Akesis Pharmaceuticals 10Q 2006 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2006

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

For the transition period from to

Commission file number: 000-27409

AKESIS PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)


Nevada		84-1409219
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

888 Prospect Street, Suite 320 La Jolla, California		92037
(Address of principal executive offices)		(Zip Code)

(858) 454-4311

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or 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. Yesx No¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act.)

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

¨ Yes x No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:


Class		Outstanding at July 27, 2006
Common Stock		15,347,552 shares

AKESIS PHARMACEUTICALS, INC.

Form 10-Q

Table of Contents


		Page
PART I. FINANCIAL INFORMATION		3

Item 1. Financial Statements		3

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		13

Item 3. Quantitative and Qualitative Disclosures About Market Risk		18

Item 4. Controls and Procedures		19

PART II - OTHER INFORMATION		19

Item 1. Legal Proceedings		19

Item 1A. Risk Factors		19

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		26

Item 3. Defaults upon Senior Securities		26

Item 4. Submission of Matters to a Vote of Security Holders		26

Item 5. Other Information		26

Item 6. Exhibits		26

Signature		27

Exhibit Index		28

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PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

Akesis Pharmaceuticals, Inc.

(a Development Stage Company)

Condensed Consolidated Balance Sheets (Unaudited)


	June 30, 2006			December 31, 2005
Assets
Current assets:
Cash and cash equivalents	$	341,257		$	388,551
Prepaid insurance and other current assets		62,160			9,164

Total current assets		403,417			397,715
Property and equipment, net		15,067			17,392

Total assets	$	418,484		$	415,107

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	73,398		$	77,437

Total current liabilities		73,398			77,437

Total liabilities		73,398			77,437

Commitments and contingencies (Note 5)		—			—
Stockholders’ equity:
Preferred stock, $0.001 par value, 10,000,000 shares authorized; none issued and outstanding as of June 30, 2006 and December 31, 2005		—			—
Common stock, $0.001 par value, 50,000,000 shares authorized:
15,347,552 and 15,167,552 shares issued and outstanding at June 30, 2006 and December 31, 2005, respectively		15,348			15,168
Additional paid-in capital		7,179,356			6,173,556
Deficit accumulated during the development stage		(6,849,618	)		(5,851,054	)

Total stockholders’ equity		345,086			337,670

Total liabilities and stockholders’ equity	$	418,484		$	415,107

See accompanying notes.

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Akesis Pharmaceuticals, Inc.

(a Development Stage Company)

Condensed Consolidated Statements of Operations (Unaudited) For the Three Months and Six

Months Ended June 30, 2006 and 2005, and For the Cumulative Period From April 27, 1998 (date of

inception of Akesis Pharmaceuticals, Inc., a Delaware corporation) to June 30, 2006


	Three months ended June 30,						Six months ended June 30,						Cumulative Period from April 27, 1998 Through June 30, 2006
	2006			2005			2006			2005
Revenue	$	—		$	—		$	—		$	—		$	226,884
Cost of goods sold		—			—			—			—			62,314

Gross margin		—			—			—			—			164,570
Operating costs and expenses:
Selling, general and administrative		424,448			865,068			976,702			1,756,849			6,732,631
Research and development		25,100			—			25,100			—			282,044

Total expenses		449,548			865,068			1,001,802			1,756,849			7,014,675

Loss from operations		(449,548	)		(865,068	)		(1,001,802	)		(1,756,849	)		(6,850,105	)
Interest income, net		3,235			2,980			5,038			5,461			16,904
Other expense, net		—			—			—			—			(9,817	)

Loss before income taxes		(446,313	)		(862,088	)		(996,764	)		(1,751,388	)		(6,843,018	)
Provision for income taxes		—			—			1,800			3,200			6,600

Net loss	$	(446,313	)	$	(862,088	)	$	(998,564	)	$	(1,754,588	)	$	(6,849,618	)

Net loss per common share - basic and diluted	$	(0.03	)	$	(0.06	)	$	(0.07	)	$	(0.12	)	$	(0.97	)

Weighted-average common shares outstanding -basic and diluted		15,347,552			14,992,552			15,288,380			14,992,552			7,070,581

See accompanying notes.

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Akesis Pharmaceuticals, Inc.

(a Development Stage Company)

Condensed Consolidated Statements of Cash Flows (Unaudited) For the Three Months and Six

Months Ended June 30, 2006 and 2005, and For the Cumulative Period from April 27, 1998 (date of

inception of Akesis Pharmaceuticals, Inc., a Delaware corporation) to June 30, 2006


	Six months ended June 30,						Cumulative Period from April 27, 1998 Through June 30, 2006
	2006			2005
Cash flows from operating activities:
Net loss	$	(998,564	)	$	(1,754,588	)	$	(6,849,618	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		2,325			1,867			14,015
Stock-based compensation		602,319			940,000			3,588,555
Warrants issued for employee termination cost		35,000			—			35,000
Warrants issued for private placement fees		18,965			—			50,572
Changes in assets and liabilities:
Prepaid insurance and other current assets		(52,996	)		63,942			(62,160	)
Other assets		—			—			(815	)
Accounts payable		(4,039	)		23,829			73,398

Net cash used in operating activities		(396,990	)		(724,950	)		(3,151,053	)

Cash flows from investing activities:
Purchase of property and equipment		—			(20,992	)		(28,268	)

Net cash used in investing activities		—			(20,992	)		(28,268	)

Cash flows from financing activities:
Proceeds from stock issuances		349,696			—			3,520,578
Proceeds from shareholder loan		—			—			—

Net cash provided by financing activities		349,696			—			3,520,578

Net increase (decrease) in cash and cash equivalents		(47,294	)		(745,942	)		341,257
Cash and cash equivalents at beginning of period		388,551			1,234,250			—

Cash and cash equivalents at end of period	$	341,257		$	488,308		$	341,257

Supplemental Disclosures of Cash Flow Information:
Interest paid		—			—			14,103
Income taxes paid		1,800			3,200			6,600
Supplemental Disclosures of Non-Cash Investing and Financing Activities:
Conversion of shareholders’ loans to Series C convertible preferred stock		—			—			129,615
Conversion of Series A, B and C convertible preferred stock to common stock		—			—			1,120,404

See accompanying notes.

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Akesis Pharmaceuticals, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

1. Basis of Presentation

Akesis Pharmaceuticals, Inc., a Nevada corporation, (“we” or “us” or the “Company” or “Liberty”) has prepared the unaudited condensed consolidated financial statements in this quarterly report in accordance with the instructions to Form 10-Q adopted under the Securities Exchange Act of 1934. Certain information and note disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. These unaudited condensed consolidated financial statements should be read with our audited consolidated financial statements and the accompanying notes included in our Annual Report on Form 10-K/A for the fiscal year ended December 31, 2005. In our opinion, all adjustments (consisting only of normal recurring adjustments) necessary to present a fair statement of our financial position as of June 30, 2006 and December 31, 2005, and the results of operations for the three-month and six-month periods ended June 30, 2006 and 2005, have been made. The results of operations for the three-month and six-month periods ended June 30, 2006 and 2005 are not necessarily indicative of the results for the fiscal year ending December 31, 2006 or any future periods.

