Intellect Neurosciences 10-Q 2010 Q3 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)
R	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2010
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: 333-128226

INTELLECT NEUROSCIENCES, INC.

 (Exact Name of Registrant as Specified in Its Charter)

Delaware	20-2777006
(State or Other Jurisdiction of	(I.R.S. Employer
Incorporation)	Identification Number)
7 West 18th Street
New York, New York	10011
(Address of Principal Executive Offices)	(Zip Code)

(212) 448-9300

(Registrant’s Telephone Number, Including Area Code)

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

      Indicate by checkmark whether the Registrant has submitted electronically and posted on its corporate website, if any, any Interactive Data File required to be submitted and posted pursuant to Rule 405 of regulation S-T (Section 232.405) of this chapter during the preceding 12 months or for such shorter period that the Registrant was required to submit and post such files.  Yes¨   No  ¨

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

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

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

The registrant had 831,297,208 shares of Common Stock, par value $.001 par value per share, outstanding as of November 17, 2010.

Index

		PAGE
PART I.	FINANCIAL INFORMATION	3
Item 1.	Financial Statements: (Unaudited)	3
	Consolidated Condensed Balance Sheet as of September 30, 2010 and June 30, 2010	3
	Consolidated Condensed Statements of Operations for the three months ended September 30, 2010 and 2009 and for the period April 25, 2005 (inception) through September 30, 2010	4
	Consolidated Condensed Statement of Changes in  Capital Deficiency for the period ended September 30, 2010	5
	Consolidated Condensed Statements of Cash Flows for the three months ended September  30, 2010 and 2009 and for the period April 25, 2005 (inception) through September 30, 2010	6
	Notes to Consolidated Condensed Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	21
Item 4.	Controls and Procedures	21
PART II.	OTHER INFORMATION	22
Item 5.	Other	22
Item 6.	Exhibits	22
SIGNATURES		23
CERTIFICATIONS

2

Intellect Neurosciences, Inc.

(A development stage company)

Consolidated Condensed Balance Sheet

	September 30,  2010			June 30,  2010
ASSETS
Current assets:
Cash and cash equivalents	$	85,876		$	200,961
Cash held in escrow		-			545,556
Prepaid expenses and other current assets		5,096			883,142
Total current assets	$	90,972		$	1,629,659
Fixed assets, net	$	-		$	-
Security deposits		70,400			70,652
Total Assets	$	161,372		$	1,700,311
LIABILITIES AND CAPITAL DEFICIENCY
Current Liabilities:
Accounts payable and accrued expenses	$	3,354,352		$	3,398,030
Convertible promissory notes		90,555			342,222
Accrued interest - convertible promissory notes		28,715			121,230
Derivative instruments		1,077,228			17,696,890
Preferred stock liability		6,118			67,299
Preferred stock dividend payable		375,755			359,563
Total Current liabilities	$	4,932,724		$	21,985,234
Commitments and Contingencies
Deferred lease liability	$	-			913
Other long-term liabilities	$	-			26,285
Total Liabilities	$	4,932,724		$	22,012,432
Capital deficiency:
Preferred stock, $0.001 per share, 15,000,000 shares authorized;
Series B Convertible Preferred stock - 459,309 shares designated
and 61,181 shares issued (classified as liability above)
(liquidation preference $1,604,982)
Common stock, par value $0.001 per share, 2,000,000,000 shares
authorized; 831,297,208 and 814,180,314  issued and outstanding, respectively	$	831,297		$	814,180
Additional paid in capital	$	54,554,355			54,097,719
Deficit accumulated during the development stage	$	(60,157,003	)		(75,224,020	)
Total Capital Deficiency	$	(4,771,351	)	$	(20,312,121	)
Total Liabilities and Capital Deficiency	$	161,372		$	1,700,311

See notes to condensed consolidated financial statements

3

Intellect Neurosciences, Inc.

(A development stage company)

Consolidated Statements of Operations

(Unaudited)

	Three Months Ended
	September 30, 2010,						April 25, 2005 (inception) through September 30,  2010
	2010			2009
Revenues:
License fees	$	-		$	-		$	4,016,667
Total revenue	$	-		$	-		$	4,016,667
Costs and Expenses:
Research and development	$	578		$	38,238		$	13,331,349
General and administrative		1,687,703			523,708			34,271,414
Total cost and expenses	$	1,688,280		$	561,946		$	47,602,763
Income /(loss) from operations	$	(1,688,280	)	$	(561,946	)	$	(43,586,096	)
Other income/(expenses):
Interest expense	$	(65,764	)	$	(448,006	)	$	(52,426,089	)
Interest income		-			35		$	18,525
Changes in value of derivative instruments and preferred stock liability		16,821,061			868,980		$	43,276,130
Loss on extinguishment of debt							$	(701,869	)
Other							$	(6,587,604	)
Write off of investment							$	(150,000	)
Total other income/(expense):	$	16,755,297		$	421,009		$	(16,570,907	)
Net income/(loss)	$	15,067,017		$	(140,937	)	$	(60,157,003	)
Basic income/(loss) per share	$	0.02		$	(0.00	)
Diluted income/(loss) per share	$	0.02		$	(0.01	)
Weighted average number of shares outstanding:
Basic		831,297,208			30,843,873
Diluted		834,927,518			41,830,502

See notes to condensed consolidated financial statements

4

Intellect Neurosciences, Inc.

(A development stage company)

Consolidated Statement of Changes in Capital Deficiency

	Common Stock
	Number of Shares		Amount		Additional paid in capital		Deficit accumulated during the development stage			Total
Balance as of June 30, 2010		814,180,314	$	814,180	$	54,097,719	$	(75,224,020	)	$	(20,312,121	)
Conversion of promissory notes and interest into common stock		13,116,894		13,117		380,636					393,753
Shares issued to independent director		500,000		500		9,500					10,000
Shares issued as part of consulting agreements (August 2010)		3,500,000		3,500		66,500					70,000
Net income / (loss)								15,067,017			15,067,017
Balance as of September 30, 2010		831,297,208	$	831,297	$	54,554,355	$	(60,157,003	)		(4,771,351	)

See notes to condensed consolidated financial statements

5

Intellect Neurosciences, Inc.

(A development stage company)

