UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

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

For the Fiscal Year Ended December 31, 2008

Commission File Number: 000-50470

CERAGENIX PHARMACEUTICALS, INC.

(Exact name of registrant as Specified in its Charter)

Delaware		84-1561463
(State or Other Jurisdiction of Incorporation or Organization)		(Internal Revenue Service Employer Identification Number)

1444 Wazee Street, Suite 210, Denver, Colorado		80202
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s Telephone Number, Including Area Code: (720) 946-6440

Securities registered under Section 12(b) of the Exchange Act:

None

Securities registered under Section 12(g) of the Exchange Act:

Common Stock, $.0001 par value per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes o No x

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:

Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K: x

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

Large accelerated filer o		Accelerated filer o

Non-accelerated filer o (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 o No x

The aggregate market value of the voting and non-voting common stock ($.0001 par value) held by non-affiliates was approximately $3,712,294 as of June 30, 2008 based upon the average bid and asked price of the registrant’s common stock on the Nasdaq Electronic Bulletin Board.

As of March 23, 2009, the registrant had 17,808,293 shares of its common stock ($.0001 par value) outstanding.

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FORWARD LOOKING STATEMENTS

Our disclosure and analysis in this Annual Report on Form 10-K (this “Form 10-K”), in other reports that we file with the Securities and Exchange Commission (“SEC”), in our press releases and in public statements of our officers contain forward-looking statements. Forward-looking statements are based on the current expectations of or forecasts of future events made by our management. Forward-looking statements may turn out to be wrong. They can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Many factors mentioned in this Form 10-K, for example general economic conditions, governmental regulation and competition in our industry, will be important in determining future results. No forward-looking statement can be guaranteed, and actual results may vary materially from those anticipated in any forward-looking statement.

You can identify forward-looking statements by the fact that they do not relate strictly to historical or current events. They use words such as “anticipate,” “estimate,” “expect” “will,” “may,” “intent,” “plan,” “believe,” and similar expressions in connection with discussion of future operating or financial performance. These include statements relating to future actions, prospective products or product approvals, future performance or results of anticipated products, expenses, financial results or contingencies.

Although we believe that our plans, intentions and expectations reflected in these forward-looking statements are reasonable, we may not achieve these plans or expectations. Forward-looking statements in this Form 10-K will be affected by several factors, including the following: the ability of the Company to raise sufficient capital to finance its planned activities including completing development of its Ceragenin™ technology; the ability of the Company to meet its obligations under the supply and distribution agreement with Dr. Reddy’s Laboratories including having sufficient working capital to fulfill purchase orders within the timeframes required by the agreement; the ability of the Company to service its outstanding convertible debt obligations; receiving the necessary marketing clearance approvals from the United States Food and Drug Administration (the “FDA”); successful clinical trials of the Company’s planned products including the ability to enroll the studies in a timely manner, patient compliance with the study protocol, and a sufficient number of patients completing the studies; the ability of the Company to commercialize its planned products; the ability of the Company to successfully manufacture its products in commercial quantities (through contract manufacturers); market acceptance of the Company’s planned products, the Company’s ability to successfully develop its licensed compounds, alone or in cooperation with others, into commercial products, the ability of the Company to successfully prosecute and protect its intellectual property, and the Company’s ability to hire, manage and retain qualified personnel. Actual results, performance or achievements could differ materially from those contemplated, expressed or implied by the forward-looking statements contained in this Form 10-K. In particular, this Form 10-K sets forth important factors that could cause actual results to differ materially from our forward-looking statements. These and other factors, including general economic factors, business strategies, the state of capital markets, regulatory conditions, and other factors not currently known to us, may be significant, now or in the future, and the factors set forth in this Form 10-K may affect us to a greater extent than indicated. 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 Form 10-K and in other documents that we file from time to time with the SEC including Quarterly Reports on Form 10-Q and Current Reports on Form 8-K to be filed in 2009. Except as required by law, we do not undertake any obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise.

PART I

Item 1. Business

THE COMPANY

Ceragenix Pharmaceuticals, Inc., a Delaware corporation, is an emerging medical device company focused on infectious disease and dermatology. We have two base technology platforms each with multiple applications: Ceragenins™ (also known as cationic steroid antibiotics or “CSAs”) and barrier repair (“Barrier Repair”). We believe that the Barrier Repair platform represents near term revenue opportunities for prescription skin care products to treat a variety of skin disorders all characterized by a disrupted skin barrier. Our Ceragenin™ technology has shown activity against bacteria, and certain viruses, fungi and cancers in a variety of in vitro tests and represents a near, mid and long term revenue opportunity. References to “the Company,” “we,” “our,” or “us” in this Form 10-K refer to Ceragenix Pharmaceuticals, Inc. and Ceragenix Corporation.