2. Going Concern

We have prepared the unaudited, condensed consolidated financial statements in this quarterly report in accordance with accounting principles generally accepted in the United States of America on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future. We have suffered recurring losses from operations and have a significant accumulated deficit that raises substantial doubt about our ability to continue as a going concern. Management’s plans in regard to these matters are also described below. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

We have incurred losses and negative cash flows from operations since inception and we have an accumulated deficit of $6.8 million at June 30, 2006. These losses are attributable to a lack of significant revenue since inception. We do not anticipate any meaningful revenue in future periods until such time that we are able to obtain approval to sell our proposed pharmaceutical products in the U.S. from the Food and Drug Administration (FDA). Additionally, our continued lack of adequate funding and working capital has prevented us from complying with the FDA’s requirements to obtain approval to sell our proposed products. Finally, if we are able to obtain FDA approval to sell our proposed products, there can be no assurance that we will be successful in selling significant quantities of those proposed products at a price that will enable us to achieve profitability.

Your attention is directed to the discussion under the caption “Risk Factors” set forth below as well as the financial statements and disclosures set forth in the documents incorporated by reference. Our management continues to undertake steps as part of a plan to attempt to continue to improve our liquidity with the goal of sustaining our operations. These steps include seeking (a) to obtain additional financing; and/or (b) to enter into a strategic partnership to finance the development of our proposed products; and (c) to control overhead costs and operating expenses.

Our monthly payroll and payroll-related expenses are approximately $2,600, and our monthly rent expense is approximately $2,400. Our other major expenditures relate to the cost of liability insurance and professional fees to our attorneys, our independent registered public accountants, and our clinical trial consultants.

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Based on these circumstances, our cash reserves may be exhausted in a matter of months. As a result, we may have to cease operations unless we are able to obtain an infusion of cash. In that regard, we are actively pursuing potential sources of financing for the Company, but there can be no assurance we can successfully complete a financing before we exhaust our cash resources. Accordingly, our ability to continue as a going concern is uncertain and dependent upon obtaining additional capital and/or entering into a strategic partner relationship. These condensed consolidated financial statements do not include any adjustments to the amounts and classification of assets and liabilities that might be necessary should we be unable to continue in business.

3. The Company and Recapitalization

Akesis Pharmaceuticals, Inc., a Delaware Corporation, (“Akesis Delaware”) was incorporated on April 27, 1998, for the purpose of marketing an established over-the-counter product for lowering blood glucose levels in the treatment of diabetes. The product was initially developed and marketed through Diabetes Pro Health, Inc. which was merged into Akesis Delaware. The product was sold primarily through direct sales to consumers. Akesis Delaware no longer sells its over-the-counter product and is focusing its efforts on the discovery, development and commercialization of complementary and alternative therapies for the treatment of three principal forms of carbohydrate intolerance and their associated complications – Type 2 diabetes, Syndrome X, and impaired glucose tolerance.

Effective December 9, 2004, pursuant to the Agreement and Plan of Merger and Reorganization, dated as of September 27, 2004, (the “Merger Agreement”), among Liberty Mint, Ltd., a Nevada Corporation (“Liberty” or the “Company”), Akesis Delaware and Ann Arbor Acquisition Corporation, a wholly-owned subsidiary of the Company (“MergerSub”), MergerSub merged with and into Akesis Delaware, with Akesis Delaware as the surviving corporation and wholly-owned subsidiary of Liberty.

Although Liberty acquired Akesis Delaware as a result of the transaction, Akesis Delaware stockholders held approximately 70% of the Company following the transaction. Accordingly, for accounting purposes, the acquisition was a “reverse acquisition” and Akesis Delaware was the “accounting acquiror.” Further, since Liberty discontinued its legacy business in 2001, it was a non-operating public shell with no continuing operations, and no intangible assets associated with Liberty were purchased by Akesis Delaware. Accordingly, the transaction was accounted for as a recapitalization of Akesis Delaware and recorded based on the fair value of Liberty’s net tangible assets acquired by Akesis Delaware. No goodwill or other intangible assets were recorded. The merger resulted in the issuance of 10,499,985 Liberty’s common shares to Akesis Delaware’s pre-merger shareholders (on an as-converted basis). Effective January 11, 2005, Liberty changed its name to Akesis Pharmaceuticals, Inc. and the trading symbol was changed to AKES.OB.

Akesis Delaware is considered to be in the development stage as defined in Statement of Financial Accounting Standards No. 7, “Accounting and Reporting by Developing Stage Enterprises” (“SFAS No. 7”) and since inception has devoted substantially all of its efforts to developing its products, raising capital and recruiting personnel.

4. Summary of Significant Accounting Policies

Principles of consolidation

The acquisition of Akesis Delaware by the Company has been accounted for as a reorganization as described in Note 3. Since Akesis Delaware is the surviving entity, the accompanying consolidated financial statements reflect its historical results of operations prior to the acquisition. The accounts of the Company and Akesis Delaware have been consolidated as of December 9, 2004, the effective date of the acquisition.

Use of estimates

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

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Business risk and concentrations of credit risk

The Company’s business is in the healthcare industry and it plans to sell products that may not be successful in the marketplace. Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, including money market accounts. Substantially all of our cash and cash equivalents are maintained with one financial institution in the United States. Deposits held with that financial institution exceed the amount of insurance provided on such deposits. Those deposits may be redeemed upon demand and, therefore, bear minimal risk.

Fair value of financial instruments

The carrying amounts of cash and cash equivalents, prepaid assets and accounts payable approximate fair market value because of the short maturity of those instruments.

Cash and cash equivalents

Cash equivalents consist of highly liquid investments with original maturities of three months or less when purchased.

Property and equipment

Property and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the related assets ranging from 3 to 5 years. Maintenance and repairs are charged to expense as incurred, and improvements and betterments are capitalized. When assets are retired or otherwise disposed of, the cost and accumulated depreciation and amortization are removed from the accounts and any resulting gain or loss is reflected in operations in the period realized.

Income taxes

Income taxes are accounted for in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS No. 109”). Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities and net operating loss and credit carryforwards using enacted tax rates in effects for the year in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.

Stock-based compensation

In December 2004 the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”), which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”). SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values and does not allow the previously permitted pro forma disclosure as an alternative to financial statement recognition. SFAS No. 123(R) supersedes APB 25 and related interpretations and amends SFAS No. 95, Statement of Cash Flows. SFAS No. 123(R) is required to be effective beginning in fiscal year 2006. However, the Company decided to adopt SFAS No. 123(R) effective with the acquisition of Akesis Delaware by the Company on December 9, 2004. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS No. 123(R), which among other things, expanded the coverage of SFAS No. 123(R) to include share-based payments to outside directors. The Company has applied the provisions of SAB 107 in its adoption of SFAS No. 123(R).

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Compensation costs for all share-based awards to employees and outside directors are measured based on the grant date fair value of those awards and is recognized over the period during which the employee or outside director is required to perform service in exchange for the award (generally over the vesting period of the award). The cost of share-based compensation awards is recognized during the period based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period, and is amortized under the multiple option methodology prescribed by SFAS No. 123(R). As share-based compensation expense recognized in the consolidated statement of operations for the three months and six months ended June 30, 2006 and 2005 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS No. 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

We have no awards with market or performance conditions. Excess tax benefits, as defined by SFAS No. 123(R), will be recognized as an addition to additional paid-in capital. The adoption of the SFAS No. 123(R) fair value method resulted in a non-cash stock-based compensation charge of $280,815, $602,319, $470,000 and $940,000 on the Company’s reported results of operations for the three months and six months ended June 30, 2006 and 2005, respectively.