Consolidated Condensed Statements of Cash Flows

	Three Months Ended
	September 30,
	2010			2009			April 25, 2005 (inception) through September 30, 2010
Cashflows from operating activities:
Net income	$	15,067,017		$	1,846,763			(60,157,002	)
Adjustments to reconcile net (loss) to net cash used by operating activities:
Depreciation and amortization		-			212,333			836,769
Amortization of financing costs		-			10,444			2,403,966
Change in unrealized (gain) loss of derivative instruments		(16,821,061	)		(3,403,737	)		(42,574,269	)
Stock based compensation		80,000			470,807			12,874,007
Interest expense related to warrants		-			-			39,013,009
Write-off of investment		-			-			150,000
Shares issued in connection with merger		-			-			7,020,000
Shares and Warrants issued for note extensions and compensation		140,219			-			893,672
Conversion of common stock to new Series B preferred shares		-			-			6,606,532
Non-cash interest expense relating to Notes		65,763			1,097,598			8,039,334
Non-cash expense related to Series B dividends		-			488,974			1,775,654
Amortization of deferred costs		-			(1,000,000	)		-
Disposition of fixed assets		-						43,412
Loss on sale of fixed assets		-			27,544			179,516
Changes in:
(Increase) decrease in prepaid expenses and other assets		878,046			6,089			(5,194	)
(Increase)  decrease in accounts receivable		-			(9,338	)		(6,964	)
Increase (decrease)  in accounts payable and accrued expenses		(43,680	)		(432,024	)		3,602,350
Increase (decrease) in deferred lease liability		(913	)		(6,123	)		(2	)
Increase (decrease) in other long term liabilities		(26,285	)		(46,049	)		-
Net cash provided by (used in) operating activities:		(660,894	)		(646,581	)		(19,305,210	)
Cashflows from investing activities:
Security deposit		21,777			-			(48,872	)
Acquistion of property and equipment					-			(1,059,699	)
Restricted cash		524,032			(21,524	)		(21,524	)
Cash paid for acquisition		-			-			(150,000	)
Net cash provided by (used in) investing activities:		545,809			(21,524	)		(1,280,095	)
Cashflows from financing activities:
Borrowings from stockholders		-			-			6,153,828
Proceeds from sale of common stock		-			-			1,761,353
Proceeds from sale of preferred stock		-			-			6,761,150
Preferred stock issuance costs		-			-			(814,550	)
Proceeds from sale of Convertible Promissory Notes		-			391,460			10,306,500
Repayment of borrowings from stockholder		-			(20,000	)		(1,706,000	)
Convertible Promissory Notes issuance cost		-			58,540			(466,100	)
Repayment of borrowings from noteholders		-			-			(1,325,000	)
Net cash provided by financing activities:		-			430,000			20,671,181
Net increase (decrease) in cash and cash equivalents		(115,085	)		(238,105	)		85,876
Cash and cash equivalents beginning of period		200,961			270,588			-
Cash and cash equivalents end of period	$	85,876		$	32,483		$	85,876
Supplemental disclosure of cash flow informations:
Cash paid during the period for:
Interest	$	-		$	-		$	71,737
Non-cash investing and financing transactions:
Conversion of Convertible Notes payable and accrued interest into Common Stock	$	393,753					$	15,252,682
Conversion of Preferred Stock to Common Stock								5,328,729
Common Stock issued in repayment of debt								248,000
Accrued dividend on Series B prefs treated as capital contribution								387,104
Cashless excersise of Warrant for Common Stock								15,625,442

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Note 1. Business Description and Going Concern

Intellect Neurosciences, Inc., a Delaware corporation, (“Intellect”, “our”, “us”, “we” or the “Company” refer to Intellect Neurosciences, Inc. and its subsidiaries) is a biopharmaceutical company, which together with its subsidiaries Intellect Neurosciences, USA, Inc. (“Intellect USA”) and Intellect Neurosciences, (Israel) Ltd. (“Intellect Israel”), is conducting research and developing proprietary drug candidates to treat Alzheimer’s disease (“AD”) and other diseases associated with oxidative stress. In addition, we have developed and are advancing a patent portfolio related to specific therapeutic approaches for treating AD. Since our inception in 2005, we have devoted substantially all of our efforts and resources to research and development activities and advancing our patent estate. We operate under a single segment. Our fiscal year end is June 30. We have had no product sales through September 30, 2010 but we have received $4,050,000 in license fees from inception through September 30, 2010. Our losses from operations have been funded primarily with the proceeds of equity and debt financings and fees from license arrangements.

We are a development stage company and our core business strategy is to leverage our intellectual property estate through license arrangements and to develop our proprietary compounds that we have purchased, developed internally or in-licensed from universities and others, through human proof of concept (Phase II) studies or earlier if appropriate and then seek to enter into collaboration agreements, licenses or sales to complete product development and commercialize the resulting drug products. Our objective is to obtain revenues from licensing fees, milestone payments, development fees and royalties related to the use of our intellectual property estate and the use of our proprietary compounds for specific therapeutic indications or applications. As of September 30, 2010, we had no self developed or licensed products approved for sale by the U.S. Food and Drug Administration (“FDA”). There can be no assurance that our research and development efforts will be successful, that any products developed by any of our licensees will obtain necessary government regulatory approval or that any approved products will be commercially viable. In addition, we operate in an environment of rapid change in technology and are dependent upon the continued services of our current employees, consultants and subcontractors.

One of our key assets is our ANTISENILIN patent estate. We have entered into two license agreements and one option agreement with major global pharmaceutical companies with respect to this patent estate.

Our proprietary internal pipeline includes:

· OXIGON (OX1), an orally administered, small molecular weight, copper-binding compound that prevents oxidative stress and blocks formation of toxic Aß aggregates. Phase I trials in Europe have been completed and the drug candidate is planned to enter Phase II trials in AD patients, provided we obtain sufficient financing.

· IN-N01, an Aß specific, humanized monoclonal antibody generated using our ANTISENILIN® platform technology. The prototype drug candidate is in preclinical optimization-stage. The antibody product would be administered to AD patients by infusion.

· RECALL-VAX, an active vaccine against Aß based on our RECALL-VAX™ technology. The prototype drug candidate is ready for preclinical optimization. The vaccine product would be used to inoculate individuals by injection with a modified non-toxic form of Aß so that they become “immunized” to the naturally occurring toxin.

These consolidated financial statements are presented on the basis that we will continue as a going concern. The going concern concept contemplates the realization of assets and satisfaction of liabilities in the normal course of business. Due to the start up nature of our activities, we have incurred significant operating losses since inception. We have generated negative cash flows from operations and have an accumulated deficit at September 30, 2010 of $60,157,003. We have limited capital resources and operations since inception have been funded with the proceeds from private equity and debt financings and license fee arrangements. We anticipate that our existing capital resources will not enable us to continue operations past mid January of 2011, or earlier if unforeseen events or circumstances arise that negatively affect our liquidity. These conditions raise substantial doubt about our ability to continue as a going concern. We continue to seek additional funding through various financing alternatives. If additional capital is raised through the sale of equity or convertible debt securities, the issuance of such securities will result in dilution to our existing stockholders. We cannot assure you that financing will be available on favorable terms or at all. If we fail to raise additional capital or obtain substantial cash inflows from potential partners prior to mid-January 2011, we may be forced to cease operations. The consolidated financial statements do not include any adjustments that might result from the outcome of this going concern uncertainty.

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2. Basis of Presentation

The unaudited consolidated condensed financial statements presented herein have been prepared in accordance with the instructions to Form 10-Q and do not include all the information and note disclosures required by accounting principles generally accepted in the United States. The consolidated condensed financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company’s Current Report on Form 10-K for the fiscal year ended June 30, 2010 filed with the Securities and Exchange Commission (the “SEC”) on October 13, 2010. The consolidated financial statements include the accounts of our wholly owned subsidiary, Intellect Israel and the accounts of Mindgenix, Inc. (“Mindgenix”), a wholly-owned subsidiary of Mindset Biopharmaceuticals, Inc. (“Mindset”). We consolidate Mindgenix because we have agreed to absorb certain costs and expenses incurred that are attributable to its research. Dr. Chain, our CEO, is a controlling shareholder of Mindset and the President of Mindgenix. All inter-company transactions have been eliminated in consolidation.

In the opinion of management, this interim information includes all material adjustments, which are of a normal and recurring nature, necessary for fair presentation. No adjustment has been made to the carrying amount and classification of assets and the carrying amount of liabilities based on the going concern uncertainty.

In June 2009, the FASB issued Accounting Standards Update No. 2009-01 which amends ASC 105, Generally Accepted Accounting Principles. This guidance states that the ASC will become the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities.  We adopted ASC 105 as of September 30, 2009 and thus have incorporated the new Codification citations in place of the corresponding references to legacy accounting pronouncements.

