special Protocol Assessment Agreement for POET-2, we estimate that the total costs to complete the POET-2 program and prepare and submit an NDA for Altropane in the U.S. will be approximately $34 million. This funding is not available at present and there can be no assurance that such funds will be available on acceptable terms if at all.

Critical Accounting Policies and Estimates

     Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements which have been prepared by us in accordance with accounting principles generally accepted in the United States of America. The preparation of these 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. Our estimates include those related to marketable securities, research contracts, the fair value and classification of financial instruments, our lease accrual and stock-based compensation. We base our estimates on historical experience and on various other assumptions that we believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

Going Concern Basis of Accounting

     The consolidated financial statements have been prepared on the basis that we will continue as a going concern. We have incurred significant operating losses and negative cash flows from operating activities since our inception. As of September 30, 2009, these conditions raised substantial doubt as to our ability to continue as a going concern. There can be no assurance that we will be successful in our efforts to raise additional capital or that we will be able to continue as a going concern. The condensed consolidated financial statements do not include any adjustments relating to the recoverability of the carrying amount of the recorded assets or the amount of liabilities that might result from the outcome of this uncertainty. In the event that we concluded that we would not be able to continue as a going concern, we would potentially present our financial statements on a liquidation basis of accounting.

Research Contracts

     We regularly enter into contracts with third parties to perform research and development activities on our behalf in connection with our scientific technologies. Costs incurred under these contracts are recognized ratably over the term of the contract or based on actual enrollment levels which we believe corresponds to the manner in which the work is performed. Clinical trial, contract services and other outside costs require that we make estimates of the costs incurred in a given accounting period and record accruals at period end as the third party service periods and billing terms do not always coincide with our period end. We base our estimates on our knowledge of the research and development programs, services performed for the period, past history for related activities and the expected duration of the third party service contract, where applicable.

Fair Value and Classification of Financial Instruments

     Historically, we have issued warrants to purchase shares of our common stock in connection with our debt and equity financings. We record each of the securities issued on a relative fair value basis up to the amount of the proceeds received. We estimate the fair value of the warrants using the Black-Scholes valuation model. The Black-Scholes valuation model is dependent on a number of variables and estimates including interest rates, dividend yield, volatility and the expected term of the warrants. Our estimates are based on market interest rates at the date of issuance, our past history for declaring dividends, our estimated stock price volatility and the contractual term of the warrants. The value ascribed to the warrants in connection with debt offerings is considered a cost of capital and amortized to interest expense over the term of the debt.

     We have, at certain times, issued preferred stock and notes, which were convertible into common stock at a discount from the common stock market price at the date of issuance. The amount of the discount associated with such conversion rights represents an incremental yield, or “beneficial conversion feature” that is recorded when the consideration allocated to the convertible security, divided by the number of common shares into which the security converts, is below the fair value of the common stock at the date of issuance of the convertible instrument.

     A beneficial conversion feature associated with the preferred stock is recognized as a return to the preferred stockholders and represents a non-cash charge in the determination of net loss attributable to common stockholders. The beneficial conversion feature is recognized in full immediately if there is no redemption date for the preferred stock, or over the period of issuance through the redemption date, if applicable. A beneficial conversion feature associated with debentures, notes or other debt instruments is recognized as a discount to the debt and is amortized as additional interest expense using the effective interest method over the remaining term of the debt instrument.

Lease Accrual

     We are required to make significant judgments and assumptions when estimating the liability for our net ongoing obligations under our amended lease agreement relating to our former executive offices located in Boston, Massachusetts. We use a discounted cash-flow analysis to calculate the amount of the liability. We applied a discount rate of 15% representing our best estimate of our credit-adjusted risk-free rate. The discounted cash-flow analysis is based on management’s assumptions and estimates of our ongoing lease obligations, and income from sublease rentals, including estimates of sublease timing and sublease rental terms. It is possible that our estimates and assumptions will change in the future, resulting in additional adjustments to the amount of the estimated liability, and the effect of any adjustments could be material. We review our assumptions and judgments related to the lease amendment on at least a quarterly basis, until the outcome is finalized, and make whatever modifications we believe are necessary, based on our best judgment, to reflect any changes in circumstances.

