Akesis Pharmaceuticals (AKES) 10-Q 2008 Q1 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 March 31, 2008

or

¨ 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.    Yes  x    No  ¨

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

Large accelerated filer  ¨                    Accelerated filer  ¨

Non-accelerated filer (Do not check if a smaller reporting company)¨            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

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 April 30, 2008
Common Stock	24,933,826 shares

AKESIS PHARMACEUTICALS, INC.

Form 10-Q

Table of Contents

		Page
PART I. FINANCIAL INFORMATION
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
Item 1.	Legal Proceedings	20
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	20
Item 3.	Defaults upon Senior Securities	20
Item 4.	Submission of Matters to a Vote of Security Holders	20
Item 5.	Other Information	20
Item 6.	Exhibits	20
Signature		21
Exhibit Index		21

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Akesis Pharmaceuticals, Inc.

Condensed Consolidated Balance Sheet

	March 31, 2008 (unaudited)			December 31, 2007 (audited)
Assets
Current assets:
Cash and cash equivalents	$	2,231,462		$	1,110,196
Prepaid and other current assets		12,164			221,119
Total current assets		2,243,626			1,331,315
Debt issuance costs, net		46,778			53,795
Total assets	$	2,290,404		$	1,385,110
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	115,499		$	73,416
Current portion of long-term debt		400,000			400,000
Total current liabilities		515,499			473,416
Long-term debt		300,000			400,000
Total liabilities		815,499			873,416
Commitments and contingencies (Note 5)
Stockholders’ equity:
Preferred stock, $0.001 par value, 10,000,000 shares authorized; none issued and outstanding as of March 31, 2008 and December 31, 2007		—			—
Common stock, $0.001 par value, 50,000,000 shares authorized: 24,993,826 and 22,580,884 shares issued and outstanding at March 31, 2008 and December 31, 2007, respectively		24,934			22,581
Additional paid-in capital		13,854,432			11,704,679
Accumulated deficit		(12,404,461	)		(11,215,566	)
Total stockholders’ equity		1,474,905			511,694
Total liabilities and stockholders’ equity	$	2,290,404		$	1,385,110

See accompanying notes.

3

Akesis Pharmaceuticals, Inc.

Condensed Consolidated Statements of Operations (Unaudited)

For the Three Months Ended March 31, 2008 and 2007

	Three months ended March 31,
	2008			2007
Revenue	$	—		$	—
Operating costs and expenses:
Selling, general and administrative		568,461			472,938
Research and development		600,878			166,714
Total expenses		1,169,339			639,652
Loss from operations		(1,169,339	)		(639,652	)
Interest (expense) income, net		(17,956	)		29,545
Loss before income taxes		(1,187,295	)		(610,107	)
Provision for income taxes		1,600			945
Net loss	$	(1,188,895	)	$	(611,052	)
Net loss per common share—basic and diluted	$	(0.05	)	$	(0.03	)
						��
Weighted-average common shares outstanding—basic and diluted		22,736,023			22,580,884

See accompanying notes.

4

Akesis Pharmaceuticals, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

For the Three Months Ended March 31, 2008 and 2007

	Three months ended March 31,
	2008			2007
Cash flows from operating activities:
Net loss	$	(1,188,895	)	$	(611,052	)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization		7,017			6,914
Stock-based compensation		168,395			140,681
Changes in assets and liabilities:
Prepaid and other current assets		208,955			(59,660	)
Debt issuance costs, net		—			3,703
Accounts payable		42,083			2,913
Net cash used in operating activities		(762,445	)		(516,501	)
Cash flows from investing activities:
Net cash used in investing activities		—			—
Cash flows from financing activities:
Proceeds from stock issuances		1,983,711			—
Principal payments on bank loan		(100,000	)		—
Net cash provided by financing activities		1,883,711			—
Net increase (decrease) in cash and cash equivalents		1,121,266			(516,501	)
Cash and cash equivalents at beginning of period		1,110,196			4,111,070
Cash and cash equivalents at end of period	$	2,231,462		$	3,594,569
Supplemental Disclosures of Cash Flow Information:
Interest paid	$	14,234		$	—
Income taxes paid	$	1,600		$	945

See accompanying notes.

5

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”), 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-KSB for the fiscal year ended December 31, 2007. In our opinion, all adjustments (consisting only of normal recurring adjustments) necessary to present a fair statement of our financial position as of March 31, 2008, and the results of operations for the three-month periods ended March 31, 2008 and 2007, have been made. The results of operations for the three-month periods ended March 31, 2008 and 2007 are not necessarily indicative of the results for the fiscal year ending December 31, 2008 or any future periods.