Prior to the adoption of SFAS No. 123(R), no stock options had been issued by Akesis Delaware to employees. However, stock options were issued by Akesis Delaware prior to the recapitalization to non-employees and were recorded at their fair value in accordance with SFAS No. 123 and EITF 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.” Such stock options to non-employees were periodically re-measured as the stock options vested, and no re-measurement issues having a material impact on the financial statements were identified.

Stock offering costs

Expenses incurred in connection with common stock issuances are recorded as an offset to additional paid-in capital on the condensed consolidated balance sheets. Such expenses consist of third-party related offering expenses.

Net loss per share

Basic and diluted net loss per share is computed in accordance with Statement of Financial Accounting Standards No. 128, “Earnings per Share.” Basic loss per share includes no dilution and is computed by dividing net loss by the weighted-average number of shares of common stock outstanding for the period. Diluted loss per share reflects the potential dilution of securities that could share in the Company’s earnings, such as common stock equivalents which may be issued upon exercise of outstanding common stock options. Diluted loss per share is identical to basic loss per share for all periods reported because inclusion of common stock equivalents would be anti-dilutive.

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For the periods ended June 30, 2006 and 2005, the following options and warrants to purchase shares of common stock were excluded from the computation of diluted net loss per share, as the inclusion of such shares would be antidilutive:


	Periods Ended June 30,
	2006	2005
Stock options	1,262,499	1,062,499
Stock warrants	258,300	—

Effect of new accounting standards

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments”, which amends SFAS No. 133 and SFAS No. 140. SFAS No. 155 improves the financial reporting of certain hybrid financial instruments by requiring more consistent accounting that eliminates exemptions and provides a means to simplify the accounting for these instruments. Specifically, SFAS No. 155 allows financial instruments that have embedded derivatives to be accounted for as a whole (eliminating the need to bifurcate the derivative from its host) if the holder elects to account for the whole instrument on a fair value basis. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Company does not intend to issue or acquire the hybrid instruments included in the scope of SFAS No. 155 and does not expect the adoption of SFAS No. 155 to affect future reporting or disclosures.

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets – an amendment of SFAS No. 140”, which clarifies when servicing rights should be separately accounted for, requires companies to account for separately recognized servicing rights initially at fair value, and gives companies the option of subsequently accounting for those servicing rights at either fair value or under the amortization method. SFAS No. 156 is effective for fiscal years beginning after September 15, 2006. The Company does not expect the adoption of SFAS No. 156 to affect future reporting or disclosures.

In June 2006, the FASB issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes”. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes”. This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, and disclosure. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company does not expect the adoption of FIN 48 to affect future reporting or disclosures.

5. Commitments, Contingencies and Related Party Transactions

The Company leases in aggregate approximately 1,100 square feet of office space located in La Jolla, California, and Carefree, Arizona pursuant to two leases, each on a month-to-month basis. The Arizona lease is sublet from the Company’s CEO at his cost, and the La Jolla office space is sublet from Avalon Ventures. One of the Company’s directors, Kevin Kinsella, is a general partner of Avalon, and the Board of Directors has determined that the rent charged to the Company for both leases is fair and reasonable. The Company recorded rent expense during the three months and six months ended June 30, 2006 and 2005 of $8,450, $15,800, $6,741 and $12,391, respectively.

6. Stock-based Compensation

Stock-based compensation expense for the three months and six months ended June 30, 2006 and 2005 was $280,815, $602,319, $470,000 and $940,000, respectively. Since we have a net operating loss carryforward as of December 31, 2005, no excess tax benefits for the tax deductions related to share-based awards were recognized in the consolidated statement of operations. At the present time, we intend to issue new common shares upon the exercise of stock options. None of the share-based awards are classified as a liability as of June 30, 2006.

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Immediately following the acquisition of Akesis Delaware by Liberty in December 2004, two executive officers became entitled, through their respective employment offer letters, to nonstatutory stock options with a term of 10 years to acquire a total of 1,062,499 shares of common stock at an exercise price of $1.50 per share. Twenty percent of the shares of common stock subject to the options vested as of the effective date of the officers’ employment immediately following the acquisition of Akesis Delaware by Liberty and one forty-eighth (1/48th) of the remaining shares subject to the options will vest each month following the effective date of the officers’ employment, subject to the officers’ continued employment with the Company on any such date. In addition, in the event of a change of control of the Company, then the officers shall fully vest in and have the right to exercise the options as to all of the shares of common stock subject to the options as to which the officers would not otherwise be vested or exercisable.

The Company’s Board of Directors also authorized and reserved 1,500,000 shares of common stock pursuant to a 2005 Stock Plan in January 2005 for option grants to employees, directors and consultants. Options were granted pursuant to such 2005 Stock Plan to an officer and an outside director during the year ended December 31, 2005 for each of them to acquire 200,000 shares of our common stock. The stock options are Nonqualified Stock Options with a term of 10 years and an exercise price of $1.94 per share. Twenty-five percent of the shares of common stock subject to the options vest as of the first anniversary of the officer’s and outside director’s service to the Company, and one forty-eighth (1/48th) of the shares subject to the options vest each month following the first anniversary of the officer’s and outside director’s service to the Company, subject to the officer’s and outside director’s continued service to the Company on any such date. In addition, in the event of a change of control of the Company, then the officer and outside director shall fully vest in and have the right to exercise the options as to all of the shares of common stock subject to the options as to which the officer and outside director would not otherwise be vested or exercisable. Both the officer and outside director joined the Company in January 2005. The officer resigned from the Company effective March 15, 2006, and declined to exercise the stock options that had vested.

The fair value of each option award is estimated on the date of grant using the Black-Scholes method for option pricing, and is amortized over the vesting period of the option using the multiple option methodology in accordance with the provisions of SFAS No. 123(R). The key assumptions in the Black-Scholes model are as follows: expected volatility, annual expected termination rate, and risk-free interest rate. Expected volatilities are based on historical volatility of our common stock and other factors. The expected term of options granted is based on our management’s estimate since our operating history is too brief to have established historical rates for employee termination and option exercises. The risk-free interest rates are based on the U.S. Treasury yield for a period consistent with the expected term of the option in effect at the time of the grant. No options were granted during the six months ended June 30, 2006 or 2005.

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The following is a summary of the status of the 2004 nonstatutory options and the options under the 2005 Stock Plan for the six months ended June 30, 2006:


	Number of Shares		Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in millions)
Balance at December 31, 2005	1,462,499		$	1.62	9.21	$	4.9
Granted	—			—
Exercised	—			—
Expired	(58,333	)	$	1.94
Cancelled	(141,667	)	$	1.94

Balance at June 30, 2006	1,262,499		$	1.57	8.44	$	4.7

Exercisable at June 30, 2006	602,083		$	1.55	8.44	$	2.3

A summary of the status of our non-vested stock options as of June 30, 2006 and changes during the six months then ended are presented below.


	Number of shares		Average Grant-Date Fair Value Per Share
Nonvested at December 31, 2005	1,037,499		$	3.02
Granted	—			—
Vested	(235,416	)	$	2.50
Cancelled	(141,667	)	$	1.94

Nonvested at June 30, 2006	660,416		$	3.61

As of June 30, 2006, there was $1.3 million of total unrecognized compensation cost, related to non-vested stock options, which is expected to be recognized over a weighted-average period of approximately 2.5 years. The total fair values of shares vested during the three months and six months ended June 30, 2006 and 2005 were approximately $238,000, $588,000, $225,000 and $450,000, respectively.

