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EX-32 - ONCOVISTA INNOVATIVE THERAPIES, INCv193872_ex32.htm
EX-31.2 - ONCOVISTA INNOVATIVE THERAPIES, INCv193872_ex31-2.htm
EX-31.1 - ONCOVISTA INNOVATIVE THERAPIES, INCv193872_ex31-1.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549


FORM 10-Q


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

For the Quarterly Period Ended June 30, 2010

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

For the transition period from _________ to __________

Commission file number: 000-28347

ONCOVISTA INNOVATIVE THERAPIES, INC.
(Exact name of registrant as specified in its charter)

Nevada
33-0881303
(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)

14785 Omicron Drive
Suite 104
San Antonio, Texas 78245
(Address of principal executive offices)

(210) 677-6000
(Registrant's telephone number, including area code)

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

Indicate by check mark 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 ¨ No ¨

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

Large accelerated filer ¨        Accelerated filer ¨        Non-accelerated filer ¨        Smaller reporting company x

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

State the number of shares outstanding of each of the registrant's classes of common equity, as of the latest practicable date: 21,149,675 shares of common stock with a par value of $.001 outstanding as of August 10, 2010.
 
 


 
ONCOVISTA INNOVATIVE THERAPIES, INC.

FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2010
TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION
2
ITEM 1 – FINANCIAL STATEMENTS
2
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
16
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
21
ITEM 4 – CONTROLS AND PROCEDURES
21
PART II – OTHER INFORMATION
22
ITEM 1 – LEGAL PROCEEDINGS
22
ITEM 1A – RISK FACTORS
22
ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
22
ITEM 3 – DEFAULTS UPON SENIOR SECURITIES
22
ITEM 4 – (REMOVED AND RESERVED)
22
ITEM 5 – OTHER INFORMATION
22
ITEM 6 – EXHIBITS
23


 

 
 

 
 
PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

ONCOVISTA INNOVATIVE THERAPIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets


   
June 30,
   
December 31,
 
   
2010
   
2009
 
             
ASSETS
 
(Unaudited)
       
Current assets:
           
Cash and cash equivalents
  $ 84,424     $ 108,994  
Accounts receivable
    93,847       113,187  
Inventory
    22,964       26,962  
Prepaid and other current assets
    4,911       25,329  
                 
Total current assets
    206,146       274,472  
                 
Equipment, net
    64,650       91,341  
Deposits and other assets
    38,061       44,329  
                 
Total assets
  $ 308,857     $ 410,142  
                 
LIABILITIES, CONTINGENTLY REDEEMABLE NONCONTROLLING INTEREST AND DEFICIT
               
                 
Current liabilities:
               
Accounts payable
  $ 1,325,481     $ 1,279,278  
Accrued expenses
    1,367,532       1,995,800  
Derivative liability
    250,666       46,704  
Loans payable, related party
    400,388       259,556  
Notes payable (including $350,000 of related party notes payable)
    1,460,400       1,541,016  
Contingently restructured debt
          6,176,310  
Accrued interest payable (including related party interest of $69,220 and $33,466 at June 30, 2010 and December 31, 2009, respectively)
     443,927        359,983  
                 
Total current liabilities
    5,248,394       11,658,647  
                 
Commitments and contingencies
               
                 
Contingently redeemable noncontrolling interest
    5,293,251        
                 
Deficit:
               
OncoVista Innovative Therapies stockholders’ deficit:
               
Common stock, $.001 par value; 147,397,390 shares authorized, 21,149,675 shares issued and outstanding at June 30, 2010 and December 31, 2009, respectively
      21,149         21,149  
Additional paid-in capital
    19,244,408       18,560,394  
Accumulated deficit
    (29,332,581 )     (28,357,947 )
Accumulated other comprehensive loss
    (117,810 )     (1,430,618 )
                 
Total OncoVista Innovative Therapies stockholders’ deficit
    (10,184,834 )     (11,207,022 )
                 
Noncontrolling interest
    (47,954 )     (41,483 )
                 
Total deficit
    (10,232,788 )     (11,248,505 )
             
Total liabilities, contingently redeemable noncontrolling interest and deficit
  $ 308,857     $ 410,142  
 
 
See accompanying notes to the condensed consolidated financial statements
- 2 -

 
ONCOVISTA INNOVATIVE THERAPIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Revenues:
                       
Diagnostic kits (including related party revenue of $10,000 and $56,000 for the three months ended June 30, 2010 and 2009, respectively, and $68,000for the six months ended June 30, 2010 and 2009, respectively)
  $ 283,873     $ 271,140     $ 578,336     $ 429,546  
Licensing
    23,306       8,506       64,541       17,782  
Research and development revenue
    15,946       211       15,946       10,342  
                                 
Total revenues
    323,125       279,857       658,823       457,670  
                                 
Operating expenses:
                               
Research and development
    306,796       677,130       576,790       1,350,376  
General and administrative
    560,386       1,088,340       1,046,234       2,229,759  
                                 
Total operating expenses
    867,182       1,765,470       1,623,024       3,580,135  
                                 
Loss from operations
    (544,057 )     (1,485,613 )     (964,201 )     (3,122,465 )
                                 
Other income (expense):
                               
Interest expense
    (99,693 )     (160,498 )     (205,585 )     (321,867 )
Extinguishment of royalty liability
                520,000        
(Loss) gain on derivative liability
    (16,247 )     170,625       (203,962 )     442,950  
Other
    (42,224 )     65,117       (151,833 )     20,355  
                                 
Total other income (expense), net
    (158,164 )     75,244       (41,380 )     141,438  
                                 
Net loss
    (702,221 )     (1,410,369 )     (1,005,581 )     (2,981,027 )
                                 
Net loss attributable to noncontrolling interest
     1,688        8,189        6,471        23,761  
Net loss attributable to contingently redeemable noncontrolling interest
       6,382                    24,476            
                                 
Net loss attributable to OncoVista Innovative Therapies
  $ (694,151 )   $ (1,402,180 )   $ (974,634 )   $ (2,957,266 )
                                 
Net loss per share - basic and diluted
  $ (0.03 )   $ (0.08 )   $ (0.05 )   $ (0.16 )
                                 
Weighted average number of shares outstanding during the period - basic and diluted
       20,483,008          18,316,475          20,483,008          18,316,475  
 
 
See accompanying notes to the condensed consolidated financial statements

 
- 3 -

 

ONCOVISTA INNOVATIVE THERAPIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)


   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Net loss
  $ (702,221 )   $ (1,410,369 )   $ (1,005,581 )   $ (2,981,027 )
                                 
Other comprehensive income (loss):
                               
                                 
Foreign currency translation gain (loss)
    763,596       (503,552 )     1,312,808       7,517  
                                 
Total other comprehensive income
    763,596       (503,552 )     1,312,808       7,517  
                                 