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Our Ceragenin™ technology, licensed from Brigham Young University, covers the composition of matter and use of a broad class of small molecule, positively charged aminosterol compounds. These patented compounds mimic the activity of the naturally occurring antimicrobial peptides that form the body’s innate immune system and several of these candidates are currently in pre-clinical development. Ceragenin™ compounds are electrostatically attracted to bacteria, viruses, fungi and cancers that all share in common the presence of negatively charged phospholipids on their cell membrane surfaces. The compounds are believed to primarily act via induction of apoptosis by rapid depolarization of the cell membranes (by tearing holes in the cell walls). Unlike most antibiotics which are bacteriastatic (prevents the reproduction of bacteria cells), the Ceragenins™ are bacteriacidal (kills the bacterial cells). While Ceragenins™ have the potential to be developed for a broad range of applications, we intend to focus our efforts on developing them as an antimicrobial treatment for medical devices such as endotracheal tubes, catheters and implantable devices. It is our expectation that we will be able to generate revenue from the Ceragenin™ technology prior to receiving FDA approvals in the form of upfront and milestone payments under development and sublicense agreements.

We have also licensed patents from the Regents of the University of California for a Barrier Repair technology that is a specific combination of ceramides, cholesterol and fatty acids which are able to create a human-like skin barrier and thus provide patients with a more normal skin barrier function. This patented Barrier Repair technology is the invention of Dr. Peter Elias, Chairman of our Scientific Advisory Board, the author of over 500 peer reviewed journal articles. Our first developed product using this technology is EpiCeram®.

EpiCeram® is a prescription only product intended for use to treat dry skin conditions and to manage and relieve the burning and itching associated with various types of dermatoses, including atopic dermatitis (“eczema”), irritant contact dermatitis, and radiation dermatitis. All of these conditions share in common a defective or incomplete skin barrier and we believe current therapies are viewed as either lacking effectiveness or in need of improvement. In April 2006, we received marketing clearance from the FDA to sell EpiCeram® as a medical device pursuant to a 510(k) filing. The clearance received from the FDA allows us to market EpiCeram® for all of the above listed conditions. In April 2007, we announced the results of a 113 person clinical trial which demonstrated that EpiCeram® had comparable efficacy to a mid strength steroid in treating the symptoms associated with eczema after 28 days of treatment. In November 2007, we entered into an exclusive distribution and supply agreement with Dr. Reddy’s Laboratories, Inc. (“DRL”) for the commercialization of EpiCeram® in the United States (the “DRL Agreement”). Under the terms of the DRL Agreement, we are responsible for manufacturing (through a contract manufacturer) and supplying the product while DRL is responsible for distribution, marketing and sales. During September 2008, we shipped the first commercial quantities of EpiCeram® to DRL and DRL officially launched sales and marketing efforts during October 2008.

Our executive offices are located at 1444 Wazee Street, Suite 210, Denver, Colorado 80202. Our telephone number is (720) 946-6440

OUR STRATEGY

Our principal objective is to be a leading provider of technology used in the prevention and treatment of infectious disease. More specifically, we want our Cerashield™ antimicrobial coatings to be utilized by leading manufacturers to coat their catheters, implantables and devices to prevent the bacterial colonization of such products. Bacterial colonization of indwelling medical devices is a leading cause of nosocomial (hospital acquired) infections. Leading healthcare organizations such as the World Health Organization and the U.S. Centers for Disease Control (the “CDC”) have recognized that the growing number of multidrug resistant bacterial infections poses a major worldwide health risk. According to the CDC, during 2002, there were approximately 1.7 million nosocomial infections in the United States resulting in 99,000 deaths (up from 13,000 in 1992) and over $4 billion in additional treatment costs. Over half of these infections were attributable to bacterial growth on medical devices and the greatest risk of mortality is associated with multidrug resistant bacterial infections. In August of 2007, the Center for Medicare Services (CMS) issued a ruling that it will no longer reimburse hospitals for certain hospital acquired infections including those related to urinary tract infections (associated with urinary catheters) and certain central venous line related bloodstream infections. This ruling went into effect in October 2008. Each year CMS expects to add additional nosocomial infections to its exclusionary list. As a result, hospitals and third party payors are seeking solutions from device makers to help reduce the incidence of nosocomial infections.

