-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LEEKo+QStl1quUEjzy3rlT3JE5/Z6J5yuyGwPQn44t63V/3PPMBCO6ECGjkxE0Vt n72lwEOpqq3XubUlE7y0sg== 0001144204-09-052524.txt : 20091013 0001144204-09-052524.hdr.sgml : 20091012 20091013064823 ACCESSION NUMBER: 0001144204-09-052524 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 23 CONFORMED PERIOD OF REPORT: 20090630 FILED AS OF DATE: 20091013 DATE AS OF CHANGE: 20091013 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Intellect Neurosciences, Inc. CENTRAL INDEX KEY: 0001337905 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 208329066 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 333-128226 FILM NUMBER: 091115334 BUSINESS ADDRESS: STREET 1: 7 WEST 18TH STREET CITY: NEW YORK STATE: NY ZIP: 10011 BUSINESS PHONE: 212-448-9300 MAIL ADDRESS: STREET 1: 7 WEST 18TH STREET CITY: NEW YORK STATE: NY ZIP: 10011 FORMER COMPANY: FORMER CONFORMED NAME: GlobePan Resources, Inc. DATE OF NAME CHANGE: 20050906 10-K 1 v162603_10k.htm Unassociated Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-K

x
ANNUAL REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934:

For the fiscal year ended June 30, 2009
 
o
TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT OF 1934
 
Commission file number:  333-128226

INTELLECT NEUROSCIENCES, INC.
 (Exact name of registrant as specified in its charter)
 
Delaware
 
20-2777006
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
     
7 West 18th Street
New York, NY
 
10011
(Address of principal executive offices)
 
(Zip Code)

 (212) 448 9300
(Registrant’s telephone number, including area code) 

 
Securities registered pursuant to Section 12(b) of the Act:
None
     
 
Securities registered pursuant to Section 12(g) of the Act:
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act:
Yes ¨ No x

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes 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  o.    No  o.
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
 
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
 
As of December 31, 2008 (the last business day of the registrant’s most recently completed second fiscal quarter), the aggregate market value of the shares of common stock held by non-affiliates (computed by reference to the price at which such stock was last sold on such date as reported by the Over-the-Counter Bulletin Board) was $1,476,080.
 
As of September 30, 2009, there were 30,843,873 shares of common stock issued and outstanding.
 
Transitional Small Business Disclosure Format (Check one): Yes o No x
 
 

 

TABLE OF CONTENTS
 
   
Page No.
     
PART I
   
     
Item 1.
Description of the Business
3
     
Item 1A.
Risk Factors
19
     
Item 2.
Properties
31
     
Item 3.
Legal Proceedings
31
     
Item 4.
Submission of Matters to a Vote of Security Holders
31
     
PART II
   
     
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
32
     
Item 6
Selected Financial Data
33
     
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
34
     
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
42
     
Item 8.
Financial Statements and Supplementary Data
43
     
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
79
     
Item 9A.
Controls and Procedures
79
     
Item 9B.
Other Information
79
     
PART III
   
     
Item 10.
Directors, Executive Officers and Corporate Governance
80
     
Item 11.
Executive Compensation
86
     
Item 12.
Security Ownership of Certain Beneficial Owners, Management and Related Stockholder Matters
90
     
Item 13.
Certain Relationships, Related Transactions and Director Independence
91
     
Item 14.
Principal Accounting Fees and Services
94
     
PART IV
   
     
Item 15.
Exhibits, Financial Statement Schedules
95
     
 
Exhibits Index
96
     
 
Signatures
100

 
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PART I
 
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements include our plans, goals, strategies, intent, beliefs or current expectations. These statements are expressed in good faith and based upon a reasonable basis when made, but there can be no assurance that these expectations will be achieved or accomplished. These forward looking statements can be identified by the use of terms and phrases such as “believe,” “plan,” “intend,” “anticipate,” “target,” “estimate,” “expect,” and the like, and/or future-tense or conditional constructions (“will,” “may,” “could,” “should,” etc.). Items contemplating or making assumptions about actual or potential future sales, market size, collaborations, or operating results also constitute such forward-looking statements.
 
Although forward-looking statements in this report reflect the good faith judgment of management, forward-looking statements are inherently subject to known and unknown risks, business, economic and other risks and uncertainties that may cause actual results to be materially different from those discussed in these forward-looking statements. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We assume no obligation to update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report, other than as may be required by applicable law or regulation. Readers are urged to carefully review and consider Item 1A of Part I of this annual report, “Risk Factors,” beginning on page 19, and various disclosures made by us in our reports filed with the Securities and Exchange Commission, each of which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operation and cash flows. If one or more of these risks or uncertainties materialize, or if the underlying assumptions prove incorrect or inaccurate, our actual results may vary materially from those expected or projected.
 
Item 1.  Business
 
Explanatory Note: Reverse Merger
 
On January 25, 2007, GlobePan Resources, Inc. entered into an agreement and plan of merger with Intellect Neurosciences, Inc., a privately held Delaware corporation, and INS Acquisition, Inc., a newly formed, wholly-owned Delaware subsidiary of GlobePan Resources, Inc., which we refer to as Acquisition Sub. Pursuant to this agreement and plan of merger, on January 25, 2007, Acquisition Sub merged with and into Intellect Neurosciences, Inc., Acquisition Sub ceased to exist and Intellect Neurosciences, Inc. survived the merger and became the wholly-owned subsidiary of GlobePan Resources, Inc. We refer to this transaction as the merger. Intellect Neurosciences, Inc., the surviving entity in the merger, then changed its name to Intellect USA, Inc. and GlobePan Resources, Inc. changed its name to Intellect Neurosciences, Inc. Therefore, as of January 26, 2007, our name is Intellect Neurosciences, Inc. and the name of our wholly-owned subsidiary is Intellect USA, Inc., which wholly-owns Intellect Neurosciences (Israel) Ltd., an Israeli company. We refer to Intellect USA, Inc. as Intellect USA and we refer to Intellect Neurosciences (Israel) Ltd. as Intellect Israel.
 
Following the merger and after giving effect to the options we issued immediately following the merger, there were 35,075,442 shares of our common stock issued and outstanding on an actual basis and 55,244,385 shares of our common stock issued and outstanding on a fully diluted basis. In determining the number of shares of our common stock issued and outstanding on a fully diluted basis, we (i) included the aggregate 9,000,000 shares of our common stock retained by existing GlobePan stockholders, (ii) included the aggregate 26,075,442 shares of our common stock received by former holders of Intellect USA capital stock, including the former holders of Intellect USA’s Series B Preferred stock, (iii) assumed the issuance of all shares potentially available for issuance under our 2005 and 2006 stock option plans, regardless of whether such shares are currently covered by options, and (iv) assumed the conversion of all outstanding warrants, convertible preferred stock and convertible notes into shares of our common stock.
 
In connection with the merger, we reflected a charge for the fiscal year ended June 30, 2007 in the amount of $7,020,000, representing the shares issued to the GlobePan shareholders. We incurred this charge due to the fact that the GlobePan shareholders obtained shares of the shell company prior to the reverse merger date.
 
Following the merger, we exchanged the shares of our common stock received by the former holders of Intellect USA’s Series B Convertible Preferred stock in the merger for shares of a new series of our convertible preferred stock. The new Series B Convertible Preferred stock has the same designations, preferences, special rights and qualifications, limitations and restrictions with respect to our capital stock as the designations, preferences, special rights and qualifications, limitations and restrictions that the Intellect USA Series B Preferred stock had with respect to Intellect USA’s capital stock. (See Note 8 of Notes to Consolidated Financial Statements, Series B Convertible Preferred Stock.)
 
 
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We treated the Merger as a capital transaction or a recapitalization for financial accounting purposes. Intellect is treated as the acquirer for accounting purposes, whereas GlobePan is treated as the acquirer for legal purposes. Accordingly, historical financial statements of GlobePan before the Merger have been replaced with the historical financial statements of Intellect.
 
The parties believe they have taken all actions necessary to qualify the merger as a “tax free exchange” under Section 368 of the Internal Revenue Code of 1986, as amended.
 
All securities issued in connection with the Merger were “restricted” securities and are subject to all applicable resale restrictions specified by federal and state securities laws.
 
Unless otherwise indicated, the term “GlobePan” refers to GlobePan Resources, Inc. before giving effect to the Merger; the term “Intellect” refers to Intellect Neurosciences, Inc. before giving effect to the Merger; the terms “our company,” “we,” “us,” and “our” refer to Intellect Neurosciences, Inc. after giving effect to the Merger and related transactions, unless the context clearly indicates otherwise; and all share numbers, per share information and share price information contained in this annual Report on Form 10-K give effect to the Merger and the related transactions.
 
ANTISENILIN®, BETA-VAX™, OXIGON™ and RECALL-VAX™, are our trademarks. Each trademark, trade name or service mark of any other company appearing in this annual report on Form 10-K belongs to its respective holder.
 
Company Overview
 
Immediately following the Merger, Intellect’s business became our business. Through our operating subsidiary, Intellect USA, we are a biopharmaceutical company developing and advancing a patent portfolio related to specific therapeutic approaches for treating Alzheimer’s disease (“AD”). In addition, we are developing proprietary drug candidates to treat AD and other diseases associated with oxidative stress.  We have entered into license and other agreements with large pharmaceutical companies related to our patent estate, however, neither we nor any of our licensees have obtained regulatory approval for sales of any product candidates covered by our patents.
 
We believe, based on transactions that we have consummated with global pharmaceutical companies, that our intellectual property portfolio may limit several of our competitors in their development of Alzheimer’s disease-modifying therapeutics and may require them to take a license under our patents to commercialize certain of their products. In addition, based on our own scientific research, published data relating to our drug candidates, pre-clinical studies that we have completed and clinical studies that other pharmaceutical companies have conducted, we believe that the scientific approach outlined in our intellectual property portfolio is the pathway for developing safe and efficacious disease-modifying products to delay, arrest and ultimately prevent the onset of Alzheimer’s disease.
 
History
 
Intellect was incorporated in Delaware on April 25, 2005 under the name Eidetic Biosciences, Inc. and changed its name to Mindset Neurosciences, Inc. on April 28, 2005, to Lucid Neurosciences, Inc. on May 17, 2005 and to Intellect Neurosciences, Inc. on May 20, 2005. On January 25, 2007, we completed the merger and Intellect became our wholly-owned subsidiary and changed its name to Intellect USA, Inc. Following the merger, our sole business is the business operated by Intellect.
 
Business Strategy
 
Our core business strategy is to leverage our intellectual property estate through license or other arrangements and to develop our proprietary compounds that we have purchased, developed internally or in-licensed from universities and others, through human proof of concept (Phase II) studies or earlier if appropriate and then seek to enter into collaboration agreements, licenses or sales to complete product development and commercialize the resulting drug products. We intend to obtain revenues from licensing fees, milestone payments, development fees, royalties and/or sales related to the use of our drug candidates or intellectual property for specific therapeutic indications or applications.
 
 
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Our Therapeutic Approach
 
Our therapeutic approach to Alzheimer’s disease is based on developing mechanisms to prevent both the accumulation and neurotoxicity of the Alzheimer’s toxin, the so-called amyloid-beta (Aß) protein. Insight as to how amyloid beta may be implicated in Alzheimer’s disease has resulted from progress in Alzheimer’s research that has occurred over the last two decades. Dr. Chain, our Chairman and CEO, was among the first in the biotechnology industry to focus on preventing the accumulation and neurotoxicity of amyloid beta as an approach to treating and preventing Alzheimer’s disease. The amyloid beta toxin is produced in most tissues of the body as a normal product of metabolism, but accumulates in the brains of Alzheimer’s disease patients to a point where it reaches toxic concentrations. This accumulation of amyloid beta is thought to start a cascade that leads to neurodegeneration, depletion of essential neurotransmitters and memory loss. Our approach targets the top of this cascade and aims to delay, halt the progression, or prevent the onset of Alzheimer’s disease, whereas existing therapies appear to be directed at the bottom of the cascade, with the aim of causing only symptomatic improvement.
 
Our ANTISENILIN platform technology is based on this approach and has yielded a drug product in development that we refer to as “IN-N01”, a monoclonal antibody undergoing the humanization process. IN-N01 specifically binds to the beta amyloid toxin and is intended to prevent the accumulation and toxicity of the toxin by promoting its clearance away from sites of damage in the brain. Wyeth and Elan Pharmaceuticals are developing Bapinezumab, a monoclonal antibody of this type. We have entered into a license agreement with Wyeth and Elan Pharmaceuticals and with another top tier global pharmaceutical company and have entered into an Option and License Agreement with Glaxo Group Limited (see Material Agreements below) and are in discussions with other large pharmaceutical companies concerning a potential license of part or all of our ANTISENILIN patent estate as well as collaborations that may result in the eventual commercialization of IN-N01.
 
We believe, based on publicly available information, that our therapeutic approach to Alzheimer’s disease is at the forefront of potential therapeutics being developed in the pharmaceutical industry to treat Alzheimer’s disease.
 
Product Candidates in Development
 
In addition, to IN-N01, our drug candidates in development include OXIGON, a small molecule that targets the underlying pathology of the disease through a dual mode of action having both anti-oxidant and anti-fibrilogenic activity. In addition, we are in the process of identifying additional drug candidates based on our RECALL-VAX technology, which uses chimeric peptides as vaccines to immunize patients with Alzheimer’s disease or individuals who are susceptible to developing the disease because of age or other risk factors. Although there may be some overlap in the patient populations that would qualify for use of these products, we believe that the multiple genetic, biological and environmental causes of Alzheimer’s disease and different stages of the disease may require a diverse set of drug products to successfully delay, halt the progression, or prevent the onset of Alzheimer’s disease in all patients.
 
The following table sets forth our product candidates, the present stage of development, and the source of the underlying technology.
 
Product Candidate
(Technology Platform)
 
Stage of Development
 
Source of Technology
         
 
OXIGON
 
 
Completed Phase I
 
Licensed from NYU and the University South Alabama Medical Science Foundation
         
IN-N01 (ANTISENILIN)
 
 
Humanized antibody
 
Technology assigned to Mindset BioPharmaceuticals, Inc, (“Mindset”) by its inventor Dr. Daniel Chain and by Mindset to Intellect, with additional technology acquired from MRCT, and Immuno-Biologicals Laboratory.
         
 (RECALL-VAX)
 
Drug candidate selection
 
Technology assigned to Mindset by its inventor, Dr. Benjamin Chain, and by Mindset to Intellect.
 
 
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Overview of Alzheimer’s Disease
 
Alzheimer’s disease is characterized by progressive loss of memory and cognition, declining activities of daily living, neuropsychiatric symptoms or behavioral changes and ultimately complete debilitation and death. Its effects are devastating to the patient as well as caregivers, typically the family, with significant associated health care costs over an extended period of time. It is reported that approximately 40 million people suffer from Alzheimer’s disease worldwide, with the number increasing as the global population ages, to the point where it is expected that if the disease continues on its present course, by the year 2040, approximately 80 million people will suffer from the disease. Alzheimer’s disease is estimated to affect 4.5 million Americans and it is estimated that by 2050, over 16 million Americans will have Alzheimer’s disease. The annual cost of Alzheimer’s disease care in the United States is in excess of $100 billion. Medicare spends $91 billion a year on care for people with Alzheimer’s disease.
 
Currently available therapies only treat symptoms of Alzheimer’s disease and do not address the underlying neurodegeneration. Currently, the leading therapeutic agents for Alzheimer’s disease include AriceptTM (donepezil), an acetylcholinesterase inhibitor approved in 1996 and marketed by Pfizer, Inc. and Esai, and NamendaTM (memantine), an N-methyl-D-aspartate receptor antagonist marketed by Forest Laboratories in the United States and H. Lundbeck and Merz Pharmaceuticals in Europe. Aricept is the leader among anti-Alzheimer’s disease drugs, with $3.6 billion in estimated worldwide sales in 2008. Clearly, the Alzheimer’s disease space represents a multi-billion dollar potential market. It is dominated by a handful of companies that have succeeded in launching highly successful but, we believe, relatively ineffective drugs. We believe that our approach, which is to develop anti-Alzheimer’s disease drugs that attack the underlying pathology of the disease, should position us to be a formidable entrant into and participant in this market.
 
The scientific and medical community generally concurs that Alzheimer’s disease is caused by the formation of highly toxic protofibrils of the amyloid-beta protein that accumulate in the brain and eventually deposit as plaques. The overproduction of the amyloid-beta protein in certain hereditary forms of the disease and the inability of the aging brain to rid itself of the protein after it is formed starts a molecular cascade causing oxidative stress, inflammation and ultimately the death of brain cells, leading to the symptoms of Alzheimer’s disease. In forming our company, Dr. Chain sought to identify complementary technologies that could address the underlying cause of Alzheimer’s disease from a variety of perspectives, recognizing that a single approach is unlikely to work for the entire patient population. At the same time, multiple technologies are attractive because they give rise to multiple product and partnering opportunities both within and outside the Alzheimer’s disease field (i.e., other oxidative stress indications and other diseases of amyloidosis).
 
We seek to obtain revenues from the licensing of our intellectual property for drug candidates under development by other pharmaceutical companies. In addition, we seek to enter into drug development collaborations to obtain revenues from signing fees and milestone payments before our products reach Food and Drug Administration (“FDA”) approval and royalties from product sales following such approval.
 
Our Immunotherapy Platform Technologies
 
Our immunotherapy platforms aim to prevent the accumulation of aggregated beta amyloid protein fragments in the brain that are thought to be the root cause of Alzheimer’s disease. In healthy people, beta amyloid does not aggregate, but in Alzheimer’s patients it clumps first to form long fibrils, like tentacles, that eventually deposit on the surface of nerve cells as a spaghetti-like protein mass called amyloid plaques. The beta amyloid fragments are generated as a product of metabolism from the much larger Amyloid Precursor Protein, which is present in most tissues in the body and implicated in numerous important physiological functions. Intellect’s immunotherapy approach for Alzheimer’s disease involves making an antibody molecule available to bind to the beta-amyloid toxin, thus promoting its clearance away from sites of damage in the brain. This therapeutic outcome potentially can be achieved either by administering an externally generated monoclonal antibody (passive immunization) or by provoking the patient’s immune system to generate such an antibody (active immunization). Both approaches have the potential to slow or arrest disease progression provided that key safety issues are addressed. Of particular importance, is the need to avoid interfering with the physiological roles of the Amyloid Precursor Protein.  Intellect has incorporated proprietary safety features into its ANTISENILIN monoclonal antibody and RECALL-VAX technology platforms for both passive and active immunization, respectively, to minimize the potential for adverse side-effects, by generating antibodies that bind only the toxic beta amyloid and not the Amyloid Precursor Protein. We believe that these features and supporting patent position provides us with a strong potential competitive advantage in this field.
 
 Both active and passive immunization approaches have been demonstrated in transgenic Alzheimer’s disease mouse models to prevent amyloid beta deposition. In addition, published human clinical trial data from various trials sponsored by major pharmaceutical companies provide additional support for these approaches, though both approaches have potential safety concerns. We have amassed a portfolio of patents and patent applications in several technologies addressing an immunotherapy approach to treating Alzheimer’s disease in an effective and safe manner.
 
 
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Passive Immunotherapy - Our ANTISENILIN Program
 
Our passive monoclonal antibody platform is called ANTISENILIN, which was invented by our Chairman and CEO, Dr. Daniel Chain. We believe that product candidates emerging from this technology platform will result in a reduced potential to generate an adverse inflammatory reaction in patients; and a high degree of specificity such that the antibodies generated are less likely to bind to and affect the function of physiologically important proteins.
 