Comprehensive income (loss)
    61,375       (1,913,921 )     307,227       (2,973,510 )
                                 
Comprehensive loss attributable to noncontrolling interest
     1,688        8,189        6,471        30,550  
Comprehensive loss attributable to contingently redeemable noncontrolling interest
       6,382                    24,476            
                                 
Comprehensive income (loss) attributable to OncoVista Innovative Therapies
  $  69,445     $ (1,905,732 )   $  338,174     $ (2,942,960 )
 
 
See accompanying notes to the condensed consolidated financial statements

 
- 4 -

 

ONCOVISTA INNOVATIVE THERAPIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)

   
Six Months Ended
 
   
June 30,
 
   
2010
   
2009
 
Cash flows from operating activities
           
    Net loss
  $ (1,005,581 )   $ (2,981,027 )
    Adjustments to reconcile net loss to net cash
               
      used in operating activities:
               
          Depreciation
    21,962       33,726  
          Amortization of debt discount
    41,882       211,956  
          Employee stock-based compensation
    614,603       1,132,556  
          Non-employee stock-based consulting
    36,413       70,426  
          Non-employee stock-based consulting (warrants)
    32,998       92,028  
          Loss (gain) on derivative liability
    203,962       (442,950 )
    Changes in operating assets and liabilities:
               
          Accounts receivable
    2,915       100,975  
          Prepaid and other assets
    18,161       17,772  
          Accounts payable
    95,565       435,273  
          Accrued expenses
    (590,816 )     518,061  
          Accrued interest payable
    125,913       54,890  
Net cash used in operating activities
    (402,023 )     (756,314 )
                 
Cash flows from investing activities
               
    Purchase of equipment
    (3,925 )     (650 )
Net cash used in investing activities
    (3,925 )     (650 )
                 
Cash flows from financing activities
               
    Proceeds from loans and notes payable, related party
    196,277       350,000  
    Proceeds from notes payable
            400,000  
Net cash provided by financing activities
    196,277       750,000  
                 
Net decrease in cash and cash equivalents
    (209,671 )     (6,964 )
                 
Effect of exchange rate changes on cash
    185,101       19,271  
                 
Cash and cash equivalents at beginning of period
    108,994       91,482  
                 
Cash and cash equivalents at end of period
  $ 84,424     $ 103,789  
                 
Supplemental disclosures of cash flow information:
               
        Cash paid for interest
  $ 665     $ 48,270  
                 
 
 
 
- 5 -

 
ONCOVISTA INNOVATIVE THERAPIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)

 
Note 1.
BASIS OF PRESENTATION, ORGANIZATION AND NATURE OF OPERATIONS

OncoVista Innovative Therapies, Inc. (“OVIT” or the “Company”) is a biopharmaceutical company involved in the commercialization of diagnostic tests for metastatic tumors, as well as the development of targeted anticancer therapies by utilizing tumor-associated biomarkers. The Company has developed diagnostic kits for breast, colon, ovarian and prostate cancers, and currently markets diagnostic kits in Europe for the detection of circulating tumor cells (“CTCs”) in patients with breast, colon, ovarian, and prostate cancer.  The Company has also developed research products for the detection of steroid receptors (ER/PR) and cancer stem cells.

In August 2009, with the exception of the Chief Executive Officer (“CEO”), the Company terminated the employment of all employees of OncoVista, Inc. (“OncoVista”), the Company’s U.S. operating subsidiary.  AdnaGen AG (“AdnaGen”), the Company’s German operating subsidiary, has eight full-time employees. The Company is currently attempting to raise additional funding to provide working capital. The Company has received and continues to receive cash advances from companies affiliated with the CEO to support continuing operations.

In December 2005, OncoVista acquired a controlling (51%) interest in AdnaGen, a research and development company based in Langenhagen, Germany.  AdnaGen focuses on the development of innovative tumor diagnostics by utilizing its proprietary technology for the detection and analysis of rare cells.  In December 2007, OncoVista purchased from a now former shareholder of AdnaGen an additional 34% equity interest in AdnaGen for $599,241. In June 2008, OncoVista purchased an additional 10% equity interest in AdnaGen for $70,374 from now former AdnaGen shareholders.  As a result of these purchases, OncoVista now owns approximately 95% of AdnaGen subject to the contingent debt restructuring described below and in Note 7.

In April 2009, the Company negotiated a contingent debt restructuring with three of its major creditors which resulted in exchanging approximately €4.3 million ($5.3 million) of debt and related accrued interest for an equity share of approximately 18% of AdnaGen.  The shares were contingently issued in January 2010 and are presented as contingently redeemable noncontrolling interest as of June 30, 2010.  In addition, as part of the contingent restructuring, OncoVista agreed to forgive approximately $1.0 million in receivables, advances, loans and related interest as of June 30, 2010, due from AdnaGen.  The debt restructuring and the related share issuance is contingent on AdnaGen raising a minimum of €2.0 million ($2.7 million) that was originally to be due no later than July 30, 2009.  In July 2009, we received an extension until December 31, 2009, subsequently extended to May 2010,  In May 2010, we received an additional extension until December 2011. After the contingent restructuring, OncoVista now owns approximately 78% of AdnaGen.


Note 2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the United States Securities and Exchange Commission (the “Commission”) for interim financial information. Accordingly, they do not include all the information and footnotes necessary for a comprehensive presentation of financial position, results of operations, and changes in deficit or cash flows. It is management's opinion, however, that all material adjustments (consisting of normal recurring adjustments) have been made which are necessary for a fair financial statement presentation.  The interim results for the period ended June 30, 2010 are not necessarily indicative of results for the full fiscal year.

The unaudited interim consolidated financial statements should be read in conjunction with the required financial information included as part of the Company’s Form 10-K for the year ended December 31, 2009, filed with the Commission on March 31, 2010.
 
- 6 -

 
ONCOVISTA INNOVATIVE THERAPIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)

 
Principles of Consolidation

The consolidated financial statements include the accounts of OVIT, OncoVista and AdnaGen (collectively, the “Company”).  All intercompany balances have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Significant estimates include the valuation of warrants and stock options granted for services or compensation, estimates of the probability and potential magnitude of contingent liabilities, estimates relating to the fair value of derivative liabilities and the valuation allowance for deferred tax assets.

Comprehensive Income (Loss)

Comprehensive income or loss is comprised of net income or loss and other comprehensive income or loss, which includes certain changes in equity that are excluded from net earnings, primarily foreign currency translation adjustments.

Accounts and Other Receivables

There has been no identifiable bad debt expense during the six months ended June 30, 2010 and 2009, respectively.  Additionally, the Company has not recorded any allowance for doubtful accounts.  The allowance is generally determined based on an account-by-account review.  Accounts are charged off when collection efforts have failed and the account is deemed uncollectible.  The Company does not charge interest on accounts receivable.