7. Income Taxes

At December 31, 2005, Akesis Delaware had no federal income tax expense or benefit but did have federal tax net operating loss carryforwards of approximately $3.5 million. The federal net operating loss carryforwards will begin to expire in 2018, unless previously utilized. Pursuant to Internal Revenue Code Section 382 and 383, use of Akesis Delaware’s net operating loss carryforwards may be limited if a cumulative change in ownership of more than 50% occurs within a three-year period. No assessment has been made as to whether such a change in ownership has occurred. The Company incurred zero, $1,800, zero and $3,200 of statutory minimum state tax expense for the three months and six months ended June 30, 2006 and 2005, respectively.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This document contains forward-looking statements that are based upon current expectations within the meaning of the Private Securities Reform Act of 1995. It is our intent that such statements be protected by the safe harbor created thereby and we disclaim any duty or obligation to update. Forward-looking statements involve risks and uncertainties and our actual results and the timing of events may differ significantly from the results discussed in the forward-looking statements. Forward-looking statements include information concerning possible or assumed future results of our operations. Also, when we use words such as “believes,” “expects,” “anticipates” or similar expressions, we are making forward-looking statements. Examples of such forward-looking statements include, but are not limited to, statements about:

•

Our capital requirements and resources;

•

Our strategy;

•

Development of new products;

•

Intent to develop and sell products and services to companies in the pharmaceutical industry;

•

Technological change and uncertainty of new and emerging technologies;

•

Potential competitors or products;

•

Future employment of our key employees;

•

Development of strategic relationships;

•

Statements about potential future dividends;

•

Statements about protection of our intellectual property; and

•

Possible changes in legislation.

Such forward-looking statements are inherently subject to risks and uncertainties, (including those discussed in “Risk Factors” below and other sections of this document) and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements.

All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth in this report. Except as required by federal securities laws, we are under no obligation to update any forward-looking statement, whether as a result of new information, future events, or otherwise.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of results of operations, liquidity and capital resources contains forward-looking statements that involve risks and uncertainties. As described above, our actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause or contribute to such differences include those discussed below and in the section entitled “Risk Factors” in Part II of this report.

Present Situation – Liquidity Issues

We have significant liquidity and capital resource issues relative to our recurring losses from operations, which raises substantial doubt about our ability to continue as a going concern. We have incurred losses and negative cash flows from operations since inception and we have an accumulated deficit of $6.8 million at June 30, 2006. These losses are attributable to a lack of significant revenue since inception. We do not anticipate any meaningful revenue in future periods until such time that we are able to obtain

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approval to sell our proposed pharmaceutical products in the U.S. from the Food and Drug Administration (FDA). Additionally, our continued lack of adequate funding and working capital has prevented us from complying with the FDA’s requirements to obtain approval to sell our proposed products. Finally, even if we succeed in our attempt to raise additional funds, there can be assurance that we will be successful in obtaining FDA approval to sell our proposed products, or if we are able to obtain FDA approval to sell our proposed products, there can be no assurance that we will be successful in selling significant quantities of those proposed products at a price that will enable us to achieve profitability.

As described elsewhere, without an infusion of cash, we will exhaust our cash reserves within months, and as a result, we may have to cease operations. As of June 30, 2006, we have a cash balance of approximately $341,000 and we have accrued expenses and accounts payable as of that date of approximately $73,000. Our monthly payroll and payroll-related expenses are approximately $2,600, and our monthly rent expense is approximately $2,400. Our other major expenditures relate to the cost of liability insurance and professional fees to our attorneys, our independent registered public accountants and our clinical trial consultants. Additional development work on our proposed pharmaceutical products will depend on the future availability of cash.

Our future working capital requirements and our ability to continue operations are based on various factors and assumptions, which are subject to substantial uncertainty and risks beyond our control and no assurances can be given that these expectations will prove correct. The occurrence of adverse developments related to these risks and uncertainties or others could result in our being unable to continue the development of our proposed pharmaceutical products. Any such adverse developments may also result in the incurrence of unforeseen expenses or our being unable to control expected expenses and overhead. Furthermore, without an infusion of cash, we will exhaust our cash reserves within months. If we incur unforeseen expenses or fail to control our expected expenses and overhead, we will likely be unable to continue operations in the absence of obtaining additional sources of cash. The risks and uncertainties regarding management’s expectations are also described under the heading “Risk Factors”.

Our management continues to undertake steps as part of a plan to attempt to continue to improve our liquidity with the goal of sustaining our operations. These steps include seeking (a) to obtain additional financing; and/or (b) to enter into a strategic partnership to finance the development of our proposed products; and (c) to control overhead costs and operating expenses.

The Company and Recapitalization

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Research and Development Projects

We are an early stage biopharmaceutical company engaged in the discovery, development and commercialization of complementary and alternative therapies for the treatment of three principal forms of carbohydrate intolerance and their associated complications – Type 2 diabetes, Syndrome X, and impaired glucose tolerance. We have been granted patents and filed patent applications for a number of proprietary formulations and combination therapies, including formulations with existing diabetes medications, for use in the treatment of Type 2 diabetes. We intend to use our proprietary formulations to develop prescription treatments for diabetes and related metabolic disorders. These products are in an early stage of development and no regulatory filings to commercialize our products have yet been made with the United States Food and Drug Administration, or FDA or any similar state or foreign authorities. We have completed an initial clinical study of a specific formulation and demonstrated a consistent improvement in glycated hemoglobin levels (A1c), compared to base line, after three months of treatment in a diabetic population. The observed reduction in A1c, (which is an established long-term measure of blood glucose), in this open-label study was in excess of 2% for all treatment groups. This reduction contemplates an average improvement in excess of 20% in blood glucose parameters in this patient population. This included patients taking the initial product candidate as monotherapy, as well as with concomitant medications. We believe that these clinical studies may suggest that our formulations show the potential for enhancing currently available oral antidiabetic therapeutic agents. We intend to conduct follow-on feasibility clinical trials with one or more of our formulations with a goal of confirming and extending the results of our initial clinical studies. We believe that the successful completion of these feasibility trials could lead to partnering opportunities in the pharmaceutical industry. We are in the process of develoing a clinical research protocol and related activities to support the initiation of such feasibility clinical trials. We are not currently in discussions with the FDA regarding the specific requirements for approval of our products.

The risks and uncertainties associated with completing the development of our products on schedule, or at all, include the following, as well the other risk factors described in this report:

•

Our products may not be shown to be safe and efficacious in the clinical trials;

•

We may be unable to obtain regulatory approval of our products or be unable to obtain such approval on a timely basis;

•

We may be unable to recruit enough patients to complete the clinical trials in a timely manner; and

•

We may not have adequate funds to complete the development of our products even if we secure the additional amount of capital we have targeted if we have underestimated the cost of the clinical trials.

If our products fail to achieve statistically significant results in the clinical trials, or we do not complete the clinical trials on a timely basis, our operations, financial position and liquidity could be severely impaired, including as follows:

•

It could make it more difficult for us to consummate partnering opportunities in the pharmaceutical industry, or at all.

•

Our reputation among investors might be harmed, which could make it more difficult for us to obtain equity capital on attractive terms, or at all.

Because of the many risks and uncertainties relating to the completion of clinical trials, consummation of partnering opportunities in the pharmaceutical industry, receipt of marketing approvals and acceptance in the marketplace, we cannot predict the period in which material cash inflows from our products will commence, if ever.