2. The Company

One of our predecessors, Akesis Delaware, was incorporated on April 27, 1998, for the purpose of direct marketing to consumers an established over-the-counter product for lowering blood glucose levels in the treatment of diabetes. Effective December 9, 2004, pursuant to the Agreement and Plan of Merger and Reorganization, dated as of September 27, 2004 (the “Merger Agreement”), among Akesis Delaware, another of our predecessors, Liberty Mint, Ltd., a Nevada corporation (“Liberty”), and Ann Arbor Acquisition Corporation, a wholly-owned subsidiary of Liberty (“MergerSub”), MergerSub merged with and into Akesis Delaware, with Akesis Delaware as the surviving corporation and wholly-owned subsidiary of Liberty. Effective January 11, 2005, the combined company changed its name to Akesis Pharmaceuticals, Inc. and its trading symbol to AKES.OB.

Despite the legacy businesses of our predecessors, we are currently an early stage biopharmaceutical company engaged in the discovery, development and commercialization of ethical pharmaceuticals for the treatment of Type 2 diabetes. We have been granted patents and filed patent applications for a proprietary therapy for use in the treatment of Type 2 diabetes.

Our therapeutic approach is directed to the use of vanadium containing compounds as an insulin enhancer. We intend to use our primary proprietary compound, AKP-020, to develop a prescription treatment for Type 2 diabetes. This product is in an early stage of development. In February 2008, we began a Phase IIa clinical trial for AKP-020 under an open Investigational New Drug Application (“IND”) filed with the United States Food and Drug Administration (“FDA”). Vanadium containing compounds have demonstrated preliminary and published evidence of lowering and controlling blood glucose levels animal models of diabetes in patients with Type 2 diabetes.

3. Summary of Significant Accounting Policies

Principles of consolidation

The acquisition of Akesis Delaware by Liberty described in Note 2 has been accounted for as a recapitalization of Akesis Delaware. 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 described in Note 2.

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.

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.

6

Akesis Pharmaceuticals, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

Fair value of financial instruments

Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements”(“SFAS No. 157”). SFAS No. 157 provides guidance for using fair value to measure assets and liabilities and requires expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. The standard applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. The adoption of SFAS No. 157 did not have a material effect on the Company’s condensed consolidated financial statements.

The carrying amounts of the Company’s cash and cash equivalents, prepaid and other current assets and accounts payable and accrued liabilities as of March 31, 2008, approximate fair market value based on Level I inputs (quoted prices in active markets) because of their short-term nature. The fair value of the note payable as of March 31, 2008, approximates the carrying value of the note because the stated interest rate for the note is at current market rates. The Company has no assets or liabilities that were valued on the basis of Level II inputs (significant observable inputs) or Level III inputs (significant unobservable inputs).

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.

Recognition of expenses in outsourced contracts

Pursuant to management’s assessment of the services that have been performed on clinical trials and other contracts, we recognize expenses as the services are provided. Such management assessments include, but are not limited to: (1) an evaluation of the work that has been completed during the period, (2) measurement of progress prepared internally and/or provided by the third-party service provider, (3) analyses of data that justify the progress, and (4) management’s judgment. In December 2007 we entered into a contract with a contract research organization to conduct a Phase IIa clinical trial of our primary product candidate, AKP-020, that will extend across multiple reporting periods. The estimated total cost of the contract is approximately $700,000 and the estimated total cost of the clinical trial is approximately $850,000, though our actual expenses could differ materially from those estimates.

Patent-related costs

All costs associated with application for patents are expensed as incurred and classified as research and development expenses in our consolidated statements of operations. Such patent-related costs for the three months ended March 31, 2007 have been reclassified to conform to the classification for the three months ended March 31, 2008.

Acquired contractual rights

Payments to acquire contractual rights to a licensed technology or drug candidate are expensed as incurred when there is uncertainty in receiving future economic benefits from the acquired contractual rights. We consider the future economic benefits from the acquired contractual rights to a drug candidate to be uncertain until such drug candidate is approved by the FDA or when other significant risk factors are abated.

7

Akesis Pharmaceuticals, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

Income taxes

Income taxes are accounted for in accordance with SFAS 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.

Research and development

Research and development costs are expensed as incurred. Such costs include the cost of in-licensed technology, consultants, supplies and clinical trials.

Stock-based compensation

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 (revised 2004), “Share Based Payments” (“SFAS No. 123(R)”).

As share-based compensation expense recognized in the consolidated statement of operations for the quarters ended March 31, 2008 and 2007 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. The estimation of the number of stock awards that will ultimately be forfeited requires judgment, and to the extent actual results or updated estimates differ from the Company’s current estimates, such amounts are required by SFAS No. 123(R) to be recorded as a cumulative adjustment in the period in which estimates are revised.

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 $168,395 and $140,681 on the Company’s reported results of operations for the three months ended March 31, 2008 and 2007, respectively.