We believe that our Ceragenin™ class of compounds has the potential to be a solution for combating nosocomial infections. Our Cerashield™ technology (utilizing CSA-13) is being developed in a variety of forms: (i) as a coating in combination with a polyurethane polymer which may be dip coated onto a broad range of polymeric and metallic medical devices which allows CSA-13 to elute out over time; (ii) as a covalent attachment to polymers (including textiles) and metals to provide a shield against bacterial colonization that does not migrate from the surface; and (iii) by direct incorporation into polymers (during the melt process) to create catheters and other components of medical devices that have antimicrobial

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activity built into the device without the need for an exterior coating. Our primary strategy is to license Cerashield™ on a device by device basis to the manufacturers of such devices. We are evaluating retaining one or more niche applications of the technology to commercialize ourselves once our financial and managerial resources make such approach a viable option. We believe that antimicrobial treated devices with demonstrated ability to prevent or reduce bacterial colonization can demand premium pricing in the market based on cost savings to payors and/or reduction in morbidity and/or mortality rates. Our goal is to establish Cerashield™ as the most efficacious antimicrobial technology available for medical devices. We believe that current antimicrobial approaches (such as silver) are of limited efficacy and duration. We plan to target Cerashield™ development for several devices with high incidences of infection such as endotracheal tubes, urinary catheters, and central venous catheters as well as those devices associated with less frequent but catastrophic infections. We believe that there is a broad range of medical devices that would benefit from use of our Cerashield™ technology and we are open to collaboration arrangements with medical device manufacturers.

While our in vitro testing activities have demonstrated that one or more of our lead Ceragenin™ compounds may have efficacy as a pharmaceutical therapy against key pathogens associated with various diseases (e.g. multidrug resistant Pseudomonas aeuroginosa associated with respiratory infections in Cystic Fibrosis patients), we plan to focus on Cerashield™ applications that will be regulated as medical devices as opposed to pharmaceutical therapies which would require regulation as new drugs. We have based this decision on the following considerations:

· Anticipated development costs;

· Projected timeframes associated with regulatory approvals;

· Heightened awareness on the part of payors, physicians and patients of nosocomial infections;

· Anticipated market demand;

· Currently available and anticipated competitive products; and

· Projected financial resources available to the Company

A key component of our current business strategy has been to operate as a fairly “virtual” firm until such time as the business requires a more robust infrastructure. We believe this strategy has been successful as it allowed us to direct a greater percentage of our financial resources into product development and provided us with greater flexibility by limiting the size of our corporate infrastructure and workforce. While it is possible that we will hire additional management and staff resources during 2009 to develop our business, we believe we can keep our corporate and development staff to levels that are substantially lower than found in traditional medical device companies by carefully leveraging third party expertise.

OUR TECHNOLOGY

We have two base technology platforms; Ceragenins™ and Barrier Repair. Our primary focus in the future will be on Ceragenin™ development given the remaining patent life of the Barrier Repair technology (5.5 years). See “License Agreements and Proprietary Rights.” A discussion of both technologies follows below.

Ceragenins™

As discussed above, we plan to utilize our Ceragenin™ technology to develop new generation antimicrobial protection for medical devices. Ceragenins™ are small molecule, positively charged compounds that have shown promising activity against bacteria, and certain viruses, fungi and cancers in a variety of in vitro tests. These patented compounds mimic the activity of the naturally occurring antimicrobial peptides that form the body’s innate immune system. The compounds are electrostatically attracted to bacteria, viruses, and certain lines of cancer cells that all share in common the presence of negatively charged phospholipids on their cell membrane surfaces. The compounds are believed to primarily act via induction of apoptosis by rapid depolarization of the cell membranes (tearing holes in the cell walls). Unlike most antibiotics which are bacteriastatic (preventing the reproduction of bacteria cells), the Ceragenins™ are bacteriacidal (kills the bacterial cells). Other efforts to duplicate the naturally occurring antimicrobial peptides have proven not to be commercially viable because of the inability to stabilize and cost effectively produce bulk quantities of such compounds. Ceragenins™, however, are neither peptides nor steroids, but rather cationic steroid shaped small molecules that we believe are far simpler, more stable and inexpensive to produce in bulk quantities.

Since May 2005, we have accomplished the following developments related to our Ceragenin™ technology:

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· Demonstrated that a Ceragenin™ based coating prevented bacterial colonization on titanium surfaces and eradicated staphylococcus aureus and E. coli bacteria in the fluid surrounding the coated plate in an in vitro medical device coating model;

· Presented data at a meeting of the American Academy of Dermatology showing that use of one of our Ceragenin™ compounds (CSA-8) when used in combination with mupirocin (a commonly used topical antibiotic active against gram-positive bacteria) was able to expand mupirocin’s spectrum of activity to include gram-negative bacteria such as E. coli, salmonella and kleibsiella;

· Demonstrated that our leading Ceragenin™ pre-clinical compound, CSA-13, was highly effective in vitro against vancomycin-resistant staphylococcus aureus (“VRSA”), vancomycin-resistant enterococci (“VRE”), vancomycin intermediate resistant staph aureus (“VISA”), hospital acquired MRSA, and community associated MRSA (“CA-MRSA”) at minimum inhibitory concentrations (“MIC”) of under .25 micrograms/ml;

· Demonstrated that compound CSA-13 was highly effective in vitro against strains of pseudomonas infections isolated from cystic fibrosis patients (MIC values of 1 to 3 micrograms/ml) that are highly resistant to tobramycin (mics of over 80 micrograms/ml are required);