We acquired a monoclonal antibody from Immuno-Biological Laboratories Co., Ltd. (“IBL”), which has been humanized by MRCT (see Material Agreements below). We refer to the humanized drug candidate as IN-N01. We anticipate entering IN-N01 into human Phase I clinical trials in 2010 if we have sufficient financial resources.  The ANTISENILIN passive immunotherapy program involves designing antibodies that attack only the toxic version of amyloid beta without binding to other structurally related proteins and interfering with their important physiological functions. Published material has shown that generation of antibodies against amyloid beta is effective in slowing progression of Alzheimer’s disease.  The advantages of the passive approach are that it bypasses the need for patients to trigger their own immune response to generate antibodies, which could be particularly difficult for Alzheimer’s disease patients who tend to be elderly and who lack the ability to generate a robust immune response; allows the antibodies to be designed ex vivo with the required specificity rather than relying on the patient’s immune system; and retains the ability to halt treatment if necessary by ceasing the administration of antibodies whereas once the immune system has begun generating the antibodies, it is harder to “turn off” the immune response.
 
The specificity of IN-N01, which binds all major classes of circulating and pharmacokinetics profiles, makes it an ideal candidate for passive immunization. Additional modifications of the molecule are being made to further increase its safety profile.
 
Wyeth and Elan Pharmaceuticals are developing Bapinezumab, a monoclonal antibody of this type. Also, other pharmaceutical companies are developing or wish to develop similar antibodies. We have entered into a license agreement with Wyeth and Elan Pharmaceuticals, an option and license agreement with Glaxo and a license agreement with another top tier global pharmaceutical company   (see Material Agreements below).
 
Active Immunotherapy - Our RECALL-VAX Program
 
RECALL-VAX is a platform technology for developing a vaccine that could potentially be used as a form of active immunization to treat people with Alzheimer’s disease or prevent or delay the onset of the disease in individuals that are susceptible through age or other risk factors. We believe product candidates based on the RECALL-VAX technology will result in reduced potential to generate an adverse auto-immune response in patients; reduced toxicity compared to the natural amyloid beta protein; and a high degree of specificity such that the antibodies generated are less likely to bind to and affect the function of physiologically important proteins. RECALL-VAX was developed by Dr. Benjamin Chain of the University College of London. Dr. Benjamin Chain is the brother of our Chairman and Chief Executive Officer, Dr. Daniel Chain.
 
Other vaccines have shown in animal and limited human studies that antibodies generated by the immune system can help prevent the accumulation of toxic amyloid beta protein in the brain, but that such vaccines produce adverse side-effects thought to be due to the generation of a strong inflammatory auto-immune response. Elan Pharmaceuticals and Wyeth conducted a trial of an amyloid vaccine (AN1972) that was suspended in January 2002 because of safety concerns arising from an autoimmune response in 18 out of 360 patients that triggered post-vaccination meningeal encephalitis. RECALL-VAX is designed to reduce or eliminate an autoimmune response and to ensure that the antibodies produced by the patient’s immune system only attack the amyloid beta protein, thereby significantly reducing the likelihood of side-effects.
 
We believe the key to inactivation of amyloid beta toxin by vaccination is to stimulate a strong antibody immune response that targets and inactivates the toxin. However, strong antibody responses require parallel stimulation of cellular immunity in the form of antigen-specific T-helper lymphocytes. Although amyloid beta itself contains elements (epitopes) that can stimulate T-cell immunity, such T-cell responses carry the risk of inducing harmful autoimmunity. In our patented RECALL-VAX technology, a safe and well-characterized T-cell epitope polypeptide, such as tetanus toxoid (against which most people have been vaccinated), is combined with a very short fragment of amyloid beta toxin to produce the combined RECALL-VAX vaccine. We believe that our particular combination of human amyloid beta and bacterial (tetanus toxoid) polypeptides to provide B and T-helper epitopes, respectively, encourages a robust immune response with lessened danger of contamination by potentially harmful human amyloid beta T-cell epitopes. Moreover, by using only very short fragments of the amyloid beta toxin, the immune response is more specific than when using full length or larger pieces of amyloid beta, ensuring that only the toxin and not the amyloid precursor protein is targeted by the antibody.
 
 
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Our intent is to screen several different chemical variants for optimal immune responses with the goal of selecting a clinical candidate for development if we obtain sufficient financial resources. We have established proof of principle of the approach in animal tests using a proprietary chimeric structure to elicit an antibody response to a fragment protein, which includes a particularly potent form of the toxin that has been observed in neuronal cultures and in the brains of patients who died of Alzheimer’s disease.
 
Small Molecules - Our OXIGON Program
 
OXIGON is our drug candidate that is most advanced in clinical trials. It is a chemically synthesized form of a small, potent, dual mode of action, naturally occurring molecule. OXIGON is unique because it exhibits both anti-amyloid and antioxidant properties. It has potential use for Alzheimer’s disease and other diseases caused by oxidative stress and/or amyloidosis. Such diseases include, for example, Parkinson’s disease, Huntington’s disease, diabetes, focal ischemia, stroke, toxic neuropathy, motor neuron disease, heart and cardiovascular diseases, and radiation damage. Some of these diseases are orphan drug indications that could provide a more rapid route to registration than the route required for the Alzheimer’s disease indication.
 
OXIGON was previously under development at Mindset Biopharmaceuticals, Inc. (“Mindset”), partly with federal and private financial support from the National Institute of Aging, the BIRD Foundation, a bi-national quasi-governmental organization sponsored by the United States and Israel, and the Institute for the Study of Aging, a philanthropic organization in New York. We acquired the technology from Mindset in 2005. Our rights in the intellectual property underlying OXIGON are licensed from New York University (“NYU”) and the University of South Alabama Medical Science Foundation (“SAMSF”). Under the agreements with these institutions, we have an exclusive, worldwide, royalty-bearing license, with the right to grant sublicenses relating to OXIGON. NYU and SAMSF reserve the right to use and practice the licensed patents and know-how for their own non-commercial, educational or research purposes and to distribute certain research materials to third parties for non-commercial uses. Under the agreements, we have the first right to enforce the underlying intellectual property against unauthorized third parties. OXIGON sales are subject to royalties due to NYU and SAMSF, and to a royalty obligation arising from the use of test animals licensed to Mindset in drug discovery under a non-exclusive royalty bearing license from the Mayo Foundation for Medical Education and Research (“Mayo”).
 
In various in vitro and in vivo studies, OXIGON has shown the potential to be a potent neuroprotectant against amyloid beta and other toxins and a powerful antioxidant without pro-oxidant activity. In addition, it has shown the potential to inhibit amyloid beta fibril formation; reduce plaque burden and improve cognition (in Alzheimer’s disease transgenic mice); and protect DNA from oxidative damage.
 
These neuroprotective and antioxidant properties make OXIGON a promising therapeutic candidate for development in Alzheimer’s disease and other disorders characterized by oxidative stress. These diseases include central nervous system indications, such as Parkinson’s disease, stroke, traumatic brain injury, Huntington’s disease, ataxia telangiectasia and autism and non-central nervous system indications, such as multiple sclerosis, motor neuron disease, cardiac disease, ionization radiation injury, chemotherapy side-effects and others.
 
OXIGON was approved for testing in human clinical Phase I trials by the Ethics Committee in Utrecht, the Netherlands, on October, 28, 2005 and entered human Phase I clinical trials on December 1, 2005 in The Netherlands. The purpose of the first administrations of OXIGON to humans in our Phase I clinical trials was to determine safety and tolerability of OXIGON; identify adverse events associated with the drug and its formulation and determine their possible dose relationship; establish pharmacokinetic and pharmacodynamic profiles of OXIGON; and identify the maximum tolerated dose in single and multiple dose administrations.
 
We completed our Phase Ia trial on March 22, 2006 in a total of 54 subjects. We demonstrated in this clinical trial that OXIGON is safe and well tolerated in healthy elderly subjects in single doses up to 1200 mg; the absorption of OXIGON is rapid; the pharmacokinetics appear to be linear over the dose range studied; and the half life is three to four hours in plasma.
 
Following successful completion of our Phase Ia trial, OXIGON was approved for testing in human clinical Phase Ib trials by the Ethics Committee in Utrecht, the Netherlands on July 24, 2006, and this study, testing multiple doses of OXIGON over a fourteen day period, commenced on September 1, 2006. The study was completed on November 15, 2006 in a total of 36 subjects and initial data demonstrated that OXIGON is safe and well tolerated in healthy elderly subjects receiving multiple doses of OXIGON of up to 800 mg daily over a fourteen day period and shows linear pharmacokinetics in blood following oral administration. We received the final report for the Phase Ia trial and will receive the final report related to the Phase Ib trial upon final payment to our Contract Research Organization.
 
 
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Additional non-clinical studies were carried out in support of conducting planned Phase II trials. These non-clinical studies included toxicology in rats and non-human primates. The 90 day rat study was conducted by the Biosciences Division of SRI International, Menlo Park, California, under a contract with the National Institute on Aging, part of the National Institutes of Health.  This contract is part of a federal effort to work with academia and the private sector to encourage the discovery and development of drugs for Alzheimer’s disease.  The second study was performed by a company in the UK under contract to Intellect.
 
We intend to initiate a Phase II trial for OXIGON in 2010 if we have sufficient financial resources. The objective of our planned Phase IIa trial in AD is to generate sufficient proof of concept data to attract a partner for a pivotal Phase II/III clinical trial. Our study design is based on a previous trial design for OXIGON developed by the Alzheimer’s Disease Cooperative Study (ACDS), a consortium of academic institutions with research focused on AD. Our goal is to demonstrate changes in relevant biomarkers in cerebrospinal fluid (“CSF”) and plasma and possibly changes in cognitive outcomes. We believe that our study design allows us the potential for statistically significant data with fewer patients and treated for a shorter duration than in trials relying solely on cognition outcomes
 
We believe that OXIGON’s dual mode of action gives it the potential to treat any disease which is caused by either “amyloidosis,” the toxic accumulation of abnormally sticky proteins, and/or “oxidative stress”. In addition to the disease indications mentioned above, the list of diseases associated with amyloidosis and/or oxidative stress includes: aging disorders, heart and cardiovascular disease, diabetes, gastrointestinal tract diseases, other central nervous system disorders, certain inflammatory diseases, radiation damage, chemotherapy-related cell damage and others. Vitamin E has often been mentioned as a potent antioxidant. Yet its ability to effectively treat oxidative damage has been relatively limited, as has been the case with many other antioxidants that generally have poor bioavailability in the brain and/or adverse effects caused by the formation of damaging metabolites, particularly metabolites that have pro-oxidant activity. In contrast to most other antioxidants, OXIGON appears to be accessible to the brain and does not form any pro-oxidant metabolites. In vitro studies have shown that OXIGON protects cells against several potent neurotoxins, including Alzheimer’s toxin amyloid beta, and protects against DNA damage by oxidation, leading us to believe that OXIGON has the potential to treat Alzheimer’s disease and other diseases caused or promoted by oxidative damage.
 
In published research, OXIGON was found to be a potent antioxidant both in vitro and in vivo and a protectant of nerve cells from amyloid beta induced toxicity. The measurements obtained in the in-vitro studies indicated that the drug candidate is several orders of magnitude more potent than Vitamin E as a scavenger of so-called OH-radicals, which are a particularly damaging source of free radicals known to cause severe damage to cells. Similar studies also showed that in contrast to such other well-known antioxidants, including close structural analogs such as indole-3-pyruvic acid and indole-3-acetic acid, OXIGON cannot be metabolized to yield pro-oxidant intermediates whereas Vitamin E and many other antioxidants break down into “pro-oxidant” metabolites that tend to neutralize their effect in the body. In other studies carried out by researchers, OXIGON was shown to protect the brain from numerous potent neurotoxins in animal models of Parkinson’s disease, Huntington’s disease, focal ischaemia, toxic neuropathy and Alzheimer’s disease.
 
In addition to its antioxidant properties, OXIGON shows the potential to have anti-fibrillogenic properties, such as the ability to prevent the formation of the protofibrils and amyloid plaques that cause much of the damage in Alzheimer’s disease patients. OXIGON has been tested for safety across species, including primates, and found safe for testing in humans under applicable European regulatory guidelines. We believe that these properties, coupled with its bioavailability, as demonstrated in animal models, and recently in humans, including uptake across the gut and from the blood into the brain, should make OXIGON an attractive candidate to treat Alzheimer’s disease, as well as many of the oxidative stress related diseases. Although primarily we are focused on Alzheimer’s disease, if sufficient funding is available, we expect to conduct additional testing eventually, either alone or with partners, in other indications where clinical trials designed to show efficacy may be significantly shorter and less expensive than clinical trials for Alzheimer’s disease.
 
 
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In connection with our purchase of OXIGON from Mindset, we obtained data related to certain initial research activities that were undertaken by Mindset and that were suggestive of efficacy of OXIGON as an anti-Alzheimer’s disease drug in animals. Specifically, OXIGON was previously tested in a so-called double transgenic mouse model of Alzheimer’s disease. The mouse is double transgenic because it contains in its genome two mutant human genes each of which, in humans, gives rise individually to a form of familial early onset Alzheimer’s disease. Several pharmaceutical companies have tested compounds in this model because it is considered relevant to Alzheimer’s disease. A preliminary exploratory study was conducted in these mice to investigate the efficacy of OXIGON in preventing or delaying amyloid beta burden and improving memory. The design of this exploratory study included a wide range of OXIGON doses to find a pharmacologically active dose in this model, as well as multiple assays to determine which, if any, was appropriate to further test the effect of OXIGON. A behavioral test, known as trace conditioning, was used to evaluate the effects of OXIGON on learning/memory in a subset of the transgenic mice enrolled in the study. Use of OXIGON (10 mg/kg) resulted in better cognition than that exhibited by placebo-treated double transgenic mice when tested 24 hours after training following 17 weeks of drug administration. OXIGON also was tested in an enzyme-linked immunosorbent assay using specific antibodies to measure the total amyloid beta peptides extracted from brain homogenates. These assays revealed effects of OXIGON in both the eight and 17-week treatment periods. At certain doses, animals treated with OXIGON showed reductions of more than 80% in the amount of brain amyloid species (1 to 40), and 30% reductions in the amount of brain amyloid species (1 to 42). However, OXIGON was not effective at all doses and we intend to conduct further studies to determine the effective dose if sufficient funding is available. Some of the biological tests applied in this exploratory study failed to show significant changes between treated and untreated animals. We believe that tests that did not show significant changes were of insufficient sensitivity and were unsuited to this type of study, but there is no assurance that our belief will prove accurate.
 
Material Agreements
 
Mindset Asset Transfer Agreement
 
The majority of Intellect’s assets were acquired in 2005 from Mindset Biopharmaceuticals, Inc., which we refer to as Mindset. Dr. Daniel Chain, our Chairman and Chief Executive Officer, founded Mindset and remains a significant stockholder of Mindset. He had previously served as Mindset’s Chairman and Chief Executive Officer, and currently serves as its President. Dr. Chain spends approximately 5% of his time on matters relating to Mindset. Mindset is not involved in any business that competes, directly or indirectly, with the business of Intellect.
 
Effective June 23, 2005, Intellect entered into an agreement (the “Asset Transfer Agreement”) with Mindset to acquire from Mindset certain intellectual property related assets (the “Mindset Assets”), including their related patents, patent applications, trademarks, licenses, know-how inventions and certain inventories (the “2005 Asset Transfer”).
 
Pursuant to the Asset Transfer Agreement, Mindset sold, assigned, conveyed and transferred to Intellect the Mindset Assets. As consideration for the Mindset Assets, Intellect agreed to:
 
 
purchase from Mindset’s creditors $1,277,438 of Mindset debt in exchange for a release of the claims against Mindset held by such creditors;
 
 
purchase from Mindset’s wholly owned Israeli subsidiary, Mindset Biopharmaceuticals, Ltd. (“Mindset Ltd.”), $743,282 of Mindset debt at a price to be determined based on negotiations with the trustee in bankruptcy in Israel of Mindset Ltd, which price was determined to be $150,00;
 
 
purchase from certain of Intellect’s officers and stockholders $1,634,000 of Mindset debt in exchange for a release of the claims against Mindset held by such officers and stockholders;
 
 
assume $1,623,730 of Mindset debt owed to third parties;
 
 
pay $60,405 to third parties for certain research and development costs previously incurred by Mindset; and
 
 
assume the obligations of Mindset under certain licenses that would be assigned to us pursuant to the 2005 Asset Transfer.
 
As a result of the transactions described above, we are a significant creditor of Mindset. Mindset’s current business plan is to leverage its intellectual property estate through licenses and other arrangements and to provide transgenic mice for Alzheimer’s disease research through its existing subsidiary, Mindgenix, Inc. (“Mindgenix). Although it is possible that Mindset will become a profitable entity in the future, we believe that we are unlikely to recover any significant repayment of amounts due to us from Mindset. Therefore, we have fully offset this receivable by a reserve due to uncertainty regarding collection. Under the Asset Transfer Agreement, in the event of certain acceleration events, such as the liquidation, dissolution or institution against or by Mindset of bankruptcy proceedings, approximately $2.9 million of Mindset debt owed to us will become immediately due. If no such acceleration event has occurred on or before December 31, 2013, the $2.9 million of Mindset debt will be extinguished. No such bankruptcy proceedings have been instituted by or against Mindset as of the date of this report and we have no basis to assume that any such proceedings are likely to occur in the foreseeable future.
 
 
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Agreements Related to our Immunotherapy Programs
 
Beta-Amyloid Specific, Humanized Monoclonal Antibody Purchase and Sale Agreement (ANTISENILIN)
 
Under the terms of a Beta-Amyloid Specific, Humanized Monoclonal Antibody Purchase and Sale Agreement (the "IBL Agreement") effective as of December 26, 2006 by and between Intellect USA and Immuno-Biological Laboratories Co., Ltd. ("IBL"), we acquired a beta amyloid specific monoclonal antibody ready for humanization, referred to as 82E1, including all lines and DNA sequences pertaining to it, and the IBL patents or applications relating to this antibody. We also acquired a second monoclonal antibody referred to as 1A10, the DNA sequence pertaining to it and the IBL patents or applications relating to this antibody. The Agreement requires an upfront payment of $50,000, which was subsequently reduced to $40,000, which we paid in March 2008.
 
In consideration for the purchase, we agreed to pay IBL a total of $2,125,000 (including the $40,000 referred to above) upon the achievement of certain milestones plus a specified royalty based on sales of any pharmaceutical product derived from the 82El or 1A10 antibodies. Also, we granted to IBL a worldwide, exclusive, paid-up license under certain Intellect granted patents and pending applications in Japan, to make, use and sell certain beta amyloid specific monoclonal antibodies solely for diagnostic and/or laboratory research purposes. The IBL Agreement expires upon the last to expire of the relevant Intellect patents, unless earlier terminated as the result of a material breach by or certain bankruptcy related events of either party to the agreement.
 
Medical Research Council Technology (“MRCT”) Research Collaboration Agreement (ANTISENILIN)
 
MRCT and Intellect entered into a Research Collaboration Agreement effective as of August 6, 2007 and amended on June 19, 2008 (the “Collaboration Agreement”) pursuant to which MRCT agreed to conduct a project to humanize Intellect’s beta-amyloid specific, monoclonal antibodies for the treatment of Alzheimer’s disease.  The first antibody to undergo humanization is 82E1, the antibody that we acquired from IBL. Humanization is an essential step in making antibodies safe for use in humans. We refer to the humanized form of 82E1 as IN-N01.
 