Stock offering costs

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

Debt issuance costs

Debt issuance costs incurred to obtain debt financing are deferred and included on the consolidated balance sheets. The costs are amortized over the term of the debt. The amortization expense is included in interest expense on the consolidated statements of operations.

Net loss per share

Basic and diluted net loss per share is computed in accordance with SFAS 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.

8

Akesis Pharmaceuticals, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

For the quarters ended March 31, 2008 and 2007, 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 anti-dilutive:

	Quarters Ended March 31,
	2008	2007
Stock options	1,940,000	1,590,000
Stock warrants	2,079,241	1,726,300

Effect of new accounting standards

In March 2008, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 161, which is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance and cash flows. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company does not expect the adoption of SFAS No. 161 to affect future reporting or disclosures.

In December 2007, the FASB issued SFAS No. 160, which requires all entities to report noncontrolling (minority) interests in subsidiaries in the same way—as equity in the consolidated financial statements. Moreover, SFAS No. 160 eliminates the diversity that currently exists in accounting for transactions between an entity and noncontrolling interests by requiring they be treated as equity transactions. SFAS 160 is effective as of the beginning of the first fiscal year beginning after December 15, 2008. The Company does not expect the adoption of SFAS No. 160 to affect future reporting or disclosures.

In December 2007, the FASB issued SFAS No. 141(R), which creates greater consistency in the accounting and financial reporting of business combinations, resulting in more complete, comparable, and relevant information for investors and other users of financial statements. The new standard requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. SFAS 141(R) is effective as of the beginning of the first fiscal year beginning after December 15, 2008. The Company does not expect the adoption of SFAS No. 141(R) to affect future reporting or disclosures.

4. Long-Term Debt

In December 2006, the Company entered into a loan and security agreement with Square 1 Bank (the “Bank”) that provided for a loan of up to $1.0 million to finance general corporate purposes, which amount the Company borrowed in June 2007. The loan is payable in 30 monthly principal payments of $33,333 (in each case, plus monthly interest payments equal to the Bank’s prime rate plus 0.75%) and matures in December 2009. At March 31, 2008, the interest rate for the loan was 6%. The Company has granted a security interest in favor of the Bank in substantially all of its tangible assets as collateral for the loans under the loan and security agreement, and the agreement imposes certain limitations on the Company’s ability to engage in certain transactions. In connection with the agreement, the Company also issued to the Bank a warrant to purchase up to 50,000 shares of its common stock. The warrant is exercisable for seven years from the date of issuance at an exercise price per share of $0.60. The fair value of the warrant issued to the Bank was determined to be $55,505 using a Black-Scholes model, which amount was recorded as debt issuance costs and is being amortized over the life of the agreement. Interest expense, excluding amortization of debt issuance costs, for the three months ended March 31, 2008 and 2007 was $13,033 and zero, respectively. Amortization of debt issuance costs for the three months ended March 31, 2008 and 2007 was $7,017 and $6,914, respectively.

Loan maturities following March 31, 2008, are as follows:

Twelve months ended March 31, 2009	$	400,000
Twelve months ended March 31, 2010		300,000
	$	700,000

9

Akesis Pharmaceuticals, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

5. Commitments, Contingencies and Related Party Transactions

The Company leases approximately 200 square feet of office space located in La Jolla, California on a month-to-month basis from Avalon Ventures (together with its affiliated investment funds, “Avalon”). Avalon is a stockholder, owning 7,670,442 shares of the Company’s stock, or 31% of shares outstanding as of March 31, 2008. Additionally, Kevin Kinsella, a member of the Company’s board of directors, is a managing member of Avalon, and Jay B. Lichter, our President and Chief Executive Officer and a member of the Company’s board of directors, is a member of an affiliate of Avalon. From January 1, 2007 through January 31, 2008, the Company also sublet approximately 100 square feet of office space in San Diego, California from Sirion Therapeutics, Inc. (“Sirion”). Jay Lichter, the Company’s Chief Executive Officer and a member of the Board of Directors, is a former officer and current consultant to Sirion, and Kevin Kinsella is a current member of the Board of Directors of Sirion. 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 ended March 31, 2008 and 2007 of $4,325 and $5,250, respectively.

6. Stock-based Compensation

Stock-based compensation expense for the three months ended March 31, 2008 and 2007 was $168,395 and $140,681, respectively. Since we have a net operating loss carryforward as of December 31, 2007, 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 March 31, 2008.

As of March 31, 2008, there are 1,550,000 shares of common stock subject to nonstatutory stock options granted to executive officers and outside directors at exercise prices ranging from $0.51 to $1.50. Those stock options vest through various dates ending between December 12, 2008 and December 16, 2011, subject to the officers’ and directors’ continued employment with and service to the Company on any such date. In addition, in the event of a change of control of the Company, if the option is not assumed or an equivalent option is not substituted by the successor corporation or a parent or subsidiary of the successor corporation, the officers and directors 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 and directors would not otherwise be vested or exercisable. During the three months ended March 31, 2008 and 2007 nonstatutory stock options to acquire zero and 500,000 shares of our common stock, respectively, were granted.