3. New Accounting Pronouncements

In January 2010, FASB issued ASU No. 2010-06 – Improving Disclosures about Fair Value Measurements. This update provides amendments to Subtopic 820-10 that requires new disclosure as follows: 1) Transfers in and out of Levels 1 and 2. A reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. 2) Activity in Level 3 fair value measurements. In the reconciliation for fair value measurements using significant unobservable inputs (Level 3), a reporting entity should present separately information about purchases, sales, issuances, and settlements (that is, on a gross basis rather than as one net number). This update provides amendments to Subtopic 820-10 that clarifies existing disclosures as follows: 1) Level of disaggregation. A reporting entity should provide fair value measurement disclosures for each class of assets and liabilities. A class is often a subset of assets or liabilities within a line item in the statement of financial position. A reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities. 2) Disclosures about inputs and valuation techniques. A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. Those disclosures are required for fair value measurements that fall in either Level 2 or Level 3. The adoption of this guidance did not have a material impact on our consolidated financial statements.

In February 2010, FASB issued ASU No. 2010-9 –Amendments to Certain Recognition and Disclosure Requirements. This update addresses certain implementation issues related to an entity’s requirement to perform and disclose subsequent-events procedures, removes the requirement that public companies disclose the date of their financial statements in both issued and revised financial statements. According to the FASB, the revised statements include those that have been changed to correct an error or conform to a retrospective application of U.S. GAAP. The adoption of this ASU did not have a material impact on our consolidated financial statements.

In March 2010, FASB issued ASU No. 2010-11 –Scope Exception Related to Embedded Credit Derivatives. Embedded credit-derivative features related only to the transfer of credit risk in the form of subordination of one financial instrument to another are not subject to potential bifurcation and separate accounting as clarified by recently issued FASB guidance. Other embedded credit-derivative features are required to be analyzed to determine whether they must be accounted for separately. This update provides guidance on whether embedded credit-derivative features in financial instruments issued by structures such as collateralized debt obligations (CDOs) and synthetic CDOs are subject to bifurcation and separate accounting. The guidance is effective at the beginning of a company’s first fiscal quarter beginning after June 15, 2010. We not expect the adoption of this ASU to have a material impact on our consolidated financial statements.

In April 2010, the FASB issued ASU No. 2010-13, Compensation – Stock Compensation: Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades. ASU 2010-13 clarifies that a share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, such an award should not be classified as a liability if it otherwise qualifies as equity. ASU 2010-13 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010, with early adoption permitted. We are currently evaluating the potential impact of this standard.

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4. Asset Transfer Agreement

In 2005, we acquired certain assets from Mindset Biopharmaceuticals, Inc., which we refer to as “Mindset”. Dr. Daniel Chain, our Chairman and Chief Executive Officer, founded Mindset and remains a significant stockholder and officer of Mindset. Dr. Chain spends approximately 5% of his time on matters relating to Mindset. Mindset is not involved in any business that competes, directly or indirectly, with the business of Intellect.

In connection with the asset transfer, we acquired certain debt of Mindset that was held by its former creditors. As a result, we became a significant creditor of Mindset. Although it is possible that Mindset will become a profitable entity in the future, we believe that we are unlikely to recover any significant repayment of amounts due to us from Mindset. In addition, the debt owed to us by Mindset is extinguished by its terms without any additional consideration on December 31, 2013. Accordingly, we have determined that the receivable from Mindset is uncollectable and of no value.

5. April 23, 2010 Transaction

Pursuant to a series of agreements dated April 23, 2010:

· We sold investment units for an aggregate purchase price of $2,320,000. Each unit consisted of a Secured Convertible Promissory Note (the “2010 Notes”), shares of our common stock, and Class A, Class B and Class C warrants. Net proceeds from the sale of the securities were approximately $2,025,000, after taking into account repayment of the November Notes, as defined and described in Note 6. The net proceeds were placed in escrow and were distributed to us on a monthly basis pursuant to the terms of an Escrow Agreement. We issued a total of 58,000,000 shares of our common stock and 77,333,334 of each Class A Warrants, Class B Warrants and Class C Warrants. The 2010 Notes have an aggregate principal amount of $580,000, are due April 22, 2013, bear interest at 14%, payable at maturity, and are secured by all of our assets, including the net proceeds from the transaction that have been retained in the escrow account. At the option of the holder, principal and all accrued interest is convertible into our common stock at a price of $0.03 per common share.

· The holder of a note with a face amount of $75,000 that was issued in connection with the extension of the maturity date of certain of the 2006 Notes accepted shares of our common stock in repayment of his Note. See Note 6.

· All the holders of the 2007 Notes (except for holders owning notes with an aggregate principal amount of $310,000 and 177,142 warrants) accepted shares of our common stock in repayment of their 2007 Notes and agreed to the cancellation of their warrants. In June, we issued 3,870,137 shares of our common stock to the holder of 2007 Notes with an aggregate principal amount of $300,000 in consideration for release of certain claims. Those notes were repaid through the issuance of our common stock in July 2010. See Note 6.

· All of the holders of the 2008 Notes accepted shares of our common stock in repayment of their 2008 Notes and agreed to the cancellation of their warrants. See Note 6.

· All of the holders of the Royalty Notes accepted shares of our common stock in repayment of their Royalty Notes and agreed to the cancellation of their warrants. See Note 6.

· The holder of the August Note accepted shares of our common stock in repayment of his Note and we issued to him 15 million shares of our common stock in lieu of the Purchaser Warrant. See Note 6.

· The holders of the November Notes exchanged an amount equal to the principal component of the November Notes for investment units and accepted shares of our common stock in payment of the accrued interest and the escrow agent released the Purchaser Shares to them. We subsequently issued 2.5 million replacement shares to our CEO. See Note 6.

· All of the holders of the Series B Preferred (except holders owning Series B Preferred with an aggregate liquidation preference of $987,000 and 424,858 warrants) exercised the conversion feature contained in the Series B Preferred and exchanged their securities for shares of our common stock and agreed to the cancellation of their Series B Warrants.

· We issued 66,379,167 shares of our common stock and 35,000,000 warrants to purchase shares of our common stock to various consultants in connection with transactions referred to above.

6. Notes Payable

The “2007 Notes”

During the fiscal year ended June 30, 2007, we issued $5,678,000 aggregate face amount of Convertible Promissory Notes (the “2007 Notes”) together with warrants to purchase up to 3,236,000 shares of our common stock at a price of $1.75 per share. All of the 2007 Notes carried interest at 10% and were unsecured obligations and had a maturity of one year from issuance. All of the 2007 Notes were in default and were repaid by the issuance of shares of our common stock during the year ended June 30, 2010 except for 2007 Notes with an aggregate principal amount of $310,000 (see Note 5). In July 2010, holders of notes with an aggregate principal amount of $300,000 accepted shares of our common stock in repayment of their notes.

9

We determined the initial fair value of the warrants issued to the purchasers of the 2007 Notes to be $3,425,861 based on the Black-Scholes option pricing model, which we treated as a liability with a corresponding decrease in the carrying value of the 2007 Notes. This difference was amortized over the term of the 2007 Notes as interest expense, calculated using an effective interest method.

During the fiscal year ended June 30, 2007, we incurred placement fees of $340,000 and issued 485,714 warrants to a placement agent in connection with the issuance of 2007 Notes. We recorded the placement fee and the value of the warrants as deferred financing costs, which was amortized over the term of these Notes. We determined the initial fair value of the warrants on the closing date to be $1,116,250 using the Black Scholes option pricing model. This amount was recorded as a warrant liability with an offset to deferred financing costs.

The “2008 Notes”.

During the year ended June 30, 2008, we issued convertible promissory notes with an aggregate face amount of $325,000 (the “2008 Notes”) together with warrants to purchase up to 185,744 shares of our common stock. These notes were due 12 months from the date of issuance, carried interest at 10% per annum and were unsecured, except for one note with a face amount of $100,000 that carried interest at 17% and was due six months from the date of issuance. All of the 2008 Notes were in default and were repaid by the issuance shares of our common stock during the year ended June 30, 2010 (see Note 5).