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Results of Operations for the Three Months and Six Months Ended June 30, 2006 and 2005

Three Months Ended June 30, 2006 Compared with Three Months Ended June 30, 2005

Total operating expenses decreased to $449,548 for the three months ended June 30, 2006, from $865,068 for the same time period in 2005. During the fourth quarter of 2005, we terminated one employee, and reduced the salaries of the three remaining employees to $14,400 annually. Effective March 15, 2006, we terminated another employee and incurred a $35,000 non-cash termination charge related to the issuance to the terminated employee of a warrant to acquire 50,000 shares of our common stock. As a result, payroll-related expenses decreased for the three months ended June 30, 2006 to $8,109, from $136,799 for the same period in 2005. Also, effective November 1, 2005, we stopped paying cash fees to our outside directors. Director fees for the three months ended June 30, 2006 and 2005 were zero and $27,000, respectively. Total operating expenses for the three months ended June 30, 2006 and 2005 included non-cash stock-based compensation charges of $280,815 and $470,000, respectively, which were determined in accordance with the provisions of SFAS No. 123(R). In addition, in May 2006, we began the development of a clinical research protocol and began conducting other activities to support the initiation of new clinical trials related to our proposed pharmaceutical products. The cost of the clinical trial work during the three months ended June 20, 2006 was $25,100 compared to zero for the same time period in 2005. The remaining operating expenses consisted primarily of legal and accounting fees, consultants and insurance.

Six Months Ended June 30, 2006 Compared with Six Months Ended June 30, 2005

Total operating expenses decreased to $1,001,802 for the six months ended June 30, 2006, from $1,756,849 for the same time period in 2005. During the fourth quarter of 2005, we terminated one employee, and reduced the salaries of the three remaining employees to $14,400 annually. Effective March 15, 2006, we terminated another employee and incurred a $35,000 non-cash termination charge related to the issuance to the terminated employee of a warrant to acquire 50,000 shares of our common stock. As a result, payroll-related expenses decreased for the six months ended June 30, 2006 to $19,462, from $266,269 for the same period in 2005. Also, effective November 1, 2005, we stopped paying cash fees to our outside directors. Director fees for the six months ended June 30, 2006 and 2005 were zero and $54,000, respectively. Total operating expenses for the six months ended June 30, 2006 and 2005 included non-cash stock-based compensation charges of $602,319 and $940,000, respectively, which were determined in accordance with the provisions of SFAS No. 123(R). In addition, in May 2006, we began the development of a clinical research protocol and began conducting other activities to support the initiation of new clinical trials related to our proposed pharmaceutical products. The cost of the clinical trial work during the six months ended June 20, 2006 was $25,100 compared to zero for the same time period in 2005. The remaining operating expenses consisted primarily of legal and accounting fees, consultants and insurance.

Liquidity and Capital Resources

We have significant liquidity and capital resources issues relative to our recurring losses from operations, which raises substantial doubt about our ability to continue as a going concern. We have incurred losses and negative cash flows from operations since inception and we have an accumulated deficit of $6.8 million at June 30, 2006. As of June 30, 2006, we have a cash balance of approximately $341,000 and we have accrued expenses and accounts payable as of that date of approximately $73,000. Our monthly payroll and payroll-related expenses are approximately $2,600, and our monthly rent expense is approximately $2,400. Our other major expenditures relate to the cost of liability insurance and professional fees to our attorneys, our independent registered public accountants and our clinical trial consultants. Additional development work on our proposed pharmaceutical products will depend on the future availability of cash.

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Our future working capital requirements and our ability to continue operations are based on various factors and assumptions, which are subject to substantial uncertainty and risks beyond our control and no assurances can be given that these expectations will prove correct. If these assumptions prove incorrect, the duration of the time period during which we could continue operations could be materially shorter. Also, the occurrence of adverse developments related to these risks and uncertainties or others could result in our being unable to continue the development of our proposed pharmaceutical products. Any such adverse developments may also result in the incurrence of unforeseen expenses or our being unable to control expected expenses and overhead.

Based on these circumstances, our cash reserves may be exhausted in a matter of months. As a result, we may have to cease operations unless we are able to obtain an infusion of cash. In that regard, we are actively pursuing potential sources of financing for the Company, but there can be no assurance we can successfully complete a financing before we exhaust our cash resources. Accordingly, our ability to continue as a going concern and proceed with the development work on our proposed pharmaceutical products is uncertain and dependent upon obtaining additional capital and/or entering into a strategic partner relationship. The risks and uncertainties regarding management’s expectations are also described under the heading “Risk Factors”.

We have financed our operations primarily through the sale of equity securities, stockholder loans and limited revenues from the sale of our over-the-counter products. We invest excess cash in investment securities that will be used to fund future operating costs. We primarily fund current operations with our existing cash and investments. We had no revenues or other income sources for the six months ended June 30, 2006 to cover operating expenses, and we do not expect any revenues in the foreseeable future.

As of June 30, 2006, we have no long-term financial commitments. However, in order to finance additional feasibility trials to further validate our products, we will need to raise a significant amount of capital. We will also need to raise additional capital to finance our future operating cash needs. We may seek to raise capital through the sale of equity or debt securities or the development of other funding mechanisms. In addition, we may seek to form a strategic partnership for the development and commercialization of our products.

We believe that minimum proceeds of $3.2 million of additional capital will be required to enable us to fund at least one clinical feasibility study as well as all of our general and administrative expenses for approximately the next twelve to eighteen months. Each additional clinical study will cost us approximately $1.5 million and if as much as $6.4 million of proceeds in additional capital are realized, then we anticipate conducting a total of three clinical studies over the next 18 months.

If we are successful in raising additional capital, the first clinical feasibility study that we intend to initiate is the one related to our metformin combination product. If we realize sufficient proceeds from future sources of capital, then we also plan to conduct clinical studies related to our sulfonyurea combination product and thalidazione combination product.

Our actual capital requirements will depend upon numerous factors, including:

•

the rate of progress and costs of our clinical trial and research and development activities;

•

actions taken by the FDA and other regulatory authorities;

•

the timing and amount of milestone or other payments we might receive from potential strategic partners;

•

our degree of success in commercializing our product candidates;

•

the emergence of competing technologies and products, and other adverse market developments; and

•

the costs of preparing, filing, prosecuting, maintaining and enforcing patent claims and other intellectual property rights.

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There can be no assurance that we will be able to obtain needed additional capital or enter into relationships with corporate partners on a timely basis, on favorable terms, or at all. Conditions in the capital markets in general, and the life science capital market specifically, may affect our potential financing sources and opportunities for strategic partnering.

Critical Accounting Policies

Management believes the following to be critical accounting policies, the application of which could have a material impact on our financial statements.

Revenue Recognition: To date, we do not have any significant ongoing revenue sources.

Stock-based compensation: We have adopted SFAS No. 123(R), Accounting for Share-Based Compensation, effective in 2004. Stock-based compensation for the three months and six months ended June 30, 2006 and 2005 was $280,815, $602,319, $470,000 and $940,000, respectively.

Effect of New Accounting Standards

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

We do not use derivative financial instruments for trading or speculative purposes. However, we regularly invest excess cash in short-term investments that are subject to changes in short-term interest rates. We believe that the market risk arising from holding these financial instruments is minimal.

Because we have minimal debt, our exposure to market risks associated with changes in interest rates arise from increases or decreases in interest income earned on our investment portfolio. We attempt to ensure the safety and preservation of invested funds by limiting default risks, market risk, and reinvestment risk. We mitigate default risk by investing in short-term investments. A hypothetical 100 basis point decrease in interest rates along the entire interest rate yield curve would not materially affect the fair value of our interest sensitive financial instruments at June 30, 2006.