Noncontrolling interest

On January 1, 2009, the Company adopted Financial Accounting Standards Board (“FASB”) issued authoritative guidance related to Noncontrolling Interests in Consolidated Financial Statements, the provisions of which, among others, require the recognition of a noncontrolling interest (previously referred to as minority interest) as a component of equity in the consolidated financial statements and separate from the parent’s equity for all periods presented. In addition, the amount of net income or loss attributable to the noncontrolling interest is included in consolidated net income or loss on the face of the consolidated statement of operations. Under GAAP, certain noncontrolling interests in consolidated entities meet the definition of mandatorily redeemable financial instruments if the ability to redeem the interest is outside of the control of the consolidating entity. As described in Note 1, the Company negotiated a contingent debt restructuring with three of its major creditors. As such, the contingently redeemable noncontrolling interest is shown as a separate caption between liabilities and equity (mezzanine section). The carrying value of the contingently redeemable noncontrolling interest reflects the carrying value of the debt and related interest.

Customer Concentration

For the three months ended June 30, 2010 and 2009, the Company derived a substantial portion of its revenues from three customers accounting for 77% of the Company’s revenue (38%, 30% and 9%), and three customers for 63% of the Company’s revenue (30%, 20% and 13%), respectively. For the six months ended June 30, 2010 and 2009, the Company derived a substantial portion of its revenues from three customers accounting for 61% of the Company’s revenue (43%, 9% and 9%), and four customers for 68% of the Company’s revenue (21%, 19%, 15% and 13%), respectively.
 
- 7 -

 
ONCOVISTA INNOVATIVE THERAPIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)

 
Four customers accounted for approximately 81% of the accounts receivable balance (32%, 24%, 15% and 10%) at June 30, 2010, and two customers accounted for approximately 75% of the balance (44% and 31%) at December 31, 2009.

Net Loss per Share

Basic earnings (loss) per share are computed by dividing the net income (loss) by the weighted average number of common shares outstanding. Unvested restricted stock is excluded from the basic weighted average number of common shares outstanding as these shares are subject to certain contingencies. For the three and six months ended June 30, 2010, there were 666,667 shares that were unvested. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares outstanding including the effect of share equivalents.  Common stock equivalents consist of shares issuable upon the exercise of certain common stock purchase warrants and stock options.

At June 30, 2010 and 2009, the following numbers of shares have been excluded since such inclusion in the computation would be anti-dilutive:

   
2010
   
2009
 
             
Stock options outstanding under various stock option plans
    650,000       2,190,000  
Warrants
    3,881,712       3,681,712  
    Total
    4,531,712       5,871,712  

Reclassifications

Certain prior year balances have been reclassified to conform to the current year presentation.


Note 3.
GOING CONCERN

As reflected in the accompanying consolidated financial statements, the Company reported a net loss of approximately $1.0 million and net cash used in operations of approximately $402,000 for the six months ended June 30, 2010, a working capital deficit of approximately $5.0 million, an accumulated deficit of approximately $29.3 million and a total deficit of approximately $10.2 million at June 30, 2010. The Company is also in default on certain loans, notes, and related accrued interest aggregating $139,605 at June 30, 2010 (see Note 7). These factors raise significant doubt about the Company’s ability to continue as a going concern.

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.  These financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.  The ability of the Company to continue as a going concern is dependent on management’s ability to further implement its strategic plan, resolve its liquidity problems, principally by obtaining additional debt and/or equity financing, and generate additional revenues from collaborative agreements or sale of pharmaceutical products.

In January 2009, the Company secured $750,000 in bridge financing and has engaged several investment banks to assist in raising funding to support ongoing development activities. The Company also obtained additional funding of approximately $196,000 during the six months ended June 30, 2010 from related parties. As described in Note 1, the Company also restructured approximately $5.3 million of debt and related accrued interest subject to the Company raising a certain amount of additional funding. There can be no assurance that these financings will be sufficient or that additional financing will be available in amounts or terms acceptable to the Company, if at all.
 
- 8 -

 
ONCOVISTA INNOVATIVE THERAPIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)

 
Note 4.
EQUIPMENT
 
Equipment balances at June 30, 2010 and December 31, 2009 are summarized below:

   
2010
   
2009
 
             
Equipment
  $ 454,863     $ 528,795  
Computer and office equipment
    96,270       108,747  
Furniture and fixtures
    5,554       5,554  
      556,687       643,096  
Less: accumulated depreciation
    (492,037 )     (551,755 )
Equipment, net
  $ 64,650     $ 91,341  


Note 5.
ACCRUED EXPENSES

Accrued expenses at June 30, 2010 and December 31, 2009 are summarized below:

   
2010
   
2009
 
             
Legal and professional
  $ 454,301     $ 988,584  
Clinical and other studies
    279,197       279,197  
Compensation
    305,599       347,526  
Other
    328,436       380,493  
    Total accrued expenses
  $ 1,367,532     $ 1,995,800  

In March 2010, the Company terminated its license agreements and returned the intellectual property related to technologies associated with tubulin isotype-specific anti-mitotics and a proprietary database of tubulin structures.  As a result, the Company is no longer obligated to pay $520,000 in liabilities for minimum royalties associated with these licenses. Accordingly, in March 2010, the Company reversed the accrued liability which has been included in current liabilities on the Company’s consolidated balance sheets.


Note 6.
DERIVATIVE LIABILITY

In January 2010, the Company amended certain terms of the 2009 Bridge Note financing agreement, which did not affect the liability classification of the associated warrants. In consideration for the modifications, the Company extended the expiration date for the warrants to July 15, 2014, and the exercise price of the warrants was reduced to $0.10 per share. The modification of the terms of the warrants resulted in an additional expense of $67,172 at the amendment date. At June 30, 2010 and December 31, 2009, the estimated fair value of the derivative liability was $250,666 and $46,704, respectively.

The Company uses the Black-Scholes pricing model to calculate fair value of its warrant liabilities. Key assumptions used to apply these models are as follows:

   
June 30, 2010
Expected term
 
4-5 years
Volatility
 
86.5%-100.4%
Risk-free interest rate
 
0.25%-0.43%
Dividend yield
 
0%
 

 
- 9 -

 
ONCOVISTA INNOVATIVE THERAPIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)

 
Fair value measurements

Assets and liabilities measured at fair value as of June 30, 2010, are as follows:

   
 
Value at
June 30, 2010
   
Quoted prices
in active
markets
(Level 1)
   
Significant
other observable
inputs
(Level 2)
   
Significant
unobservable
inputs
(Level 3)
 
                         
Derivative liability
  $ 250,666     $     $ 250,666     $  

The fair value framework requires a categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets and liabilities. Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment. The three levels are defined as follows:

Level 1: Unadjusted quoted prices in active markets for identical assets and liabilities.
 