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. Currently outstanding options to acquire a total of 390,000 shares of our common stock have been granted pursuant to such 2005 Stock Plan to an outside director and certain consultants. The stock options are nonqualified stock options with a term of 10 years and an exercise price ranging from $0.46 to $1.94 per share. The options vest through various dates ending between January 24, 2009 and June 4, 2010, subject to the director’s and consultants’ continued service to the Company on any such vesting date. In addition, in the event of a change of control of the Company, if the option is not assumed or an equivalent option is not substituted by the successor corporation or a parent or subsidiary of the successor corporation, the 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 director would not otherwise be vested or exercisable. During the three months ended March 31, 2008 and 2007 options to acquire zero and 90,000 shares of our common stock, respectively, were granted under the 2005 Stock Plan.

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 forfeiture rate 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.

10

Akesis Pharmaceuticals, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

The following is a summary of the status of the nonstatutory options and the options under the 2005 Stock Plan for the quarter ended March 31, 2008:

	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, 2007	1,940,000	$	0.91	8.82	$	—
Granted	—		—
Exercised	—		—
Expired	—		—
Cancelled	—		—
Balance at March 31, 2008	1,940,000	$	0.91	8.57	$	—
Exercisable at March 31, 2008	944,024	$	1.05	8.23	$	—

A summary of the status of our non-vested stock options as of March 31, 2008 and changes during the quarter then ended are presented below.

	Number of shares		Average Grant- Date Fair Value Per Share
Non-vested at December 31, 2007	1,121,394		$	0.37
Granted	—		$	—
Vested	(125,418	)	$	0.95
Cancelled	—			—
Non-vested at March 31, 2008	995,976		$	0.69

As of March 31, 2008, there was approximately $395,000 of total unrecognized compensation cost, related to non-vested stock options, which is expected to be recognized over a weighted-average period of approximately 1.73 years. The total fair value of shares vested during the quarters ended March 31, 2008 and 2007 was approximately $119,000 and $151,000, respectively.

7. Common Stock

In March 2008, the Company entered into a financing with Avalon where it sold 2,352,942 shares of its common stock at a purchase price of $0.85 per share. In addition, the Company issued warrants to purchase up to 352,941 shares of its common stock in connection with the financing. The warrants are exercisable for shares of the Company’s common stock until the earlier of March 25, 2011 or the date of a change of control of the Company at an exercise price per share of $0.85. The net proceeds from the financing after deducting expenses related to the financing were approximately $2 million. All the shares and warrants issued in connection with the financing were exempt from registration by virtue of Section 4(2) of the Securities Act of 1933, as amended.

As of March 31, 2008 and 2007, 2,079,241 and 1,726,300, respectively, shares of common stock were purchaseable under outstanding warrants. The weighted average exercise price of the outstanding warrants is $0.93 per share. During the three months ended March 31, 2008 and 2007, warrants to purchase 352,941 and zero, respectively, shares of common stock were issued by the Company as described above. During the three months ended March 31, 2008 and 2007, no warrants were exercised, adjusted or expired.

11

Akesis Pharmaceuticals, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

8. Income Taxes

At December 31, 2007, Akesis Delaware had no federal or state deferred tax assets or liabilities but did have federal and state tax net operating loss carryforwards of approximately $8.0 million and $5.4 million, respectively. The federal and state net operating loss carryforwards will begin to expire in 2018 and 2014, respectively, unless previously utilized. 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 $1,600 and $945 of statutory minimum state tax expense for the three months ended March 31, 2008 and 2007, respectively.

SFAS No. 109, “Accounting for Income Taxes”, requires that a valuation allowance be established when it is more likely than not that its recorded net deferred tax asset will not be realized. In determining whether a valuation allowance is required, a company must make take into account all positive and negative evidence with regard to the utilization of a deferred tax asset. SFAS No. 109 further states that it is difficult to conclude that a valuation allowance is not needed when there is negative evidence such as cumulative losses in recent years. The Company plans to continue to provide a full valuation allowance on future tax benefits until it can sustain an appropriate level of profitability and until such time, the Company would not expect to recognize any significant tax benefits in its future results of operations.

On January 1, 2007, the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”). Under FIN 48, tax positions are evaluated for recognition using a more-likely-than-not threshold, and those tax positions requiring recognition are measured as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information.

As of March 31, 2008 and December 31, 2007, the Company had no unrecognized tax benefits, including interest and penalties, and does not expect a significant change in the unrecognized tax benefits in the next twelve months. The Company recognizes interest and penalties to unrecognized tax benefits through interest and operating expenses respectively. There were no interest and penalties recorded as of March 31, 2008.