Under the terms of the Research Collaboration Agreement as amended, we are obligated to pay MRCT up-front fees and research milestone payments related to the development of the 82E1 humanized antibody and additional commercialization milestones and sales based royalties related to the resulting drug products. As of June 30, 2009, we have paid to MRCT a total of $200,000 of up-front fees, and none of the research milestones. Under the June 19, 2008 amendment, we may deliver warrants to purchase our common stock in lieu of cash payments under certain circumstances related to our future financing activities as payment for research milestone payment obligations. Three of the five research milestones have been achieved and as a result, a liability reflecting research milestone payment obligations outstanding is included in Accounts Payable and Accrued Expenses.
 
License Agreement among Intellect and AHP Manufacturing BV, acting through its Wyeth Medica Ireland Branch and Elan Pharma International Limited (ANTISENILIN)
 
In May 2008, we entered into a License Agreement (the “Agreement”) by and among Intellect and AHP Manufacturing BV, acting through its Wyeth Medica Ireland Branch, (“Wyeth”) and Elan Pharma International Limited (“Elan”) to provide Wyeth and Elan (the “Licensees”) with certain license rights under certain of our patents and patent applications (the “Licensed Patents”) relating to certain antibodies that may serve as potential therapeutic products for the treatment for Alzheimer’s Disease (the “Licensed Products”) and for the research, development, manufacture and commercialization of Licensed Products.
 
Pursuant to the Agreement, we granted the Licensees a co-exclusive license (co-exclusive as to each Licensee) under the Licensed Patents to research, develop, manufacture and commercialize Bapineuzumab Products in the Field in the Territory (all as defined in the Agreement) and a non-exclusive license under the Licensed Patents to research, develop, manufacture and commercialize Licensed Products (other than Bapineuzumab Products) in the Field in the Territory.  We received $1 million as of June 30, 2008 and an additional $1 million in August, 2008 pursuant to this Agreement. In addition, we are eligible to receive certain milestones and royalties based on sale of Licensed Products as set forth in the Agreement. The term during which royalties would be payable is determined based on a country-by-country and Licensed Product-by-Licensed Product basis, the period beginning upon the first commercial sale of a Licensed Product in a country and ending on the first date that such Licensed Product ceases to be covered by a Valid Claim issued in such country.
 
Under the terms of the License Agreement, the Licensees have an option to receive ownership of all of our right, title and interest in and to the Licensed Patents if at any time during the term of the Agreement (i) Licensor and its sublicensees have abandoned all activities related to research, development and commercialization of all Intellect Products that are covered by the Licensed Patents and (ii) no licenses granted by Licensor under the Licensed Patents (other than the licenses granted to Licensees under the Agreement) remain in force. “Abandonment” includes a failure by Intellect to incur $50,000 in patent or program research related expenses during any six month period that the Agreement is in effect. Accordingly, initially we recorded the up-front payment of $1 million received from the Licensees as a Deferred Credit on our Consolidated Balance Sheet, representing our obligation to fund such future patent or program research related expenses, and recorded periodic amortization expense related to the deferred credit based on the remaining life of the License, which approximates the remaining life of the underlying patents.
 
 
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As described more fully below, in October 2008 we entered into an Option and License Agreement with a top-tier global pharmaceutical company regarding an option to purchase a license under certain patents. The patents are the same patents and patent applications as the Licensed Patents arising from the Agreement with Elan and Wyeth described above.  Effective as of December 19, 2008, we granted a License to the counterparty to this Agreement.  As a result, Wyeth and Elan’s option to receive ownership of all of our right, title and interest in and to the Licensed Patents described above terminated as of December 19, 2008. Accordingly, we recognized the remaining balance of the deferred credit as income during the period ended December 31, 2008.
 
ANTISENILIN Option and License Agreement
 
In October 2008, we entered into an Option Agreement (the “Option Agreement”) by and among Intellect and a global pharmaceutical company (“Option Holder”) regarding an option to obtain a license under certain of our patents and patent applications (the “Subject Patents”) related to antibodies and methods of treatment for Alzheimer’s disease and to make, have made, use, sell, offer to sell and import certain Licensed Products, as defined in the Agreement.
 
Pursuant to the Agreement, we granted the Option Holder an irrevocable option to acquire a non-exclusive, royalty bearing license under the Subject Patents with the right to grant sublicenses, to develop, have developed, make, have made, use, offer to sell, sell, import and have imported Licensed Products in the Territory in the Field (the “Option”).
 
In consideration of the Option, the Option Holder paid us a non-refundable fee of five hundred thousand dollars ($500,000) (the “Option Fee”). In consideration of the exercise of the Option, the Option Holder agreed to pay us two million dollars ($2,000,000) (the “Exercise Fee”). Two hundred and fifty thousand dollars ($250,000) of the Option Fee is creditable against the Exercise Fee.
 
In addition, upon the later of (1) exercise of the Option, and (2) grant in the United States of a Licensed Patent with at least one Valid Claim that covers a Licensed Product in the Territory in the Field (as such terms are defined in the Agreement), we will receive two million U.S. dollars (U.S. $2,000,000). An additional milestone payment shall be made to us should the Option Holder achieve certain thresholds for aggregate annual Net Sales for any Licensed Product in countries in which there are then existing one or more Valid Claims covering the Licensed Product.
 
The Agreement also provides that we will be eligible to receive certain royalty payments from the Option Holder in connection with Net Sales of Licensed Products by the Option Holder, its affiliates and its permitted sublicensees. The term during which such royalties would be payable begins upon launch of a Licensed Product in a country (or upon issuance of a Valid Claim, whichever is later) and ending upon the date on which such Licensed Product is no longer covered by a Valid Claim in such country (as such terms are defined in the Agreement).
 
Effective as of December 19, 2008, the Option Holder became the Licensee of the Subject Patents by paying us $1,550,000, which is the Exercise Fee described in the Option Agreement as adjusted by subsequent discussions between the parties to the Option Agreement. We recognized the $1,550,000 exercise fee and the $500,000 non refundable option fee described above as revenue in the period of receipt on our financial statements.
 
GSK Option and License Agreement
 
On  April 29, 2009, we entered into an Option Agreement (the “Agreement”) with Glaxo Group Limited (“GSK”) regarding an option to purchase a license under certain of Intellect’s patents and patent applications (the “Subject Patents”) related to antibodies and methods of treatment for Alzheimer’s disease.
 
Pursuant to the Agreement, we granted GSK an irrevocable option (the “Option”) to acquire a non-exclusive, royalty bearing license under the Subject Patents with the right to grant sublicenses, to develop, have developed, make, have made, use, offer to sell, sell, import and have imported Licensed Products in the Territory in the Field (as such terms are defined in the Agreement).
 
Upon exercise of the Option, GSK will pay us two million dollars ($2,000,000). In addition, upon the later of the (1) exercise of the Option, and (2) grant in the United States of a Licensed Patent with at least one Valid Claim that covers a Licensed Product incorporating a GSK Compound in the Territory in the Field (as such terms are defined in the Agreement), GSK will pay us an additional two million U.S. dollars (U.S. $2,000,000). An additional milestone payment will be made to us should GSK achieve certain thresholds for aggregate annual Net Sales for any Licensed Product in countries in which there are then existing one or more Valid Claims covering the Licensed Product.
 
 
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The Agreement provides that we will be eligible to receive certain royalty payments from GSK in connection with Net Sales of Licensed Products by GSK, its affiliates and its permitted sublicensees. The term during which such royalties would be payable begins upon launch of a Licensed Product in a country (or upon issuance of a Valid Claim, whichever is later) and ending upon the date on which such Licensed Product is no longer covered by a Valid Claim in such country (as such terms are defined in the Agreement).
 
Dr. Benjamin Chain — Chimeric Peptide Assignment Agreement (RECALL-VAX)
 
Effective as of June 6, 2000, Dr. Benjamin Chain assigned to Mindset all of his right, title and interest in certain of his inventions and patent applications related to the use of chimeric peptides for the treatment of AD. Dr. Benjamin Chain is the brother of our Chairman and Chief Executive Officer.  In exchange for such assignment, Mindset agreed to pay a royalty to Dr. Benjamin Chain equal to 1.5% of net sales of any drug products sold or licensed by Mindset utilizing the chimeric peptide technology. Intellect USA acquired these inventions and patent applications as part of the asset estate that we acquired from Mindset and we are obligated to make royalty payments to Dr. Benjamin Chain upon successful development of a drug utilizing this chimeric peptide technology. We have yet to develop any drug product that would trigger our obligation to make future payments to Dr. Benjamin Chain.
 
New York University License Agreement – BETA-VAX (terminated)
 
On August 31, 2005, Intellect USA entered into an Option Agreement with New York University for an option to license certain NYU inventions and know-how relating to a vaccine for the mitigation, prophylaxis or treatment of AD.  Under the Option Agreement, we were entitled to acquire an exclusive, worldwide license to commercially use NYU's inventions and know-how in the development of products for use in the mitigation, prophylaxis or treatment of AD.  NYU retained the right to use the inventions and know-how for its own academic and research purposes and to allow other academic institutions to use the inventions and know-how for their academic and research purposes other than clinical trials, as well as any rights of the United States government. In addition, we agreed to reimburse NYU for certain patent protection costs and expenses incurred by NYU. Patent costs were expensed as incurred to general and administrative costs.  Intellect USA exercised the option to acquire the license on April 1, 2006 and entered into a License Agreement with NYU on April 21, 2006.
 
Under the terms of the License Agreement, we were obligated to pay non-refundable, non-creditable license fees totaling $200,000, payable in five installments as follows: $25,000 on each of May 1 and June 1, 2006 and $50,000 payable on each of April 1, 2007, 2008 and 2009. We did not pay the license payments due on April 1, 2007 or April 1, 2008. The Agreement did not provide for interest payments; consequently, the principal payments have been discounted to their present value at an annual interest rate of 10%, resulting in a principal amount of approximately $172,700 and imputed interest of approximately $27,300 at the time of execution of the License Agreement. As of June 30, 2009, the approximate remaining balance due to NYU in respect of the License Agreement, including accrued interest for 2007 and 2008 is $145,260, which is included in Accounts Payable and Accrued Expenses as Due to Licensors on our Consolidated Balance Sheet.
 
In addition, we were obligated to pay NYU non-refundable research payments for performance by NYU of certain ongoing research activities totaling $200,000, payable in eight equal installments of $25,000 every three-months beginning on April 1, 2006. We paid $150,000 of such payments and are delinquent with respect to the balance. Also, we were obligated to make future payments totaling approximately $2,000,000 upon achievement of certain milestones based on phases of clinical development and approval of the FDA (or foreign equivalent) and also to pay NYU a royalty on the sales, net of various customary discounts, attributable to each licensed product. As a result of the payment delinquencies and a decision by Intellect’s management to focus on its core programs, Intellect agreed with NYU on December 24, 2008 to the cancellation of the Licensing Agreement, resulting in the termination of the license from NYU to Intellect. We remain obligated to pay NYU the outstanding amounts due under the License Agreement through the date of termination.
 
 
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Agreements Related to OXIGON
 
New York University (NYU) License Agreement- Melatonin and indole-3-propionic acid
 
Effective August 10, 1998 as amended in September 2002, Mindset entered into a license agreement with NYU. On June 17, 2005, in connection with the 2005 Asset Transfer, NYU consented to Mindset’s assignment of the license agreement to us. Under the license agreement, we have an exclusive, worldwide, royalty-bearing license in the field of research, development and testing within pharmaceutical, biotechnological and diagnostic development programs in the field of Alzheimer’s disease and other central nervous system and neurodegenerative diseases, and in the field of all other possible utilities for melatonin analogs, with the right to grant sublicenses, under certain patents and know-how relating to the use of melatonin and melatonin analogs in the prevention or treatment of amyloid-related disorders and in the use of melatonin analogs as antioxidants and to the use of indole-3-propionic acid to prevent a cytotoxic effect of amyloid-beta protein, treat a fibrillogenic disease, including Alzheimer’s disease, or generally treat a disease or condition where free radicals and/or oxidative stress contribute to pathogenesis. Under the agreement, we have the first right to enforce the underlying intellectual property against unauthorized third parties. The license agreement is expressly subject to all applicable United States government rights. The license agreement expires upon the expiration date of the last to expire patent or 15 years from the date of first commercial sale of products, whichever is later. We are obligated to make future payments totaling approximately $1,500,000 upon achievement of certain milestones based on phases of clinical development and approval of the FDA (or foreign equivalent) and also to pay NYU a royalty based on product sales by us or royalty payments that we receive from sub-licensees. We have yet to achieve the clinical development or FDA approval milestones that trigger our obligation to make future payments.
 
University of South Alabama Medical Science Foundation (“SAMSF”) — Research and License Agreement- Melatonin and indole-3-propionic acid
 
Effective August 10, 1998 and as amended as of September 1, 2002, Mindset entered into a Research and License Agreement with the South Alabama Medical Science Foundation (the "SAMS Foundation").  On June 17, 2005, SAMS Foundation consented to Mindset's assignment of the Research and License Agreement to Intellect USA.  Under the Research and License Agreement, we have an exclusive, worldwide, royalty-bearing license, with the right to grant sublicenses, under certain patents and know-how relating to the use of melatonin and melatonin analogs in the prevention or treatment of amyloid-related disorders and in the use of melatonin analogs as antioxidants and to the use of indole-3-propionic acid to prevent a cytotoxic effect of amyloid-beta protein to treat a fibrillogenic disease, including AD, or generally to treat a disease or condition where free radicals and/or oxidative stress contribute to pathogenesis.  Under the agreement, we have the first right to enforce the underlying intellectual property against unauthorized third parties. The license agreement is expressly subject to all applicable United States government rights. The license agreement expires upon the expiration date of the last to expire patent or 15 years from the date of first commercial sale of products, whichever is later. We are obligated to make future payments totaling approximately $1,500,000 upon achievement of certain milestones based on phases of clinical development and approval of the FDA (or foreign equivalent) and also to pay SAMS Foundation a royalty based on product sales based on product sales by us or royalty payments that we receive from sub-licensees. We have yet to achieve the clinical development or FDA approval milestones that trigger our obligation to make future payments.
 
Mayo Foundation for Medical Education and Research (“Mayo”) — Transgenic Animal Non-Exclusive License and Sponsored Research Agreement
 
Effective October 24, 1997 as amended on September 1, 2001 and again on February 1, 2005, Mindset acquired from Mayo a non-exclusive license to use certain transgenic mice and related technologies as models for Alzheimer’s disease and other neurodegenerative diseases. Under the amended agreement with Mayo, Mindset is obligated to pay Mayo a royalty of 2.5% of any net revenue that Mindset receives from the sale or licensing of a drug product for Alzheimer’s disease in which the Mayo transgenic mice were used for research purposes. The Mayo transgenic mice were used by the SAMSF to conduct research with respect to OXIGON and by NYU with respect to BETA-VAX. Pursuant to the Consent to Assignment that we executed with the SAMSF in June 2005 and the license agreement with NYU for BETA-VAX, we agreed to assume all of Mindset’s obligations with respect to these licenses, which include Mindset’s obligations to pay royalties to Mayo. The license agreement with Mayo expires upon the expiration date of the last to expire patent or 10 years from the date of the agreement, whichever is later. Neither Mindset nor Intellect has received any net revenue that would trigger a payment obligation to Mayo.
 
PharmaSeed Transaction – Mindgenix
 
Effective as of July 15, 2008, Mindgenix and PharmaSeed Ltd., an Israeli company that provides drug testing services (“Pharmaseed”), entered into an Operating and Marketing Agreement under which Pharmaseed will manage MindGenix’ third party testing business, which involves the testing of compounds using APP/PS1 transgenic mice (the “Testing Business”). Pharmaseed will operate, at its expense, all aspects of the Testing Business, including invoicing and collecting client payments. MindGenix will be entitled to receive a portion of the revenue earned by Pharmaseed from the Testing Business. In addition, Pharmaseed will pay to MindGenix the portion of gross revenue due as royalty payments to USFRF and Mayo under their respective licenses, which are used to conduct the Testing Business. MindGenix would pay that money over to USFRF and Mayo. Pharmaseed has yet to make any payments to Mindgenix under this Agreement.
 
 
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The term of the agreement is three years and is renewable every year for five years, at Pharmaseed’s sole discretion. Pharmaseed may terminate the agreement with 90 days prior notice. MindGenix may terminate the agreement in the event that Pharmaseed has not used commercially reasonable efforts to maintain and develop the Testing Business. Also, the agreement may be terminated upon certain bankruptcy and insolvency events.
 
Pursuant to the agreement, Pharmaseed will manage all aspects of the Testing Business (facilities, personnel, etc.) at its own cost; market the Testing business at its own cost and discretion; invoice and collect payment from customers; purchase supplies and third-party services; and pay facilities utility costs for space/utilities used for the Testing Business. In addition, Pharmaseed will pay to MindGenix the amounts due to USFRF and Mayo per the terms of their respective license agreements on Testing Business revenue.
 
MindGenix’ retained obligations are to pay to USFRF and Mayo all amounts due per the terms of their respective license agreements on Testing Business revenue and forward Pharmaseed all documentation evidencing such payments; pay all liabilities incurred related to personnel and facilities not related to the Testing Business and all liabilities incurred prior to the effective date of the agreement; maintain responsibility for all corporate related permits, filings, tax returns and tax liabilities; maintain insurance naming Pharmaseed as an additional insured; and maintain all licenses required in order for Pharmaseed to conduct the Testing Business, including performance of all obligations towards Mayo and USFRF under the applicable license agreements.
 
From the revenue received from the Testing Business, Pharmaseed will pay the operating costs of the Testing Business (comprising its facilities and personnel overhead and consumables related to the Testing Business) and will pay MindGenix a quarterly fee equal to 10% of the difference between Pharmaseed’s revenues actually received directly from the Testing Business (other than revenues accepted from Intellect) less the Testing Costs. Also, Pharmaseed will pay to MindGenix, the license fees payable to USFRF and Mayo and MindGenix will pay such money over to the licensors and provide Pharmaseed with proper documentation of such payment.
 
Pursuant to the agreement, Pharmaseed will provide Intellect with preferred pricing and priority for testing services, equivalent to Testing Costs and license fees related to the Intellect projects plus 7% and will not pay MindGenix any fees with respect to such revenues.
 
We consolidate the accounts of Mindgenix because we have agreed to absorb certain costs and expenses incurred that are attributable to its research.
 
Research and Development Costs
 
We have devoted substantially all of our efforts and resources to advancing our intellectual property estate and scientific research and drug development. Generally, research and development expenditures are allocated to specific research projects. Due to various uncertainties and risks, including those described in “Risk Factors” beginning on page 19, relating to the progress of our product candidates through development stages, clinical trials, regulatory approval, commercialization and market acceptance, it is not possible to accurately predict future spending or time to completion by project or project category. Research and Development costs were $444,928 for the year ended June 30, 2009; $3,298,740 for the year ended June 30, 2008 and $5, 870, 016 for the year ended June 30, 2007. Research and Development costs from inception through June 30, 2009 were $13,271,797, which exclude patent related expenses.
 
Competition
 
Alzheimer’s disease therapies under development can largely be divided into two categories: those demonstrating a symptomatic benefit therapy; and those demonstrating a disease-modifying benefit. Although a symptomatic benefit can improve the quality of life of the patient by reducing depression, agitation and anxiety and even delay hospitalization by a few months, the effects are typically transient and do not have the disease-modifying effects that will slow the progression of Alzheimer’s disease, prolong life expectancy and possibly even cure this devastating illness. To date, the FDA has approved five drugs to treat people who have been diagnosed with Alzheimer’s disease. All are drugs that provide symptomatic benefits. None of these medications slows or arrests the progression of Alzheimer’s disease itself.
 