Level 2: Observable inputs other than those included in Level 1. For example, quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.
 
Level 3: Unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability.

There were no financial assets or liabilities measured at fair value, with the exception of cash and cash equivalents and the above mentioned derivative liability as of June 30, 2010 and December 31, 2009, respectively. The fair values of accounts receivable, accounts payable and third-party debt approximate their carrying amounts due to the short-term nature of these instruments.  The fair value of debt due to related parties is not practicable to estimate due to the related party nature of the underlying transactions.


Note 7.
DEBT

In January 2010, the Company issued contingently redeemable shares of AdnaGen to certain holders of debt with a principal balance of $4,924,312 together with accrued interest of $1,251,998 as of December 31, 2009, which is recorded as contingently redeemable noncontrolling interest at June 30, 2010 (see Note 1).

In January 2010, the Company obtained consent from the holders of the Bridge Note financing to extend the maturity date from January 15, 2010 until the earlier of July 15, 2010 or such time that the Company obtains a “Qualified Financing.”  The term “Qualified Financing” was also revised from aggregate gross proceeds which equal or exceed $5.0 million to $3.0 million and the interest rate was increased from 10% to 12%.  In July 2010, the Company received an extension until December 31, 2010, and increased the number of warrants to be issued by 50%, extending the exercise period to December 31, 2014.

In March 2010, the Company also obtained consent from the holders of the Bridge Note financing to formalize agreements for loans and advances from the CEO and affiliates of the CEO to the Company with terms identical to the Bridge Notes issued in January 2009, as amended in January 2010.
 
 
- 10 -

 
ONCOVISTA INNOVATIVE THERAPIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)

 
The Company had the following outstanding loans and notes payable at June 30, 2010 and December 31, 2009:

   
2010
   
2009
 
             
Unsecured loans payable to third parties with interest at 10% and due on demand1
  $     $ 1,341,062  
Unsecured note payable to a third party with interest at 5%, maturing in December 20101
     –        2,149,950  
Unsecured note payable to a third party with interest at 9%, maturing in December 20101
     –        1,433,300  
            4,924,312  
Unsecured loans payable to related parties with interest at 10% and due on demand2
    400,388       259,556  
Unsecured notes payable to third parties with interest at 10%, maturing in July 20103
     750,000        724,366  
Unsecured convertible notes payable to a third party with interest at 8% and due on demand, matured in December 20054
       100,000          100,000  
Unsecured note payable to a third party with interest at 5.5%, matured in June 20085
     610,400        716,650  
                 
Total loans and notes payable
    1,860,788       6,724,884  
Less: current portion
    (1,860,788 )     (6,724,884 )
Total long-term debt
  $     $  


Note 8.
RELATED PARTY TRANSACTIONS

The Company’s CEO, Chairman of the Board, President and a significant shareholder, is a beneficial owner of Lipitek International, Inc. (“Lipitek”) and Lipitek Research, LLC (“Lipitek Research”).  The Company leases its laboratory space from Lipitek under a five-year lease agreement for approximately $17,000 per month that expired in December 2009.  The Company continues to occupy this space on a month-to-month basis and has been accruing approximately $17,000 per month in payments for this space.

In November 2005, the Company entered into a purchase agreement with Lipitek and the Company’s CEO, Chairman of the Board, and President, under which Lipitek granted the Company an option to purchase all membership interests in Lipitek Research for a purchase price of $5.0 million, which is payable quarterly based upon revenues of Lipitek Research up to $50,000 per quarter.  Through June 30, 2010, the Company has paid $300,000 toward this agreement and has accrued $400,000 representing one-half of the amounts for 2008, and all of the 2009 and 2010 amounts, which are included in accounts payable in the consolidated balance sheets as of June 30, 2010 and December 31, 2009. During 2010 and 2009, the Company did not make any payments toward the agreement which expense is included as a component of research and development expenses.
 
 
 

1  In April 2009, the Company negotiated a contingent debt restructuring with three of its major creditors (see Note 1).
 
2  Amount relates to loans and advances from the CEO and companies affiliated with the CEO.
 
3  Includes Bridge Notes in the principal amount of $350,000 to affiliates of Dr. Weis and Bridge Notes in the principal amount of $300,000 to Wexford Spectrum Trading Limited. Wexford Capital LLC is the investment sub-advisor of Wexford Spectrum Trading Limited which beneficially owns approximately 11% of the Company’s outstanding common stock. Prior to the January 2010 amendment described below, the notes bear interest at 10% per annum increasing to 18% in the case of an event of default and mature on the earlier of (i) January 15, 2010, (ii) the date upon which the Company consummates a financing, the aggregate gross proceeds of which equal or exceed $5,000,000 (a “Qualified Financing"), and (iii) the acceleration of the maturity of the Bridge Notes as described therein.
 
4  The debt holder, at its option, may convert the principal and any accrued interest into shares of common stock at a price of $2.50 per share.
 
5  Amount relates to an unsecured note payable in the amount of €500,000 with a contingent repayment plan for which principal is payable at the maturity date only if AdnaGen is profitable and achieves certain positive shareholder’s equity.
 
 
- 11 -

 
ONCOVISTA INNOVATIVE THERAPIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)

 
Prior to the full payment of the purchase price, the Company has the option, upon 30 days written notice, to abandon the purchase of Lipitek Research and would forfeit the amounts already paid.  All intellectual property developments by Lipitek Research through the term of the agreement or December 2012, whichever is later, shall remain the Company’s property, irrespective of whether the option is exercised.  In addition, the Company will receive 80% of the research and development revenue earned by Lipitek while the agreement is in place. In 2009, the Company did not recognize, and thus far in 2010, the Company has not recognized, any revenue from its share of Lipitek revenues.

The Company’s CEO, Chairman of the Board, President and a significant shareholder, is also a beneficial owner of Biomarkers LLC (“Biomarkers”).  In September 2008, AdnaGen entered into an exclusive distribution and license agreement with Biomarkers. Pursuant to the terms of the license agreement, AdnaGen granted Biomarkers the right to distribute diagnostic kits in North America. Biomarkers will have the capability to run AdnaGen assays in a Clinical Laboratory Improvement Amendments (“CLIA”) laboratory based in New York in order to support on-going and planned clinical trials.  In January 2009, AdnaGen also entered into an exclusive distribution and license agreement with Biomarkers granting Biomarkers the exclusive right to commercialize the AdnaGen diagnostic kits in South America and the Middle East. Pursuant to the terms of these license agreements, AdnaGen also granted Biomarkers the right to appoint sub-licensees at Biomarkers’ sole discretion. These agreements continue through December 2013, unless terminated by either party under the terms of the agreement. The Company recorded approximately $10,000 (€8,000) and $68,000 (€51,000) in revenue from the sale of diagnostic kits to Biomarkers in the six months ended June 30, 2010 and 2009, respectively.