· Demonstrated that compound CSA-13 was highly effective in vitro against pseudomonas aueroginosa, E. coli;

· Demonstrated that compound CSA-13 was highly effective in vitro against bioterrorism surrogate strains of anthrax, listeria and plague;

· Demonstrated that compounds CSA’s -8, -13 and -54 possessed activity similar to human angiostatins in vitro and that the compounds had been accepted by the National Cancer Institute’s developmental therapeutics program to evaluate potential activity in inhibiting the growth of tumor blood supply;

· Demonstrated that compound CSA-54 was highly active against Epstein-Barr virus in in vitro testing;

· Demonstrated that compound CSA-13 was highly active in vitro against the vaccinia virus;

· Demonstrated that compound CSA-54 showed potent virucidal activity in in vitro testing against multiple strains of HIV;

· Demonstrated that CSA-13 and CSA-54 showed the ability to inhibit angiogenesis at low micromolar concentrations in in vitro testing performed by the National Cancer Institute;

· Demonstrated that CSA-13 was 100 times more effective in eradicating a MRSA biofilm than vancomycin in in vitro testing;

· Demonstrated that CSA-13 was able to significantly inhibit bladder cancer growth with minimal toxicity to normal cells in in vitro testing;

· Demonstrated that CSA-13 was able to prevent influenza infection by H3N2, one of the common strains of Type A Influenza, in in vitro testing;

· Developed a prototype contact lens disinfectant solution that demonstrated the ability to virtually eradicate the bacterial and fungal strains that the FDA specifies for testing pursuant to its published guidance document in in vitro testing;

· Demonstrated that Ceragenin™ treated hemodialysis catheters were able to virtually prevent bacterial colonization in a 21 day in vitro study;

· Demonstrated that in a series of in vitro experiments that CSA-13 shows promise as a potential therapy to treat multidrug resistant Pseudomonas aeuroginosa infections which are a leading cause of morbidity and mortality in patients with cystic fibrosis;

· Demonstrated that in a series of in vitro experiments that CSA-13 showed rapid killing activity and synergistic activity with conventional antibiotics against multidrug resistant Pseudomonas aeuroginosa bacterial strains. P. aeuroginosa is a leading cause of morbidity and mortality in patients with pneumonia and other respiratory diseases;

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· Demonstrated that in a series of in vitro experiments that prototype Cerashield™ coated endotracheal tube segments were able to completely prevent bacterial adhesion and biofilm formation in a 21 day continuous challenge test;

· Demonstrated that in an in vitro test, Cerashield™ coated silicone urinary catheters provided complete protection against E.Coli bacterial colonization for the entire duration of the 21 day study when challenged with daily inocula of 1,000 colony forming units of E. Coli;

· Demonstrated that a silicone intravaginal ring incorporating CeraShield™ achieved 120 days of continuous antimicrobial efficacy when soaked in artificial urine with a fresh inoculum of at least 1,000 colony forming units per ml of E. coli on a daily basis; and

· Demonstrated in a pilot, in vivo study (sheep), that Cerashield™ treated surgical screws did not have any adverse biological, histological or hematological effects on bone tissue healing or remodeling compared to untreated screws. However, given the small number of animals (n=2), the study did not allow for extended interpretations or provide statistically conclusive data.

During 2009, we expect that testing of Cerashield™ will be expanded primarily by potential commercialization partners into device specific in vitro and in vivo models.

Barrier Repair

Our Barrier Repair technology is a specific combination of epidermal lipids which are able to create a human-like skin barrier and thus provide patients with a more normal skin barrier function. Defects in the skin’s barrier function play critical roles in the pathogenesis of certain skin diseases such as eczema. The skin’s barrier is composed of a thin sheet of epidermal lipids about half the thickness of a piece of notebook paper. This thin, flexible, strong combination of lipid components forms a mechanical defense against skin irritants and bacterial infections while also helping to retain skin moisture. Persons with a deficient skin barrier suffer from higher levels of moisture evaporating through their skin also known as trans-epidermal water loss (“TEWL”). TEWL leads to dry, itchy, cracked skin which can then lead to further degradation of the skin’s barrier. Deficient skin barrier function can be caused by both internal factors (i.e. genetic predisposition and/or immune system related misregulation) and external factors (i.e. radiation treatment and other skin irritants).