Various companies are reportedly testing active Alzheimer’s vaccines and therapeutics in clinical trials. Such companies include Elan and Wyeth, Novartis and others.
 
Government Regulation and Required Approvals
 
The process required by the FDA under the drug provisions of the United States Food, Drug and Cosmetic Act for any of our drug products to be marketed in the United States generally involves preclinical laboratory and animal tests; submission of an Investigational New Drug Application (“IND”), which must become effective before human clinical trials may begin; adequate and well-controlled human clinical trials to establish the safety and efficacy of the product candidate for its intended use; submission to the FDA of a New Drug Application (“NDA”); and FDA review and approval of a NDA. The testing and approval process requires substantial time, effort and financial resources, and we cannot be certain that any approval will be granted to us or to our licensees on a timely basis, if at all.
 
 
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Preclinical tests include laboratory evaluation of the product candidate, its chemistry, formulation and stability, as well as in-vitro and animal studies, to assess the potential safety and efficacy of the product candidate. Certain preclinical tests must be conducted in compliance with Good Manufacturing Practice (“GMP”) regulations and Good Laboratory Practice (“GLP”) guidelines. Violations of these regulations or guidelines can lead to invalidation of studies, requiring, in some cases, such studies to be replicated. In some instances, long-term preclinical studies are conducted while clinical studies are ongoing.
 
Results of preclinical tests, together with manufacturing information and analytical data, are submitted to the FDA as part of an IND before human clinical trials may begin. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA, within the 30-day time period, raises concerns or questions about the conduct of the trials as outlined in the IND and imposes a clinical hold. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before clinical trials may begin. All clinical trials must be conducted under the supervision of a qualified investigator in accordance with Good Clinical Practice (“GCP”) regulations. These regulations include the requirement that all subjects provide informed consent. Further, an independent institutional review board (“IRB”) at each medical center proposing to conduct the clinical trials must review and approve any clinical study. The IRB monitors the study and is informed of the study’s progress, particularly as to adverse events and changes in the research. Progress reports detailing the results of the clinical trials must be submitted at least annually to the FDA and more frequently if serious adverse events occur.
 
Human clinical trials typically are conducted in three sequential phases that may overlap:
 
 
Phase One (I): The drug is typically initially introduced into healthy human subjects or patients and tested for safety, dosage tolerance, absorption, metabolism, distribution and excretion. In some instances, the first introduction into humans will be to patients rather than healthy subject, such as in some drugs developed for various cancer indications.
 
 
Phase Two (II): The drug is studied in a limited patient population to identify possible adverse effects and safety risks, to obtain initial information regarding the efficacy of the product for specific targeted diseases and to determine dosage tolerance and optimal dosage.
 
 
Phase Three (III): Generally large trials undertaken to further evaluate dosage and clinical efficacy and safety in an expanded patient population, often at geographically dispersed clinical study sites.
 
With the exception of OXIGON, which has successfully completed Phase I, we cannot be certain that we will successfully complete Phase I, Phase II or Phase III testing of our product candidates within any specific time period, if at all.
 
Concurrent with clinical trials and preclinical studies, information about the chemistry and physical characteristics of the drug product must be developed and a process for its manufacture in accordance with GMP requirements must be finalized. The manufacturing process must be capable of consistently producing quality batches of the product, and we must develop methods for testing the quality, purity and potency of initial, intermediate and final products. Additionally, appropriate packaging must be selected and tested and chemistry stability studies must be conducted to demonstrate that the product does not undergo unacceptable deterioration over its shelf life.
 
The results of product development, preclinical studies and clinical studies are submitted to the FDA as part of a NDA for approval of the marketing and commercial shipment of the product. The FDA reviews each NDA submitted and may request additional information, rather than accepting the NDA for filing. In this event, the application must be resubmitted with the additional information. The resubmitted application is subject to review before the FDA accepts it for filing. Once the FDA accepts the NDA for filing, the agency begins an in-depth review of the NDA. The FDA has substantial discretion in the approval process and may disagree with interpretations of the data submitted in the NDA. The review process may be significantly extended should the FDA request additional information or clarification regarding information already provided. Also, as part of this review, the FDA may refer the application to an appropriate advisory committee, typically a panel of clinicians, for review, evaluation and a recommendation. The FDA is not bound by the recommendation of an advisory committee. Manufacturing establishments often are subject to inspections prior to NDA approval to assure compliance with GMP standards and with manufacturing commitments made in the relevant marketing application.
 
 
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Satisfaction of FDA requirements or requirements of state, local and foreign regulatory agencies typically takes several years and the actual time required may vary substantially based upon the type, complexity and novelty of the pharmaceutical product. Government regulation may delay or prevent marketing of potential products for a considerable period of time and impose costly procedures upon our activities. We cannot be certain that the FDA or any other regulatory agency will grant approval for any of our product candidates on a timely basis, if at all. Success in preclinical or early-stage clinical trials does not assure success in later-stage clinical trials. Data obtained from preclinical and clinical activities are not always conclusive and may be susceptible to varying interpretations that could delay, limit or prevent regulatory approval. Even if a product receives regulatory approval, the approval may be significantly limited to specific indications or uses. Further, even after regulatory approval is obtained, later discovery of previously unknown problems with a product may result in restrictions on the product or even complete withdrawal of the product from the market. Delays in obtaining, or failures to obtain regulatory approvals would have a material adverse effect on our business.
 
Any products manufactured or distributed by us pursuant to the FDA clearances or approvals would be subject to pervasive and continuing regulation by the FDA, including record-keeping requirements, reporting of adverse experiences with the drug, submitting other periodic reports, drug sampling and distribution requirements, notifying the FDA and gaining its approval of certain manufacturing or labeling changes, complying with certain electronic records and signature requirements, and complying with the FDA promotion and advertising requirements. Drug manufacturers and their subcontractors are required to register their facilities with the FDA and state agencies and are subject to periodic unannounced inspections by the FDA and state agencies for compliance with GMP standards, which impose procedural and documentation requirements upon us and our third-party manufacturers. Failure to comply with these regulations could result, among other things, in suspension of regulatory approval, recalls, suspension of production or injunctions, seizures, or civil or criminal sanctions.
 
The FDA regulates drug labeling and promotion activities. The FDA has actively enforced regulations prohibiting the marketing of products for unapproved uses. Under the FDA Modernization Act of 1997, the FDA occasionally will permit the promotion of a drug for an unapproved use in certain circumstances, but subject to very stringent requirements. OXIGON may be prescribed for uses unintended in its initial approval because it may prove to be effective in treating other indications caused by oxidative stress. However, due to the FDA Modernization Act of 1997, we would be prohibited from labeling OXIGON for such other indications, which may limit the marketability of the product.
 
We would be subject to a variety of state laws and regulations in those states or localities where our product candidates and any other products we may in-license would be marketed. Any applicable state or local regulations may hinder our ability to market our product candidates and any other products we may in-license in those states or localities. In addition, whether or not FDA approval has been obtained, approval of a pharmaceutical product by comparable governmental regulatory authorities in foreign countries must be obtained prior to the commencement of clinical trials and subsequent sales and marketing efforts in those countries. The approval procedure varies in complexity from country to country and the time required may be longer or shorter than that required for FDA approval. We may incur significant costs to comply with these laws and regulations now or in the future.
 
The FDA’s policies may change and additional government regulations may be enacted that could prevent or delay regulatory approval of our potential products. Moreover, increased attention to the containment of health care costs in the United States and in foreign markets could result in new government regulations that could have a material adverse effect on our business. We cannot predict the likelihood, nature or extent of adverse governmental regulation that might arise from future legislative or administrative action, either in the United States or abroad.
 
We are subject to a variety of other local, state, federal and foreign regulatory regimes, and may become subject to additional regulations if any of our product candidates enter the production cycle, that may require us to incur significant costs to comply with such regulations now or in the future.  We cannot assure you that any portion of the regulatory framework under which we currently operate will remain consistent and that any change or new regulations will not have a material adverse effect on our current and anticipated operations.
 
Employees
 
As of June 30, 2009, we have three employees, our chief executive officer, our President and Chief Financial Officer and an administrative assistant.  All of our employees are located in New York City. Dr. Chain, our CEO, and Mr. Maza, our President and CFO, have signed employment agreements with us.  We believe our relations with our employees are good.
 
 
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Outsourcing
 
We expect to outsource most of our development and manufacturing work. We engage experienced drug development consultants to provide advice on development issues. Overseeing our scientific and clinical strategy are two boards of academic and clinical advisors comprised of experts in the field of Alzheimer’s disease research and related disorders. We believe that this outsourcing strategy is the optimal method for developing our drug candidates given our current and anticipated financial resources.
 
Marketing
 
We do not have an organization for the sales, marketing and distribution of our product candidates. Our core business strategy is to leverage our intellectual property estate through license or other arrangements and to enter into collaboration agreements with major pharmaceutical companies to develop our proprietary compounds. We expect future partners to complete product development, seek regulatory approvals and commercialize the resulting drug products. We do not intend to market any products and do not anticipate a need for any sales, marketing or distribution capabilities.
 
Insurance Coverage
 
We have General Liability Insurance and Workers Compensation and Disability policies and Director & Officer Insurance.
 
Corporate Information
 
We are located at 7 West 18th Street, 9th Floor, New York, New York, 10011 and our corporate telephone number is (212) 448-9300. Additional information can be found on our website; www.intellectns.com. Our Internet website and the information contained therein or connected thereto are not a part or incorporated into this Annual Report on Form 10-K.
 
 
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Item 1A. RISK FACTORS
 
Risk Factors
 
You should carefully read the following risk factors when you evaluate our business and the forward-looking statements that we make in this report, in our financial statements and elsewhere. Any of the following risks could materially adversely affect our business, our operating results, our financial condition and the actual outcome of matters as to which we make forward-looking statements.
 
Risks related to our lack of liquidity
 
We have minimal cash on hand and may be forced to cease operations.
 
As of June 30, 2009, we had cash and cash equivalents of approximately $271,000. We anticipate that our existing capital resources will not enable us to continue operations beyond mid-October 2009, or earlier if unforeseen events or circumstances arise that negatively affect our liquidity. If we fail to raise additional capital or obtain substantial cash inflows from potential partners by mid-October 2009, we will be forced to cease operations. We are in discussions with several potential investors concerning financing options. We cannot assure you that financing will be available in a timely manner, on favorable terms or at all.
 
We have limited capital resources and operations to date have been funded with the proceeds from equity and debt financings and proceeds from license agreements. The audit report prepared by our independent registered public accounting firm relating to our consolidated financial statements for the period ended June 30, 2009 includes an explanatory paragraph expressing the substantial doubt about our ability to continue as a going concern.
 
Even if we obtain additional financing, our business will require substantial additional investment that we have not yet secured. We cannot be sure how much we will need to spend in order to develop new products and technologies in the future. Further, we will not have sufficient resources to develop fully any new products or technologies unless we are able to raise substantial additional financing on acceptable terms or secure funds from new or existing partners. Our failure to raise capital when needed would adversely affect our business, financial condition and results of operations, and could force us to reduce or discontinue our operations at some time in the future, even if we obtain financing in the near term.
 
We have no revenues and have incurred and expect to continue to incur substantial losses. We may never earn product revenues or achieve and maintain profitability.
 
Through June 30, 2009, we have not generated any revenues other than up-front fees and milestone payments from license agreements. As a result, we have generated significant operating losses since our formation and expect to incur substantial losses and negative operating cash flows for the foreseeable future.
 
As of June 30, 2009, we had a capital deficit of approximately $19.7 million and a deficit accumulated during the development stage of our Company of approximately $42.2 million. Our net income from operations for the fiscal year ended June 30, 2009 was approximately $0.3 million and net cash used by operations was approximately $0.7 million. Our failure to achieve or maintain significant profitability has and will continue to have an adverse effect our stockholder’s equity, total assets and working capital and could negatively impact the value of our common stock.
 
Unless and until our product candidates or product candidates subject to license agreements with our licensees receive approval from the FDA and from regulatory authorities in foreign jurisdictions, we will not generate any revenues from product sales. Even if we succeed in licensing our technology to generate income, we still will be operating at a significant loss during the course of our drug development programs. We expect to continue to incur significant operating expenditures for at least the next several years and anticipate that our expenses will increase substantially in the foreseeable future. As a result, we may not be able to achieve or maintain profitability in the future.
 
We are in default under certain of our Convertible Notes.
 
As of June 30, 2009 and continuing through the date of this report, we are in default on convertible promissory notes with an aggregate carrying value of $5.3 million. On October 21, 2008, one of our note holders filed a complaint in the United States District Court of the Southern District of New York claiming that approximately $541,000 of principal and accrued interest was past due and that he was entitled to a money judgment against us for all amounts due under the note, plus attorney’s fees, costs and disbursements.  The matter was settled on April 22, 2009 and the note holder released our company from all of the claims set forth above.  In connection with the settlement, Margie Chassman, one of our principal stockholders, purchased the note from the note holder and agreed to cancel it.
 
 
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Risks related to our business
 
We are in the early stages of product development and we may never successfully develop and commercialize any products.
 
We are a development stage biopharmaceutical company and are in the early stages of developing our products. We have not yet successfully developed any of our product candidates. We may fail to develop any products, to implement our business model and strategy successfully or to revise our business model and strategy should industry conditions and competition change. Even if we successfully develop one or more of our product candidates, the products may not generate sufficient revenues to enable us to be profitable. Furthermore, we cannot make any assurances that we will be successful in addressing these risks. If we are not, our business, results of operations and financial condition will be materially adversely affected.
 
We plan to develop our products by collaborating with third-parties and we face substantial competition in this endeavor. If we are not successful in establishing such third party collaboration arrangements, we may not be able to successfully develop and commercialize our products.
 
Our business strategy includes finding larger pharmaceutical companies with which to collaborate to support the research, development and commercialization of our product candidates. In trying to attract corporate partners to collaborate with us in the research, development and commercialization process, we face serious competition from other small biopharmaceutical companies. If we are unable to enter into such collaboration arrangements, our ability to proceed with the research, development, manufacture or sale of product candidates may be severely limited. Even if we do enter into such collaborations, our partners may not succeed in developing or commercializing product candidates.
 
We have a limited operating history and we may not be able to successfully develop our business.
 
We were incorporated in Delaware in April 2005 and began operations in June 2005 when we acquired assets from Mindset Biopharmaceuticals (USA), Inc. (“Mindset”). Our limited operating history makes predicting our future operating results difficult. As a biopharmaceutical company with a limited history, we face numerous risks and uncertainties in the competitive market for Alzheimer’s disease and central nervous system related drugs. In particular, we have not proven that we can develop drugs in a manner that enables us to be profitable and meet regulatory, strategic partner and customer requirements; develop and maintain relationships with key vendors and strategic partners that will be necessary to enhance the market value of our product candidates; raise sufficient capital in the public and/or private markets; or respond effectively to competitive pressures.
 
If we are unable to accomplish these goals, our business is unlikely to succeed. Even if we are able to license our technology to generate income we still will be operating at a significant loss during the course of our drug development programs.
 
OXIGON is our only product candidate in clinical trials and if we are unable to proceed with clinical trials for our other product candidates or if the future trials are unsuccessful or significantly delayed we may not be able to develop and commercialize our products.
 
None of our product candidates has reached clinical trial stages in the United States. On December 1, 2005, we began Phase I clinical trials for OXIGON in the Netherlands. These trials were completed on November 15, 2006. We intend to submit an Investigational New Drug Application to the FDA for OXIGON and begin Phase II trials in the United States shortly after obtaining sufficient financial resources to support such activities. Additionally, we anticipate starting Phase I trials for IN-N01, our monoclonal therapeutic antibody, when we obtain sufficient financial resources to support such trials. Successful development and commercialization of our product candidates are dependent on, among other factors, the successful outcome of future studies needed to make a final selection of drug candidates; successful manufacture and formulation of drug products; additional preclinical studies to establish efficacy and safety across species; successful outcome of future clinical trials that establish both safety and efficacy; receipt of regulatory approval for our product candidates; raising substantial additional financing; and establishing any strategic partnerships that would result in a license of our technology. There can be no assurance that we or any future partners will successfully develop and commercialize our product candidates.
 
If we or future partners fail to obtain or maintain the necessary United States or worldwide regulatory approvals for our product candidates or those subject to license agreements with us, such products will not be commercialized.
 
The success of our business depends on our or any future partner’s ability to put product candidates through rigorous, time-consuming and costly clinical testing, and to obtain regulatory approval for those products. Government regulations in the United States and other countries significantly impact the research and development, manufacture and marketing of drug product candidates. We or any of our future partners will require FDA approval to commercialize product candidates in the United States and approvals from similar regulatory authorities in foreign jurisdictions to commercialize our product candidates, or those subject to license agreements with us, in those jurisdictions.
 
 
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The FDA and other regulatory authorities have substantial discretion in the drug approval process and may either refuse to accept an application for any product candidates or may decide after review of the application(s) that the data is insufficient to allow approval of the relevant product(s). If the FDA or other regulatory authorities do not accept or approve the application(s), they may require us or our partners to conduct additional preclinical testing, clinical trials or manufacturing studies and submit those data before they will reconsider the application or require us or our partners to perform post-marketing studies even after a product candidate is approved for commercialization. Even if we or our partners comply with all FDA and other regulatory requests, the FDA may ultimately reject the product candidates or the New Drug Applications. We cannot be certain that we or any of our future partners will ever obtain regulatory clearance of any of our product candidates or those subject to license agreements with us. Failure to obtain FDA approval will severely undermine our business by reducing our potential number of salable products and, therefore, corresponding product revenues. Also, the FDA might approve one or more of our or our future partner’s product candidates, but also might approve competitors’ products possessing characteristics that offer their own treatment, cost or other advantages.
 
In addition, even if our current product candidates and any additional product candidates we pursue in the future are marketed, the products and our manufacturers are subject to continual review by the FDA and other applicable regulatory authorities. At any stage of development or commercialization, the discovery of previously unknown problems with our product candidates, our manufacturing or the manufacturing by third-party manufacturers may result in restrictions on our product candidates and any other products we may in-license, including withdrawal of the product from the market. Foreign regulatory approval processes generally include all of the risks associated with the FDA approval procedures described above.
 
If we are not able to maintain our current license rights or obtain additional licenses, our business will suffer.
 
We use technologies that we do not own in the development and configuration of our product candidates. There can be no assurance that any of the current contractual arrangements between us and third parties or between our strategic partners and other third parties, will be continued or not breached or terminated early. In the future, we may also require technologies to which we do not currently have any rights. We may not be able to obtain these technologies on acceptable terms if at all. Any such additional licenses may require us to pay royalties or other fees to third parties, which would have an adverse effect on our potential revenues and gross margin.
 
If we fail to make payments under or otherwise breach our key license agreements, they could be terminated and we would lose our rights to such technologies. This loss of rights could materially adversely affect our ability to develop and commercialize our product candidates and our ability to generate revenues.
 