Note 9.
CHANGES IN DEFICIT

Common Stock

The Company is authorized to issue up to 147,397,390 shares of common stock. At June 30, 2010, shares of common stock reserved for future issuance are as follows:

Stock options outstanding
    650,000  
Warrants outstanding
    3,881,712  
Stock options available for grant
     2,916,800  
         
      7,448,512  

Restricted Stock

In October 2007, the Company granted an aggregate of 2,000,000 shares of restricted stock to certain officers valued at $3.5 million based upon the quoted closing trading price on the date of issuance.  These shares vest, subject to future service requirements, two-thirds on January 1, 2010 and one-third on January 1, 2011.  As of June 30, 2010, there was approximately $583,333 of unrecognized compensation cost related to unvested restricted stock.  For the three months ended June 30, 2010 and 2009, the Company recognized compensation expense of $291,667 for vested restricted stock grants. For the six months ended June 30, 2010 and 2009, the Company recognized compensation expense of $583,333 for vested restricted stock grants.
 
 
- 12 -

 
ONCOVISTA INNOVATIVE THERAPIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)

 
Stock Option Plans

All option grants are expensed in the appropriate period based upon each award’s vesting terms, in each case with an offsetting credit to additional paid in capital. Under the authoritative guidance for share based compensation, in the event of termination, the Company will cease to recognize compensation expense. There is no deferred compensation recorded upon initial grant date, instead, the fair value of the share-based payment is recognized ratably over the stated vesting period.  Vesting periods for the Company’s stock option awards during 2008 included the following: one-half vesting on the first anniversary and one-half on the second anniversary, and annually over four years.  The Company granted stock options to acquire 1,010,000 shares of common stock for future services having a fair value $1,054,560 during the six months ended June 30, 2009. No options were granted during the six months ended June 30, 2010.

The stock-based compensation expense recorded by the Company with respect to awards under the Company’s stock plans is as follows:

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Research and development
  $     $ 149,608     $     $ 265,988  
General and administrative
    15,636       160,354       31,270       283,235  
    Total employee stock-based compensation
  $ 15,636     $ 309,962     $ 31,270     $ 549,223  

In addition to options granted to employees, the Company historically granted options to consultants and for the six months ended June 30, 2010 and 2009, recognized $36,413 and $70,426, respectively, as consulting expense.  Such amounts are included in general and administrative expense in the consolidated statements of operations in each of the six months ended June 30, 2010 and 2009. As of June 30, 2010, there was a total of approximately$77,000 in unrecognized compensation expense and no unrecognized consulting expense.

The Company has followed the related authoritative guidance for share based compensation. The fair value of each option or warrant granted is estimated on the date of grant using the Black-Scholes option-pricing model.
 
The following is a summary of the Company’s stock option activity:

   
Shares
   
Weighted
Average
Exercise Price
 
Weighted
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value
 
                     
Outstanding at January 1, 2010
    650,000     $ 1.57          
    Granted
                   
    Exercised
                   
    Forfeited
                   
Outstanding at June 30, 2010
    650,000     $ 1.57  
5.89 years
  $ 79,800  
Options Exercisable at June 30, 2010
    572,500     $ 1.56  
5.69 years
  $ 79,800  
 
 
- 13 -

 
ONCOVISTA INNOVATIVE THERAPIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)

 
The following summarizes the activity of the Company’s stock options that have not vested for the six months ended June 30, 2010:
 
   
Shares
   
Weighted
Average
Fair Value
 
Nonvested at January 1, 2010
    140,000     $ 1.92  
    Granted
           
    Vested
    (62,500 )     2.28  
    Cancelled or forfeited
           
Outstanding at June 30, 2010
    77,500       1.63  

Warrants

The following is a summary of the Company’s warrant activity:
 
   
Shares
   
Weighted
Average
Exercise Price
 
Outstanding at January 1, 2010
    3,681,712     $ 2.06  
    Granted
    200,000       0.40  
    Exercised
           
    Forfeited
           
Outstanding at June 30, 2010
    3,881,712       1.96  
Exercisable at June 30, 2010
     3,756,712       2.03  

In May 2010, the Company agreed to issue to a consulting firm warrants to acquire 250,000 shares of its common stock, with up to 150,000 vesting in equal monthly installments over six months at an exercise price of $0.38 for shares vesting in the first three months, and an exercise price equal to the last ten day average closing price at the end of the third month for the shares vesting the last three months.  Of the remaining warrants to acquire 100,000 shares of common stock, 50,000 vested immediately at an exercise price of $0.38, and 50,000 will be issued and vest on the first day of the fourth month at an exercise price of equal to the ten day average closing price through the last trading day of the third month.  The Company valued these warrants at $70,800 based on the Black-Scholes option pricing model and recorded $33,000 as expense for  the warrants.  As of June 30, 2010, there was a total of approximately$38,000 in unrecognized consulting expense.

The Black-Scholes assumptions used for warrants granted in the six months ended June 30, 2010 are as follows:
 
     
Risk-free interest rate
 
0.25%
Expected dividend yield
 
0%
Expected volatility
 
100.4%
Expected life of option
 
5 years


Note 10.
SEGMENT INFORMATION

The Company’s revenue is substantially derived from the operation in a single business segment, the development of innovative tumor diagnostics for detection, analysis, and treatment of rare (cancer) cells.  Sales to customers outside the United States (in Europe) are made by AdnaGen, the Company’s German subsidiary.
 
- 14 -

 
ONCOVISTA INNOVATIVE THERAPIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)

 
A summary of the Company’s operations for the three and six months ended June 30, 2010 and 2009 is provided below:

   
Three Months Ended June 30, 2010
 
   
OncoVista
   
AdnaGen
   
Total
 
                   
Revenues
  $     $ 323,125     $ 323,125  
Operating expenses
    539,390       327,792       867,182  
    Loss from operations
    (539,390 )     (4,667 )     (544,057 )
Other income (expense)
    (126,151 )     (32,013 )     (158,164 )
    Net loss
  $ (665,541 )   $ (36,680 )   $ (702,221 )
                         

   
Three Months Ended June 30, 2009
 
   
OncoVista
   
AdnaGen
   
Total
 
                   
Revenues
  $     $ 279,857     $ 279,857  
Operating expenses
    1,341,512       423,958       1,765,470  
    Loss from operations
    (1,341,512 )     (144,101 )     (1,485,613 )
Other income (expense)
    123,575       (48,331 )     75,244  
    Net loss
  $ (1,217,937 )   $ (192,432 )   $ (1,410,369 )
                         