Since May 2005, we accomplished the following developments related to our Barrier Repair technology:

· Received 510(k) marketing clearance from the FDA for EpiCeram®, our first prescription barrier product candidate;

· Demonstrated that EpiCeram® accelerated skin barrier recovery in eczema patients afflicted with moderate to severe symptoms compared to untreated patients in a small but statistically significant third party study. The objective measurement of this study showed that there was 100% reduction in itch, an over 50% reduction in dry skin, over 36% reduction in scaliness and an over 37% reduction in irritation/inflammation (each at the 3 and 6 hour measurement points after applying EpiCeram®);

· Completed a 113 person clinical study to compare the efficacy of EpiCeram® to Cutivate®, a commonly prescribed mid strength steroid, in children with moderate to severe eczema. In the study, we demonstrated that there was no significant statistical difference in efficacy between EpiCeram® and Cutivate® in treating the symptoms of eczema after 28 days of treatment. More detailed study results were as follows:

Study Design

The study was an investigator-blinded, randomized controlled study conducted at five centers which evaluated a total of 113 patients in two groups of children (ages 6 months to 18 years) with moderate-to-severe eczema treated with either Cutivate® Cream, a mid-potency topical steroid, or EpiCeram®. The study was primarily conducted during the winter months of December (‘06), January (‘07) and February (‘07).

Primary and Secondary Outcome Measures

According to the protocol, the primary outcome measure was the change in mean SCORAD score measured at Day 28 as compared to the baseline. The protocol’s secondary efficacy parameters were:

· Percentage of subjects reaching clear or almost clear on Investigator’s Global Assessment (IGA) at Day 28;

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· Change in patient reported assessments of pruritus (itch); and

· Change in patient reported assessment of disturbance of sleep habits.

Study Results

Primary Outcome Measure (change in mean SCORAD score measured at Day 28 compared to Baseline)

Daily (twice) applications of both Cutivate® Cream and EpiCeram® produced significant reductions in SCORAD scores at Day 28 compared to baseline values. Daily (twice) applications of EpiCeram® produced statistically significant improvement of eczema after 28 days with a reduction in SCORAD scores of 56.41% from baseline. Daily (twice) applications of the comparator product, Cutivate® cream, also produced statistically significant improvement of eczema after 28 days with a reduction in SCORAD scores of 68.77%. Statistical comparison of the treatment effects (SCORAD scores) showed no statistically significant difference between treatment effects after 28 days of treatment.

Secondary Outcome Measures

A. Percentage of subjects reaching clear or almost clear on IGA at Day 28

Assessment of the disease progression showed significant improvements in the IGA scores over time for both EpiCeram® and Cutivate® cream with 61.1% of the EpiCeram® patients assessed as clear or almost clear after 28 days of treatment and 76.2% of the Cutivate® cream patients being assessed as clear or almost clear at Day 28. Comparison of the disease progression results for both treatments showed no statistically significant difference between EpiCeram® and Cutivate® cream after 28 days of treatment.

B. Assessment of Pruritus

Patient reported assessments of pruritus also showed significant improvement from baseline after 28 days of treatment for both EpiCeram® (3.54 change from baseline) and Cutivate® cream (3.75 change from baseline). No statistically significant differences were found between treatments after 28 days of treatment.

C. Assessment of Sleep Habits

Patient reported assessments of sleep habits also showed significant improvement from baseline after 28 days of treatment for both EpiCeram® (2.63 change from baseline) and Cutivate® cream (2.81 change from baseline). No statistically significant differences were found between treatments after 28 days of treatment.

Safety

The investigators concluded that use of EpiCeram® was safe for use under the conditions of the study. There were no serious adverse events reported in the study, all but one of the reported adverse events was either mild or moderate and all were consistent with the symptoms of eczema. The investigators recommended that four EpiCeram® patients experiencing adverse events temporarily discontinue use of the product. Two of these patients fully resolved. The investigators made no recommendation that any of the Cutivate® patients discontinue use.

· Completed a 38 person clinical study to compare the efficacy of EpiCeram® to Elidel®, a commonly prescribed non steroidal therapy, in children with mild to moderate eczema. In the study, we demonstrated that both EpiCeram® and Elidel® produced significant improvement after four weeks of treatment. More detailed study results were as follows:

Study Design

The study was an investigator-blinded, randomized controlled study conducted at two centers which evaluated a total of 38 patients in two groups of children (ages 6 months to 12 years) with mild-to-moderate eczema treated with either Elidel® (pimecrolimus 1%), an immunosuppressant cream, or EpiCeram®. The study was conducted from April 2007 to January 2008.

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Primary and Secondary Outcome Measures

According to the protocol, the primary outcome measure was the change in median Eczema Area and Severity Index (“EASI”) scores measured at Day 28 as compared to the baseline. The protocol’s secondary efficacy parameters were:

· Percentage of subjects reaching clear or almost clear on IGA at Day 28; and

· Change in patient reported assessments of pruritus (itch).

Study Results

Primary Outcome Measure (change in median EASI score measured at Day 28 compared to Baseline)

Daily (twice) applications of Elidel® produced significant reductions in EASI scores at Day 28 compared to baseline. While twice daily applications of EpiCeram® did not produce statistically significant improvement in EASI scores at Day 28, the overall improvement produced by EpiCeram® was not statistically different from that produced by Elidel®. Additionally, there were no statistically significant differences between EpiCeram® and Elidel® in the proportion of subjects with either greater than 50% improvement in EASI scores or greater than 75% improvement in EASI scores at Day 28.