We determined the initial fair value of the warrants issued with the 2008 Notes to be $52,740 based on the Black-Scholes option pricing model, which has been treated as a liability with a corresponding decrease in the carrying value of the 2008 Notes. This difference will be amortized over the term of the 2008 Notes as interest expense calculated using an effective interest method.

“Royalty Notes”

Effective as of July 31, 2008, we issued notes (the “Royalty Notes”) with an aggregate principal amount of $5,075,000 and 2.9 million warrants to holders of convertible promissory notes that we previously issued with an aggregate face amount of $4,967,328 in exchange for their Notes and to holders of 2008 Notes with an aggregate face amount of $107,672 in exchange for their Notes. In addition, we issued to an unrelated party a Royalty Note with a face amount of $650,000 and 371,429 warrants in exchange for $650,000. In addition, we granted all of these holders the right to receive 25% of future royalties that we receive from the license of our ANTISENILIN patents.

We accounted for the exchange of the notes as an extinguishment of debt in accordance with authoritative guidance and concluded that it was necessary to reflect the Royalty Notes at fair market value and record a loss on extinguishment of debt of approximately $702,000 in July 2008. We accounted for the issuance of the Royalty Note with a face amount of $650,000 as a new issuance. We accounted for the 371,429 Royalty Warrants issued to this holder as a liability, measured at fair value, which has been offset by a reduction in the carrying value of the associated Royalty Note.

On March 22, 2009, in connection with the settlement of certain litigation relating to a convertible promissory note in default, one of our related party shareholders purchased the note in default from the original note holder and agreed to cancel the note. In exchange, we issued to the related party shareholder an additional Royalty Note with a face amount of $310,000 and repaid $100,000 of other notes held by the shareholder.

As of June 30, 2009, the outstanding principal balance of the Royalty Notes was $5,242,328, of which $3,808,828 was owed to a related party. As of June 30, 2010, all of the Senior Notes were repaid and the associated warrants were cancelled (see Note 5)

The “August Note”

On August 12, 2009, we issued a 10% Senior Promissory Note (the “August Note”) with a principal amount of $450,000, resulting in net proceeds of approximately $360,000. The August Note carried interest at 10% annually and was due upon the earlier of 6 months from the date of the Note or the closing of an equity financing with gross proceeds to us of at least $1,125,000 (the “Liquidity Event”). Our payment and performance obligations were guaranteed by Margie Chassman, one of our principal shareholders. In consideration of the guaranty provided by Ms. Chassman, we paid her a fee of $30,000. As of June 30, 2010, the Note was repaid through the issuance of our common stock (see Note 5).

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The closing price of our common stock on April 23, 2010 was $0.16. Under authoritative guidance, we recorded the difference between the aggregate value of our common stock issued in repayment of the August Note, including the shares issued as additional consideration, and the sum of the carrying value of the August Note and carrying value of the Purchaser warrants as additional interest expense.

The purchaser of the August Note had the right to receive at maturity, in addition to accrued interest, either a number of our shares of common stock equal to the quotient of the principal amount of the August Note divided by 0.15; or warrants to purchase a number of shares of our common stock equal to the quotient of the principal amount of the August Note divided by 0.15, (the “Purchaser Warrants”). If the Liquidity Event occurs on or prior to the maturity date of the August Note, the purchaser will receive Shares. If the Liquidity Event has not occurred on or prior to the maturity date of the August Note, the purchaser will receive Purchaser Warrants.

We determined at the time of issuance of the August Note that it was probable that the holder would receive Purchaser Warrants rather than the shares of common stock at maturity. We based this determination on our estimate of the likelihood that the Liquidity Event would occur on or before the maturity date of the August Note. We determined the initial fair value of the warrants issued to the purchaser of the August Note to be $151,930 based on the Black-Scholes option pricing model, which we treated as a liability with a corresponding decrease in the carrying value of the August Note. This difference was amortized over the term of the August Note as interest expense, calculated using an effective interest method.

We paid a commission of $45,000 plus reimbursement of expenses and agreed to issue to the broker warrants (the “Broker Warrants”) to purchase 750,000 shares of our common stock at an exercise price of $0.15 per share. In addition, we agreed to extend the expiration date of warrants to purchase 485,714 shares of our common stock, which were issued to this broker in July 2007 until the expiration date of the Broker Warrants.

The “November Notes”

On November 17, 2009, we issued Convertible Promissory Notes (the “November Notes”) with an aggregate principal amount of $200,000, resulting in net proceeds of approximately $192,500. The November Notes bear interest at 14% annually (payable in arrears) and mature 3 months from the issue date.

The purchasers of the November Notes were entitled to receive at maturity, in addition to accrued interest, 2.5 million shares of our common stock (the “Purchaser Shares”). The CEO of the Company transferred to an escrow agent 2.5 million shares of his Company common stock as collateral at the time of issuance of the Note.

We calculated the initial fair value of the Purchaser Shares to be $250,000 based on the closing price of the our common stock on the date of issuance of the November Notes. We treated this amount as a liability with a corresponding decrease in the carrying value of the November Notes, with any excess treated as interest expense for the current period. The decrease in the carrying value of the November Notes was amortized over the term of the notes as interest expense, calculated using an effective interest method.

As of June 30, 2010, all of the November Notes were repaid, the Purchaser Shares were released by the Escrow Agent and we issued 2.5 million replacement shares to our CEO (see Note 7).

The “April 2010 Notes”

On April 23, 2010, we issued Convertible Promissory Notes (the “April 2010 Notes”) with an aggregate principal amount of $580,000. The April 2010 Notes carry interest at 14% annually (payable in arrears) and mature three years from the issue date (see Note 5).

We determined the initial fair value of the Warrants issued with the April 2010 Notes to be $41,093,377 based on the Black-Scholes option pricing model, which we treated as a liability with a corresponding decrease in the carrying value of the April 2010 Notes. Under authoritative guidance, the carrying value of the April 2010 Notes may not be reduced below zero. Accordingly, we recorded the excess of the value of the Warrants over the face amount of the April 2010 Notes as interest expense incurred at the time of issuance of the April 2010 Notes. The face amount of the April 2010 Notes will be amortized over the term of the notes as interest expense, calculated using an effective interest method. See Note 8.

The conversion feature of the convertible notes provides for a rate of conversion that is below market value. This feature is characterized as a beneficial conversion feature (“BCF”). We recorded the BCF as a debt discount pursuant to ASC Topic 470-20. In this circumstance, we recorded the convertible debt net of the discount related to the BCF and we will amortize the discount to interest expense over the life of the April 2010 Notes. We recorded a BCF of $3,093,333 related to the April 2010 Notes.

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Convertible notes outstanding as of September 30, 2010 are as follows:

Convertible notes issued:	$	590,000
Less: debt discount:	$	499,445
Balance – September 30, 2010	$	90,555

7. Series B Convertible Preferred Stock and Derivative Liability

As of September 30, 2010 and September 30, 2009, there were 61,181 and 459,309 shares, respectively, of "Series B Convertible Preferred Stock" outstanding. The shares carry a cumulative dividend of 6% per annum. The initial conversion price is subject to certain anti-dilution adjustments. The Series B Preferred carries a stated value of $17.50 and is convertible into 10 shares of our common stock. We issued 3,046,756 warrants in connection with the issuance of the Series B Preferred (the “Series B Warrants”).

Based on authoritative guidance, we accounted for the Series B Preferred and the Series B Warrants as derivative liabilities at the time of issuance using the Black Scholes option pricing model. We recorded the amount received in consideration for the Series B Preferred as a liability for the Series B Preferred shares with an allocation to the Series B Warrants and the difference recorded as additional paid in capital. The liability related to the Series B Preferred and the Warrants will be marked to market for all future periods they remain outstanding with an offsetting charge to earnings.