   
Six Months Ended June 30, 2010
 
   
OncoVista
   
AdnaGen
   
Total
 
                   
Revenues
  $     $ 658,823     $ 658,823  
Operating expenses
    959,694       663,330       1,623,024  
    Loss from operations
    (959,694 )     (4,507 )     (964,201 )
Other income (expense)
    94,781       (136,161 )     (41,380 )
    Net loss
  $ (864,913 )   $ (140,668 )   $ (1,005,581 )
                         
Total assets
  $ 39,862     $ 268,995     $ 308,857  

   
Six Months Ended June 30, 2009
 
   
OncoVista
   
AdnaGen
   
Total
 
                   
Revenues
  $     $ 457,670     $ 457,670  
Operating expenses
    2,698,418       881,717       3,580,135  
    Loss from operations
    (2,698,418 )     (424,047 )     (3,122,465 )
Other income (expense)
    233,933       (92,495 )     141,438  
    Net loss
  $ (2,464,485 )   $ (516,542 )   $ (2,981,027 )
                         
Total assets
  $ 59,747     $ 346,089     $ 405,836  


Note 11.
SUBSEQUENT EVENTS

In July 2010, the Company obtained consent from the holders of the Bridge Note financing to extend the maturity date from July 15, 2010 until the earlier of December 31, 2010 or such time that the Company obtains a “Qualified Financing.”  In addition, the Company increased the number of warrants to be issued by 50%, and extended the exercise period to December 31, 2014.



 
- 15 -

 

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our Management’s Discussion and Analysis contains not only statements that are historical facts, but also statements that are forward-looking (within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934).  Forward-looking statements are, by their very nature, uncertain and risky.  These risks and uncertainties include international, national and local general economic and market conditions; demographic changes; our ability to sustain, manage, or forecast growth; our ability to successfully make and integrate acquisitions; raw material costs and availability; new product development and introduction; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; the loss of significant customers or suppliers; fluctuations and difficulty in forecasting operating results; changes in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect technology; and other risks that might be detailed from time to time in our filings with the Commission.

Although the forward-looking statements in this report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by them.  Consequently, and because forward-looking statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements.  You are urged to carefully review and consider the various disclosures made by us in this report and in our other reports as we attempt to advise interested parties of the risks and factors that may affect our business, financial condition, and results of operations and prospects.

As used in this Quarterly Report, the terms “we,” “us,” and “our,” mean OncoVista Innovative Therapies, Inc. and our subsidiaries, OncoVista, Inc. (“OncoVista”) and AdnaGen A.G. (“AdnaGen”), collectively, unless otherwise indicated.

Overview

We are a biopharmaceutical company commercializing diagnostic tests for metastatic tumors, as well as developing targeted anticancer therapies by utilizing tumor-associated biomarkers. We have developed diagnostic kits for breast, colon, ovarian, and prostate cancers, and currently market diagnostic kits in Europe for the detection of circulating tumor cells (“CTCs”) in patients with breast, colon and prostate cancer. Subject to availability of sufficient working capital and AdnaGen generating positive cash flow to support their operations within the next 12 months, we believe we are positioned to leverage our ownership in our diagnostics company, AdnaGen, to realize revenues from sales of AdnaGen’s CE-marked diagnostic kits in Europe, while utilizing the diagnostic technology to guide and expedite our anticancer drug development efforts.

Our product pipeline is comprised of advanced (Phase II) and early (Phase I) clinical-stage compounds, late preclinical drug candidates and early preclinical leads. We are not committed to any single treatment modality or class of compound, but believe that successful treatment of cancer requires a tailored approach based upon individual patient disease characteristics.

As a result of the unavailability of sufficient capital resources and AdnaGen’s cash needs, we were forced to scale back our research and development operations during the previous 12 months. In August 2009, with the exception of our Chief Executive Officer (“CEO”), we terminated the employment of all employees of OncoVista, our U.S. subsidiary, and instead engage  independent contractors on an as-needed basis. We are currently attempting to raise additional funds to provide working capital. We have received and continue to receive cash advances from companies affiliated with our CEO to support continuing operations.  See Note 3 to the condensed consolidated financial statements.


 
- 16 -

 

Development Programs

Our most advanced drug candidate is OVI-237, a liposomal formulation of a thymidylate synthase (“TS”) inhibitor which has been administered in over 150 patients so far in various Phase I and Phase II trials. The drug was in-licensed in November 2007 and we finalized the protocol and selected clinical sites to conduct a Phase II study of OVI-237 monotherapy and combination therapy with cisplatin for the treatment of metastatic breast cancer. Subject to the availability of sufficient working capital, we plan on initiating the trial in 2011.

Our next most advanced product candidate is Cordycepin (OVI-123) which is in Phase I/II clinical trials for refractory leukemia patients who express the enzyme terminal deoxynucleotidyl transferase (“TdT”). We have received orphan drug designation from the U.S. Food and Drug Administration (“FDA”) for Cordycepin which affords us seven years of market exclusivity once the drug is approved for marketing. We initiated a Phase I/II trial based on the “original” ADA-sensitive compound in the second quarter of 2008. The trial was initiated at two U.S. centers, The Dana Farber Cancer Institute in Boston, Massachusetts and the Cancer Therapy Research Center at the University of Texas Health Sciences Center at San Antonio, Texas, and is designed to enroll up to 24 patients in the first stage and up to 20 patients in the second stage.  In October 2009, after enrolling five patients in this clinical trial, we placed the clinical trial on administrative hold until such time that additional capital can be raised.

We completed the GLP animal drug safety studies for our lead drug candidate from the L-nucleoside conjugate program (OVI-117). We have begun to compile the Investigational New Drug (“IND”) application for submission to the FDA, which is a key step to conducting human clinical trials. Subject to availability of sufficient working capital, we plan to submit the completed IND for review during 2011.

We are also marketing kits in Europe for the detection of CTCs in breast, colon, ovarian, and prostate cancer patients. The kits are manufactured by AdnaGen, our German subsidiary, and marketed through non-exclusive distribution agreements in Europe. We have also developed research products for the detection of steroid receptors (ER/PR) and cancer stem cells.  We have developed the protocol for a pivotal trial in metastatic breast cancer to obtain approval to market the kit in the U.S.

Results of Operations

Three Months Ended June 30, 2010 and 2009

Revenue. Revenues were approximately $323,000 for the three months ended June 30, 2010, an increase of $43,000, or 15%, compared to approximately $280,000 for the three months ended June 30, 2009.  Our revenues reflect royalties earned from the sale of diagnostic kits, licensing and research and development revenue.  Revenues are summarized in the following table:

   
2010
   
2009
 
Diagnostic kits
  $ 283,873     $ 271,140  
Licensing
    23,306       8,506  
Research and development
    15,946       211  
    Total revenues
  $ 323,125     $ 279,857  

The increase in revenue in the three months ended June 30, 2010 is primarily attributable to an increase in revenue from licensing and research and development.  Additionally, during the three months ended June 30, 2010 and 2009, we recorded a return credit of $7,000 (€5,000) and revenue of $56,000 (€42,000), respectively, from the sale of diagnostic kits to Biomarkers.