Secondary Outcome Measures

A. Percentage of subjects reaching clear or almost clear on IGA at Day 28

Both treatments demonstrated statistically significant reductions in eczema symptoms as measured by IGA at Day 28. Assessment of the disease progression showed significant improvements in the IGA scores over time with 27% of the EpiCeram® patients assessed as clear or almost clear after 28 days of treatment and 44% of Elidel® patients being assessed as clear or almost clear at Day 28. Comparison of these disease progression results for both treatments showed no statistically significant difference between EpiCeram® and Elidel® after 28 days of treatment.

B. Assessment of Pruritus

Patient reported assessments of pruritus also showed significant improvement from baseline after 28 days of treatment for both EpiCeram® and Elidel®. No statistically significant differences were found between treatments after 28 days of treatment.

Safety

The investigators concluded that use of EpiCeram® was safe for use in the patient population studied. There were no serious adverse events reported in the study and both treatments had similar rates of adverse events.

· Entered into the DRL Agreement to commercialize EpiCeram® in the United States;

· Commenced shipment of EpiCeram® for commercial launch in the United States (September 2008);

· Entered into an exclusive distribution and supply agreement for commercialization of EpiCeram® in Southeast Asia; and

· Entered into an exclusive distribution and supply agreement for commercialization of EpiCeram® in Canada.

PRODUCTS AND PRODUCT CANDIDATES

Nearly all of our product candidates will require clearance by the FDA and in certain cases extensive clinical evaluation before we can sell them either directly or via partners. Any product or technology under development may not result in the successful introduction of a new product.

Cerashield™ Antimicrobial Technology

We believe that our Ceragenin™ class of compounds has the potential to be a solution for combating nosocomial infections. For information on our Cerashield™ technology, see the discussion under the heading “Our Strategy.” We

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believe that Cerashield™ coatings can receive regulatory approval as medical devices under Pre-Market Approval (“PMA”) regulatory filings or in certain applications under 510(k) (see Government Regulation). However, there is no assurance that the FDA will agree with our conclusions.

We are not doing any new drug development unless that development is funded by potential collaboration partners or under potential grant applications.

Barrier Repair

EpiCeram ®

NeoCeram ™

NeoCeram™ is a pediatric barrier repair cream intended to help create a skin barrier in premature infants and neonates. Infants born prematurely enter the world without fully formed skin barriers. As lung surfactant therapy has pushed back the age of viability to 23 weeks of gestational age, the lack of an adequate skin barrier is now of critical importance to morbidity and mortality in this at-risk population. We believe that by providing the topical equivalent of a skin barrier that these infants will develop more rapidly, be at lower risk for bacterial infections and sepsis, and spend less time in the neonatal intensive care unit thereby significantly reducing the costs incurred by the health care system to care for these infants. We had intended to utilize our 510(k) approval for EpiCeram® to market NeoCeram™ using an identical formulation packaged for single dose use. However, based upon additional research and feedback from practitioners, we now plan on formulating NeoCeram as a lotion and market as an OTC product. During 2008, we progressed with development of NeoCeram, and during 2009, we plan to complete development and commence a clinical study. Our ability to commence the study is dependent upon receiving institutional review board (“IRB”) approval, which cannot be assured, and having sufficient capital resources to fund the study. As of December 31, 2008, we did not have sufficient funding to commence the study. There is no assurance that we will ever commercialize NeoCeram™.

PRODUCT MARKETS

Ceragenin™ Based Products

Cerashield™ Antimicrobial Coatings

Every year, approximately 1 million Americans acquire infections while hospitalized as the result of implantation of medical devices such as urinary catheters, central venous catheters, endotracheal tubes, pacemakers, orthopedic implants and fixator pins. These devices act as focal points for bacterial adhesion, growth and infection. Certain of these infections have lethal consequences resulting in over 50,000 deaths each year while non-lethal infections prolong hospital stays, complicate recoveries and increase costs. It has been estimated that the cost of treating medical-device related infections run into the billions of dollars annually. Medical device related infections are becoming of even greater concern in recent years as a result of the development of an increased number of multiple drug resistant bacterial strains particularly in the hospital setting, which are proving increasingly difficult to safely and successfully treat. Nearly every implantable medical device is susceptible to infections by a variety of pathogens, with implantable devices estimated to account for over 50% of all nosocomial infections. Depending on the length of time a medical device is present in the body, the likelihood for a biofilm related infection increases, and biofilm based infections typically require dramatically higher antibiotic concentrations to treat. For example, it has been estimated that up to 90% of bloodstream infections in the hospital setting are related to the use of some type of intravascular medical device. While many factors contribute to the medical device related infection rate, including health care worker hand washing and training procedures, sterilization protocols, and prophylactic use of antibiotics, the development of catheter wound dressings and antimicrobial technology for medical devices aimed at helping to prevent the development of device-related infections is an area of growing interest. Current antimicrobial coatings are extremely limited and in general do not provide very effective long-lasting antimicrobial protection.