At September 30, 2010 the Series B Preferred stock liability was $6,118 with a change (decrease) in fair value of $61,181 for the three months ended September 30, 2010, recorded in other income. As of September 30, 2010, we have accrued Series B Preferred Stock dividends payable of $375,755, which are recognized as interest expense.

8. Outstanding Warrants and Warrant Liability

The “2006 Warrants”

In connection with the sale of the 2006 Notes, we issued warrants (the “2006 Warrants”), entitling the holders to purchase up to 2,171,424 shares of our common stock. We issued additional 2006 Warrants upon extension of the maturity date of certain of the 2006 Notes. The 2006 Warrants expire five years from date of issuance, except for 1,142,855 of such warrants, which expire in 2013. The number of shares underlying each 2006 Warrant is the quotient of the face amount of the related 2006 Note divided by 50% of the price per equity security issued in the Next Equity Financing, which occurred on May 12, 2006. The 2006 Warrant exercise price is 50% of the price per equity security issued in the Next Equity Financing. The maximum number of shares available for purchase by an investor is equal to the principal amount of such holder's 2006 Note divided by the warrant exercise price.

We valued the 2006 Warrants as of May 12, 2006, the measurement date, and recorded a charge to interest expense and a corresponding derivative liability of $746,972 based on a Black-Scholes option pricing model. As of September 30, 2010, a total of 1,825,430 warrants remain outstanding.

The “Convertible Note Warrants”

In connection with the sale of the 2007 and 2008 Notes, we issued 3,837,546 and 185,714 warrants, respectively. In addition, we issued 371,429 warrants in connection with a Convertible Note issued during fiscal year ended June 30, 2009 (the “Convertible Note Warrants”). The Convertible Note Warrants expire five years from date of issuance. The number of shares underlying each Convertible Note Warrant is the quotient of the face amount of the related Note divided by 1.75. The exercise price of each warrant is $1.75 per share, subject to anti-dilution adjustments. These warrants provide the holder with “piggyback registration rights”, which obligate us to register the common shares underlying the Warrants in the event that we decide to register any of our common stock either for our own account or the account of a security holder (other than with respect to registration of securities covered by certain employee option plans). The terms of the Warrants fail to specify a penalty if we fail to satisfy our obligations under these piggyback registration rights. Presumably, we would be obligated to make a cash payment to the holder to compensate for such failure. Based on authoritative guidance, we have accounted for the Convertible Note Warrants as liabilities. The liability for the Convertible Note Warrants, measured at fair value, based on a Black- Scholes option pricing model, has been offset by a reduction in the carrying value of the related Notes. The liability for the Convertible Note Warrants has been marked to market for each period they remain outstanding.

As of September 30, 2010, 5,714 Convertible Note Warrants remain outstanding. In addition, 485,714 warrants issued to the placement agent in 2007 remain outstanding. Also, during the three months ended September 30, 2010, we issued 1,937,500 warrants to various consultants.

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The “Royalty Warrants”.

In connection with the issuance of the Royalty Notes, we issued warrants to purchase up to 3,271,429 of our common shares (the “Royalty Warrants”). We issued approximately 371,429 warrants to the lender who advanced to us new funds of $650,000 and issued the remaining 2,900,000 warrants to the other lenders who exchanged their notes for Royalty Notes. The Royalty Warrants contain the same terms as the Convertible Note Warrants described above.

Based on authoritative guidance, we accounted for the 371,429 Royalty Warrants issued to the unrelated lender as a liability. We valued these warrants on the date of issuance based on a Black-Scholes option pricing model and the resulting liability will be marked to market for each future period these warrants remain outstanding, with the resulting gain or loss being recorded in the statement of operations. We accounted for the 2,900,000 Royalty Warrants issued to the other lenders as interest expense incurred in exchange for an extension of the maturity dates of the Notes exchanged in the transaction. We calculated the fair value of these remaining warrants on the issue date of the warrants to be $1,172,062, using a Black Scholes pricing model and recorded this amount as additional interest expense incurred in July 2008.

As of June 30, 2010, all of the holders of the Royalty Notes accepted common stock in repayment of their notes and agreed to the cancellation of their Royalty Warrants (see Note 5).

The “Purchaser Warrants”.

In connection with the sale of the August Note, we agreed, at maturity or early repayment of the note, to issue either common shares or warrants to purchase up to 3.0 million of our common shares (the Purchaser Warrants). The Purchaser Warrants were to contain the same terms as the Convertible Note Warrants described above. Based on authoritative guidance, we accounted for the Purchaser Warrants as a liability as of the date of issuance and reduced the carrying value of the August Note by the initial fair value of these Warrants. The liability for the Purchaser Warrants has been marked to market for each period the August Note remained outstanding with the resulting gain or loss being recorded in the statement of operations.

On April 23, 2010, we agreed to issue to the holder of the August Note 15 million shares of our common stock in lieu of the Purchaser Warrants (see Note 5).

The “Series B Warrants”

In connection with the issuance of the Series B Preferred, we issued Series B warrants to purchase up to 3,796,966 shares of our common stock. The initial exercise price of the Series B Warrants was $2.50 per common share, subject to anti dilution adjustments. The strike price of the Series B Warrants was subsequently reduced to $1.75 per common share pursuant the anti-dilution adjustment. The Series B Warrants have a 5 year term.

The Series B Warrants provide for cashless exercise under certain circumstances. Accordingly, the amount of additional shares underlying potential future issuances of Series B Warrants is indeterminate. There is no specified cash payment obligation related to the Series B Warrants and there is no obligation to register the common shares underlying the Series B Warrants except in the event that we decide to register any of our common stock for cash (“piggyback registration rights”). Presumably, we would be obligated to make a cash payment to the holder if we failed to satisfy our obligations under these piggyback registration rights. Based on authoritative guidance, we have accounted for the Series B Warrants as liabilities. The liability for the Series B Warrants, measured at fair value as determined in the manner described below, has been offset by a charge to earnings rather than as a discount from the carrying value of the Series B Preferred. The liability for the Series B Warrants has been marked to market for each period they remain outstanding.

As of September 30, 2010, 448,764 Series B Warrants remain outstanding.

The “April 2010 Warrants”

In connection with the April 2010 Financing, we issued Class A, B and C Warrants. The Class A Warrants have a 5 year term, an initial exercise price of $0.03 per common share, subject to anti dilution adjustments and contain a “cashless exercise feature”. The Class B Warrants have a 9 month term and an initial exercise price of $0.03 per common share, subject to anti dilution adjustments. The Class C Warrants have a 5 year and 9 month term, an initial exercise price of $0.03 per common share, subject to anti dilution adjustments and contain a “cashless exercise feature”. All of the April 2010 Warrants provide the holder with “piggyback registration rights” as described above. Based on authoritative guidance, we have accounted for the April 2010 Warrants as liabilities. The liability, measured at fair value on the date of issuance using a Black-Scholes option pricing model has been offset by a reduction in the carrying value of the April 2010 Notes and will be marked to market for each future period they remain outstanding.

On June 28, 2010, holders of all 77,333,334 Class A Warrants exercised their Class A Warrants through the cashless exercise feature and received a total of 60,761,994 shares of our common stock.

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 “Consultant Warrants”

In connection with the April 2010 Financing, we issued 35 million warrants to various consultants (the “Consultant Warrants”) with terms that are the same as those contained in the Class A Warrants. Based on authoritative guidance, we have accounted for the Consultant Warrants as liabilities. The liability, measured at fair value on the date of issuance using a Black-Scholes option pricing model, will be marked to market for each future period the warrants remain outstanding.

On June 28, 2010, holders of all of the outstanding Consultant Warrants exercised their Warrants through the cashless exercise feature and received a total of 27,499,999 shares of Company common stock.