Research and development.  Research and development expenses decreased by approximately $370,000, or 55%, to approximately $307,000 for the three months ended June 30, 2010, as compared to approximately $677,000 for the three months ended June 30, 2009.  The decrease in 2010 was primarily due to the scaling back of our research and development operations as a result of the unavailability of sufficient capital resources and AdnaGen’s cash needs.


 
- 17 -

 

General and administrative.  General and administrative expenses decreased by approximately $528,000, or 49%, to approximately $560,000 for the three months ended June 30, 2010 compared to approximately $1.1 million for the three months ended June 30, 2009.  In 2010, the decrease was due primarily to reduced costs for legal and professional services. Additionally, the decrease is related to terminating the employment of certain OncoVista employees, as well as stock-based compensation expense recorded by the Company.

Other Income (Expense). Other income (expense) increased approximately $233,000, or 311%, to expense of approximately $158,000 for the three months ended June 30, 2010 compared to income of approximately $75,000 for the three months ended June 30, 2009.  In 2010, the decrease is due primarily as a result of a foreign currency translation loss of approximately $42,000, as well as a loss on the derivative liability of $16,000 in 2010 compared to a foreign currency translation gain of approximately $65,000, and a gain on the derivative liability of $171,000 in 2009.  These amounts were partially offset by a decrease in interest expense as a result of the contingent debt restructure.

Net Income (Loss). As a result of the foregoing, our net loss decreased by approximately $708,000, or 50%, to approximately $702,000 for the three months ended June 30, 2010 compared to a net loss of approximately $1.4 million for the three months ended June 30, 2009.

Six Months Ended June 30, 2010 and 2009

Revenue. Revenues were approximately $659,000 for the six months ended June 30, 2010, an increase of $201,000, or 44% as compared to approximately $458,000 for the six months ended June 30, 2009.  Our revenues reflect royalties earned from the sale of diagnostic kits, licensing and research and development revenue.  Revenues are summarized in the following table:

   
2010
   
2009
 
Diagnostic kits
  $ 578,336     $ 429,546  
Licensing
    64,541       17,782  
Research and development, grant and other revenues
    15,946       10,342  
    Total revenues
  $ 658,823     $ 457,670  

The increase in revenue in the six months ended June 30, 2010 is primarily attributable to an increase in sales from diagnostic kits.  During the six months ended June 30, 2010 and 2009, we recorded $10,000 (€8,000) and $68,000 (€51,000), respectively, in revenue from the sale of diagnostic kits to Biomarkers.

Research and development.  Research and development expenses decreased by approximately $774,000, or 57%, to approximately $577,000 for the six months ended June 30, 2010, as compared to approximately $1.4 million for the six months ended June 30, 2009.  The decrease in 2010 was primarily due to the scaling back of our research and development operations as a result of the unavailability of sufficient capital resources and AdnaGen’s cash needs.

General and administrative.  General and administrative expenses decreased by approximately $1.2 million, or 53%, to approximately $1.0 million for the six months ended June 30, 2010, compared to approximately $2.2 million for the six months ended June 30, 2009.  In 2010, the decrease was due primarily to reduced costs for legal and professional services. Additionally, the decrease is related to terminating the employment of certain OncoVista employees, as well as lower stock-based compensation expense recorded by the Company.
 
Other Income (Expense). Other income (expense) decreased approximately $182,000, or 129%, to approximately $41,000 for the six months ended June 30, 2010 from income of approximately $141,000 for the six months ended June 30, 2009.  In 2010, the decrease is due primarily to a loss on the derivative liability of $204,000 in 2010 related to the bridge round of debt financing, compared to a gain of $443,000 in 2009.  Additionally, the decrease is attributable to a foreign currency translation loss of approximately $152,000 in 2010 compared to a foreign currency translation gain of approximately $20,000 in 2009.  These decreases were partially offset by income from extinguishing $520,000 in liabilities in 2010 related to minimum royalty payments as a result of signing a letter agreement and returning technology related to tubulin isotype-specific anti-mitotics.
 
 
- 18 -


Net Income (Loss). As a result of the foregoing, our net loss decreased by approximately $2.0 million, or 66%, to approximately $1.0 million for the six months ended June 30, 2010 from a net loss of approximately $3.0 million for the six months ended June 30, 2009.


Going Concern

Our consolidated financial statements for the six months ended June 30, 2010 have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business.  We have a net loss of approximately $1.0 million and net cash used in operations of approximately $402,000 for the six months ended June 30, 2010, a working capital deficit of approximately $5.0 million, an accumulated deficit of approximately $29.3 million and a total deficit of approximately $10.2 million at June 30, 2010.

These conditions raise doubt about our ability to continue as a going concern.  The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.  We expect AdnaGen to be profitable in 2010, however, we expect OncoVista to continue to incur losses from operations in 2010.

Our ability to continue as a going concern depends on the success of management’s plans to bridge such cash shortfalls in 2010 including the following:

 
·
Aggressively seeking investment capital;
 
·
Furthering the development of our product pipeline;
 
·
Advancing scientific progress in our research and development; and
 
·
Continuing to monitor and implement cost control initiatives to conserve cash.


Liquidity and Capital Resources

At June 30, 2010, we had cash and cash equivalents of approximately $84,000 compared to $109,000 at December 31, 2009. In order to preserve principal and maintain liquidity, our funds are primarily in operating or money market accounts with the primary objective of capital preservation. Based on our current projections, we believe that our available resources and cash flow are insufficient to meet our anticipated operating cash needs in the next two to three months.  As such, we have received and continue to receive cash advances in the amount of approximately $405,000 from our CEO or companies affiliated with our CEO to support continuing operations, including $5,000 received subsequent to June 30, 2010.  Our ability to continue as a going concern is dependent upon our ability to further implement our strategic plan; resolve our liquidity problems, principally by obtaining additional debt and/or equity financing; and generate additional revenues from collaborative agreements or sale of pharmaceutical products.  These factors raise doubt about our ability to continue as a going concern.