Medical device markets are large and we believe that currently available methods for combating the higher incidence of infection associated with those devices lack effectiveness. For example, each of the following segments of the medical device market has annual sales over $100 million and has also been reported to have infection rates in the 1% to 30%

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range: urinary catheters, central venous catheters, dental implants, fracture fixation (including fixator pins and orthopedic implants), and pacemakers. There are a variety of additional attractive market segments with unmet antimicrobial coating needs including segments such as endotracheal tubes, needleless connectors, antimicrobial medical sponges, and wound dressings. We believe that there is a large opportunity for introducing a new generation catheter, wound dressing or antimicrobial coating that is safe, effective and provides longer lasting protection than available product offerings.

Barrier Repair Products

EpiCeram ®

Atopic Dermatitis

An estimated 15 million Americans suffer from the disease Atopic Dermatitis, which is commonly known as eczema. Eczema is the leading skin disease of childhood and 65% of those affected show clinical symptoms by 6 months of age. The skin of eczema patients becomes extremely itchy and inflamed, causing redness, swelling, cracking and scaling. The skin can become so severely irritated, patients often scratch themselves until they bleed, leading to a secondary infection. Histological analysis of the skin of eczema patients reveals a global deficiency in epidermal lipids (ceramides, cholesterol and essential fatty acids) with a marked deficiency of ceramides. This lack of epidermal lipids leads to a defective skin barrier. Normalizing the barrier is the key to successful treatment. The work of Dr. Elias has shown that topical application of an optimal molar ration of these epidermal lipids can correct the skin barrier abnormality. We believe that EpiCeram® will greatly reduce skin irritation, quickly reduce itch, and help to restore a more normal skin barrier than currently available products. While there are multiple products and treatments for eczema, the most commonly prescribed treatments are immune system suppressants or steroids both of which have well recognized undesirable side effects. Immunomodulator drugs used for treating eczema recently received a black box safety warning from the FDA that is resulting in a substantial decline in sales for these products since 2004, when they combined had over $500 million in sales. EpiCeram® is non steroidal and is not an immunomodulator The current market size for eczema treatments is believed to be between $800 million and $900 million annually in the U.S. alone.

NeoCeram ™

It is estimated that 80,000 infants a year are born in the U.S. under 32 weeks of gestational age. Infants under 32 weeks lack a fully developed skin barrier. Pre term infants spend an average of 56 days in the neonatal intensive care unit (“NICU”) at a total cost estimated to be $18 billion annually in the United States. The lack of a fully formed barrier increases the risk of infections (sepsis) and other medical complications due to excessive trans-epidermal water loss. Pre term infants who develop sepsis (20%) spend an additional 19 days in the NICU. NICUs receive capitated payments for treating premature infants so any reduction in the length of stay positively affects the institution’s profitability. At present, the standard of care for such infants is to place them in a warmer in a high humidity environment. We believe that if the data shows a significant benefit in the use of NeoCeram™ (for example, reduction of length of stay in the NICU or reduction of bacterial infections), then there is the possibility of rapid adoption of it by the 600 neonatologists in the United States. We plan to commence a clinical study to determine the efficacy of NeoCeram™ sometime during 2009. Our ability to conduct this trial is dependent upon receiving IRB approval, which cannot be assured, and having sufficient financial resources to pay for the study. Under the terms of the DRL Agreement , we have retained the rights to market NeoCeram™.

SALES AND MARKETING

We currently do not have any sales and marketing personnel. We do not anticipate hiring a significant number of sales and marketing personnel unless we choose to commercialize products using an internal sales force.

COMPETITION

Ceragenins™

The pharmaceutical industry is highly competitive and includes a number of established, large and mid-size companies, as well as smaller emerging companies, whose activities are directly focused on our target markets. Nearly all of these companies have far greater financial and human resources than we do as well as more experienced management teams. If approved, we expect to compete primarily on the efficacy and safety of our planned products. However, new developments, including the development of other drug technologies and methods of preventing the incidence of disease, occur in the pharmaceutical industry at a rapid pace. These developments may render our product candidates or technologies obsolete or noncompetitive. While the initial in vitro data generated against a wide variety of infectious agents appears to be promising for selected Ceragenin™ candidates, it is still too early in the development process to be able to assess the likelihood for successful pre-clinical and clinical development of these compounds. Many companies are developing or have recently developed new

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antibiotic therapies, including Cubist Pharmaceuticals, Inhibitex, Wyeth and others. In addition, several companies are working to commercialize antimicrobial peptides or their analogs as either prescription drugs or antimicrobial coatings, including Polymedix, Helix Biomedical, Demegen and others.