Summary of Derivative Liability at September 30, 2010

Category	Weighted Average Strike Price at September 30, 2010		Weighted Average Remaining Term at September 30, 2010		Derivative Liability at September 30, 2010
2006 Warrants	$	0.03		1.13	$	10,732
Convertible Note Warrants , Broker Warrants and Consultant Warrants	$	0.04		3.47	$	23,166
Series B Preferred Stock	$	1.75			$	6,118
Series B Preferred Warrants	$	0.03		1.12	$	2,554
Beneficial Conversion Feature in April 2010 Notes					$	112,777
April 2010 Class B Warrants	$	0.03		0.32	$	154,666
April 2010 Class C Warrants	$	0.03		5.32	$	773,333
Total					$	1,083,346

9. Capital Deficiency

Common stock. In November 2009, we amended our Certificate of Incorporation to provide for the issuance of up to 650,000,000 shares of common stock with a par value of $.001 per share.

In April 2010, we amended our Certificate of Incorporation to provide for the issuance of up to 2,000,000,000 shares of common stock with a par value of $.001 per share.

In April 2010, we issued 213,059,679 shares of our Common stock as full repayment of principal and interest owed to holders of Convertible Promissory Notes. All of these Notes were in default.

In April 2010, we issued 143,268,714 shares of our Common stock as full repayment of principal and interest owed to holders of Senior Promissory Notes.

In April, 2010, we issued 206,946,745 shares of our Common stock to holders of Series B Preferred Stock upon their exercise of the conversion feature contained in those securities.

As described above in Note 6, in connection with the sale of the November Notes, we agreed that the purchasers of the November Notes will receive at maturity of the November Notes 2.5 million shares of our common stock. Simultaneous with the issuance of the November Notes, Daniel Chain, our CEO, transferred to an escrow agent, 2.5 million shares of Company common stock issued to him at the time that he founded the Company in 2005 as collateral for the purchasers’ right to receive such shares. On April 23, 2010, the holders of the November Notes accepted common stock in repayment of their notes in conjunction with the financing transaction described above and the escrow agent released the Purchaser Shares to the holders of the November Notes. In April 2010, we issued 2.5 million shares to Dr. Chain to replace the shares that he had surrendered to the holders of the November Notes.

On April 23, 2010, we sold 58,000,000 shares of our common stock for aggregate consideration of $1,740,000 as part of the sale of investment units.

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In April 2010, we issued 66,379,167 shares of our common stock to various consultants.

In April 2010, we issued 3,870,137 shares of our common stock to a former holder of our Convertible Promissory Notes in settlement of a claim.

In April 2010, we issued 1,050,000 shares of our common stock to certain of our trade creditors in partial settlement of past due amounts owed to these creditors.

In June 2010, we issued 88,261,999 shares of our common stock to holders of Class A Warrants and Consultant Warrants upon the cashless exercise of those warrants.

In August 2010, we issued 500,000 shares of our common stock to our sole independent director as and 3,500,000 shares of our common stock to various consultants.

10. Stock-Based Compensation Plans

Total compensation expense recorded during the three months ended September 30, 2010 and 2009 for share-based payment awards was $0 and $5,587, respectively, of which $0 and $5,587, respectively, is shown in general and administrative expenses in the condensed statement of operations.

Summary of all option plans at September 30, 2010:

	Year Ended June 30, 2010		Weighted Average Exercise Price		Intrinsic Value		Weighted Average Remaining Contractual Life
Options outstanding at June 30, 2010		11,905,478	$	0.74	$	-
Granted		-
Cancelled/Forfeited		-
Expired		-
Balance at September 30, 2010		11,905,478	$	0.74	$	-		6.32
Options exercisable at September 30, 2010		11,899,228	$	0.74	$	-		6.32
Options vested or expected to vest		11,905,478	$	0.74	$	-		6.32

A summary of the status of the Company’s non-vested shares as of September 30, 2010:

	Number of Awards		Weighted Average Exercise Price		Weighted Average Grant Date Fair Value		Weighted Average Remaining Amortization period
Balance beginning of period		6,250	$	0.74
Granted		-
Vested		-
Cancelled/Forfeited		-
Balance at September 30, 2010		6,250	$	0.74	$	0.26		0.25

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A summary of the Company’s stock options at September 30, 2010 is as follows:

	Options Outstanding						Options Exercisable
Range of Exercise Price	Number Outstanding		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price		Number Exercisable		Weighted Average Exercise Price
$0.08 - $0.40		575,000		6.32	$	0.18		568,750	$	0.18
$0.41 - $0.78		11,330,478		6.32	$	0.77		11,330,478	$	0.77
		11,905,478		6.32	$	0.74		11,899,228	$	0.74

11. Related Party Transactions

Our AD research activities require that we test our drug candidates in a certain type of transgenic mouse that exhibits the human AD pathology. Mindgenix, Inc., a wholly-owned subsidiary of Mindset, holds a license on the proprietary intellectual property related to these particular mice from the University of South Florida Research Foundation (“USFRF”). We have engaged Mindgenix to perform testing services for us using these transgenic mice. Dr. Chain, our CEO, is a controlling shareholder of Mindset. We consolidate the results of operations of Mindgenix with our results of operations because we have agreed to absorb certain costs and expenses incurred that are attributable to their research.

In December of 2006, we entered into an agreement with USFRF as a co-obligor with Mindgenix, pursuant to which USFRF agreed to reinstate the license with Mindgenix in exchange for our agreement to pay to USFRF $209,148 plus accrued interest of $50,870 in installments. We have paid $184,151 through June 30, 2008 and established a liability for the remainder of the payments.

12. Commitments and Contingencies

In the ordinary course of business, we enter into agreements with third parties that include indemnification provisions which, in our judgment, are normal and customary for companies in our industry sector. These agreements are typically with business partners, clinical sites, and suppliers. Pursuant to these agreements, we generally agree to indemnify, hold harmless, and reimburse indemnified parties for losses suffered or incurred by the indemnified parties with respect to our product candidates, use of such product candidates, or other actions taken or omitted by us. The maximum potential amount of future payments we could be required to make under these indemnification provisions is unlimited. We have not incurred material costs to defend lawsuits or settle claims related to these indemnification provisions. As a result, the estimated fair value of liabilities relating to these provisions is minimal. Accordingly, we have no liabilities recorded for these provisions as of September 30, 2010 and 2009.

In the normal course of business, we may be confronted with issues or events that may result in a contingent liability. These generally relate to lawsuits, claims, environmental actions or the action of various regulatory agencies. If necessary, management consults with counsel and other appropriate experts to assess any matters that arise. If, in management’s opinion, we have incurred a probable loss as set forth by accounting principles generally accepted in the United States, an estimate is made of the loss, and the appropriate accounting entries are reflected in our financial statements. After consultation with legal counsel, we do not anticipate that liabilities arising out of currently pending or threatened lawsuits and claims will have a material adverse effect on our financial position, results of operations or cash flows.

Employment Agreements. Effective as of April 23, 2010, we canceled the existing employment agreements with our Chief Executive Officer and President and Chief Financial Officer which we had entered into on June 30, 2005 and entered into new employment agreements with these officers. Each Employment Agreement provides for a two year employment term with an annual base salary of $250,000 per year commencing on the effective date of the amended agreement. In addition, the Chief Executive Officer and the President and Chief Financial Officer are entitled to a subsequent grant of options and or warrants to purchase a number of shares of Company common stock equal to 14% and 5%, respectively, of our outstanding common stock on a fully diluted basis, with terms and timing of grant to be determined.