Stock-Based Compensation

     We measure compensation costs for all share-based awards at fair value on grant date and recognize it as expense over the requisite service period or expected performance period of the award. We estimate the fair value of stock-based awards using the Black-Scholes valuation model on the grant date. The Black-Scholes valuation model requires us to make certain assumptions and

estimates concerning the expected term of the awards, the rate of return of risk-free investments, our stock price volatility, and our anticipated dividends. If any of our estimates or assumptions prove incorrect, our results could be materially affected.

Marketable Securities

     From time to time, we invest in marketable securities. These marketable securities consist exclusively of investments in United States agency bonds and corporate debt obligations. These marketable securities are adjusted to fair value on the Condensed Consolidated Balance Sheet through other comprehensive income. If a decline in the fair value of a security is considered to be other than temporary, the investment is written down to a new cost basis and the unrealized loss is removed from accumulated other comprehensive loss and recorded in the Condensed Consolidated Statements of Operations. We evaluate whether a decline in fair value is other than temporary based on factors such as the significance of the decline, the duration of time for which the decline has been in existence and our ability and intent to hold the security to maturity. To date, we have not recorded any other than temporary impairments related to our marketable securities. These marketable securities are classified as current assets because they are highly liquid and are available, as required, to meet working capital and other operating requirements.

     Results of Operations

Three Months Ended September 30, 2009 and 2008

     Our net loss and net loss attributable to common stockholders was $2,060,300 during the three months ended September 30, 2009 as compared with $5,111,315 during the three months ended September 30, 2008. Net loss attributable to common stockholders totaled $0.09 per share for the 2009 period as compared to $0.25 per share for the 2008 period. The decrease in net loss in the 2009 period was primarily due to lower operating expenses resulting from our ongoing curtailment of operations. The decrease in net loss attributable to common stockholders on a per share basis in the 2009 period was primarily due to the decrease in net loss in 2009 and an increase in weighted average shares outstanding of approximately 2,494,000 shares in 2009, which was primarily the result of the common stock issuances in November 2008 and January 2009.

     Research and development expenses were $720,505 during the three months ended September 30, 2009 as compared with $2,818,398 during the three months ended September 30, 2008. The decrease in the 2009 period was primarily attributable to our decision to scale back operations specifically resulting in (i) lower costs of approximately $1,161,000 associated with our nerve repair program, primarily related to Cethrin clinical costs including our Phase I/IIa trial and suspended preparations for our Phase IIb trial; (ii) lower costs of approximately $464,000 associated with our molecular imaging program primarily related to decreased Altropane clinical costs and (iii) lower compensation and related costs of approximately $402,000 primarily related to lower headcount and lower stock-compensation expense. Subject to our ability to raise additional capital, we are currently planning for an increase in our research and development expenses over the next twelve months although there may be significant fluctuations on a quarterly basis. This expected increase is primarily related to higher Altropane clinical costs. Our working capital constraints may limit our planned expenditures.

     General and administrative expenses were $705,904 during the three months ended September 30, 2009 as compared with $1,703,609 during the three months ended September 30, 2008. The decrease in the 2009 period was primarily related to (i) lower compensation and related costs of approximately $738,000 primarily related to decreased headcount and lower stock-compensation expense, and (ii) lower commercialization and communication costs of approximately $147,000. We currently anticipate that our general and administrative expenses will decrease over the next twelve months primarily related to reduced headcount, although there may be significant fluctuations on a quarterly basis.

     Interest expense was $634,679 during the three months ended September 30, 2009 as compared with $609,817 during the three months ended September 30, 2008. The increase in the 2009 period was primarily attributable to the issuance of $10,000,000 in convertible promissory notes during 2008, which bear interest at the rate of 5% per annum.

     Investment income was $788 during the three months ended September 30, 2009 as compared with $20,509 during the three months ended September 30, 2008. The decrease in the 2009 period was primarily due to lower average cash and cash equivalent balances during the 2009 period.

Nine Months Ended September 30, 2009 and 2008

     Our net loss and net loss attributable to common stockholders was $9,022,736 during the nine months ended September 30, 2009 as compared with $16,552,039 during the nine months ended September 30, 2008. Net loss attributable to common stockholders totaled $0.39 per share for the 2009 period as compared to $0.80 per share for the 2008 period. The decrease in net loss in the 2009 period was primarily due to lower operating expenses resulting from our decision to curtail operations pending additional funding. The decrease in net loss attributable to common stockholders on a per share basis in the 2009 period was primarily due to the decrease in net loss in 2009 and an increase in weighted average shares outstanding of approximately 2,162,000 shares in 2009, which was primarily the result of the common stock issuances in November 2008 and January 2009.