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Item 4.

Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer, based on the evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended) required by paragraph (b) of Rule 13a-15 or Rule 15d-15, have concluded that, as of June 30, 2006, our disclosure controls and procedures were effective to ensure that the information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

During the three months and six months ended June 30, 2006, there was no change in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1.

Legal Proceedings.

None

Item 1A.

Risk Factors.

Our future operating results may vary substantially from anticipated results due to a number of factors, many of which are beyond our control. The following discussion highlights some of these factors and the possible impact of these factors on future results of operations. You should carefully consider these factors before making an investment decision. If any of the following factors actually occur, our business, financial condition or results of operations could be harmed. In that case, the price of our common stock could decline, and you could experience losses on your investment.

We require additional financing and are uncertain of the availability or terms of additional funding, and if additional financing is not available or not available on acceptable terms, we will have to cease operations within months.

As of June 30, 2006, we have no long-term financial obligations. However, our cash balance as of June 30, 2006 is approximately $341,000 and we have accrued expenses and accounts payable as of that date of approximately $73,000. Our monthly payroll and payroll related expenses are approximately $2,600, and our monthly rent expense is approximately $2,400. Our other major expenditures relate to the cost of liability insurance and professional fees to our attorneys, our independent registered public accountants and our clinical trial consultants. We are actively seeking to raise additional funds through one or more private placements of our securities and/or a strategic partnership to finance our operations, and, in particular, planned feasibility clinical trials to further validate our drug candidates. Based on these circumstances, our cash reserves may be exhausted in a matter of months, if not earlier. As a result, we may have to cease operations unless we are able to obtain an infusion of cash.

We believe we will require a minimum of $3.2 million of additional funds to undertake our planned feasibility clinical trials and maintain our operations. If we are unable to secure such additional financing, we will have to significantly curtail our clinical development activities, delaying the clinical development and potential regulatory approval of our drug candidates, and our business will be materially and adversely impacted.

Accordingly, we may issue additional shares and warrants to raise additional financing in 2006 and we have little control over the timing of any resales of such shares. As a result, the market price of our common stock may fall if a large portion of those shares is sold in the public market. We may raise additional funds through public or private financing, strategic relationships or other arrangements. We cannot be certain that the funding will be available on attractive terms, or at all. Furthermore, any additional equity financing may be dilutive to shareholders, and debt financing, if available, may involve restrictive covenants. Strategic arrangements, if necessary to raise additional funds, may require us to relinquish our rights to certain of our technologies or products. If we fail to raise capital when needed, our business will be negatively affected, which could cause the price of our common stock to decline.

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We are currently assessing various prospective product formulations. We will require additional capital to fund the development and commercialization of our specific formulations. Our future capital requirements will depend on many factors, including:

•

progress with our preclinical studies and toxicity studies;

•

the time and costs involved in obtaining regulatory approvals for the marketing of any of our specific formulations;

•

the costs of manufacturing any of our specific formulations;

•

our ability, and the ability of any partner, to effectively market, sell and distribute product, subject to obtaining regulatory approval;

•

our ability to establish one or more marketing, distribution or other commercialization arrangements;

•

the cost of any potential licenses or acquisitions; and

•

the costs involved in preparing, filing, prosecuting, maintaining and enforcing patents or defending ourselves against competing technological and market developments.

You should be aware that:

•

we may not be able to obtain additional financial resources in the necessary time frame or on terms favorable to us, if at all;

•

any available additional financing may not be adequate; and

•

we may be required to use a portion of future financing to repay indebtedness to future creditors.

If adequate funds are not available, we may have to delay, scale back or eliminate one or more of our development programs, or obtain funds by entering into more arrangements with collaborative partners or others that may require us to relinquish rights to certain of our specific formulations or technologies that we would not otherwise relinquish.

In the event we are unable to obtain additional financing on acceptable terms, we may not have the financial resources to continue research and development of any of our other proprietary formulations and we could be forced to curtail or cease our operations.

We have a history of operating losses, anticipate future losses, may not generate revenues from product sales and may never become profitable.

We have experienced significant operating losses in each period since our inception. As of June 30, 2006, we have incurred total losses of $6.8 million. We expect these losses to continue and it is uncertain when, if ever, we will become profitable. These losses have resulted principally from costs incurred in conducting the initial open-label clinical trials, non-cash stock-based compensation for our executive officers and an outside director and from general and administrative costs associated with operations. We expect to incur increasing operating losses in the future as a result of expenses associated with clinical trials (see the Liquidity and Capital Resources section of this report preceding this section) as well as general and administrative costs. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis.

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We may be unable to obtain regulatory clearance to market our proprietary formulations in the United States or foreign countries on a timely basis, or at all.

Our proprietary formulations are subject to extensive government regulations related to development, clinical trials, manufacturing and commercialization. The process of obtaining FDA and other regulatory approvals is costly, time consuming, uncertain and subject to unanticipated delays.

The FDA may refuse to approve an application for approval of a specific formulation if it believes that applicable regulatory criteria are not satisfied. The FDA may also require additional testing for safety and efficacy. Moreover, if the FDA grants regulatory approval of a product, the approval may be limited to specific indications or limited with respect to its distribution, which could limit our revenues. Foreign regulatory authorities may apply similar limitations or may refuse to grant any approval.

No diabetes product using our technologies has been approved for marketing. Consequently there is no precedent for the successful commercialization of products based on our technologies. In addition, members of our management team have had only limited experience in filing and pursuing applications necessary to gain regulatory approvals for pharmaceutical products. This may impede our ability to obtain timely approvals from the FDA or foreign regulatory agencies. We will not be able to commercialize our proprietary products until we obtain regulatory approval, and consequently any delay in obtaining, or inability to obtain regulatory approvals could harm our business.

If we violate regulatory requirements at any stage, whether before or after marketing approval is obtained, we may be fined, forced to remove a product from the market or experience other adverse consequences, including delay, which would materially harm our financial results. Additionally, we may not be able to obtain the labeling claims necessary or desirable for product promotion.

Moreover, manufacturing facilities operated by the third-party manufacturers with whom we may contract to manufacture our proprietary formulations may not pass an FDA or other regulatory authority pre-approval inspection. Any failure or delay in obtaining these approvals could prohibit or delay us or any of our business partners from marketing our formulations.

On August 27, 1998, Diabetes Pro Health, a predecessor entity, received a warning letter from the United States Department of Health and Human Services. The warning letter was written in reference to our marketing and distribution of the products Diabetes Pro Health, DPH and Pro Health Pak for use as a dietary supplement. The Department of Health & Human Services concluded that the labeling associated with the product made therapeutic claims which caused the product to be considered a drug requiring prior approval by the FDA prior to commercialization. Diabetes Pro Health, working with the FDA, modified the labeling in order to be in compliance with the Dietary Supplement Health and Education Act, or DSHEA, and implementing regulations.

Delays in the conduct or completion of our clinical trials, the analysis of the data from our clinical trials, or our manufacturing scale-up activities may result in delays in our planned filings for regulatory approvals, and may adversely affect our ability to enter into new collaborative arrangements.

We cannot predict whether we will encounter problems with any of our completed, or planned clinical studies that will cause us or regulatory authorities to delay or suspend planned clinical studies. If the results of our planned clinical studies for our proprietary formulations are not available when we expect or if we encounter any delay in the analysis of data from our clinical studies or if we encounter delays in our ability to scale-up our manufacturing processes, we may have to delay our planned filings seeking regulatory approval of our proprietary formulations. Additionally we may not have the financial resources to continue research and development of any of our proprietary formulations; and we may not be able to enter into additional collaborative arrangements relating to any proprietary formulations subject to delay in clinical studies or delay in regulatory filings.