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13. Per Share Data

The following table sets forth the information needed to compute basic and diluted earnings per share:

	Three Months Ended
	September 30, 2010		September 30, 2009
Basic EPS
Net income (loss) attributable to common stockholders, basic	$	15,067,017	$	(140,937	)
Weighted average shares outstanding		831,297,208		30,843,873
Basic earnings (loss) earnings per share	$	0.02	$	(0.00	)
Diluted EPS
Net income (loss) attributable to common stockholders, basic	$	15,067,017	$	(140,937	)
Preferred stock dividends		16,192		123,248
Interest on convertible notes		49,572		300,237
Net income (loss) attributable to common stockholders, diluted	$	15,132,781	$	282,548
Weighted average shares outstanding		831,297,208		30,843,873
Dilutive effect of stock options		-		-
Dilutive effect of warrants		-		-
Dilutive effect of Series B preferred shares		611,810		4,593,091
Dilutive effect of convertible notes		3,018,500		6,393,538
Diluted weighted average shares outstanding		834,927,518		41,830,502
Diluted earnings (loss) per share	$	0.02	$	0.01

14. Subsequent Events

On November 3, 2010, we entered into allonges with holders of two of our April 2010 Notes whereby the principal amount of such Notes were increased by $75,000 and $137,500, respectively, and the conversion price of the April 2010 Notes was amended to $0.0025. The conversion price of previously issued and outstanding Series B Convertible Preferred Stock held by holders other than the purchasers is not subject to adjustment as a result of the allonges related to the April 2010 Notes.

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ITEM 2.               MANAGEMENTS’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations contains information that management believes is relevant to an assessment and understanding of our results of operations. You should read this discussion in conjunction with the Financial Statements and Notes included elsewhere in this report and with Management’s Discussion and Analysis of Financial Condition and Results of Operations for the period ended June 30, 2010 and Risk Factors contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on October 13, 2010. Certain statements set forth below constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. See “Special Note Regarding Forward-Looking Statements”. References to “Intellect,” the “Company,” “we,” “us” and “our” refer to Intellect Neurosciences, Inc. and its subsidiaries.

General

We are a biopharmaceutical company developing and advancing a patent portfolio related to specific therapeutic approaches for treating Alzheimer’s disease (“AD”). In addition, we are developing proprietary drug candidates to treat AD and other diseases associated with oxidative stress.

Since our inception in 2005, we have devoted substantially all of our efforts and resources to advancing our intellectual property portfolio and research and development activities. We have entered into license and other agreements with large pharmaceutical companies related to our patent estate, however, neither we nor any of our licensees have obtained regulatory approval for sales of any product candidates covered by our patents. We operate under a single segment. Our fiscal year end is June 30.

Our core business strategy is to leverage our intellectual property estate through license and other arrangements and to develop our proprietary compounds that we have purchased, developed internally or in-licensed from universities and others, through human proof of concept (Phase II) studies or earlier if appropriate and then to enter into collaboration agreements, licenses or sales to complete product development and commercialize the resulting drug products. Our objective is to obtain revenues from licensing fees, milestone payments, development fees and royalties related to the use of our intellectual property estate and the use of our proprietary compounds for specific therapeutic indications or applications.

Our most advanced drug candidate, OXIGON (OX1), is a chemically synthesized form of a small, potent, dual mode of action, naturally occurring molecule. We commenced human Phase I clinical trials for OXIGON on December 1, 2005 in the Netherlands and completed Phase I clinical trials on November 15, 2006. We have designed a Phase IIa clinical trial to test OXIGON in 80 to 100 mild to moderate AD patients and plan to initiate that trial during 2010 if we have sufficient financial resources. We plan to orally administer OXIGON to evaluate the drug’s activity in patients as measured by changes in certain biomarkers that correlate with the condition of AD.

Our pipeline includes drugs based on our immunotherapy platform technologies, ANTISENILIN and RECALL-VAX. These immunotherapy programs are based on monoclonal antibodies and therapeutic vaccines, respectively, to prevent the accumulation and toxicity of the amyloid beta toxin. Both are in pre-clinical development. Our lead product candidate in our immunotherapy programs is IN-N01, a monoclonal antibody that has undergone certain procedures in the humanization process at MRCT in the UK.

Our current business is focused on granting licenses to our patent estate to large pharmaceutical companies and on research and development of proprietary therapies for the treatment of AD through outsourcing and other arrangements with third parties. We expect research and development, including patent related costs, to continue to be the most significant expense of our business for the foreseeable future. Our research and development activity is subject to change as we develop a better understanding of our projects and their prospects.

Results of Operations

Three Months Ended September 30, 2010 Compared to Three Months Ended September 30, 2009:

	Three Months Ended September 30,
				(in thousands)
	2010			2009			Change
Net income/(loss) from operations		(1,688,280	)		(561,946	)		(1,126,334	)
Net other income (expenses):		16,755,297			421,009			16,334,288
Net income/(loss)	$	15,067,017		$	(140,937	)	$	15,207,954

Net loss from operations increased by $1,126,334 or 220% from $(561,946) for the three months ended September 30, 2009 to $(1,688,280) for the three months ended September 30, 2010. The increase in net loss was primarily due to a decrease in R&D expenses and G&A salaries of approximately $100,000 offset by an increase in professional fees and other G&A expenses of approximately $1.2 million.

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General and Administrative expenses increased by $1,201,992 or 247% from $485,710 for the three months ended September 30, 2009 to $1,687,702 for the three months ended September 30, 2010. The increase was primarily due to an increase in professional fees and insurance expenses.

Research and Development costs decreased by $37,661 or 660% from $38,238 for the three months ended September 30, 2009 to $577 for the three months ended September 30, 2010. The decrease was primarily due to a reduction in R&D activities.

Other income increased by approximately $16.3 million or 98.5% from $421,009 for the three months ended September 30, 2009 to $ $16,755,297 for the three months ended September 30, 2010, primarily due to changes in the fair value of derivative instruments that we have issued, including the warrants issued in the April 23, 2010 Financing Transaction, and a decrease in interest expense related to the Convertible Promissory Notes and Series B Preferred Stock that were converted into common stock.

Liquidity and Capital Resources

Since our inception in 2005, we have mainly generated losses from operations and we anticipate that we will continue to generate significant losses from operations for the foreseeable future. As of September 30, 2010 and September 30, 2009, our accumulated deficit was approximately $60,157,003 and 42,317,231, respectively. Our net income/ (loss) from operations for the three months ended September 30, 2010 and 2009 was $15,067,017 and ($140,937) respectively. Our cash outlays from operations were $660,894 and $646,581 for the three months ended September 30, 2010 and September 30, 2009, respectively. Our capital shows a deficit of $4,771,350 and $19,792,215 as of September 30, 2010 and September 30, 2009, respectively.

We have limited capital resources and operations since inception have been funded with the proceeds from equity and debt financings and license fee arrangements. As of September 30, 2010, we had cash and cash equivalents of approximately $85,876. We anticipate that our existing capital resources will not enable us to continue operations beyond mid-December 2010, or earlier if unforeseen events or circumstances arise that negatively affect our liquidity. If we fail to raise additional capital or obtain substantial cash inflows from potential partners prior to mid-December 2010, we will be forced to cease operations. We are in discussions with several investors concerning our financing options. We cannot assure you that these discussions will result in available financing in a timely manner, on favorable terms or at all.

The audit report prepared by our independent registered public accounting firm relating to our consolidated financial statements for the period ended June 30, 2010 includes an explanatory paragraph expressing the substantial doubt about our ability to continue as a going concern.

Even if we obtain additional financing, our business will require substantial additional investment that we have yet to secure. We are uncertain as to how much we will need to spend in order to develop, manufacture and market new products and technologies in the future. We expect to continue to spend substantial amounts on research and development, including amounts that will be incurred to conduct clinical trials for our product candidates. Further, we will have insufficient resources to fully develop any new products or technologies unless we are able to raise substantial additional financing on acceptable terms or secure funds from new or existing partners. Our failure to raise capital when needed will adversely affect our business, financial condition and results of operations, and could force us to reduce or discontinue our operations at some time in the future, even if we obtain financing in the near term.