Our license agreements related to OXIGON with each of New York University and South Alabama Medical Science Foundation require us to pay royalties and other fees and also to make payments when certain milestones are reached. In addition, our license agreements with each of New York University and South Alabama Medical Science Foundation require us to take steps to commercialize the licensed technology in a timely manner. We have not as of yet generated any revenues or successfully developed or commercialized any of our products. If we are not able to generate revenues or develop and commercialize our products in the future we may be in breach of our key licensing agreements and our licensing parties may terminate the agreements. If a licensor terminates an agreement, we could lose our right to commercially exploit the intellectual property underlying OXIGON or certain of our immunotherapy programs, which would adversely affect our ability to develop commercial products.
 
Our operating results may significantly fluctuate from quarter-to-quarter and year-to-year.
 
Through the date of this report, we have generated minimal revenues. If and when we do, we expect that a significant portion of our revenues for the foreseeable future will be comprised of license fees, royalties and milestone payments. The timing of revenue in the future will depend largely upon the signing of collaborative research and development or technology licensing agreements or the licensing of our product candidates for further development and payment of fees, milestone payments and royalties. In any one fiscal quarter we may receive multiple or no payments from our collaborators. As a result, operating results may vary substantially from quarter-to-quarter and, thus, from year-to-year. Revenue for any given period may be greater or less than revenue in the immediately preceding period or in the comparable period of the prior year.  Therefore, investors should not rely on our revenue or other operating results from one or more quarters as being indicative of our revenue or other operating results for any future period.
 
 
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We have no research facilities. If we are not successful in developing our own research facilities or entering into research agreements with third party providers, our development efforts and clinical trials may be delayed.
 
Currently, we have no scientific research laboratory. We have shut down our Israeli research laboratory and sold the majority of the equipment due to lack of sufficient funds to support the research operation. We have dismissed all remaining employees in Israel.  In order to resume our research efforts, we must recruit additional scientists and rebuild or utilize third party laboratory facilities. We cannot be sure that we will raise sufficient funds to do any of the above. Failure to accomplish these tasks would impede our efforts to develop our existing product candidates and conduct research to identify future product candidates, which would adversely affect our ability to generate revenue.
 
We have no manufacturing capabilities. If we are not successful in developing our own manufacturing capabilities or entering into third party manufacturing agreements or if third-party manufacturers fail to devote sufficient time and resources to our concerns, our clinical trials may be delayed.
 
Currently, we have no internal manufacturing capabilities for any of our product candidates. Our clinical batch supplies are manufactured by a third party manufacturer based in Switzerland and other countries. We have sufficient drug product to perform the necessary non-clinical studies in support of Phase II and have the necessary “know-how” to manufacture OXIGON. In order to continue the clinical development process for OXIGON and our other product candidates, however, we must continue to rely on third parties to manufacture these product candidates. There can be no assurance that any of the current contractual arrangements between us and third party manufacturers will be continued or not breached or terminated early. There can be no assurance that we can identify and enter into contracts with replacement manufacturers if our current manufacturing arrangements are terminated. In addition, reliance on third party manufacturers could expose us to other risks, such as substandard performance, difficulties in achieving volume production and poor quality control or noncompliance with FDA and other regulatory requirements. If we decide to manufacture one or more product candidates ourselves, we would incur substantial start-up expenses and need to acquire or build facilities and hire additional personnel.
 
Our product candidates are subject to the risk of failure inherent in the development of products based on new and unproved technologies.
 
Because our product candidates and those of any future partner, which are the subject of license agreements with us, are and will be based on new and unproven technologies, they are subject to risk of failure. These risks include the possibility that our new approaches will not result in any products that gain market acceptance; a product candidate will prove to be unsafe or ineffective, or will otherwise fail to receive and maintain regulatory clearances necessary for marketing; a product, even if found to be safe and effective, could still be difficult to manufacture on the large scale necessary for commercialization or otherwise not be economical to market; a product could unfavorably interact with other types of commonly used medications, thus restricting the circumstances in which it may be used; proprietary rights of third parties will preclude us from manufacturing or marketing a new product; or third parties could market superior or more cost-effective products. As a result, our activities, either directly or through corporate partners, may not result in any commercially viable products.
 
In order to achieve successful sales of our product candidates or those developed by any of our future partners, the product candidates need to be accepted in the healthcare market by healthcare providers, patients and insurers. Lack of such acceptance will have a negative impact on any future sales.
 
Our future success is dependent upon the acceptance of our product candidates by health care providers, patients and health insurance companies, Medicare and Medicaid. Such market acceptance, if it were to occur, would depend on numerous factors, many of which are not under our control including regulatory approval; product labeling; safety and efficacy of our products; availability, safety, efficacy and ease of use of alternative products and treatments; the price of our drugs relative to the price of alternative products and treatments; and achieving reimbursement approvals from Medicare, Medicaid and private insurance providers.
 
We cannot guarantee that any of our product candidates or those developed by any of our future partners, which are subject to license agreements with us, would achieve market acceptance. Additionally, we cannot guarantee that third-party payors, hospitals or health care administrators would accept any of the products we manufacture or in-license on a large-scale basis. We also cannot guarantee that we would be able to obtain approvals for indications and labeling for our products that will facilitate their market acceptance. Furthermore, unanticipated side-effects, patient discomfort, defects or unfavorable publicity of our drugs or other therapies based on a similar technology, could have a significant adverse effect on our effort to commercialize our lead or any subsequent drug candidates.
 
 
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Our ability to generate product revenues will be diminished if our drugs sell for inadequate prices or patients are unable to obtain adequate levels of reimbursement.
 
Our collaborator’s ability to commercialize our drugs will depend in part on the extent to which reimbursement will be available from government and health administration authorities, private health maintenance organizations and health insurers, and other health care payors. Significant uncertainty exists as to the reimbursement status of newly approved health care products. Health care payors, including Medicare, routinely challenge the prices charged for medical products and services. Government and other health care payors increasingly attempt to contain health care costs by limiting both coverage and the level of reimbursement for drugs, which may limit our commercial opportunity. Even if our product candidates are approved by the FDA, insurance coverage may not be available and reimbursement levels may be inadequate to cover our drugs. Proposals currently being considered by to reform the U.S. health insurance system create additional uncertainty and risk that any drugs that we or our collaborators seek to commercialize may not receive adequate coverage or reimbursement.  If government and other health care payors do not provide adequate coverage and reimbursement levels for our product candidates, the post-approval market acceptance of our products could be diminished.
 
Our product candidates may be subject to future product liability claims. Such product liability claims could result in expensive and time-consuming litigation and payment of substantial damages.
 
The testing, production, marketing, sale and use of products using our technology is unproven as of yet and there is risk that product liability claims may be asserted against us if it is believed that the use or testing of our product candidates have caused adverse side effects or other injuries. In addition, providing diagnostic testing and therapeutics entails an inherent risk of professional malpractice and other claims. Claims, suits or complaints relating to the use of products utilizing our technology may be asserted against us in the future by patients participating in clinical trials of our product candidates or following commercialization of products. If a product liability claim asserted against was successful, we also could also be required to limit commercialization of our product candidates or completely withdraw a product from the market. Regardless of merit or outcome, claims against us would likely result in significant diversion of our management’s time and attention, expenditure of large amounts of cash on legal fees, expenses and damages and a decreased demand for our products and services. We currently do not have any insurance coverage to protect us against product liability claims during clinical trials of product candidates and we may not be able to acquire or maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us during clinical trials of any product candidates or following commercialization of any products
 
Our future collaborators may compete with us or have interests which conflict with ours. This may restrict our research and development efforts and limit the areas of research in which we intend to expand.
 
Large pharmaceutical companies that we seek to collaborate with may have internal programs or enter into collaborations with our competitors for products addressing the same medical conditions targeted by our technologies. Thus, our collaborators may pursue alternative technologies or product candidates in order to develop treatments for the diseases or disorders targeted by our collaborative arrangements. Our collaborators may pursue these alternatives either on their own or in collaboration with others, including our competitors. Depending on how other product candidates advance, a corporate partner may slow down or abandon its work on our product candidates or terminate its collaborative arrangement with us in order to focus on these other prospects.
 
If any conflicts arise, our future collaborators may act in their own interests, which may be adverse to ours. In addition, in our future collaborations, we may be required to agree not to conduct any research that is competitive with the research conducted under our future collaborations. Our future collaborations may have the effect of limiting the areas of research that we may pursue. Our collaborators may be able to develop products in related fields that are competitive with the products or potential products that are the subject of these collaborations.
 
We do not have control of our outside scientific and clinical advisors. They may pursue objectives which are contrary to our interest, which could impede our research and development efforts.
 
We work with scientific and clinical advisors at academic and other institutions who are experts in the field of Alzheimer’s disease and other central nervous system disorders and diseases caused by oxidative stress. Our advisors assist us in our research and development efforts and advise us with respect to our clinical trials for OXIGON and our planned clinical trials for our other product candidates. However, our advisors are not our employees and they may have other commitments that would limit their future availability to us. Accordingly, we may lose their services, which may delay the clinical development of our drug candidates and impair our reputation in the industry.

 
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If we fail to obtain, apply for, adequately prosecute to issuance, maintain, protect or enforce patents for our inventions and products, the value of our intellectual property rights and our ability to license, make, use or sell our products would materially diminish or could be eliminated entirely.
 
Our success, competitive position and future revenues will depend in part on our ability to obtain and maintain patent protection for our inventions and product candidates and for methods, processes and other technologies, as well as our ability to preserve our trade secrets, prevent third parties from infringing on our proprietary rights or invalidating our patents and operate without infringing the proprietary rights of third parties.
 
Our patent position is uncertain and involves complex legal and factual questions for which important legal principles are changing and/or unresolved. Because we rely heavily on patent protection and others have sought patent protection for technologies similar to ours, the risks are particularly significant and include the following:
 
 
·
The patent offices may not grant claims of our pending applications or future applications and may not grant patents having claims of meaningful scope to protect adequately our technologies, processes and products.
 
 
·
We may not be able to obtain patent rights to compositions, products, treatment methods or manufacturing processes that we may develop or license from third parties.
 
 
·
Even if our patents are granted, our freedom to operate and to develop products may be restricted or blocked by patents of our competitors.
 
 
·
Some of the issued patents we now license or any patents which are issued to us in the future may be determined to be invalid and/or unenforceable, or may offer inadequate protection against competitive products.
 
 
·
If we have to defend the validity of the patents that we have in-licensed or any future patents or protect against third party infringements, the costs of such defense are likely to be substantial and we may not achieve a successful outcome.
 
 
·
In the event any of the patents we have in-licensed are found to be invalid or unenforceable, we may lose our competitive position and may not be able to receive royalties for products covered in part or whole by that patent under license agreements. Further, competitors may be free to offer copies of our products if such patents are found to be invalid or unenforceable.
 
 
·
Others may obtain patents claiming aspects similar to those covered by our patents and patent applications, which could enable them to make and sell products similar to ours.
 
 
·
We may be estopped from claiming that one or more of our patents is infringed due to amendments to the claims and/or specification, or as a result of arguments that were made during prosecution of such patents in the United States Patent and Trademark Office, or by virtue of certain language in the patent application. The estoppel may result in claim limitation and/or surrender of certain subject matter to the public domain or the ability of competitors to design around our claims and/or avoid infringement of our patents. If our patents or those patents for which we have license rights become involved in litigation, a court could revoke the patents or limit the scope of coverage to which they are entitled.
 
 
·
Several bills affecting patent rights have been introduced in the United States Congress, and significant rule changes are being considered by the Patent and Trademark Office. These bills and rule changes address various aspects of patent law and practice, including, conversion from a first-to-invent to a first-to-file standard and the concomitant implementation of procedures for opposing a granted patent and changes in (i) the permitted number of continuation applications, (ii) the timing for filing divisional applications, (iii) the rules for providing the Patent and Trademark Office with information material to the patentability of an invention, (iv) the scope of subject matter that may be claimed in a single application, (v) the number of claims permitted in an application, and (vi) the method of calculating damages for patent infringement. It is not certain whether any of these bills will be enacted into law, what form new laws and regulations may take, or what the result of Patent and Trademark Office rule changes will be. Accordingly, the effect of these changes on our intellectual property estate is uncertain.
 
If we fail to obtain and maintain adequate patent protection and trade secret protection for our drug candidates, proprietary technologies and their uses, we could lose any competitive advantage and the competition we face could increase, thereby reducing our potential revenues and adversely affecting our ability to attain or maintain profitability.

 
24

 
 
A dispute concerning the infringement or misappropriation of our proprietary rights or the proprietary rights of others could be time consuming and costly and an unfavorable outcome could harm our business.
 
There is significant litigation in the biotechnology field regarding patents and other intellectual property rights. Biotechnology companies of roughly our size and financial position have gone out of business from the cost of patent litigation and from losing a patent litigation. We may be exposed to future litigation by third parties based on claims that our drug candidates, technologies or activities infringe the intellectual property rights of others. Although we try to avoid infringement, there is the risk that we will use a patented technology owned or licensed by another person or entity and/or be sued for infringement of a patent owned by a third party. Under current United States law, patent applications are confidential for 18 months following their priority filing date and may remain confidential beyond 18 months if no foreign counterparts are applied for in jurisdictions that publish patent applications. There are many patents relating to specific genes, nucleic acids, polypeptides or the uses thereof to treat Alzheimer’s disease and other central nervous system diseases. In some instances, a patentee could prevent us from using patented genes or polypeptides for the identification or development of drug compounds. If our products or methods are found to infringe any patents, we may have to pay significant damages and royalties to the patent holder or be prevented from making, using, selling, offering for sale or importing such products or from practicing methods that employ such products.
 
In addition, we may need to resort to litigation to enforce a patent issued or licensed to us, protect our trade secrets or determine the scope and validity of third-party proprietary rights. Such litigation could be expensive and there is no assurance that we would be successful. From time to time, we may hire scientific personnel formerly employed by other companies involved in one or more fields similar to the fields in which we are working. Either these individuals or we may be subject to allegations of trade secret misappropriation or similar claims as a result of their prior affiliations. If we become involved in litigation, it could consume a substantial portion of our managerial and financial resources, regardless of whether we win or lose. As a result, we could be prevented from commercializing current or future products or methods.
 
Confidentiality agreements with employees and others may not adequately prevent disclosure of our trade secrets and other proprietary information and may not adequately protect our intellectual property.
 
Our success also depends upon the skills, knowledge and experience of our scientific and technical personnel, our consultants and advisors as well as our partners, collaborators, licensors and contractors. Because we operate in a highly competitive technical field of drug discovery, we rely in part on trade secrets to protect our proprietary technology and processes. However, trade secrets are difficult to protect. We enter into confidentiality and intellectual property assignment agreements with our corporate partners, employees, consultants, outside scientific collaborators, sponsored researchers and other advisors. These agreements generally require that the receiving party keep confidential and not disclose to third parties all confidential information developed by the receiving party or made known to the receiving party by us during the course of the receiving party’s relationship with us. These agreements also generally provide that inventions conceived by the receiving party in the course of rendering services to us will be our exclusive property. However, these agreements may be breached and may not effectively assign intellectual property rights to us. Our trade secrets also could be independently discovered by competitors, in which case we would not be able to prevent use of such trade secrets by our competitors. The enforcement of a claim alleging that a party illegally obtained and was using our trade secrets could be difficult, expensive and time consuming and the outcome would be unpredictable. In addition, courts outside the United States may be less willing to protect trade secrets. The failure to obtain or maintain meaningful trade secret protection could adversely affect our competitive position.
 
Certain of our product development programs depend on our ability to maintain rights under our licensed intellectual property. If we are unable to maintain such rights, our research and development efforts will be impeded and our business and financial condition will be negatively impacted.
 
We have licensed intellectual property, including patents, patent applications and know-how, from universities and others, including intellectual property underlying our OXIGON product development program. Some of our product development programs depend on our ability to maintain rights under these licenses. Under the terms of such license agreements, we are generally obligated to, among other things, exercise commercially reasonable efforts in the development and marketing of these technologies; make specified royalty and milestone payments to the party from which we have licensed the technology; reimburse patent costs to the licensors; enforce the underlying intellectual property against unauthorized third parties; and pay development milestones, for example, on the commencement of clinical trials and filing of a New Drug Application and pay a royalty on product sales.

 
25

 
 
Each licensor has the power to terminate its agreement if we fail to meet our obligations under that license. We may not be able to meet our obligations under these license agreements. Furthermore, these obligations may conflict with our obligations under other agreements. If we default under any of these license agreements, we may lose our right to market and sell any products based on the licensed technology. Losing marketing and sales rights would have a material negative effect on our business, financial condition and results of operations.
 
The United States government holds rights that may permit it to license to third parties technology that we currently hold the exclusive right to use. We may lose our rights to such licenses if the government chooses to exercise its rights.
 
The United States government holds rights in inventions that were conceived or reduced to practice under a government-funded program. This applies to aspects of our OXIGON technology, which has been licensed to us by third-party licensors who have received government funding. These government rights include a non-exclusive, royalty-free, worldwide license for the government to practice the invention or to have the invention practiced by a third party for any governmental purpose. In addition, the United States government has the right to grant licenses to others under any of these inventions if the government determines that adequate steps have not been taken to commercialize such inventions; the grant is necessary to meet public health or safety needs; or the grant is necessary to meet requirements for public use under federal regulations.
 
The United States government also has the right to take title to a subject invention made with government funding if we fail to disclose the invention within specified time limits. The United States government may acquire title in any country in which we do not file a patent application for inventions made with government funding within specified time limits. We may lose our right to the licensed technologies if we fail to meet the obligations required by the government, or if the government decides to exercise its rights
 
We may be subject to litigation related to our acquisition of assets from Mindset.
 
On June 23, 2005, Intellect acquired certain intellectual property from Mindset Biopharmaceuticals (USA), Inc.  (“Mindset”).  All of the significant creditors and all but one of the shareholder groups of Mindset consented to the transaction.  That shareholder group was comprised of several entities associated with MPM Capital LLC.  During or about mid-2008, MPM Capital LLC and its affiliates (collectively “MPM”) and Intellect agreed to toll claims which MPM might wish to assert arising out of or in connection with the acquisition transaction until December 2008. The parties subsequently extended the tolling agreement until June 2009.  The tolling agreement expired at the end of June 2009 without the initiation by MPM of any action or arbitration against Intellect. Although Intellect does not believe that MPM has any valid and timely claims against Intellect, there can be no assurance that MPM will not assert claims against Intellect in the future.  Any such claims could be costly and time consuming for Intellect to defend, regardless of their validity or merit.
 
Risks related to our industry
 
Our technology may become obsolete or lose its competitive advantage.
 
The pharmaceuticals business is very competitive, fast moving and intense, and we expect it to be increasingly so in the future. Other companies have developed and are developing Alzheimer’s disease drugs that, if not similar in type to our drugs, are designed to address the same patient or subject population. Therefore, there is no assurance that our product candidates or those being developed by our collaborators or licensees will be the best, the safest, the first to market, or the most economical to make or use. If competitors’ products are superior to ours or our collaborators’ or licensees’ products, for whatever reason, our products may become obsolete. In particular, our competitors could develop and market Alzheimer’s disease therapeutic products that are more effective, have fewer side-effects or are less expensive than our current or future product candidates. Such products, if successfully developed, could render our technologies or product candidates obsolete or non-competitive.
 
Clinical trials are expensive, time-consuming and difficult to design and implement.
 