12

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q 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 such statements. 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, 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

Introduction

We are currently an early stage biopharmaceutical company engaged in the discovery, development and commercialization of ethical pharmaceuticals for the treatment of Type 2 diabetes. We have been granted patents and filed patent applications for a proprietary therapy for use in the treatment of Type 2 diabetes. Our products have demonstrated preliminary evidence of lowering and controlling blood glucose levels in patients with type 2 diabetes.

The following management’s discussion and analysis of financial condition and results of operations 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.

Research and Development Projects

The focus of the Company is the development of AKP-020, a proprietary, vanadium-based monotherapy for the treatment of Type 2 diabetes. Historically, we focused on the development of our proprietary compounds AKP-111, AKP-201 and AKP-310 as potential candidates for a combination product to treat diabetes and other related metabolic disorders. For instance, we previously completed in 1999 an initial 81-individual open-label study of AKP-111, our triple combination product, which demonstrated a consistent improvement in glycosylated hemoglobin levels (which is an established long-term measure of blood glucose) compared to base line, after three months of treatment in a diabetic population.

In March 2007, we entered into a license agreement with the University of British Columbia (“UBC”), pursuant to which we obtained an exclusive license to use, commercialize and sublicense certain patented technology (and improvements thereon) owned by UBC relating to the treatment of diabetes and other related disorders (the “Licensed Technology”). Included in the Licensed Technology is bis(ethylmaltolato)oxovanadium(IV) (“BEOV”), a novel vanadium compound that has shown considerable potential as a treatment for patients with Type 2 diabetes. The addition of BEOV—which we will refer to as AKP-020—to the Company’s product portfolio substantially accelerates the Company’s clinical programs and gives the Company a proprietary drug candidate that may be useful for the treatment of Type 2 diabetes.

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In addition, by virtue of the license, we gained access to data that includes information relating to Phase I clinical trials for AKP-020 and the extended related correspondence with the FDA. This data allowed the Company to request a pre-IND meeting with the FDA and subsequently file a full IND to initiate a Phase IIa clinical trial. The IND became active on November 12, 2007.

The initial human Phase I data for AKP-020 showed that AKP-020 has advantages over unpatented vanadyl sulfate (the original vanadium compound in AKP-111) with respect to dosing, pharmacokinetics and bioavailability, without signs of any significant new toxicities. This data set also includes extensive acceptable safety and efficacy profiles derived from studies of AKP-020 in rodents and dogs. In addition to the advanced clinical stage of AKP-020 and its mechanistic similarities to vanadyl sulfate, we believe that the Licensed Technology will be a strong candidate as a stand alone product.

Previously, we also entered into arrangements with Charles River Laboratories, Inc. (“Charles River Laboratories”), pursuant to which Charles River Laboratories performed two 28-day renal-focused safety and toxicology studies, one in rats and one in dogs, with various doses of AKP-020. The studies have been completed and the initial interpretation is one that is supportive of safety at the doses that we plan to use in humans, but this assessment is subject to confirmation by the FDA.

As a result of the foregoing, the Company’s initial product focus has shifted away from combination products, and towards AKP-020. Given the existing data on AKP-020 and the feedback from the FDA, we began enrolling subjects into an initial 21-individual, 28-day single-blinded Phase IIa clinical trial of AKP-020 in February 2008. The final interpretation of these results will be made in conjunction with discussions with the FDA once all of the data is collected. We can not be certain when all data will be collected, or what the results of our analyses or the feedback and interpretation of the FDA will be.

To date, the Company, under an open IND, has dosed several Type 2 diabetic subjects out of a total planned number of 21 subjects. All subjects will have been diagnosed with pre-existing Type 2 diabetes and will either have been on anti-diabetic medication or will be drug-naïve prior to enrollment into the study. We are currently in the process of generating and analyzing data from all of those subjects, but have released results from an initial nine subjects, seven of whom were dosed with AKP-020 and two of whom were dosed with a placebo. The data generated from these nine subjects is as follows:

Fasting plasma glucose (mg/dL)

	Treatment	Day -1	Day 1/2	Day 7	Day 14	Day 21	Day 28/29	Day 35	Day 42
Subject 1	AKP-020	157	139	128	136	146	152	142	151
Subject 2	Placebo	143	148	151	145	140	132	209	TBD
Subject 3	AKP-020	276	212	130	152	140	146	154	161
Subject 4	Placebo	157	142	165	180	190	136	171	172
Subject 1006	AKP-020	144	147	131	115	124	122	126	TBD
Subject 7	AKP-020	152	123	119	119	110	107	120	198
Subject 8	AKP-020	248	205	236	223	236	200	TBD	TBD
Subject 9	AKP-020	130	141	125	134	128	145	TBD	TBD
Subject 10	AKP-020	168	177	153	172	TBD	202	TBD	TBD