     Research and development expenses were $3,441,041 during the nine months ended September 30, 2009 as compared with $9,107,664 during the nine months ended September 30, 2008. The decrease in the 2009 period was primarily attributable to our decision to scale back operations specifically resulting in (i) lower costs of approximately $3,961,000 associated with our nerve repair program, primarily related to Cethrin clinical costs including our Phase I/IIa trial and suspended preparations for our Phase IIb trial; (ii) lower costs of approximately $744,000 associated with our molecular imaging program primarily related to decreased Altropane clinical costs and (iii) lower compensation and related costs of approximately $818,000 primarily related to lower headcount.

     General and administrative expenses were $3,768,972 during the nine months ended September 30, 2009 as compared with $5,906,849 during the nine months ended September 30, 2008. The decrease in the 2009 period was primarily related to (i) lower compensation and related costs of approximately $1,183,000 primarily related to decreased headcount; (ii) lower commercialization and communication costs of approximately $400,000 (iii) lower legal, patent and consulting costs of approximately $294,000 primarily related to slowdowns in operations and resolution of the dispute with BioAxone.

     Other income was $65,000 during the nine months ended September 30, 2009 as compared with $0 during the nine months ended September 30, 2008. The amount recorded during the 2009 period represents the gain on sale of Cethrin drug substance to a vendor for said vendor to use in additional research.

     Interest expense was $1,883,730 during the nine months ended September 30, 2009 as compared with $1,610,314 during the nine months ended September 30, 2008. The increase in the 2009 period was primarily attributable to the issuance of $10,000,000 in convertible promissory notes during 2008, which bear interest at the rate of 5% per annum.

     Investment income was $6,007 during the nine months ended September 30, 2009 as compared with $72,788 during the nine months ended September 30, 2008. The decrease in the 2009 period was primarily due to lower average cash and cash equivalent balances during the 2009 period.

Liquidity and Capital Resources

     Global market and economic conditions have been, and continue to be, disruptive and volatile. In particular, the cost of raising money in the debt and equity markets has increased substantially while the availability of funds from those markets has diminished significantly. Recent distress in the financial markets has adversely affected our ability to raise capital. We must immediately raise additional funds in order to continue operations.

     Net cash used for operating activities, primarily related to our net loss, totaled $6,814,358 during the nine months ended September 30, 2009 as compared to $12,683,116 during the nine months ended September 30, 2008. The decrease in cash used during the 2009 period is primarily related to the decrease in net loss. Net cash provided by investing activities totaled $60,751 during the nine months ended September 30, 2009 as compared to $1,082,845 during the nine months ended September 30, 2008. The decrease in cash provided by investing activities is primarily associated with the sale of marketable securities used to fund operations during the 2008 period. Net cash provided by financing activities totaled $6,874,812 during the nine months ended September 30, 2009 as compared to $10,002,541 during the nine months ended September 30, 2008. The decrease during the 2009 period primarily reflects the decrease in promissory notes payable issued in the 2009 period partially offset by the issuance of preferred stock.

     To date, we have dedicated most of our financial resources to the research and development of our product candidates, general and administrative expenses (including costs related to obtaining and protecting patents). Since inception, we have primarily satisfied our working capital requirements from the sale of our securities through private placements. These private placements have included the sale and issuance of preferred stock, common stock, promissory notes and convertible debentures.