Human clinical trials are expensive and difficult to design and implement, in part because they are subject to rigorous regulatory requirements. Further, the medical, regulatory and commercial environment for pharmaceutical products changes quickly and often in ways that we may not be able to accurately predict. The clinical trial process also is time-consuming and we do not know whether planned clinical trials will begin on time or whether we will complete any of our clinical trials on schedule or at all. We estimate that clinical trials of our product candidates will take at least several more years to complete. Significant delays may adversely affect our financial results and the commercial prospects for our product candidates and any other products we may in-license and delay or impair our ability to become profitable. Product development costs to our potential collaborators and us will increase if we have delays in testing or approvals or if we need to perform more or larger clinical trials than planned. Furthermore, as failure can occur at any stage of the trials, we could encounter problems that cause us to abandon or repeat clinical trials. The commencement and completion of clinical trials may be delayed by several factors, including changes to applicable regulatory requirements; unforeseen safety issues; determination of dosing issues; lack of effectiveness in the clinical trials; lack of sufficient patient enrollment; slower than expected rates of patient recruitment; inability to monitor patients adequately during or after treatment; inability or unwillingness of medical investigators to follow our clinical protocols; inability to maintain a supply of the investigational drug in sufficient quantities to support the trials; and suspension or termination of clinical trials for various reasons, including noncompliance with regulatory requirements or changes in the clinical care protocols and standards of care within the institutions in which our trials take place.
 

 
26

 
 
In addition, we, or the FDA or other regulatory authorities, may suspend our clinical trials at any time if it appears that participants are being exposed to unacceptable health risks or if the FDA finds deficiencies in our Investigational New Drug Application submissions or the conduct of our trials. We may be unable to develop marketable products. In addition, the competition for clinical institutions that act as investigators in clinical trials is intense. There can be no assurance that we will be able to conclude appropriate contracts with such institutions. Even if we are successful, slow recruitment of patients could cause significant delay in our development plans.
 
Problems during our clinical trial procedures could have serious negative impacts on our business.
 
FDA approval requires significant research and animal tests, which are referred to as preclinical studies, as well as human tests, which are referred to as clinical trials. Similar procedures are required in foreign countries. If we experience unexpected, inconsistent or disappointing results in connection with a clinical trial, our business will suffer.
 
If any of the following events arise during our clinical trials or data review, we expect it would have a serious negative effect on our results of operations and ability to commercialize a product candidate and could subject us to significant liabilities:
 
 
·
Any of our product candidates may be found to be ineffective or to cause harmful side-effects, including death;
 
 
·
Our clinical trials for any of product candidates may take longer than anticipated, for any of a number of reasons, including a scarcity of subjects that meet the physiological or pathological criteria for entry into the study, a scarcity of subjects that are willing to participate in the trial, or data and document review;
 
 
·
The reported clinical data for any of our product candidates may change over time as a result of the continuing evaluation of patients or the current assembly and review of existing clinical and preclinical information;
 
 
·
Data from various sites participating in the clinical trials for each of our product candidates may be incomplete or unreliable, which could result in the need to repeat the trial or abandon the project; and
 
 
·
The FDA and other regulatory authorities may interpret our data differently than we do which may delay or deny approval.
 
The results of our clinical trials may not support our product candidate claims.
 
Even if our clinical trials are completed as planned, we cannot be certain that their results will support our product candidate claims or that the FDA or government authorities in other countries will agree with our conclusions regarding such results. Success in preclinical testing and early clinical trials does not ensure that later clinical trials will be successful and the results of later clinical trials often do not replicate the results of prior clinical trials and preclinical testing. In addition, our clinical trials involve a small patient population. Because of the small sample size, the results of these clinical trials may not be indicative of future results in a larger and more diverse patient population. The clinical trial process may fail to demonstrate that our product candidates are safe for humans and effective for indicated uses. This failure could cause us to abandon a product candidate and may delay development of other product candidates. Any delay in, or termination of, our clinical trials will delay the filing of our New Drug Applications with the FDA and, ultimately, our ability to commercialize our product candidates and generate product revenues.
 
27

 
If our competitors produce generic substitutes of our product candidates, we may face pricing pressures and lose sales.

The United States Food, Drug and Cosmetic Act and FDA regulations and policies provide incentives to manufacturers to challenge patent validity or create modified, non-infringing versions of a drug in order to facilitate FDA approval of an Abbreviated New Drug Application for generic substitutes. These same incentives also encourage manufacturers to submit New Drug Applications, known as 505(b)(2) Applications, which rely on literature and clinical data not originally obtained by the drug sponsor. In light of these incentives and especially if our product candidates and any other products we may in-license are commercially successful, other manufacturers may submit and gain successful expedited approval for either an Abbreviated New Drug Application or a 505(b)(2) Application that will compete directly with our products. Competitors may be able to offer such generic substitutes at a discount to the prices for our products.
 
Physicians and patients may not accept and use our drugs.
 
Even if the FDA approves our product candidates or those of our licensees, which are subject to licenses with us, physicians and patients may not accept and use them. Acceptance and use of our product candidates, or any of our future drugs, will depend upon a number of factors including, perceptions by members of the health care community, including physicians, about the safety and effectiveness of our drugs and the use of controlled substances; cost-effectiveness of our drugs relative to competing products;  availability of reimbursement for our product candidates and any other products we may in-license from government or other health care payors; and effectiveness of marketing and distribution efforts by us and our licensees and distributors, if any. The failure of any of these drugs to find market acceptance would harm our business.
 
Risks related to management
 
We rely on key executive officers and scientific and medical advisors and consultants, and their knowledge of our business and technical expertise would be difficult to replace.
 
We are highly dependent on Dr. Daniel G. Chain, our Chief Executive Officer, Chairman of the Board of Directors, and Elliot Maza, our President, Chief Financial Officer and Director. We do not have “key person” life insurance. We have entered into employment agreements with each of the foregoing employees. The loss of Dr. Chain or Elliot Maza may have an adverse effect on our ability to license or develop our technologies in a timely manner.
 
In addition, we rely on the members of our Scientific Advisory Board and our Clinical Advisory Board to assist us in formulating our research and development strategy. All of the members of our Scientific Advisory Board and our Clinical Advisory Board have other jobs and commitments and may be subject to non-disclosure obligations that may limit their availability to work with us.
 
Although we intend to outsource our development programs, we may need to hire additional qualified personnel with expertise in preclinical testing, clinical research and testing, government regulation, formulation and manufacturing and sales and marketing. We will require experienced scientific personnel in many fields in which there are a limited number of qualified personnel and we compete for qualified individuals with numerous biopharmaceutical companies, universities and other research institutions and other emerging entrepreneurial companies. Competition for such individuals, particularly in the New York City area, where our offices are headquartered, is intense and we cannot be certain that our search for such personnel will be successful. Furthermore, we are competing for employees against companies that are more established than we are and have the ability to pay more cash compensation than we do. As a result, depending upon the success and the timing of clinical tests, we may continue to experience difficulty in hiring and retaining highly skilled employees, particularly scientists. If we are unable to hire and retain skilled scientists, our business, financial condition, operating results and future prospects could be materially adversely affected.
 
Certain of our directors and scientific advisors have relationships with other biotechnology companies that may present potential conflicts of interest.
 
Our board members and officers currently and hereafter may serve, from time to time, as officers or directors of other biotechnology companies and, accordingly, from time to time, their duties and obligations to us may conflict with their duties and obligations to other entities. In addition, our board members have other jobs and commitments and may be subject to non-disclosure obligations that may limit their availability to work with us.
 
Risks related to our common stock
 
Shares of our stock suffer from low trading volume and wide fluctuations in market price.
 
Our common stock is currently quoted on the Over the Counter Bulletin Board trading system under the symbol ILNS. An investment in our common stock currently is highly illiquid and subject to significant market volatility. This illiquidity and volatility may be caused by a variety of factors including low trading volume and market conditions.

 
28

 

In addition, the value of our common stock could be affected by actual or anticipated variations in our operating results; changes in the market valuations of other similarly situated companies providing similar services or serving similar markets; announcements by us or our competitors of significant acquisitions, strategic partnerships, collaborations, joint ventures or capital commitments; adoption of new accounting standards affecting our industry; additions or departures of key personnel; introduction of new products or services by us or our competitors; actual or expected sales of our common stock or other securities in the open market; the significant amount of outstanding convertible preferred stock and notes issued by us, which have priority and preferences over our common stock; the “market overhang” of a significant number of shares of our common stock that would be issued upon the exercise of outstanding stock options and warrants or the conversion of outstanding preferred stock or notes, especially if “full ratchet” anti-dilution provisions in those securities take effect; conditions or trends in the market in which we operate; and other events or factors, many of which are beyond our control.
 
Stockholders may experience wide fluctuations in the market price of our securities. These fluctuations may have an extremely negative effect on the market price of our securities and may prevent a stockholder from obtaining a market price equal to the purchase price such stockholder paid when the stockholder attempts to sell our securities in the open market. In these situations, the stockholder may be required either to sell our securities at a market price which is lower than the purchase price the stockholder paid, or to hold our securities for a longer period of time than planned. An inactive market may also impair our ability to raise capital by selling shares of capital stock and may impair our ability to acquire other companies by using common stock as consideration or to recruit and retain managers with equity-based incentive plans.
 
We cannot assure you that our common stock will become listed on the American Stock Exchange, Nasdaq or any other securities exchange.
 
We plan to seek listing of our common stock on the American Stock Exchange or Nasdaq. However, we currently fall far below the initial listing standards of those exchanges and there are no assurances that we will be able to meet the initial listing standards of either of those or any other stock exchange, or that we will be able to maintain a listing of our common stock on either of those or any other stock exchange. Until our common stock is listed on the American Stock Exchange or Nasdaq or another stock exchange, we expect that our common stock will continue to trade on the Over-The-Counter Bulletin Board, where an investor may find it difficult to dispose of our shares of common stock. In addition, we would be subject to an SEC rule that, if we failed to meet the criteria set forth in such rule, imposes various requirements on broker-dealers who sell securities governed by the rule to persons other than established customers and accredited investors. Consequently, this SEC rule may deter broker-dealers from recommending or selling the common stock, which may further affect its liquidity. This circumstance could also make it more difficult for us to raise additional capital in the future.
 
The concentrated ownership of our capital stock may have the effect of delaying or preventing a change in control of our company.
 
Our directors, officers, principal stockholders and their affiliates beneficially own more than 50% of our outstanding common stock. The interests of our directors, officers, principal stockholders and their affiliates may differ from the interests of other stockholders. Our directors, officers, principal stockholders and their affiliates will be able to exercise significant influence over all matters requiring stockholder approval, including the election of directors, amendments to our certificate of incorporation and certificates of designations for preferred stock and approval of mergers, acquisitions and other significant corporate transactions.
 
We will continue to incur increased costs as a result of being an operating public company.
 
As a public operating company, we incur significant legal, accounting and other expenses that we did not incur as a private company. If our stock becomes listed on Nasdaq or another major exchange or if our total assets exceed $10 million at the end of any fiscal year, we will also incur additional compliance expenses. It may be time consuming, difficult and costly for us to develop and implement the additional internal controls, processes and reporting procedures required by the Sarbanes-Oxley Act of 2002, SEC proxy rules, other government regulations affecting public companies and/or stock exchange compliance requirements. We may need to hire additional financial reporting, internal auditing and other finance staff in order to develop and implement appropriate additional internal controls, processes and reporting procedures. In addition, we incur increased costs associated with our public company reporting requirements.

 
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The regulatory background of the spouse of one of our founding principal stockholders may make it more difficult for us to obtain listing on Nasdaq or another securities exchange.
 
Margaret Chassman is one of our founding principal stockholders and is the spouse of Mr. David Blech. Mr. Blech has provided significant consulting services to us. He has been subject to certain regulatory proceedings, which may make our listing on a securities exchange difficult. In May 1998, David Blech pled guilty to two counts of criminal securities fraud and, in September 1999, he was sentenced by the United States District Court for the Southern District of New York to five years probation, which was completed in September 2004. Mr. Blech also settled administrative charges by the SEC in December 2000 arising out of the collapse in 1994 of D. Blech & Co., of which Mr. Blech was president and the sole stockholder. The settlement prohibits Mr. Blech from engaging in future violations of the federal securities laws and from association with any broker-dealer. In addition, the District Business Conduct Committee for District No. 10 of NASD Regulation, Inc. reached a decision, dated December 3, 1996, in a matter entitled District Business Conduct Committee for District No. 10 v. David Blech, regarding the alleged failure of Mr. Blech to respond to requests by the staff of the National Association of Securities Dealers, Inc. (NASD) for documents and information in connection with seven customer complaints against various registered representatives of D. Blech & Co. The decision found that Mr. Blech failed to respond to such requests in violation of NASD rules and that Mr. Blech should, therefore, be censured, fined $20,000 and barred from associating with any member firm in any capacity. Furthermore, Mr. Blech was discharged in bankruptcy in the United States Bankruptcy Court for the Southern District of New York in March 2000. This regulatory background may delay or impede access to listing our common stock on a securities exchange.
 
Our common stock is considered “a penny stock.”
 
The SEC has adopted regulations that generally define “penny stock” to be an equity security that has a market price of less than $5.00 per share, subject to specific exemptions. The market price of our common stock is less than $5.00 per share and therefore may be a “penny stock” according to SEC rules. This designation requires any broker or dealer selling these securities to disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities. These rules may restrict the ability of brokers or dealers to sell our common stock and may affect the ability of investors to sell their shares of common stock.
 
There may be issuances of shares of preferred stock in the future that could have superior rights to our common stock.
 
We have provisions authorizing “blank check” preferred stock and we are therefore authorized to issue shares of preferred stock. Accordingly, our board of directors has the authority to fix and determine the relative rights and preferences of preferred shares, as well as the authority to issue such shares, without further stockholder approval. As a result, our board of directors could authorize the issuance of  one or more series of preferred stock that would grant to holders preferred rights to our assets upon liquidation, the right to receive dividends before dividends would be declared to common stockholders and the right to the redemption of such shares, together with a premium, prior to any redemption of the common stock. To the extent that we do issue such additional shares of preferred stock, the rights of the holders of the common stock would be impaired thereby, including without limitation, with respect to liquidation.
 
The exchange of Series B Preferred Stock for Common Stock may be challenged by existing common stockholders.
 
On or about July 10, 2007, we issued Series B Preferred Stock to certain of our common stockholders who held Series B Preferred Stock in Intellect Neurosciences (USA), Inc., prior to our merger with GlobePan Resources, Inc. in exchange for their common stock in Intellect Neurosciences, Inc. Our Board of Directors determined that this exchange is in the best interest of our company and its shareholders and recommended that the shareholders approve this exchange. More than two thirds of our common stockholders have approved the exchange. However, some common shareholders may object to the exchange of common stock and issuance of Series B Preferred Stock.
 
We have never paid nor do we expect in the near future to pay dividends.
 
We have never paid cash dividends on our capital stock and do not anticipate paying any cash dividends on our common stock for the foreseeable future.
 
We and our security holders are not subject to some reporting requirements applicable to most public companies; therefore, investors may have less information on which to base an investment decision.
 
We do not have a class of securities registered under Section 12(b) or 12(g) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Therefore, we do not prepare proxy or information statements in accordance with Section 14(a) of the Exchange Act with respect to matters submitted to the vote of our security holders. Our officers, directors and beneficial owners of more than 10% of our common stock are not required to file statements of beneficial ownership on SEC Forms 3, 4 and 5 pursuant to Section 16 of the Exchange Act and beneficial owners of more than 5% of our outstanding common stock are not required to file reports on SEC Schedules 13D or 13G. Therefore, investors in our securities will not have any such information available in making an investment decision.

 
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ITEM 2.            PROPERTIES
 
We lease approximately 4,700 square feet of office space at 7 West 18th Street, 9th Floor, New York, New York, 10011. The lease expires on July 31, 2010. We sublease the majority of the space to Crenshaw Communications, Inc., a strategic public relations agency.
 
Previously, our drug discovery and drug candidate selection groups were located in Nes-Ziona, Israel in leased laboratory and office space in the Weizmann Science Park. This facility has approximately 9,600 square feet of combined office space and non-GMP research laboratories. We closed this facility during the fiscal quarter ending June 30, 2008. The lease expires on October 14, 2011. The lease is held by our wholly-owned subsidiary, Intellect Israel.  We are in the process of reaching an agreement with the landlord of the Israeli facility pursuant to which the lease will be terminated in exchange for surrender of amounts available under certain lease guarantees and an agreement by Intellect Israel to pay the landlord certain costs related to rewiring the facility, estimated at approximately $12,000.
 
ITEM 3.            LEGAL PROCEEDINGS
 
MICHAEL BRAUSER vs. INTELLECT NEUROSCIENCES, INC., DAVID BLECH and MARGIE CHASSMAN (DISMISSED).
 
As of June 30, 2009 and continuing through the date of filing of this report, we are in default on convertible promissory notes with an aggregate carrying value of $5.3 million. On October 21, 2008, one of our note holders filed a complaint in the United States District Court of the Southern District of New York claiming that approximately $541,000 of principal and accrued interest is past due and that he is entitled to a money judgment against us for all amounts due under the note, plus attorney’s fees, costs and disbursements. David Blech and Margie Chassman provided personal guarantees to this note holder guaranteeing all of our obligations under the note. Margie Chassman is one of our principal shareholders and David Blech is her husband and a consultant to the Company.  On January 5, 2009, Judge Shira A. Scheindlin issued an order setting a discovery schedule and referring the matter for mediation. On March 26, 2009, we entered into a Settlement and General Release with the note holder concerning amounts due under his note. In connection with the settlement, Margie Chassman purchased the note from the note holder and agreed to cancel it. In exchange, we issued Margie Chassman an additional Senior Note Payable (as defined in Note 7 of Notes to Consolidated Financial Statements, Convertible Promissory Notes Payable) with a face amount of $310,000 and repaid $100,000 of Notes held by Ms. Chassman. We did not issue any additional warrants to Ms. Chassman. The matter was subsequently dismissed by the court with prejudice.
 
ITEM 4.            SUBMISSION OF MATTERS to a VOTE of SECURITY HOLDERS
 
None

 
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PART II
 
ITEM 5.            MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Market Information
 
Our common stock is quoted on the Over-The-Counter (OTC) Bulletin Board under the symbol “ILNS.OB” and is not listed on any exchange. The following table sets forth the range of high and low bid prices as reported for each period indicated.
 
   
High
   
Low
 
Fiscal year ended June 30, 2009
           
             
September 30,
  $ 0.45     $ 0.20  
December 31,
    0.33       0.07  
March 31,
    0.35       0.06  
June 30,
    0.32       0.14  
                 
Fiscal year ended June 30, 2008
               
                 
September 30,
  $ 1.04     $ 0.49  
December 31,
    0.60       0.19  
March 31,
    0.85       0.26  
June 30,
    0.95       0.30  

The foregoing quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.
 
Holders
 
As of June 30, 2009, the Company had 626 common stock holders of record.
 
Dividends
 
We have never paid cash dividends on our capital stock. There are no restrictions that would limit us from paying dividends; however we do not anticipate paying any cash dividends for the foreseeable future.
 
Securities Authorized for Issuance under Equity Compensation Plans
 
The following table provides information as of June 30, 2009 about the common stock that may be issued upon the exercise of options granted to employees, consultants or members of our board of directors under all of our existing equity compensation plans, including the 2005 Stock Option Plan and the 2006 Stock Option Plan.
 
   
Number of Securities
Issuable Upon Exercise of
Outstanding Options,
Warrants and Rights
   
Weighted Average
Exercise Price of
Outstanding Options,
Warrants and Rights
   
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation
Plans
 
Plan Catergory
                 
Equity compensation plans approved by security holders
    12,405,478     $ 0.74       841,022  
Equity compensation plans not approved by security holders
                       
Total
    12,405,478     $ 0.74       841,022  

 
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ITEM 6. 
SELECTED FINANCIAL DATA
[Not applicable to smaller reporting companies]

 
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ITEM 7.              MANAGEMENTS’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements included elsewhere in this report and the information described under the caption “Risk Factors” and “Special Note Regarding Forward Looking Statements” above.
 