To date, we have financed our operations principally through proceeds of offerings of securities exempt from the registration requirements of the Securities Act. In January 2009, we completed a bridge round of debt financing, whereby we issued secured promissory notes (the “Bridge Notes”) in the aggregate principal amount of $750,000, in exchange for cash equal to the face amount of such Bridge Notes, to accredited investors. In January 2010, we obtained consent from the holders of the Bridge Note financing to extend the maturity date from January 15, 2010 until the earlier of July 15, 2010 or such time that we obtain a “Qualified Financing.”  We revised the term “Qualified Financing” from aggregate gross proceeds of which equal or exceed $5.0 million to $3.0 million, and increased the interest rate from 10% to 12%.  Additionally, we extended the expiration date for the warrants granted in connection with the financing to July 15, 2014, and the exercise price was reduced to $0.10 per share. In July 2010, we obtained consent from the holders of the Bridge Note financing to extend the maturity date from July 15, 2010 until the earlier of December 31, 2010 or such time that we obtain a “Qualified Financing.”  In addition, we increased the number of warrants to be issued by 50%, and extended the exercise period to December 31, 2014. We have also loaned or advanced to AdnaGen approximately €670,000 ($925,000) during the previous 24 months to support their operations.
 
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In March 2010, we obtained consent from the holders of the Bridge Note financing to formalize agreements for advances from the CEO and affiliates of the CEO to the Company with terms identical to the Bridge Notes issued in January 2009, as amended in January 2010.

We also believe the ability to execute our strategy relies largely on the continued viability of AdnaGen. As such, we will likely continue to provide advances to AdnaGen until it attains revenue levels adequate to support its continued operations and, based on current projections, we expect that they will require at least €150,000 to €200,000 ($175,000 to $250,000) over the course of the next three to six months.

We can provide no assurance that additional funding will be available on terms acceptable to us, or at all. Accordingly, we may not be able to secure the funding which is required to expand research and development programs beyond their current levels or at levels that may be required in the future. If we cannot secure adequate financing, we may be required to delay, scale back or eliminate one or more of our research and development programs or to enter into license or other arrangements with third parties to commercialize products or technologies that we would otherwise seek to develop and commercialize ourselves. Our future capital requirements will depend upon many factors, including:

 
·
capital needs of AdnaGen;
 
·
continued scientific progress in our research and development programs;
 
·
costs and timing of conducting clinical trials and seeking regulatory approvals and patent prosecutions;
 
·
competing technological and market developments;
 
·
our ability to establish additional collaborative relationships; and
 
·
the effect of commercialization activities and facility expansions if and as required.
 
Accordingly, we will be required to issue equity or debt securities or enter into other financial arrangements, including relationships with corporate and other partners, in order to raise additional capital. Depending upon market conditions, we may not be successful in raising sufficient additional capital for our short or long-term requirements. In such event, our business, prospects, financial condition, and results of operations would be materially adversely affected.
 
In April 2009, we negotiated a contingent debt restructuring with three of our major creditors which resulted in exchanging approximately €4.3 million ($5.3 million) at June 30, 2010, of debt and related accrued interest for an equity share of approximately 18% of AdnaGen. The shares were contingently issued in January 2010 and are presented as contingently redeemable noncontrolling interest as of June 30, 2010. In addition, as part of the contingent restructuring, OncoVista agreed to forgive approximately $1.0 million in receivables, advances, loans and related interest as of June 30, 2010, due from AdnaGen. The debt restructuring and the related share issuance is contingent on AdnaGen raising a minimum of €2.0 million ($2.7 million) that was originally to be due no later than July 30, 2009.  In July 2009, we received an extension until December 31, 2009, subsequently extended to May 2010,  In May 2010, we received an additional extension until December 2011. After the contingent restructuring, OncoVista now owns approximately 78% of AdnaGen.

In January 2010, we issued contingently redeemable shares of AdnaGen to certain holders of debt with a principal balance of $4,924,312 together with accrued interest of $1,251,998 as of December 31, 2009, which is recorded as contingently redeemable noncontrolling interest as of June 30, 2010.

            Operating Activities.  For the six months ended June 30, 2010, net cash used in operating activities was approximately $402,000 compared to approximately $756,000 for the six months ended June 30, 2009. Cash used in operating activities decreased $354,000, or 47%, primarily due to a decrease in our net loss of approximately $2.0 million, or 66%, for the six months ended June 30, 2010 to $1.0 million as compared to approximately $3.0 million for the six months ended June 30, 2009.  In addition to a decrease in our net loss, operating activities were impacted by a loss in the current year for the derivative liability related to the bridge round of debt financing compared to a gain in the prior year.  Additionally, accrued expenses were adjusted due to extinguishing $520,000 in liabilities related to minimum royalty payments as a result of signing a letter agreement returning the technology.
 
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Investing Activities. For the six months ended June 30, 2010, we used $4,000 in investing activities compared to $600 for the six months June 30, 2009. Cash used in investing activities increased as a result of purchases of equipment.

Financing Activities.  Cash provided by financing activities was $196,000 for the six months ended June 30, 2010 as compared to approximately $750,000 for the six months ended June 30, 2009.  The decrease was primarily due to proceeds from the completion of a bridge loan in January 2009, partially offset by loans from our CEO and companies affiliated with our CEO during the period.

Critical Accounting Policies

See Critical Accounting Policies included as part of our Form 10-K for the year ended December 31, 2009, filed with the Commission on March 31, 2010.


ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.


ITEM 4 – CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of June 30, 2010, under the supervision and with the participation of our CEO, management has evaluated the effectiveness of the design and operation of the our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 (the “Exchange Act”). Based on that evaluation, the CEO concluded that, as of June 30, 2010, our disclosure controls and procedures were ineffective at the reasonable assurance level in timely alerting him to material information required to be included in our periodic SEC reports as a result of the material weakness in internal control over financial reporting discussed in Item 9A of our Form 10-K for the year ended December 31, 2009. Management’s assessment of the effectiveness of internal control over financial reporting is expressed at the level of reasonable assurance because a control system, no matter how well designed and operated, can provide only reasonable, but not absolute, assurance that the control system’s objectives will be met.

Changes in Internal Control Over Financial Reporting

There were no significant changes in our internal control over financial reporting that occurred during the six months ended June 30, 2010 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

 
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PART II – OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

None.


ITEM 1A – RISK FACTORS

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.


ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.


ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

There have been no events which are required to be reported under this item.


ITEM 4 – (REMOVED AND RESERVED)


ITEM 5 – OTHER INFORMATION

There have been no events which are required to be reported under this item.


 
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ITEM 6 – EXHIBITS

Exhibits:

Exhibit No.   Description
     
31.1
 
Certification of Chief Executive Officer Pursuant to the Securities Exchange Act of 1934, Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
31.2
 
Certification of Chief Financial Officer Pursuant to the Securities Exchange Act of 1934, Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
32
 
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 

 
 
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SIGNATURES

           Pursuant to the requirements of Section 13 or 15 (d) 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.

ONCOVISTA INNOVATIVE THERAPIES, INC.
 
 
/s/ Alexander L. Weis, Ph.D.

Alexander L. Weis, Ph.D.
Chief  Executive Officer, and Chief Financial Officer
(Principal Executive Officer, Principal Financial
Officer and Principal Accounting Officer)


Date:  August 16, 2010
 
 
 
 
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