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Oral glucose tolerance test (OGTT) plasma glucose (mg/dL) levels 2 hours after challenge

	Treatment	Day -1	Day 1/2	Day 7	Day 14	Day 21	Day 28/29	Day 35	Day 42
Subject 1	AKP-020	263	264	217	234	273	258	276	266
Subject 2	Placebo	317	269	307	293	313	249	326	TBD
Subject 3	AKP-020	483	378	265	302	313	289	325	333
Subject 4	Placebo	291	255	291	319	330	275	307	317
Subject 1006	AKP-020	264	243	235	249	199	205	227	TBD
Subject 7	AKP-020	283	235	240	256	225	150	216	220
Subject 8	AKP-020	357	324	341	331	322	319	TBD	TBD
Subject 9	AKP-020	250	222	232	192	TBD	208	TBD	TBD
Subject 10	AKP-020	367	384	332	372	TBD	430	TBD	TBD

Day -1 data was collected the day before subjects were dosed. Day 2 data was collected 24 hours after a single 20 mg oral dose of AKP-020 or placebo, and data from Days 7, 14, 21, and 28/29 was collected after 7, 14, 21 and 28/29 daily administrations, respectively, of a 20 mg oral dose of AKP-020 or placebo. Day 35 and Day 42 data was collected after the 28/29 daily administrations, i.e. approximately 7 and 14 days respectively post-dose. The other measure of the effect of AKP-020 on plasma glucose levels is being determined using the gold standard euglycemic-hyperinsulinemic clamp design, but the results from these evaluations will not be available until all of data have been generated.

The American Diabetes Association (“ADA”) has defined that either of the following criteria is sufficient to establish the diagnosis of diabetes mellitus: (1) a fasting plasma glucose>126 mg/dL; or (2) a 2-hour post-load glucose level of> 200 mg/dL following a 75-g oral glucose challenge (“OGTT”).

Single-blind studies are generally considered to be less reliable than double-blind trials but more reliable than open-label studies. The objective of the study described above is to provide preliminary data on the safety and efficacy of a 28-day course of treatment with AKP-020 compared to a placebo in a small number of Type 2 diabetics. If the results from this study are suggestive of clinical efficacy with an acceptable safety profile, then we will submit an additional pre-clinical development package to the FDA to support clinical studies in larger numbers of patients for a longer duration of treatment and follow-up, to include measurements in changes of plasma glycosylated hemoglobin (“HbA1c”) levels as well as other measures to monitor for drug safety and tolerability. After consultation with and approval by the FDA, if the FDA would consider the results of these longer-term studies to be sufficient to demonstrate efficacy with an acceptable safety profile, these studies would then constitute what the FDA would consider to be registration-supportive studies.

The small size of our study, combined with its short duration, and the fact that the study is ongoing, make it impossible to draw broad, statistically meaningful conclusions. While we are encouraged by these promising preliminary results, we also recognize that this is an ongoing Phase IIa trial, and will continue to recruit patients and analyze the data.

In summary, based on this preliminary clinical data, we believe that AKP-020 may be an effective approach to improving the health of certain individuals with Type 2 diabetes. However, there can be no assurance that the results of more extensive human studies will be consistent with those obtained thus far and the determination as to the ultimate registrability of AKP-020 will be made by the FDA upon the submission by the Company of a new drug application.

Finally, the Company has filed for additional intellectual property protection for AKP-020. The Company intends for these new filings to provide for an additional 20 years of protection in the United States and certain non-United States territories.

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The risks and uncertainties associated with completing the development of our products on schedule, or at all, include the following, as well as other risk factors contained in our Annual Report on Form 10-KSB for the fiscal year ended December 31, 2007:

• 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;

• The intellectual property rights underlying our products may not be enforceable or may be found to infringe on the intellectual property rights of third parties;

• 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.

Results of Operations for the Three Months ended March 31, 2008 as Compared to the Three Months ended March 31, 2007

Research and Development Expenses

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 our research and development activities during the three months ended March 31, 2008 was $600,878 compared to $166,714 for the three months ended March 31, 2007. The primary reason for the increase in research and development expense between the two quarters is that during the first quarter of 2007 we were still in the planning phase of our clinical trials whereas, the clinical trials actually commenced in February 2008. In addition, we incurred certain sponsored research fees at UBC during the first quarter of 2008.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three months ended March 31, 2008 were $568,461 as compared to $472,938 for the three months ended March 31, 2007. The increase for the three months ended March 31, 2008 is primarily attributable to the retention of a government affairs consultant in July 2007 and an increase in expenses associated with our public relations and investor relations efforts.