General
 
We are a biopharmaceutical company developing and advancing a patent portfolio related to specific therapeutic approaches for treating Alzheimer’s disease (“AD”). In addition, we are developing proprietary drug candidates to treat AD and other diseases associated with oxidative stress.
 
. Since our inception in 2005, we have devoted substantially all of our efforts and resources to advancing our intellectual property portfolio and research and development activities.  We have entered into license and other agreements with large pharmaceutical companies related to our patent estate, however, neither we nor any of our licensees have obtained regulatory approval for sales of any product candidates covered by our patents. We operate under a single segment. Our fiscal year end is June 30.
 
Our core business strategy is to leverage our intellectual property estate through license and other arrangements and to develop our proprietary compounds that we have purchased, developed internally or in-licensed from universities and others, through human proof of concept (Phase II) studies or earlier if appropriate and then seek to enter into collaboration agreements, licenses or sales to complete product development and commercialize the resulting drug products. Our objective is to obtain revenues from licensing fees, milestone payments, development fees and royalties related to the use of our intellectual property estate and the use of our proprietary compounds for specific therapeutic indications or applications.
 
In May 2008, we entered into a License Agreement with AHP Manufacturing BV, acting through its Wyeth Medica Ireland Branch, (“Wyeth”) and Elan Pharma International Limited (“Elan”) to provide Wyeth and Elan (the “Licensees”) certain license rights under our ANTISENILIN patent estate (the “Licensed Patents”) , which relates to certain antibodies that may serve as potential therapeutic products for the treatment for Alzheimer’s Disease (the “Licensed Products”) and for the research, development, manufacture and commercialization of Licensed Products. In exchange for the licenses, the Licensees collectively paid us an up-front payment of $1,000,000 and a milestone payment of $1,000,000, and we may be entitled to milestone and royalty payments in the future. We recognized $33,333 and $1,966,667 as revenue during the fiscal years ended June 30, 2008 and June 30, 2009, respectively.
 
In October 2008, we entered into an Option and License Agreement (the “Option Agreement”) with a top-tier global pharmaceutical company (“Option Holder”) regarding an option to purchase a license under certain patents (defined as “Subject Patents” in the Option Agreement). In consideration of the Option, the Option Holder paid us a non-refundable fee of five hundred thousand dollars ($500,000) (the “Option Fee”). In consideration of the exercise of the Option, the Option Holder agreed to pay us two million dollars ($2,000,000) (the “Exercise Fee”). Two hundred and fifty thousand dollars ($250,000) of the Option Fee is creditable against the Exercise Fee. The patents are the same patents and patent applications as the Licensed Patents arising from the Agreement with Elan and Wyeth described above.  Effective as of December 19, 2008, the Option Holder became the Licensee of the patents by paying us $1,550,000, representing the Exercise Fee described in the Option Agreement as adjusted by subsequent discussions between the parties to the Option Agreement.  We recognized $2,050,000 as revenue during the fiscal year ended June 30, 2009.
 
In April 2009, we entered into an Option Agreement (the “Agreement”) with Glaxo Group Limited (“GSK”) regarding an option to purchase a license under certain of Intellect’s patents and patent applications (the “Subject Patents”) related to antibodies and methods of treatment for Alzheimer’s disease. The patents are the same patents and patent applications as the Licensed Patents and Subject Patents described above. Pursuant to the Agreement, we granted GSK an irrevocable option (the “Option”) to acquire a non-exclusive, royalty bearing license under the Subject Patents with the right to grant sublicenses, to develop, have developed, make, have made, use, offer to sell, sell, import and have imported Licensed Products in the Territory in the Field (as such terms are defined in the Agreement). Upon exercise of the Option by GSK, we will be entitled to fees, and we may be entitled to milestone payments and royalties from potential future drug sales.
 
Our most advanced drug candidate, OXIGON, is a chemically synthesized form of a small, potent, dual mode of action, naturally occurring molecule.  We commenced human Phase I clinical trials for OXIGON on December 1, 2005 in the Netherlands and completed Phase I clinical trials on November 15, 2006. We have designed a Phase IIa clinical trial to test OXIGON in 80 to 100 mild to moderate AD patients and plan to initiate that trial during 2010 if we have sufficient financial resources. We plan to orally administer OXIGON to evaluate the drug’s activity in patients as measured by changes in certain biomarkers that correlate with the condition of AD.

 
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Our pipeline includes drugs based on our immunotherapy platform technologies, ANTISENILIN and RECALL-VAX. These immunotherapy programs are based on monoclonal antibodies and therapeutic vaccines, respectively, to prevent the accumulation and toxicity of the amyloid beta toxin. Both are in pre-clinical development. Our lead product candidate in our immunotherapy programs is IN-N01, a monoclonal antibody that has undergone certain procedures in the humanization process at MRCT in the UK.
 
OXIGON, RECALL-VAX and ANTISENILIN are our trademarks. Each trademark, trade name or service mark of any other company appearing in this Annual Report on Form 10-K belongs to its respective holder.
 
Our current business is focused on granting licenses to our patent estate to large pharmaceutical companies and on research and development of proprietary therapies for the treatment of AD through outsourcing and other arrangements with third parties. We expect research and development, including patent related costs, to continue to be the most significant expense of our business for the foreseeable future. Our research and development activity is subject to change as we develop a better understanding of our projects and their prospects.
 
Total research and development costs from inception through June 30, 2009 were $13,271,797, as described in the table below:
 
R&D Expenses incurred through June 2009 - By Program
 
   
Period
 
Research and Development Program
       
   
Oxigon
   
Antisenilin
   
Recall
   
Beta vax
   
Total R&D
 
                               
July 2008- June 2009
  $ -     $ 444,928     $ -     $ -     $ 444,928  
July 2007- June 2008
    734,457       1,482,141       50,000       1,032,142       3,298,740  
July 2006- June 2007
    3,069,542       2,062,856       50,000       687,618       5,870,016  
January  - June 06
    919,606       697,434       25,000       697,436       2,339,476  
April 2005 - December 2006
    464,545       364,547       25,000       464,545       1,318,637  
                                         
Total for Program
  $ 5,188,150     $ 5,051,906     $ 150,000     $ 2,881,741     $ 13,271,797  
 
We have sublet approximately 75% of our New York City office space and closed our Israeli research laboratory to conserve our financial resources. The lease is held by our wholly-owned subsidiary, Intellect Israel.  We are in the process of reaching an agreement with the landlord of the Israeli facility pursuant to which the lease will be terminated in exchange for surrender of amounts available under certain lease guarantees and an agreement by Intellect Israel to pay the landlord certain costs related to rewiring the facility, estimated at approximately $12,000.
 
. We have written off the carrying value of the remaining laboratory equipment. We expect to continue our research and development activity through outsourcing and other third party arrangements.
 
Reverse Merger
 
On January 25, 2007, GlobePan Resources, Inc. (“GlobePan”) (now known as Intellect Neurosciences, Inc.) entered into an agreement and plan of merger with Intellect Neurosciences, Inc. (now known as Intellect USA, Inc.) and INS Acquisition, Inc., a newly formed, wholly-owned Delaware subsidiary of GlobePan Resources, Inc. also called Acquisition Sub. On January 25, 2007, Acquisition Sub merged with and into Intellect Neurosciences, Inc. (now known as Intellect USA, Inc.), Acquisition Sub ceased to exist and Intellect Neurosciences, Inc. (now known as Intellect USA, Inc.) survived the merger and became the wholly-owned subsidiary of GlobePan Resources, Inc.  Immediately following the merger, Intellect Neurosciences, Inc., the surviving entity in the merger, changed its name to Intellect USA, Inc. and GlobePan Resources, Inc. changed its name to Intellect Neurosciences, Inc. Therefore, as of January 26, 2007, Intellect Neurosciences, Inc. is the name of our parent holding company.  The name of our wholly-owned operating subsidiary is Intellect USA, Inc., which owns all of the shares of Intellect Neurosciences (Israel) Ltd., an Israeli company.
 
Following the merger and after giving effect to the options we issued immediately following the merger, there were 35,075,442 shares of our common stock issued and outstanding on an actual basis and 55,244,385 shares of our common stock issued and outstanding on a fully diluted basis. In our determination of the number of shares of our common stock issued and outstanding on a fully diluted basis, we (i) include the aggregate 9,000,000 shares of our common stock retained by existing GlobePan stockholders, (ii) include the aggregate 26,075,442 shares of our common stock received by former holders of Intellect Neurosciences, Inc. (now known as Intellect USA, Inc.) capital stock, (iii) assume the issuance of all shares potentially available for issuance under our 2005 and our 2006 equity incentive plans, regardless of whether such shares are currently covered by options, and (iv) assume the conversion of all outstanding warrants and convertible notes into shares of our common stock.

 
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  In connection with the merger, we reflected in the year ended June 30, 2007 a charge of $7,020,000, representing the shares issued to the GlobePan shareholders.
 
Liquidity and Capital Resources
 
Since our inception in 2005, we have mainly generated losses from operations and we anticipate that we will continue to generate significant losses from operations for the foreseeable future. As of June 30, 2009 and June 30, 2008, our accumulated deficit was approximately $42.2 million and $44 million, respectively. Our net income/(loss) from operations for the years ended June 30, 2009 and 2008 was $0.3 million and $ (7.3) million, respectively.  Our cash outlays from operations were $0.7 million and $3.8 million for the years ended June 30, 2009 and June 30, 2008, respectively. Our capital shows a deficit of $19.7 million and $21.9 million as of June 30, 2009 and June 30, 2008, respectively.
 
We have limited capital resources and operations since inception have been funded with the proceeds from equity and debt financings and license fee arrangements.  As of June 30, 2009, we had cash and cash equivalents of approximately $271,000. We anticipate that our existing capital resources will not enable us to continue operations beyond mid-October 2009, or earlier if unforeseen events or circumstances arise that negatively affect our liquidity. If we fail to raise additional capital or obtain substantial cash inflows from potential partners prior to mid-October 2009, we will be forced to cease operations. We are in discussions with several investors concerning our financing options. We cannot assure you that these discussions will result in available financing in a timely manner, on favorable terms or at all.
 
As of June 30, 2009 and continuing through the date of filing of this report, we  are in default on convertible promissory notes with an aggregate carrying value of $5.3 million. On October 21, 2008, one of our note holders filed a complaint in the United States District Court of the Southern District of New York claiming that approximately $541,000 of principal and accrued interest is past due and that he is entitled to a money judgment against us for all amounts due under the note, plus attorney’s fees, costs and disbursements. David Blech and Margie Chassman provided personal guarantees to this note holder guaranteeing all of our obligations under the note. Margie Chassman is one of our principal shareholders and David Blech is her husband and a consultant to the Company.  On January 5, 2009, Judge Shira A. Scheindlin issued an order setting a discovery schedule and referring the matter for mediation.  On March 26, 2009, we entered into a Settlement and General Release with the note holder concerning amounts due under his note. In connection with the settlement, Margie Chassman purchased the note from the note holder and agreed to cancel it. In exchange, we issued Margie Chassman an additional Senior Note Payable (as defined in Note 7 of Notes to Consolidated Financial Statements, Convertible Promissory Notes Payable) with a face amount of $310,000 and repaid $100,000 of Notes held by Ms. Chassman. We did not issue any additional warrants to Ms. Chassman. The matter was subsequently dismissed by the court with prejudice.
 
The audit report prepared by our independent registered public accounting firm relating to our consolidated financial statements for the period ended June 30, 2009 includes an explanatory paragraph expressing the substantial doubt about our ability to continue as a going concern.
 
Even if we obtain additional financing, our business will require substantial additional investment that we have yet to secure. We are uncertain as to how much we will need to spend in order to develop, manufacture and market new products and technologies in the future. We expect to continue to spend substantial amounts on research and development, including amounts that will be incurred to conduct clinical trials for our product candidates. Further, we will have insufficient resources to fully develop any new products or technologies unless we are able to raise substantial additional financing on acceptable terms or secure funds from new or existing partners. Our failure to raise capital when needed will adversely affect our business, financial condition and results of operations, and could force us to reduce or discontinue our operations at some time in the future, even if we obtain financing in the near term.
 
Results of Operations
 
Year Ended June 30, 2009 Compared to the Year Ended June 30, 2008:

 
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Twelve Months Ended June 30,
 
         
(in thousands)
       
   
2009
   
2008
   
Change
 
Net income/(loss) from operations
  $ 251     $ (7,348 )   $ 7,599  
Net other income (expenses):
    1,596       26,973       (25,377 )
                         
Net income/(loss)
  $ 1,847     $ 19,625     $ (17,778 )

 
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Net income/(loss) from operations increased by approximately $7.6 million as a result of the following:
 
   
(in thousands)
 
       
Increase in license fee revenue
  $ (4,016 )
Decrease in clinical expenses and R&D fees and expenses
    (1,801 )
Decrease in salaries, benefits and Board compensation
    (1,499 )
Decrease in professional fees
    (85 )
Decrease in other G&A expenses
    (198 )
    $ (7,599 )
 
The increase in license fee revenue is related to the milestones that we received from Elan and Wyeth and Option and Exercise fees that we received from another top tier, global pharmaceutical company pursuant to our respective license agreements with such companies.
 
The decrease in clinical fees and R&D expenses relates to our termination of research activity at the Israel facility.
 
The decrease in compensation and benefit costs is related to a decrease in staff levels in our New York location and the closing of our Israeli research laboratory.
 
The decrease in professional fees is due to a decrease in investor relation fees offset by an increase in accounting and legal costs.
 
The decrease in other expenses is due to a decrease in office and travel expenses.
 
Other income decreased by approximately $25.4 million as a result of the following:
 
This decrease is mainly due to changes in the fair value of derivative instruments and preferred stock liability of $29.6 million related to the valuation of the warrants associated with the Series B Preferred stock, Convertible Promissory Notes, and the New Series B Preferred Stock liability, offset by a reduction in interest expense related to our Convertible Promissory notes and a reduction in amortization costs.
 
Impact of Inflation
 
The impact of inflation upon our revenue and income/(loss) from continuing operations during each of the past two fiscal years has not been material to our financial position or results of operations for those years because we have no products for sale and do not maintain any inventories whose costs are affected by inflation.
 
Off –Balance Sheet Arrangements
 
As of June 30, 2009, we had no material off-balance sheet arrangements other than operating leases and obligations under various strategic agreements as follows:
 
Under a License Agreement with New York University (“NYU”) and a similar License Agreement with University of South Alabama Medical Science Foundation (“SAMSF”) related to our OXIGON program, we are obligated to make future payments totaling approximately $1.5 million to each of NYU and SAMSF upon achievement of certain milestones based on phases of clinical development and approval of the FDA (or foreign equivalent) and also to pay each of NYU and SAMSF a royalty based on product sales by Intellect or royalty payments received by Intellect.
 
Pursuant to a Letter Agreement executed in January 2006 between Intellect USA and the Institute for the Study of Aging (the “ISOA”), we are obligated to pay a total of $225,500 of milestone payments contingent upon future clinical development of OXIGON.
 
Under a Research Agreement with MRCT, as amended, we are obligated to make future research milestone payments totaling approximately $560,000 to MRCT related to the development of the 82E1 humanized antibody and to pay additional milestones related to the commercialization, and a royalty based on sales, of the resulting drug products. MRCT has achieved certain of the research milestones and we have included $350,000 of the total $560,000 in accrued expenses.
 
Under the terms of a Beta-Amyloid Specific, Humanized Monoclonal Antibody Purchase and Sale Agreement with IBL we agreed to pay IBL a total of $2,125,000 upon the achievement of certain milestones plus a specified royalty based on sales of any pharmaceutical product derived from the 82E1or 1A10 antibodies. We have paid $40,000 to date.

 
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Under the terms of a Royalty Participation Agreement, which was approved by our Board of Directors as of May 2, 2008, but which became effective as of July 31, 2008, certain of our lenders are entitled to an aggregate share of 25% of future royalties that we receive from the license of our ANTISENILIN patent estate.
 
In the ordinary course of business, we enter into agreements with third parties that include indemnification provisions which, in our judgment, are normal and customary for companies in our industry sector. These agreements are typically with business partners, clinical sites, and suppliers. Pursuant to these agreements, we generally agree to indemnify, hold harmless, and reimburse indemnified parties for losses suffered or incurred by the indemnified parties with respect to our product candidates, use of such product candidates, or other actions taken or omitted by us. The maximum potential amount of future payments we could be required to make under these indemnification provisions is unlimited. We have not incurred material costs to defend lawsuits or settle claims related to these indemnification provisions. As a result, the estimated fair value of liabilities relating to these provisions is minimal. Accordingly, we have no liabilities recorded for these provisions as of June 30, 2009.
 
In the normal course of business, we may be confronted with issues or events that may result in a contingent liability. These generally relate to lawsuits, claims, environmental actions or the actions of various regulatory agencies. We consult with counsel and other appropriate experts to assess the claim. If, in our opinion, we have incurred a probable loss as set forth by accounting principles generally accepted in the United States, an estimate is made of the loss and the appropriate accounting entries are reflected in our consolidated financial statements. After consultation with legal counsel, we do not anticipate that liabilities arising out of currently pending or threatened lawsuits and claims will have a material adverse effect on our consolidated financial position, results of operations or cash flows.
 
Critical Accounting Estimates and New Accounting Pronouncements
 
Critical Accounting Estimates
 
The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect reported amounts and related disclosures in the financial statements. Management considers an accounting estimate to be critical if it requires assumptions to be made that were uncertain at the time the estimate was made, and changes in the estimate or different estimates that could have been selected could have a material impact on our consolidated results of operations or financial condition.
 
Share-Based Payments - As of July 1, 2006, we adopted SFAS 123(R), "Share-Based Payment", which establishes standards for share-based transactions in which an entity receives employee's services for equity instruments of the entity, such as stock options, or liabilities that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of such equity instruments. SFAS 123(R) supersedes the option of accounting for share-based compensation transactions using APB Opinion No. 25, "Accounting for Stock Issued to Employees", and requires that companies expense the fair value of stock options and similar awards, as measured on the awards' grant date, date of adoption, and to awards modified, repurchased or cancelled after that date.
 
We estimate the value of stock option awards on the date of grant using the Black-Scholes-Merton option-pricing model (the “Black-Scholes model”). The determination of the fair value of share-based payment awards on the date of grant is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over the term of the awards, expected term, risk-free interest rate, expected dividends and expected forfeiture rates.
 
If factors change and we employ different assumptions in the application of SFAS 123(R) in future periods, the compensation expense that we record under SFAS 123(R) may differ significantly from what we have recorded in the current period. There is a high degree of subjectivity involved when using option pricing models to estimate share-based compensation under SFAS 123(R). Consequently, there is a risk that our estimates of the fair values of our share-based compensation awards on the grant dates may bear little resemblance to the actual values realized upon the exercise, expiration, early termination or forfeiture of those share-based payments in the future. Employee stock options may expire worthless or otherwise result in zero intrinsic value as compared to the fair values originally estimated on the grant date and reported in our financial statements. Alternatively, value may be realized from these instruments that are significantly in excess of the fair values originally estimated on the grant date and reported in our financial statements.  During the year ended June 30, 2009, we do not believe that reasonable changes in the projections would have had a material effect on share-based compensation expense.