     A summary of financings completed during the three years ended September 30, 2009 is as follows:

				Securities or Debt
Date		Net Proceeds Raised		Instrument Issued
September 2009		$0.7 million		Convertible Preferred Stock
August 2009		$0.6 million		Convertible Preferred Stock
July 2009		$0.6 million		Convertible Preferred Stock
June 2009		$0.5 million		Convertible Preferred Stock
May 2009		$1.0 million		Convertible Preferred Stock
April 2009		$0.5 million		Convertible Preferred Stock
March 2009		$1.0 million		Convertible Preferred Stock
February 2009		$0.2 million		Common Stock
February 2009		$1.0 million		Promissory Notes
January 2009		$1.0 million		Common Stock
November 2008		$1.0 million		Common Stock
June 2008		$5.0 million		Convertible Promissory Notes
March 2008		$5.0 million		Convertible Promissory Notes
August 2007		$10.0 million		Convertible Promissory Notes
May 2007		$6.0 million		Convertible Promissory Notes
March 2007		$9.0 million		Convertible Promissory Notes
February 2007		$2.0 million		Convertible Promissory Notes(1)
October 2006		$6.0 million		Convertible Promissory Notes(1)

     In November 2009, we sold 2,500,000 shares of our common stock for gross proceeds of $1,000,000.

     During the nine months ended September 30, 2009, we have obtained all of our funding from Robert Gipson. In the event that Mr. Gipson cannot provide any future funding or we cannot obtain any additional funding from sources other than Mr. Gipson, we may need to cease operations or reduce, cease or delay one or more of our research or development programs and/or adjust our current business plan and in any such event may not be able to continue as a going concern.

     In the future, our working capital and capital requirements will depend on numerous factors, including the progress of our research and development activities, the level of resources that we devote to the developmental, clinical, and regulatory aspects of our technologies, and the extent to which we enter into collaborative relationships with pharmaceutical and biotechnology companies.

     As of September 30, 2009, we have experienced total net losses since inception of approximately $192,922,000, stockholders’ deficit of approximately $46,714,000 and a net working capital deficit of approximately $4,450,000. The cash and cash equivalents available at September 30, 2009 will not provide sufficient working capital to meet our anticipated expenditures for the next twelve months. At November 12 2009, we had cash and cash equivalents of approximately $483,000 which combined with additional operating capital committed by our lead investor and our ability to control certain costs, including those related to clinical trial programs, preclinical activities, and certain general and administrative expenses will enable us to meet our anticipated cash expenditures into December 2009. We must immediately raise additional funds in order to continue operations.

     In order to continue as a going concern, we will need to raise additional capital through one or more of the following: a debt financing, an equity offering, or a collaboration, merger, acquisition or other transaction with one or more pharmaceutical or biotechnology companies. We are currently engaged in fundraising efforts. There can be no assurance that we will be successful in our fundraising efforts or that additional funds will be available on acceptable terms, if at all. We also cannot be sure that we will be able to obtain additional credit from, or effect additional sales of debt or equity securities to certain of our existing investors (described below). If we are unable to raise additional or sufficient capital or if we violate a debt covenant or default under the March 2008 Amended Purchase Agreement or the June 2008 Purchase Agreement (described below) we may need to cease operations or reduce, cease or delay one or more of our research or development programs and/or adjust our current business plan and in any such event may not be able to continue as a going concern. Additionally, our common stock was delisted from trading on the NASDAQ Capital Market as a result of our failure to meet continued listing requirements of NASDAQ. On May 8, 2009 we began trading on the Pink Sheets OTC Market. This delisting could have an adverse affect on our ability to obtain future financing and could adversely impact our stock price and the liquidity of our common stock. See the risk factor entitled “Our common stock has been delisted from, the NASDAQ Capital Market.”

     In connection with the March 2005 Financing, we agreed with the March 2005 Investors, that, subject to certain exceptions, we would not issue any shares of our common stock at a per share price less than $2.50 without the prior consent of the March 2005 Investors holding at least a majority of the shares issued in the March 2005 Financing. On November 12, 2009, the closing price of our common stock was $0.37. The failure to receive the requisite waiver or consent of the March 2005 Investors could have the effect of delaying or preventing the consummation of a financing by us should the price per share in such financing be set at less than $2.50.

Contractual Obligations and Commitments

     Except as set forth below, the disclosures relating to our contractual obligations in our Annual Report on Form 10-K for the year ended December 31, 2008 have not materially changed since we filed that report.