Off-Balance Sheet Arrangements

As of September 30, 2010, we had no off-balance sheet arrangements, other than operating leases and obligations under various strategic agreements as set out below. There were no changes in significant contractual obligations during the three months ended September 30, 2010.

Under a License Agreement with NYU and a similar License Agreement with University of South Alabama Medical Science Foundation (“SAMSF”) related to our OXIGON program, we are obligated to make future payments totaling approximately $1.5 million to each of NYU and SAMSF upon achievement of certain milestones based on phases of clinical development and approval of the FDA (or foreign equivalent) and also to pay each of NYU and SAMSF a royalty based on product sales by Intellect or royalty payments received by Intellect.

· Mindset acquired from Mayo Foundation for Medical Education and Research (“Mayo”) a non-exclusive license to use certain transgenic mice as models for AD and is obligated to pay Mayo a royalty of 2.5% of any net revenue that Mindset receives from the sale or licensing of a drug product for AD in which the Mayo transgenic mice were used for research purposes. The Mayo transgenic mice were used by the SAMSF to conduct research with respect to OXIGON. Pursuant to the Assignment that we executed with the SAMSF, we agreed to assume Mindset’s obligations to pay royalties to Mayo. We have not received any net revenue that would trigger a payment obligation to Mayo.

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· Pursuant to a Letter Agreement with the Institute for the Study of Aging, we are obligated to pay a total of $225,500 of milestone payments contingent upon future clinical development of OXIGON.

· Under a Research Agreement with MRC Technology (“MRCT”), we are obligated to make future research milestone payments totaling approximately $560,000 to MRCT related to the development of the 82E1 humanized antibody and to pay additional milestones related to the commercialization, and a royalty based on sales, of the resulting drug products. MRCT has achieved certain of the research milestones and we have included $350,000 of the total $560,000 in accrued expenses.

· Under the terms of a Beta-Amyloid Specific, Humanized Monoclonal Antibody Purchase and Sale Agreement with Immuno-Biological Laboratories Co., Ltd (“IBL”), we agreed to pay IBL a total of $2,125,000 upon the achievement of certain milestones plus a specified royalty based on sales of any pharmaceutical product derived from the 82E1or 1A10 antibodies. We have paid $40,000 to date.

· Under the terms of a Royalty Participation Agreement effective as of July 31, 2008, certain of our lenders are entitled to an aggregate share of 25% of future royalties that we receive from the license of our ANTISENILIN patent estate.

In the ordinary course of business, we enter into agreements with third parties that include indemnification provisions which, in our judgment, are normal and customary for companies in our industry sector. These agreements are typically with business partners, clinical sites, and suppliers. Pursuant to these agreements, we generally agree to indemnify, hold harmless, and reimburse indemnified parties for losses suffered or incurred by the indemnified parties with respect to our product candidates, use of such product candidates, or other actions taken or omitted by us. The maximum potential amount of future payments we could be required to make under these indemnification provisions is unlimited. We have not incurred material costs to defend lawsuits or settle claims related to these indemnification provisions. As a result, the estimated fair value of liabilities relating to these provisions is minimal. Accordingly, we have no liabilities recorded for these provisions as of September 30, 2010.

In the normal course of business, we may be confronted with issues or events that may result in a contingent liability. These generally relate to lawsuits, claims, environmental actions or the actions of various regulatory agencies. We consult with counsel and other appropriate experts to assess the claim. If, in our opinion, we have incurred a probable loss as set forth by accounting principles generally accepted in the United States, an estimate is made of the loss and the appropriate accounting entries are reflected in our consolidated financial statements. After consultation with legal counsel, we do not anticipate that liabilities arising out of currently pending or threatened lawsuits and claims will have a material adverse effect on our consolidated financial position, results of operations or cash flows.

New Accounting Pronouncements

In January 2010, FASB issued ASU No. 2010-06 – Improving Disclosures about Fair Value Measurements. This update provides amendments to Subtopic 820-10 that requires new disclosure as follows: 1) Transfers in and out of Levels 1 and 2. A reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. 2) Activity in Level 3 fair value measurements. In the reconciliation for fair value measurements using significant unobservable inputs (Level 3), a reporting entity should present separately information about purchases, sales, issuances, and settlements (that is, on a gross basis rather than as one net number). This update provides amendments to Subtopic 820-10 that clarifies existing disclosures as follows: 1) Level of disaggregation. A reporting entity should provide fair value measurement disclosures for each class of assets and liabilities. A class is often a subset of assets or liabilities within a line item in the statement of financial position. A reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities. 2) Disclosures about inputs and valuation techniques. A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. Those disclosures are required for fair value measurements that fall in either Level 2 or Level 3. The adoption of this guidance did not have a material impact on our consolidated financial statements.

In February 2010, FASB issued ASU No. 2010-9 –Amendments to Certain Recognition and Disclosure Requirements. This update addresses certain implementation issues related to an entity’s requirement to perform and disclose subsequent-events procedures, removes the requirement that public companies disclose the date of their financial statements in both issued and revised financial statements. According to the FASB, the revised statements include those that have been changed to correct an error or conform to a retrospective application of U.S. GAAP. The adoption of this ASU did not have a material impact on our consolidated financial statements.

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In March 2010, FASB issued ASU No. 2010-11 –Scope Exception Related to Embedded Credit Derivatives. Embedded credit-derivative features related only to the transfer of credit risk in the form of subordination of one financial instrument to another are not subject to potential bifurcation and separate accounting as clarified by recently issued FASB guidance. Other embedded credit-derivative features are required to be analyzed to determine whether they must be accounted for separately. This update provides guidance on whether embedded credit-derivative features in financial instruments issued by structures such as collateralized debt obligations (CDOs) and synthetic CDOs are subject to bifurcation and separate accounting. The guidance is effective at the beginning of a company’s first fiscal quarter beginning after June 15, 2010. We not expect the adoption of this ASU to have a material impact on our consolidated financial statements.

In April 2010, the FASB issued ASU No. 2010-13, Compensation – Stock Compensation: Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades. ASU 2010-13 clarifies that a share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, such an award should not be classified as a liability if it otherwise qualifies as equity. ASU 2010-13 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010, with early adoption permitted. We are currently evaluating the potential impact of this standard.

ITEM 3.                QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable

ITEM 4.               CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We performed an evaluation under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of September 30, 2010. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within our company to disclose material information otherwise required to be set forth in our periodic reports.

Following the evaluation described above, our management, including our chief executive and chief financial officer, concluded that based on the evaluation, our disclosure controls and procedures were effective as of the date of the period covered by this quarterly report.

Changes in Internal Controls Over Financial Reporting

There has been no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II

ITEM 5. OTHER

On November 3, 2010, the Company and holders of two of its Secured Convertible Promissory Notes dated April 23, 2010 (the “Notes’) entered into allonges whereby the principal amount of the Notes were increased by $75,000 and $137,500, respectively, and the conversion price of the Notes was amended to $0.0025. Copies of such allonges are attached as Exhibit 4.1 and 4.2 respectively hereto.

ITEM 6.EXHIBITS

4.1  Allonge No. 1 to Secured Convertible Promissory Note dated November 3, 2010

4.2  Allonge No. 1 to Secured Convertible Promissory Note dated November 3, 2010

10.1 Escrow Agreement dated November 3, 2010

31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)

31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)

32.1 Certification of Chief Executive Officer pursuant to Rule 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)

32.2 Certification of Chief Financial Officer pursuant to Rule 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)

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SIGNATURES

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

November 18, 2010	Intellect Neurosciences, Inc.
	/s/ Daniel Chain
	Daniel Chain
	Chief Executive Officer
	/s/ Elliot Maza
	Elliot Maza
	Chief Financial Officer

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