 
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Research and Development Costs and Clinical Trial Expenses - Research and development costs include costs directly attributable to the conduct of research and development programs, including the cost of salaries, payroll taxes, employee benefits, materials, supplies, maintenance of research equipment, costs related to research collaboration and licensing agreements, the cost of services provided by outside contractors, including services related to our clinical trials, clinical trial expenses, the full cost of manufacturing drugs for use in research, preclinical development, and clinical trials. All costs associated with research and development is expensed as incurred.
 
 Warrants - Warrants issued in connection with our Series B Preferred Stock and Convertible Promissory Notes have been classified as liabilities due to certain provisions that may require cash settlement in certain circumstances. At each balance sheet date, we adjust the warrants to reflect their current fair value. We estimate the fair value of these instruments using the Black-Scholes option pricing model which takes into account a variety of factors, including historical stock price volatility, risk-free interest rates, remaining term and the closing price of our common stock. Changes in the assumptions used to estimate the fair value of these derivative instruments could result in a material change in the fair value of the instruments. We believe the assumptions used to estimate the fair values of the warrants are reasonable.  See Item 7A, Quantitative and Qualitative Disclosures about Market Risk, for additional information on the volatility in market value of derivative instruments.
 
Restructuring Related Assessments - During the fourth quarter of fiscal 2008, we effectively closed our Israeli laboratory and terminated all but three of the remaining employees.  In accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”, we have estimated the future sublease income from our Israeli laboratory through the end of the lease period, which ends in October 2011, and have recorded rent expense for the year ended June 30, 2008 based on the present value of the excess of our rental commitment in Israel through October 2011 over the estimated future sublease income from the laboratory during that period. In addition, we have written down the cost basis of the remaining laboratory equipment to our estimate of fair value for such equipment.
 
Revenue Recognition - We recognize revenue in accordance with Staff Accounting Bulletin No. 104, “Revenue Recognition” (“SAB 104”), Financial Accounting Standards Board (“FASB”') and Emerging Issues Task Force No. 00-21 “Accounting for Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”). Non-refundable upfront and research and development milestone payments and payments for services are recognized as revenue as the related services are performed over the term of the collaboration.
 
New Accounting Pronouncements
 
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, which is effective for fiscal years beginning after November 15, 2007. SFAS No. 159 also amends certain provisions of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. This statement permits entities to choose to measure many financial instruments and certain other items at fair value.  We do not expect our adoption of SFAS No. 159 in fiscal year 2009 to have a material impact on our results of operations or financial position.
 
In April 2007, the FASB issued FSP FIN 39-1, which amends FASB Interpretation (“FIN”) No. 39, "Offsetting of Amounts Related to Certain Contracts ” (“FIN 39”), to permit a reporting entity that is party to a master netting arrangement to offset the fair value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) against fair value amounts recognized for derivative instruments that have been offset under the same master netting arrangement in accordance with FIN 39. FSP FIN 39-1 was effective for fiscal years beginning after November 15, 2007. The adoption of FSP FIN 39-1 on July 1, 2008 is not expected to have an impact on the Company’s results of operations or financial condition.
 
In May 2007, the FASB issued FASB Staff Position (“FSP”) FIN No. 48-1, Definition of Settlement in FASB Interpretation No. 48. FSP FIN No. 48-1 provides guidance on how to determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. FSP FIN No. 48-1 is effective retroactively to April 28, 2007. The adoption of this standard did not have a significant impact on the Company’s consolidated financial position or results of operations.
 
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations" ("SFAS No. 141(R)"). SFAS No. 141(R) replaces SFAS No. 141, "Business Combinations," however, it retains the fundamental requirements of the former Statement that the acquisition method of accounting (previously referred to as the purchase method) be used for all business combinations and for an acquirer to be identified for each business. SFAS No. 141(R) defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control. Among other requirements, SFAS No. 141(R) requires the acquiring entity in a business combination to recognize the identifiable assets acquired, liabilities assumed and any non-controlling interest in the acquiree at their acquisition-date fair values, with limited exceptions; acquisition-related costs generally will be expensed as incurred. SFAS No. 141(R) requires certain financial statement disclosures to enable users to evaluate and understand the nature and financial effects of the business combination. SFAS No. 141(R) must be applied prospectively to business combinations that are consummated beginning in the Company's fiscal 2010. The Company's adoption of SFAS No. 141(R) is not expected to have a material effect on its consolidated financial statements.

 
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In December 2007, the U.S. Securities and Exchange Commission issued Staff Accounting Bulletin No. 110 ("SAB 110"). This staff accounting bulletin ("SAB") expresses the views of the staff regarding the use of a "simplified" method, as discussed in SAB No. 107 ("SAB 107"), in developing an estimate of expected term of "plain vanilla" share options in accordance with SFAS No. 123 (revised 2004), Share-Based Payment. In particular, the staff indicated in SAB 107 that it will accept a company's election to use the simplified method, regardless of whether the company has sufficient information to make more refined estimates of expected term. At the time SAB 107 was issued, the staff believed that more detailed external information about employee exercise behavior (e.g., employee exercise patterns by industry and/or other categories of companies) would, over time, become readily available to companies. Therefore, the staff stated in SAB 107 that it would not expect a company to use the simplified method for share option grants after December 31, 2007. The staff understands that such detailed information about employee exercise behavior may not be widely available by December 31, 2007. Accordingly, the staff will continue to accept, under certain circumstances, the use of the simplified method beyond December 31, 2007. The Company's adoption of SAB 111 is not expected to have a material effect on its consolidated financial statements.
 
In December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements” (“SFAS No. 160”). This Statement amends Accounting Research Bulletin (ARB) No. 51 to establish accounting and reporting standards for the non-controlling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements will have no impact. SFAS No. 160 is effective for the Company’s fiscal year beginning July 1, 2009. Management has determined that the adoption of this standard will not have an impact on the Company’s financial statements.
 
In February 2008, the FASB issued FSP No. FAS 157-2, "Effective Date of FASB Statement No. 157". This FSP delays the effective date of SFAS No. 157, "Fair Value Measurements", for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). This FSP defers the effective date of SFAS No. 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years for items within the scope of this FSP.
 
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133. This statement changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008. The Company's adoption of SFAS No. 161 is not expected to have a material effect on its consolidated financial statements.
 
In April 2008, the FASB issued FASB Staff Position SOP 90-7-1, An Amendment of AICPA Statement of Position 90-7 (“FSP SOP 90-7-1”). FSP SOP 90-7-1 resolves the conflict between the guidance requiring early adoption of new accounting standards for entities required to follow fresh-start reporting under American Institute of Certified Public Accountants Statement of Position 90-7, Financial Reporting by Entities in Reorganization under the Bankruptcy Code, and other authoritative accounting standards that expressly prohibit early adoption. Specifically, FSP SOP 90-7-1 will require an entity emerging from bankruptcy that applies fresh-start reporting to follow only the accounting standards in effect at the date fresh-start reporting is adopted, which include those standards eligible for early adoption if an election is made to adopt early. Management has elected to only adopt new accounting standards in effect at the date fresh-start reporting is adopted and to not early adopt standards eligible for early adoption.
 
In May 2008, the FASB issued Staff Position No. APB 14-1, Accounting for Convertible Debt Instruments that may be Settled in Cash upon Conversion (Including Partial Cash Settlement), (the “FSP”). The adoption of this FSP will affect the accounting for convertible and exchangeable notes and convertible preferred units. The FSP requires the initial proceeds from the sale of our convertible and exchangeable senior notes and convertible preferred units to be allocated between a liability component and an equity component. The resulting discount will be amortized using the effective interest method over the period the debt is expected to remain outstanding as additional interest expense. The FSP is effective for our fiscal year beginning on July 1, 2008 and requires retroactive application. The Company is currently evaluating the impact that this will have on the Company’s results of operations or financial condition.

 
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In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles". This Statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). This Statement is effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. The Board does not expect that this Statement will result in a change in current practice. However, transition provisions have been provided in the unusual circumstance that the application of the provisions of this Statement results in a change in practice.
 
In June 2008, the FASB issued FSP EITF 03-6-1, which addresses whether instruments granted in equity-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing basic earnings per unit under the two-class method prescribed by SFAS 128. FSP EITF 03-6-1 is retrospectively effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years, with early application prohibited. The Company is evaluating the impact the adoption of FSP EITF 03-6-1 will have on its earnings per share calculations.
 
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
Fair Value of Warrants and Derivative Liabilities.
 
As of June 30, 2009, the value of our warrant liability was $0.3 million. We estimate the fair value of these instruments using the Black-Scholes option pricing models, which takes into account a variety of factors, including historical stock price volatility, risk-free interest rates, remaining maturity and the closing price of our common stock. We believe that the change in value from period to period is most significantly impacted by the closing price of our common stock at each reporting period. The following table illustrates the potential effect on the fair value of derivative securities of changes in certain assumptions made:
 
   
Increase\decrease
 
       
10% increase in stock price
  $ 51,682  
20% increase in stock price
    107,496  
30% increase in assumed volatility
    166,792  
         
10% decrease in stock price
    (47,831 )
20% decrease in stock price
    (91,364 )
30% decrease in assumed volatility
    (130,666 )

 
42

 

ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATE
 
CONTENTS
 
CONSOLIDATED FINANCIAL STATEMENTS
 
Report of Independent  Registered Public Accounting Firm
44
   
Report of Independent Registered Public Accounting Firm
45
   
Consolidated Balance Sheet as of June 30, 2009 and 2008
46
   
Consolidated Statements of Operations for the years ended June 30, 2009, 2008 and for the period April 25, 2005 (inception) through June 30, 2009.
47
   
Consolidated Statement of Changes in Capital Deficiency for the years ended June 30, 2009 and 2008 and the period April 25, 2005 (inception) through June 30, 2009
48
   
Consolidated Statements of Cash Flows for the years ended June 30, 2009, 2008 and for the period April 25, 2005 (inception) through June 30, 2009.
49
   
Notes to the Consolidated Financial Statements
50

 
43

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Paritz     & Company, P.A
15 Warren Street, Suite 25
Hackensack, New Jersey 07601
  (201) 342-7753
Fax:  (201) 342-7598
E-Mail:  PARITZ@paritz.com
 
Certified Public Accountants

Board of Directors and Stockholders
Intellect Neurosciences, Inc

We have audited the accompanying balance sheet of Intellect Neurosciences, Inc. and subsidiary (A Development Stage Company)  (the “Company”) as of June 30, 2009 and the related statements of operations, changes in capital deficiency and cash flows for the year ended June 30, 2009 and the period from inception (April 25, 2005) to June 30, 2009. We did not audit the statements of operations, changes in capital deficiency, and cash flows of the Company from inception (April 25, 2005) to June 30, 2008 (not presented separately herein). Those statements were audited by other auditors whose report has been furnished to us, and our opinion insofar as it relates to amounts included for that period is based solely on the report of the other auditors. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Intellect Neurosciences, Inc. and subsidiary (A Development Stage Company) as of June 30, 2009 and the results of its operations and its cash flows for the year ended June 30, 2009 and the period from inception (April 25, 2005) to June 30, 2009, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has a negative working capital position, a total capital deficiency, generated cash outflows from operating activities, experienced recurring net operating losses, is in default on certain obligations, and is dependent on equity and debt financing to support its business efforts. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
.
/s/ Paritz & Company, PA
 
Hackensack, New Jersey
 
October 6, 2009

 
44

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
Board of Directors and Stockholders
Intellect Neurosciences, Inc.

We have audited the accompanying consolidated balance sheet of Intellect Neurosciences, Inc. and subsidiary (a development stage company) (the "Company") as of June 30, 2008, and the related consolidated statement of operations and cash flows for the year ended June 30, 2008, the consolidated statement of changes in capital deficiency for the period from April 25, 2005 (inception) through June 30, 2008 and the consolidated statements of operations and cash flows for the period from April 25, 2005 (inception) through June 30, 2008 (not presented separately herein). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements enumerated above present fairly, in all material respects, the consolidated financial position of Intellect Neurosciences, Inc. and subsidiary as of June 30, 2008, and the consolidated results of their operations and their consolidated cash flows for the year ended June 30, 2008 in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has a negative working capital position, a total capital deficiency, generated cash outflows from operating activities, experienced recurring net operating losses, is in default on certain obligations, and is dependent on equity and debt financing to support its business efforts. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Eisner LLP

New York, New York
November 4, 2008

 
45

 

Intellect Neurosciences Inc. and Subsidiary
(a development stage company)
Consolidated Balance Sheet

   
June 30, 2009
   
June 30, 2008
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 270,588     $ 210,758  
Prepaid expenses & other current assets
    14,390       18,203  
Deferred debt costs, net
    19,239       22,622  
Total current assets
  $ 304,218     $ 251,583  
                 
Fixed assets, net
    162,760       367,962  
Fixed assets held for sale
            22,057  
Security deposits
    70,652       78,264  
Restricted cash
    -       34,056  
Total Assets
  $ 537,630     $ 753,922  
                 
LIABILITIES AND CAPITAL DEFICIENCY
               
                 
Current Liabilities:
               
Accounts payable and accrued expenses
  $ 4,192,008     $ 4,624,030  
Convertible promissory notes
    -       182,363  
Convertible promissory notes (past due)
    5,305,088       5,644,604  
Accrued interest - convertible promissory notes
    2,052,497       993,869  
Derivative instruments
    307,906       2,001,556  
Preferred stock liability
    872,867       2,434,383  
Preferred stock dividend payable
    1,574,035       1,085,062  
Deferred credit
    -       100,000  
Total Current liabilities
  $ 14,304,400     $ 17,065,867  
                 
Commitments and Contingencies
               
                 
Notes payable (long term; net of debt discount of $121,395)
    2,104,777       1,275,000  
Notes payable, due to shareholder
    3,773,828       3,423,828  
Deferred lease liability
    11,489       17,612  
Deferred credit
    -       900,000  
Other long-term liabilities
    -       46,049  
Total Liabilities
  $ 20,194,495     $ 22,728,356  
                 
Capital deficiency:
               
                 
Preferred stock, $0.001 per share, 1,000,000 shares authorized
               
Series B Convertible Preferred stock - 459,309 shares designated and 459,309 shares issued (classified as liability above) (liquidation preference $9,611,952) Common stock, par value $0.001 per share, 100,000,000 shares authorized; 30,843,873 issued and outstanding
  $ 30,844     $ 30,844  
Additional paid in capital
    22,488,585       22,017,778  
Deficit accumulated during the development stage
    (42,176,294 )     (44,023,056 )
                 
Total Capital Deficiency
  $ (19,656,865 )   $ (21,974,434 )
                 
Total Liabilities and Capital Deficiency
  $ 537,630     $ 753,922  
 
See notes to consolidated financial statements
 
 
46

 

Intellect Neurosciences Inc. and Subsidiary
(a development stage company)
Consolidated Statements of Operations

   
Full Year Ended
       
         
April 25, 2005
 
   
June 30,
   
(inception) through
 
         
June 30, 2009
 
   
2009
   
2008
       
                   
Revenues:
                 
License fees
  $ 4,016,667       -     $ 4,016,667  
Total revenue
  $ 4,016,667     $ -     $ 4,016,667  
                         
Costs and Expenses:
                       
Research and development
  $ 444,928       3,298,740     $ 13,271,797  
General and administrative
    3,321,204       4,049,328       28,349,392  
Total cost and expenses
  $ 3,766,132     $ 7,348,068     $ 41,621,189  
                         
Net income/ (loss) from operations
  $ 250,535     $ (7,348,068 )   $ (37,604,522 )
                         
Other income/(expenses):
                       
                         
Interest expense
  $ (1,831,972 )   $ (6,675,803 )   $ (11,665,715 )
Interest income
    1,666       772     $ 18,490  
Changes in value of derivative instruments and preferred stock liability
    4,105,608       33,648,202     $ 14,511,058  
Loss on extinguishment of debt
    (701,869 )           $ (701,869 )
Other
    22,796       -     $ (6,583,736 )
Write off of investment
            -     $ (150,000 )
                         
Total other income/(expense):
  $ 1,596,229     $ 26,973,171     $ (4,571,772 )
                         
Net income/(loss)
  $ 1,846,764     $ 19,625,103     $ (42,176,294 )
                         
Basic income per share
  $ 0.06     $ 0.64          
                         
Diluted income per share
  $ 0.08     $ 0.57          
                         
Weighted average number of shares outstanding:
                       
Basic
    30,843,873       30,876,324          
Diluted
    41,696,315       42,347,654          
 
See notes to consolidated financial statements
 
 
47

 

Intellect Neurosciences Inc. and Subsidiary
(a development stage company)
Consolidated Statement of Changes in Capital Deficiency

   
Common Stock
   
Preferred Stock
                   
   
Number of
Shares
   
Amount
   
Number of
Shares
   
Amount
   
Additional
paid in capital
   
Deficit
accumulated
during the
development
stage
   
Total
 
                                           
Issuance of common stock (April 2005) ($.001 per share)
    12,078,253     $ 12,078                             $ 12,078  
                                                 
Issuance of common stock (May 2005) ($.001 per share)
    9,175,247       9,175                               9,175  
                                                 
Value of warrants issued to Goulston & Storrs (June 2005)
                                8,890             8,890  
                                                   
Net loss for period
                                        (789,177 )     (789,177 )
                                                     
Balance at June 30, 2005
    21,253,500       21,253                   8,890       (789,177 )     (759,034 )
                                                     
Issuance of Series A preferred stock (January 2006) ($.001 per share)
                    2,255       2       198,866               198,868  
                                                         
Exercise of Warrant (April 2006) ($.001 per share)
    100,000       100                                       100  
                                                         
Excess of proceeds over fair value of Series B preferred
                                    4,543,141               4,543,141  
                                                         
Net loss for the period
                                            (7,458,092 )     (7,458,092 )
                                                         
Balance at June 30, 2006
    21,353,500       21,353       2,255       2       4,750,897       (8,247,269 )     (3,475,017 )
                                                         
Excess of proceeds over fair value of Series B preferred
                                    314,845               314,845  
                                                         
Conversion of Series B preferred shares into common shares upon merger (January 2007)
    4,593,091       4,593                       3,109,522               3,114,115  
                                                         
Conversion of Series A preferred shares into common shares upon merger (January 2007)
    128,851       129       (2,255 )     (2 )     (127 )             -  
                                                         
Series B preferred dividend recorded as a capital contribution (January 2007)
                                    387,104               387,104  
                                                         
Shares issued in conjunction with merger (January 2007)
    9,000,000       9,000                       7,011,000               7,020,000  
                                                         
Reconversion of common shares back to Series B preferred shares (May 2007)
    (4,593,091 )     (4,593 )     -       -       (3,109,522 )             (3,114,115 )
                                                         
Stock based compensation
                                                       
- Clinical and Advisory Board
                                    321,634               321,634  
- Employees and Directors
                                    462,156               462,156  
- Executives
                                    7,173,547               7,173,547  
                                                         
Net loss for the period
                                            (55,400,890 )     (55,400,890 )
                                                         
Balance as of June 30, 2007
    30,482,351     $ 30,482       -       -     $ 20,421,056     $ (63,648,159 )   $ (43,196,621 )
                                                         
Shares issued as part of convertible promissory notes extension agreement (July 2007)
    311,522       312                       622,042               622,354  
                                                         
Shares issued upon conversion of convertible promissory notes and accrued interest (July 2007)
    18,240       18                       31,715               31,733  
                                                         
Shares issued as part of convertible promissory notes extension agreement (November 2007)
    30,000       30                       11,070