Interest (Expense) Income, net

Interest (expense) income, net for the three months ended March 31, 2008 and 2007, was $(17,956) and $29,545, respectively. The primary cause for the change was that, as more fully explained in the following section, Liquidity and Capital Resources, in June 2007, we borrowed $1 million from the Bank. Consequently, we had significantly more interest expense for the three months ended March 31, 2008 when compared to the three months ended March 31, 2007. In addition, in November 2006, we entered into an equity financing that resulted in net proceeds to us of approximately $4.247 million. As a result of that financing late in 2006, we had significantly more interest income during the three months ended March 31, 2007 than we did during the three months ended March 31, 2008 when our average cash balance was much less than it was during the three months ended March 31, 2007. Finally, the interest rate paid by the Bank on our cash balances is significantly less in 2008 than it was in 2007.

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Liquidity and Capital Resources

We have financed our operations primarily through the sale of equity securities and borrowings under a credit facility with the Bank. We invest excess cash in a money market account that will be used to fund future operating costs. Cash and cash equivalents totaled $2,231,462 at March 31, 2008, compared to $1,110,196 at December 31, 2007. The primary reason for this increase in cash and cash equivalents is due to the financing with Avalon, described below. We primarily fund current operations with our existing cash and investments. Cash used in operating activities for the three months ended March 31, 2008 totaled $762,445.

We had no revenues or other income sources for the three months ended March 31, 2008 or for the 12 months ended December 31, 2007 to cover operating expenses, and we do not expect any revenues in the foreseeable future. We believe our current financial resources should enable us to continue operations based on our current level of commitments through the first quarter of 2009.

In March 2008, we entered into a financing with Avalon where we sold 2,352,942 shares of our common stock at a purchase price of $0.85 per share. In addition, we issued warrants to purchase up to 352,941 shares of our common stock in connection with the financing. The warrants are exercisable for shares of the Company’s common stock until the earlier of March 25, 2011 or the date of a change of control of the Company at an exercise price per share of $0.85. The net proceeds from the financing after deducting expenses related to the financing were approximately $2 million. All the shares and warrants issued in connection with the financing were exempt from registration by virtue of Section 4(2) of the Securities Act of 1933, as amended.

In December 2006, we entered into a loan and security agreement with the Bank that provided for a loan of up to $1.0 million to finance general corporate purposes, which amount the Company borrowed in June 2007. The loan is payable in 30 monthly principal payments of $33,333 (in each case, plus monthly interest payments equal to the Bank’s prime rate plus 0.75%) and matures in December 2009. The remaining principal balance on the loan as of March 31, 2008 is $700,000. The Company has granted a security interest in favor of the Bank in substantially all of its tangible assets as collateral for the loan under the loan and security agreement, and the agreement imposes certain limitations on the Company’s ability to engage in certain transactions. In connection with the agreement, the Company also issued to the Bank a warrant to purchase up to 50,000 shares of its common stock. The warrant is exercisable for seven years from the date of issuance at an exercise price per share of $0.60. The fair value of the warrant issued to the Bank was determined to be $55,505 using a Black-Scholes model, which amount was recorded as debt issuance costs and is being amortized over the life of the agreement. Interest expense, excluding amortization of debt issuance costs, for the three months ended March 31, 2008 and 2007 was $13,033 and zero, respectively. Amortization of debt issuance costs for the three months ended March 31, 2008 and 2007 was $7,017 and $6,914, respectively.

In December 2007 we entered into a contract with a contract research organization to conduct a Phase IIa clinical trial of our primary product candidate, AKP-020, that will extend across multiple reporting periods. The estimated total cost of the contract is approximately $700,000 and the estimated total cost of the clinical trial is approximately $850,000, though our actual expenses could differ materially from those estimates. The clinical trial began treating patients in February 2008.

In order to finance additional feasibility trials beyond the trial that began in February 2008 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.

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.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

Significant Accounting Policies

The preparation of financial statements requires the Company’s management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant accounting policies are those that require application of management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Such policies are summarized in Note 3 to the financial statements, above, and Note 2 to the financial statements in the Company’s 2007 Annual Report on Form 10-KSB. There have been no significant changes to the company’s critical accounting policies since December 31, 2007.

Effect of New Accounting Policies

In March 2008, the FASB issued SFAS No. 161, which is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance and cash flows. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company does not expect the adoption of SFAS No. 161 to affect future reporting or disclosures.

In December 2007, the FASB issued SFAS No. 160, which requires all entities to report noncontrolling (minority) interests in subsidiaries in the same way—as equity in the consolidated financial statements. Moreover, SFAS No. 160 eliminates the diversity that currently exists in accounting for transactions between an entity and noncontrolling interests by requiring they be treated as equity transactions. SFAS 160 is effective as of the beginning of the first fiscal year beginning after December 15, 2008. The Company does not expect the adoption of SFAS No. 160 to affect future reporting or disclosures.