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Any of the following could delay the completion of our planned clinical studies:

•

failure of the FDA or comparable foreign authorities to approve the scope or design of our clinical trials;

•

delays in enrolling volunteers;

•

insufficient supply or deficient quality of specific formulation materials or other materials necessary for the performance of clinical trials;

•

negative results of clinical studies; or

•

serious side effects experienced by study participants relating to a specific formulation.

Even if we obtain approval to commercialize our proprietary products, we will be subject to continuing regulatory requirements.

Even if we or our business partners are able to obtain regulatory approval for our proprietary products in the United States or other countries, the approvals will be subject to continual review, and newly discovered or developed safety issues may result in revocation of the regulatory approvals. Moreover, if we obtain marketing approval in the United States, the marketing of the product will be subject to extensive regulatory requirements administered by the FDA and other regulatory bodies, including adverse event reporting requirements and the FDA’s general prohibition against promoting products for unapproved uses. The manufacturing facilities for our products are also subject to continual review and periodic inspection and approval of manufacturing modifications. Domestic manufacturing facilities are subject to inspections by the FDA and must comply with the FDA’s current Good Manufacturing Practices (cGMP) regulations. The FDA stringently applies regulatory standards for manufacturing. In complying with these regulations, manufacturers must spend funds, time and effort in the areas of production, record keeping, personnel and quality control to ensure full technical compliance. Failure to comply with any of these post-approval requirements can, among other things, result in warning letters, product seizures, recalls, fines, injunctions, suspensions or revocations of marketing licenses, operating restrictions and criminal prosecutions. Any of these enforcement actions or any unanticipated changes in existing regulatory requirements or the adoption of new requirements could adversely affect our ability to market products and generate revenues and thus adversely affect our ability to continue our business.

The manufacturers of our product candidates also are subject to numerous federal, state and local laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, fire hazard control and hazardous substance disposal. In the future, our manufacturers may incur significant costs to comply with those laws and regulations, which could increase our manufacturing costs and reduce our ability to operate profitably.

We have not commenced FDA trials and may not ever commence FDA trials.

We have not commenced FDA trials of any of our prescription formulations. There are a number of requirements that we must satisfy in order to begin FDA trials. These requirements will require substantial time, effort and financial resources. There can be no assurance that we will complete the steps necessary to reach FDA trials.

Our ability to enter into third-party relationships is important to our successful development and commercialization of our specific formulations and our potential profitability.

To market any of our products in the United States or elsewhere, we must develop internally or obtain access to sales and marketing forces with technical expertise and with supporting distribution capability in the relevant geographic territory.

We may not be able to enter into marketing and distribution arrangements or find a corporate partner for our specific formulation or our other specific formulations, and we are not likely to be able to market and distribute our products ourselves. If we are not able to enter into a marketing or distribution arrangement or find a corporate partner who can provide support for commercialization of our specific formulations as we deem necessary, we may not be able to commercialize our products successfully. Moreover, any new marketer or distributor or corporate partner for our specific formulations, with whom we choose to contract may not establish adequate sales and distribution capabilities or gain market acceptance for our products, if any.

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Our ability to generate revenues will be diminished if we fail to obtain acceptable prices or an adequate level of reimbursement for our products from third-party payors.

The requirements governing product licensing, pricing and reimbursement vary widely from country to country. Some countries require approval of the sale price of a drug before it can be marketed. In many countries, the pricing review period begins after product licensing approval is granted. As a result, we may obtain regulatory approval for a product in a particular country, but then be subject to price regulations that reduce our revenues from the sale of the product. Also, in some foreign markets, pricing of prescription pharmaceuticals is subject to continuing governmental control even after initial marketing approval. If we succeed in bringing a specific formulation to market, we cannot be certain that the products will be considered cost effective and that reimbursement will be available or, if available, will be sufficient to allow us to sell the products on a competitive basis.

The continuing efforts of government and third-party payors to contain or reduce the costs of healthcare through various means, including efforts to increase the amount of patient co-pay obligations, may limit our commercial opportunity. For example, in some foreign markets, pricing and profitability of prescription pharmaceuticals are subject to government control. In the United States, we expect that there will continue to be a number of federal and state proposals to implement similar government control. In addition, increasing emphasis on managed care in the United States will continue to put pressure on the rate of adoption and pricing of pharmaceutical products. Cost control initiatives could decrease the price that any of our collaborators or we would receive for any products in the future. Further, cost control initiatives could adversely affect our collaborators’ ability to commercialize our products, our ability to realize revenues from this commercialization, and our ability to fund the development of future specific formulations.

Our ability to commercialize pharmaceutical products, alone or with collaborators, may depend in part on the extent to which adequate reimbursement for the products will be available from governmental and health administration authorities, private health insurers, and other third-party payors.

Significant uncertainty exists as to the reimbursement status of newly approved health care products. Third-party payors, including Medicare, are challenging the prices charged for medical products and services. Government and other third-party payors increasingly are attempting to contain health care costs by limiting both coverage and the level of reimbursement for new drugs and by refusing, in some cases, to provide coverage for uses of approved products for disease indications for which the FDA has not granted labeling approval. Third-party insurance coverage may not be available to patients for any products we discover and develop, alone or with collaborators. If government and other third-party payors do not provide adequate coverage and reimbursement levels for our products, the market acceptance of these products may be reduced.

We do not manufacture our own specific formulations and rely on third-party manufacturers to provide the components necessary for our specific formulations.

We do not manufacture our own specific formulations and may not be able to obtain adequate supplies, which could cause delays or reduce profit margins. The manufacturing of sufficient quantities of new specific formulations is a time-consuming and complex process. We have no manufacturing capabilities. In order to continue to develop our proprietary formulations, apply for regulatory approvals and ultimately commercialize additional products, we need to contract or otherwise arrange for the necessary manufacturing.

If any of our existing or future manufacturers cease to manufacture or are otherwise unable to deliver any of the components of our specific formulations in either bulk or dosage form, or other product components, we may need to engage additional manufacturers. The cost and time to establish manufacturing facilities would be substantial. As a result, using a new manufacturer could disrupt our ability to supply our products and/or reduce our profit margins. Any delay or disruption in the manufacturing of bulk product, the dosage form of our products or other product components, including pens for delivery of our products, could harm our ability to generate product sales, harm our reputation and require us to raise additional funds.

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We have not selected any third-party contract manufacturers for our proprietary formulations.

We have not yet selected manufacturers for our proprietary formulations and we cannot be certain that we will be able to obtain long-term supplies of those materials on acceptable terms. We do not currently have established quality control and quality assurance programs, including a set of standard operating procedures, analytical methods and specifications, designed to ensure that proprietary formulations are manufactured in accordance with current good manufacturing practices and other domestic and foreign regulations.

If our patents are determined to be unenforceable or if we are unable to obtain new patents based on current patent applications or for future inventions, we may not be able to prevent others from using our intellectual property.