     On April 24, 2009 we entered into the Amendment Agreement with BioAxone pursuant to which the Cethrin License was amended to provide that during a specified period, the SubLicense Period, we will use reasonable commercial efforts to enter into a Sublicense Agreement for the technology licensed to us under the Cethrin License. The Amendment Agreement further provides that all of the pre-commercial financial milestones, and the performance-related milestones contained in the Cethrin License are eliminated and replaced with a formula-based approach to sharing any and all sublicense income with BioAxone. The Amendment Agreement provides that, in the event we execute a sublicense agreement within the specified SubLicense Period that meets certain specified minimum terms, we will be entitled to receive a fixed percentage of all sublicense consideration in any and all forms and the remainder will be paid to BioAxone. If we fail to execute a sublicense agreement during the specified SubLicense Period, the Cethrin License and our right to sublicense it will terminate and we will instead be entitled to receive a lower fixed percentage of any and all income received by BioAxone if and when they enter into future third party license agreement for the Cethrin technology. The Amendment Agreement includes a mutual release of all of the claims that each party had previously alleged against the other under the Cethrin License. Certain terms of the Amendment Agreement for which we have been granted Confidential Treatment are not disclosed herein. Under the terms of the Amendment Agreement, our right to sublicense Cethrin has expired. BioAxone has not indicated whether or not an extension of this right is or could be available.

Recent Accounting Pronouncements

     In April 2009, the Financial Accounting Standards Board, or FASB, issued FASB Accounting Standards Codification, or ASC, 825-10-65, “Interim Disclosures about Fair Value of Financial Instruments.” ASC 825-10-65 amends ASC 825-10 to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as annual financial statements. The ASC requires a publicly traded company to include disclosures about the fair value of its financial instruments whenever it issues summarized financial information for interim reporting periods. Such entity is required to disclose in the body or in the accompanying notes of its summarized financial information for interim reporting periods and in its financial statements for annual reporting periods the fair value of all financial instruments for which it is practicable to estimate that value, whether recognized or not recognized in the statement of financial position. Fair value information disclosed in the notes must be presented together with the related carrying amount in a form that makes it clear whether the fair value and carrying amount represent assets or liabilities and how the carrying amount relates to what is reported in the statement of financial position. Such entity also must disclose the methods and significant assumptions used to estimate the fair value of financial instruments and describe changes in methods and significant assumptions during the period. We adopted this ASC for the quarter ended June 30, 2009 and the adoption did not have a material impact on our consolidated results of operations and financial position.

     In April 2009, FASB issued ASC 820-10-65, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.” This ASC provides additional guidance for estimating fair value in accordance with ASC 820, “Fair Value Measurements”, when the volume and level of activity for the asset or liability have significantly decreased. This ASC also includes guidance on identifying circumstances that indicate a transaction is not orderly. This ASC emphasizes that even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation technique(s) used, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. We adopted this ASC for the quarter ended June 30, 2009 and the adoption did not have a material impact on our consolidated results of operations and financial position.

     In May 2009, the FASB issued ASC 855-10, “Subsequent Events” to establish accounting and disclosure standards for events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It defines financial statements as available to be issued, requiring the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, whether it be the date the financial statements were issued or the date they were available to be issued. We adopted this pronouncement upon issuance. This standard had no material impact on our financial position, results of operations or cash flows.

     In June 2009, the FASB issued ASC 105-10, “The FASB Accounting Standards Codification, or the Codification, and the Hierarchy of Generally Accepted Accounting Principles,” as the single source of authoritative nongovernmental Generally Accepted Accounting Principles in the United States. The Codification is effective for interim and annual periods ending after September 15, 2009. Upon the effective date, the Codification will be the single source of authoritative accounting principles to be applied by all nongovernmental U.S. entities. All other accounting literature not included in the Codification will be nonauthoritative. The adoption of the Codification had no material impact on our financial position or results of operations.

Item 3 — Quantitative and Qualitative Disclosures About Market Risk

     There have been no material changes in the market risks reported in our Annual Report on Form 10-K for the year ended December 31, 2008.