In December 2007, the FASB issued SFAS No. 141(R), which creates greater consistency in the accounting and financial reporting of business combinations, resulting in more complete, comparable, and relevant information for investors and other users of financial statements. The new standard requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. SFAS 141(R) is effective as of the beginning of the first fiscal year beginning after December 15, 2008. The Company does not expect the adoption of SFAS No. 141(R) to affect future reporting or disclosures.

Item 3. Qualitative and Quantitative 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 March 31, 2008.

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Item 4. Controls and Procedures

The certifications of our Chief Executive Officer and Chief Financial Officer, filed as Exhibits 31.1, 31.2 and 32.1, should be read in conjunction with this Item 4.

Evaluation of disclosure controls and procedures. Our Chief Executive Officer and our Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Form 10-Q. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have determined that our disclosure controls and procedures were effective as of March 31, 2008.

Changes in internal control over financial reporting. Based on an evaluation performed by our Chief Executive Officer and Chief Financial Officer, we have concluded that there was no change in our internal control over financial reporting that occurred during the period covered by this Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II-OTHER INFORMATION

Item 1. Legal Proceedings.

None.

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

As previously reported, on March 25, 2008, the Company entered into a Securities Purchase Agreement (the “Financing Agreement”) with Avalon pursuant to which, among other things, we raised an aggregate of $2,000,000.70 through the sale and issuance of 2,352,942 shares of our Common Stock at a purchase price per share of $0.85 (the “Financing”). Per the terms of the Financing, Avalon received a warrant (the “Warrant”) to purchase up to 352,941 shares of our Common Stock, at an exercise price per share equal to $0.85, which Warrant would terminate upon the earlier of March 25, 2011 or the date of a change of control of the Company.

Kevin Kinsella, a beneficial owner of the Company’s common stock, a holder of warrants to purchase common stock and member of the Company’s board of directors, is a managing member of Avalon. Jay Lichter, the Company’s President and Chief Executive Officer and an optionholder and member of the Company’s board of directors, is a member of Avalon.

The Financing was unanimously approved by a special committee of the board of directors comprised entirely of disinterested directors.

The foregoing descriptions of the Financing Agreement and the Warrant are intended only as summaries of those documents and are qualified in their entireties by reference to the full copies of the Financing Agreement and the Warrant which are attached hereto as Exhibit 10.1 and Exhibit 4.9, respectively, and which are hereby incorporated by reference herein.

The issuances of the shares of our Common Stock and the Warrant pursuant to the Financing Agreement were exempt from registration by virtue of Section 4(2) of the Securities Act of 1933, as amended.

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 attached Exhibit Index.

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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/ Jay B. Lichter
	Jay B. Lichter
	President and Chief Executive Officer
Date: May 12, 2008

Akesis Pharmaceuticals, Inc. and Subsidiaries

Exhibit Index

Exhibit Number	Description
3.1(1)	Articles of Incorporation, as amended, of the Registrant
3.2(1)	Bylaws of the Registrant
4.1(2)	Form of Warrant to Purchase Common Stock issued pursuant to that certain Common Stock and Warrant Purchase Agreement dated December 30, 2005 between the Company and the purchasers therein
4.2(2)	Form of Warrant to Purchase Common Stock issued pursuant to the Form of Finder Agreement
4.3(3)	Form of Warrant to Purchase Common Stock issued pursuant to that certain Securities Purchase Agreement dated November 21, 2006 between the Company and the purchasers therein
4.4(3)	Warrant to Purchase Common Stock dated November 21, 2006 between the Company and Globalvest Partners, LLC
4.5(4)	Form of Warrant issued to Investors in the Financing dated December 15, 2006
4.6(4)	Warrant, dated as of December 15, 2006, issued to Globalvest Partners, LLC
4.7(4)	Warrant, dated as of December 15, 2006, issued to Square 1 Bank
4.8(5)#	Warrant to Purchase Common Stock dated October 2, 2006 between the Company and Edward Wilson.
4.9(6)	Warrant, dated as of March 25, 2008, issued to Avalon Ventures VII, L.P.
10.1(6)	Securities Purchase Agreement, dated as of March 25, 2008, by and between the Company and Avalon Ventures VII, L.P.
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 Company’s Form 10-K as filed with the SEC on March 24, 2005.

(2) Incorporated by reference to the Company’s Form 8-K as filed with the SEC on January 6, 2006.

(3) Incorporated by reference to the Company’s Form 8-K as filed with the SEC on November 27, 2006.

(4) Incorporated by reference to the Company’s Form 8-K as filed with the SEC on December 20, 2006.

(5) Incorporated by reference to the Company’s Form 8-K as filed with the SEC on October 3, 2006.

(6) Incorporated by reference to the Company’s Form 10-KSB as filed with the SEC on March 31, 2008.

^# Indicates management contract or compensatory plan.

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