Our success will depend in part on our ability to obtain and expand patent protection for our specific formulations and technologies both in the United States and other countries. We cannot guarantee that any patents will issue from any pending or future patent applications owned by or licensed to us. Alternatively, a third party may successfully circumvent our patents. Our rights under any issued patents may not provide us with sufficient protection against competitive products or otherwise cover commercially valuable products or processes. In addition, because patent applications in the United States are maintained in secrecy for eighteen months after the filing of the applications, and publication of discoveries in the scientific or patent literature often lag behind actual discoveries, we cannot be sure that the inventors of subject matter covered by our patents and patent applications were the first to invent or the first to file patent applications for these inventions. In the event that a third party has also filed a patent on a similar invention, we may have to participate in interference proceedings declared by the U.S. Patent and Trademark Office to determine priority of invention, which could result in a loss of our patent position. Furthermore, we may not have identified all U.S. and foreign patents that pose a risk of infringement.

Litigation regarding patents and other proprietary rights may be expensive, cause delays in bringing products to market and harm our ability to operate.

Our success will depend in part on our ability to operate without infringing the proprietary rights of third parties. Legal standards relating to the validity of patents covering pharmaceutical and biotechnological inventions and the scope of claims made under these patents are still developing. As a result, our ability to obtain and enforce patents is uncertain and involves complex legal and factual questions. Third parties may challenge or infringe upon existing or future patents. In the event that a third party challenges a patent, a court may invalidate the patent or determine that the patent is not enforceable. Proceedings involving our patents or patent applications or those of others could result in adverse decisions about:

•

the patentability of our inventions and products relating to our specific formulations; and/or

•

the enforceability, validity or scope of protection offered by our patents relating to our specific formulations.

The use of our technologies could potentially conflict with the rights of others.

The manufacture, use or sale of any of our proprietary formulations may infringe on the patent rights of others. If we are unable to avoid infringement of the patent rights of others, we may be required to seek a license, defend an infringement action or challenge the validity of the patents in court. Patent litigation is costly and time consuming. We may not have sufficient resources to bring these actions to a successful conclusion. In such case, we may be required to alter our products, pay licensing fees or cease activities. If our products conflict with patent rights of others, third parties could bring legal actions against us claiming damages and seeking to enjoin manufacturing and marketing of the affected products. If these legal actions are successful, in addition to any potential liability for damages, we could be required to obtain a license in order to continue to manufacture or market the affected products. We may not prevail in any legal action and a required license under the patent may not be available on acceptable terms.

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We may be unable to adequately prevent disclosure of trade secrets and other proprietary information.

In order to protect our proprietary technology and processes, we rely in part on confidentiality agreements with our corporate partners, employees, consultants, outside scientific collaborators and sponsored researchers and other advisors. These agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover trade secrets and proprietary information. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.

Competition in the biotechnology and pharmaceutical industries may result in competing products, superior marketing of other products and lower revenues or profits for us.

There are many companies that are seeking to develop products and therapies for the treatment of diabetes and other metabolic disorders. Our competitors include multinational pharmaceutical and chemical companies, specialized biotechnology firms and universities and other research institutions. A number of our largest competitors, including Bristol-Myers Squibb Company, Aventis, Eli Lilly and Company, GlaxoSmithKline, Merck & Co., Novartis, Novo Nordisk and Takeda Pharmaceuticals, are pursuing the development or marketing of pharmaceuticals that target the same diseases that we are targeting, and it is possible that the number of companies seeking to develop products and therapies for the treatment of diabetes and other metabolic disorders will increase. The government, through the National Center for Complementary and Alternative Medicine (NCCAM) funds a variety of private, and for-profit, and academic groups to conduct trials on chromium supplementation and related alternative approaches to treat diabetes.

Many of our competitors have substantially greater financial, technical, human and other resources than we do. In addition, many of these competitors have significantly greater experience than we do in undertaking preclinical testing and human clinical studies of new pharmaceutical products and in obtaining regulatory approvals of human therapeutic products. Accordingly, our competitors may succeed in obtaining FDA approval for products more rapidly than we do, which would provide these competitors with an advantage for the marketing of products with similar potential uses. Furthermore, if we are permitted to commence commercial sales of products, we may also be competing with respect to manufacturing and product distribution efficiency and sales and marketing capabilities, areas in which we have limited or no experience as an organization.

Our target patient population for our proprietary formulations is people with type 2 diabetes. Other products are currently in development or exist in the market that may compete directly with the products that we are seeking to develop and market. Various products are available to treat type 2 diabetes, including, sulfonyureas, metformin, insulin, glinides, alpha-glucosidase inhibitors, and thiazolidinediones.

In addition, several companies are developing various approaches to improve treatments for type 1 and type 2 diabetes. We cannot predict whether our proprietary formulations, even if successfully tested and developed, will have sufficient advantages over existing products to cause health care professionals to adopt them over other products or that our specific formulations will offer an economically feasible alternative to existing products.

We may not be able to keep up with the rapid technological change in the biotechnology and pharmaceutical industries, which could make our products obsolete and reduce our revenues.

Biotechnology and related pharmaceutical technologies have undergone and continue to be subject to rapid and significant change. Our future will depend in large part on our ability to maintain a competitive position with respect to these technologies. Any products that we develop may become obsolete before we recover expenses incurred in developing those products, which may require that we raise additional funds to continue our operations.

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Our future success depends on our ability to retain our chief executive officer and other key executives.

Our success largely depends on the skills, experience and efforts of our key personnel, including our Chief Executive Officer, Edward B. Wilson. We have entered into a written employment agreement with Mr. Wilson that can be terminated at any time by us or by Mr. Wilson. The loss of Mr. Wilson, or our failure to retain other key personnel, would jeopardize our ability to execute our strategic plan and materially harm our business.

Our future success depends on our ability to hire additional employees.

We currently have only two employees. If we are unable to hire additional employees, our likelihood of success could decrease significantly.

Our business has a substantial risk of product liability claims, and insurance may be expensive or unavailable.

Our business exposes us to potential product liability risks that are inherent in the testing, manufacturing and marketing of human therapeutic products. Product liability claims could result in a recall of products or a change in the indications for which they may be used.

We currently have limited product liability insurance, including clinical trial insurance, and will seek additional coverage prior to initiating clinical trials and marketing any of our specific formulations.

We cannot assure you that our insurance will provide adequate coverage against potential liabilities. Furthermore, clinical trial and product liability insurance is becoming increasingly expensive. As a result, we may not be able to maintain current amounts of insurance coverage, obtain additional insurance or obtain insurance at a reasonable cost or in sufficient amounts to protect against losses that could have a material adverse effect on us.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

None

Item 3.

Defaults upon Senior Securities.

None

Item 4.

Submission of Matters to a Vote of Security Holders.

None

Item 5.

Other Information.

None

Item 6.

Exhibits.

See Exhibit Index attached.

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SIGNATURE

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


AKESIS PHARMACEUTICALS, INC.

By:		/s/ John T. Hendrick
		John T. Hendrick Chief Financial Officer (Duly Authorized Officer and Chief Financial Officer)

Date: August 8, 2006

Akesis Pharmaceuticals, Inc. and Subsidiaries

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Exhibit Index


Exhibit Number		Description

2.1(1)		Agreement and Plan of Merger and Reorganization dated September 27, 2004 by and among the Registrant, Ann Arbor Acquisition Corporation, and Liberty Mint, Ltd.

3.1(2)		Articles of Incorporation, as amended, of the Registrant

3.2(2)		Bylaws of the Registrant

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(1)	Incorporated by reference to the Registrant’s Form 8-K as filed with the SEC on September 28, 2004.

(2)	Incorporated by reference to the Registrant’s Form 10-K as filed with the SEC on March 24, 2005.

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Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	8th grade Avg

Akesis Pharmaceuticals (AKES) Inactive 10-Q2006 Q2 Quarterly report

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