     We generally maintain a portfolio of cash equivalents, and short-term and long-term marketable securities in a variety of securities which can include commercial paper, certificates of deposit, money market funds and government and non-government debt securities. The fair value of these available-for-sale securities are subject to changes in market interest rates and may fall in value if market interest rates increase. Our investment portfolio includes only marketable securities with active secondary or resale markets to help insure liquidity. We have implemented policies regarding the amount and credit ratings of investments. Due to the conservative nature of these policies, we do not believe we have material exposure due to market risk. We may not have the ability to hold our fixed income investments until maturity, and therefore our future operating results or cash flows could be affected if we are required to sell investments during a period in which increases in market interest rates have adversely affected the value of our securities portfolio. For fixed rate debt, changes in interest rates generally affect the fair market value of the debt instrument, but not earnings or cash flows. We do not have an obligation to prepay any fixed rate debt prior to maturity and, therefore, interest rate risk and changes in the fair market value of fixed rate debt should not have a significant impact on earnings or cash flows until such debt is refinanced, if necessary. The terms related to our fixed rate debt are described in Note 5 to the condensed consolidated financial statements. For variable rate debt, changes in interest rates generally do not impact the fair market value of the debt instrument, but do affect future earnings and cash flows. We did not have any variable rate debt outstanding during the nine months ended September 30, 2009.

Item 4T — Controls and Procedures

     Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2009. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2009, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

     No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended September 30, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II — OTHER INFORMATION

Item 1 — Legal Proceedings

     The disclosure contained under the heading “Contingencies” in Note 8 to the condensed consolidated financial statements included in Part I, Item 1 hereof is incorporated herein by reference.

Item 1A — Risk Factors

     Statements contained or incorporated by reference in this Quarterly Report on Form 10-Q that are not based on historical fact are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. These forward-looking statements regarding future events and our future results are based on current expectations, estimates, forecasts, and projections, and the beliefs and assumptions of our management including, without limitation, our expectations regarding our product candidates, including the success and timing of our

preclinical, clinical and development programs, the submission of regulatory filings and proposed partnering arrangements, the outcome of any litigation, collaboration, merger, acquisition and fund raising efforts, results of operations, selling, general and administrative expenses, research and development expenses and the sufficiency of our cash for future operations. Forward-looking statements may be identified by the use of forward-looking terminology such as “may,” “could,” “will,” “expect,” “estimate,” “anticipate,” “continue,” or similar terms, variations of such terms or the negative of those terms.

     We cannot assure investors that our assumptions and expectations will prove to have been correct. Important factors could cause our actual results to differ materially from those indicated or implied by forward-looking statements. Such factors that could cause or contribute to such differences include those factors discussed below. We undertake no intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The following is an update to our descriptions of risk factors reported in our Annual Report or Form 10-K for the year ended 2008. If any of such risks actually occur, our business, financial condition or results of operations would likely suffer.

Risks Related to our Intellectual Property

WE HAVE AMENDED OUR CETHRIN LICENSE AGREEMENT WITH BIOAXONE AND CONSEQUENTLY WE WILL NOT CLINICALLY DEVELOP CETHRIN AND PURSUANT TO THE TERMS OF THE AMENDMENT WE MAY NOT REALIZE ANY REVENUE FROM A FUTURE LICENSING OF THE CETHRIN TECHNOLOGY.

     We are party to a December 2006 license agreement, the Cethrin License, with BioAxone Therapeutic, Inc., a Canadian corporation, or BioAxone, pursuant to which we were granted an exclusive, worldwide license to develop and commercialize specified compounds including but not limited to Cethrin as further defined in the Cethrin License. On April 24, 2009 we entered into an agreement, the Amendment Agreement, with BioAxone pursuant to which the Cethrin License was amended to provide that during a specified period, the SubLicense Period, we will use reasonable commercial efforts to enter into a sublicense agreement for the technology licensed to us under the Cethrin License. The Amendment Agreement further provides that all of the pre-commercial financial milestones, and the performance-related milestones contained in the Cethrin License are eliminated and replaced with a formula-based approach to sharing any and all sublicense income with BioAxone. The Amendment Agreement provides that, in the event we execute a sublicense agreement within the SubLicense Period that meets certain specified minimum terms, we will be entitled to receive a fixed percentage of all sublicense consideration in any and all forms and the remainder will be paid to BioAxone. If we fail to execute a sublicense agreement during the SubLicense Period, the Cethrin License and our right to sublicense it will terminate and we will instead be entitled to receive a lower fixed percentage of any and all income received by BioAxone if and when they enter into a future third party license agreement for the Cethrin technology.

     We have ceased our clinical development effort for Cethrin. Therefore, we will not realize the attendant benefits under the original in-license from BioAxone. Further clinical development of Cethrin will be conducted, if at all, by a sublicense. We may not be able to sublicense Cethrin during the time period under, or on terms compliant with, the Amendment Agreement, in either of which events we will not be entitled to any sublicense income as provided for in the Amendment Agreement. Under the terms of the Amendment Agreement, our right to sublicense Cethrin has expired. BioAxone has not indicated whether or not an extension of this right is or could be available. It is unclear if or when BioAxone will license the Cethrin technology to a third party, so we may not realize any revenue at all under the Amendment Agreement.

Risks Related to our Stock

OUR COMMON STOCK HAS BEEN DELISTED FROM THE NASDAQ CAPITAL MARKET.

     On January 8, 2009, we received a letter from The NASDAQ Stock Market LLC (“NASDAQ”) advising us that for the last 10 consecutive trading days, the market value of our listed securities was below the minimum $35 million requirement for continued inclusion under NASDAQ Marketplace Rule 4310(c)(3)(B). Pursuant to NASDAQ Marketplace Rule 4310(c)(8)(C), we were provided an initial period of 30 calendar days, or until February 9, 2009, to regain compliance.

     On January 15, 2009, we received further notification from NASDAQ that on January 13, 2009 NASDAQ filed an immediately effective rule change with the Securities and Exchange Commission to extend the compliance period from 30 to 90 calendar days. We could have regained compliance if, at any time before April 8, 2009, the market value of our listed securities was $35 million or more for a minimum of 10 consecutive business days.

     On April 9, 2009, we received a NASDAQ Staff Determination indicating that we had not regained compliance with the minimum $35 million market value of listed securities requirement, and that, accordingly, our common stock would be delisted from The NASDAQ Capital Market unless we requested an appeal of the determination. Although we requested an appeal of the determination by requesting a written hearing before a NASDAQ Listing Qualifications Panel, on May 6, 2009 we withdrew such appeal because we

believed that it would ultimately be unsuccessful and that the shareholder approval requirements of the Marketplace Rules were inhibiting our ability to complete the financing necessary to fund our development efforts and ongoing operations. The withdrawal of our appeal resulted in the suspension of our stock’s trading on The NASDAQ Capital Market as of May 8, 2009, and we were suspended from trading on The NASDAQ Capital Market on May 8, 2009. On May 8, 2009 we began trading on the Pink Sheets OTC Market. Subsequently, and in keeping with procedure, NASDAQ filed a Form 25 formally removing our shares from listing on the NASDAQ exchange effective on July 27, 2009.

     Delisting from the NASDAQ Capital Market could have an adverse effect on our business, including our ability to obtain future financing, and on the trading of our common stock. Our common stock is now quoted on the Pink Sheets OTC maintained by the National Quotation Bureau, Inc. This alternative is generally considered to be a less liquid and efficient market, and our stock price, as well as the liquidity of our common stock, may be adversely impacted as a result.

Item 6 — Exhibits

10.1		Securities Purchase Agreement dated July 9, 2009, by and between the Company and Robert L. Gipson (filed as Exhibit 10.7 to our Current Report on Form 8-K filed on July 13, 2009 and incorporated herein by reference)
10.2		Securities Purchase Agreement dated July 23, 2009, by and between the Company and Robert L. Gipson (filed as Exhibit 10.7 to our Current Report on Form 8-K filed on July 29, 2009 and incorporated herein by reference)
10.3*		Securities Purchase Agreement dated August 11, 2009, by and between the Company and Robert L. Gipson
10.4		Securities Purchase Agreement dated August 26, 2009, by and between the Company and Robert L. Gipson (filed as Exhibit 10.7 to our Current Report on Form 8-K filed on September 1, 2009 and incorporated herein by reference)
10.5		Securities Purchase Agreement dated September 10, 2009, by and between the Company and Robert L. Gipson (filed as Exhibit 10.7 to our Current Report on Form 8-K filed on September 16, 2009 and incorporated herein by reference)
10.6		Securities Purchase Agreement dated September 28, 2009, by and between the Company and Robert L. Gipson (filed as Exhibit 10.7 to our Current Report on Form 8-K filed on October 2, 2009 and incorporated herein by reference)
31.1*		Certification of the Chief Executive Officer pursuant to Section 1350 of Title 18, United States Code, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification of the Chief Financial Officer pursuant to Section 1350 of Title 18, United States Code, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.