We expect our Cerashield™ technology to compete primarily with other anti-infective coating technologies designed to reduce the infection rates. Competitive product offerings would include the following products: products from C.R. Bard such as Agento Endotracheal Tubes; Bardex IC Foley Catheters with Bacti-Guard® silver and hydrogel coating; Bardex® IC Catheters with a silver hydrogel coating; and Lubri-Sil® Foley Catheter line of silicone catheters with an antimicrobial and hydrogel coating. Competitive entries from Angiotech, Inc. include their recently cleared central venous catheter based on 5-FU and other 5-FU products under development. Competitive entries from The Kendall Company include their DOVER® 100% Silicone Foley Catheters as well as their DOVER Silver catheters which incorporates OMNION® silver ion technology coupled with a hydrogel coating. Competitive entries from Rochester Medical include their RELEASE-NF® Catheter line which has a nitrofurazone coating. Competitive offerings from Arrow International Inc. include their Gard I and Gard II coatings containing chlorhexidine + silver sulfadiazine. Competitive offerings from Cook Critical Care include their SPECTRUM® line of antimicrobial polyurethane catheters containing minocycline and rifampin. The omiganan pentahydrochloride gel under development by Cadence Pharmaceuticals as well as a variety of other new antibiotic or antimicrobial coating based products which may be under development at other firms could also become future competitors. While we expect to compete based primarily on the greater spectrum of efficacy against infectious agents and longer duration of activity, it is too early to know whether the Cerashield™ technology under development will be approved for use in target medical device segments of greatest interest and unmet medical needs.

Barrier Repair

We expect to compete on, among other things, the efficacy of our products, the reduction in adverse side effects experienced when compared with certain current therapies, and more desirable patient treatment regimens. Competing successfully will depend on our ability to demonstrate efficacy of our products through clinical trials, our ability to convince opinion leaders and prescribing physicians of the advantages of our products, and having sufficient financial resources to adequately market our products. In addition, our ability to compete may be affected by our ability to obtain reimbursement from third-party payors. The clearance of EpiCeram® as a 510(k) medical device also limits the type of claims initially associated with the promotion of the product until such time as additional clinical trials, the outcomes of which cannot yet be certain, have been concluded supporting broader claims.

Although we believe that our product candidates will have favorable features for the treatment of their intended indications, existing treatments or treatments currently under clinical development that also receive regulatory approval may possess advantages in competing for market share.

Our first product, EpiCeram®, is indicated for use to treat dry skin conditions and to manage and relieve the burning and itching associated with various types of dermatoses, including atopic dermatitis, irritant contact dermatitis, radiation dermatitis, and dry skin. Accordingly, it will compete with well established products such as Elidel® from Novartis AG, Protopic® from Fujisawa, Atopiclair® from Sinclair Pharmaceuticals, MimyX® from Steifel Laboratories as well as a variety of topical steroids and skin emollients. We believe that the limitations established by the FDA on prescribing steroids and immunosuppressants to children under the age of two years of age will provide EpiCeram® with a competitive advantage in the market to children in this age category with symptoms of eczema.

LICENSE AGREEMENTS AND PROPRIETARY RIGHTS

License Agreement with the Regents of the University of California

Osmotics entered into an exclusive license agreement with the Regents of the University of California (the “Regents”) for the Barrier Repair technology on June 28, 2000. The license agreement grants exclusive U.S. and international rights to issued patent 5,634,899 — “Lipids for epidermal moisturization and repair of barrier function.” The patent expires in July 2014. In connection with the Merger, Ceragenix Corporation was substituted in place of Osmotics as the licensee under the agreement. The license agreement provides Ceragenix Corporation with the worldwide exclusive right to commercially develop, use and sell therapeutic and cosmetic applications for the Barrier Repair technology. Under the terms of a sublicense agreement with Osmotics, Ceragenix Corporation agreed that Osmotics will retain the license rights for all cosmetic, non-prescription applications (as defined in the sublicense agreement). The rights of Ceragenix Corporation under the license agreement are subject to a non-exclusive, irrevocable, royalty free license to the U.S. Government with the power to grant a license for all governmental purposes. Unless terminated earlier by Ceragenix Corporation for any reason or by the Regents due to Ceragenix Corporation’s breach, the license agreement continues until the date of expiration of the last to expire patent licensed under this agreement. Ceragenix Corporation is obligated to pay the Regents, on an annual basis, the greater of $50,000 or five percent of

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net sales (as defined in the agreement) of products derived from the Barrier Repair technology. Upfront and milestone payments received from sub licensed products are subject to a 15% royalty. In addition, the agreement requires Ceragenix Corporation to reimburse the Regents for legal expenses associated with patent protection and expansion.

License Agreement with the Brigham Young University

On May 1, 2004, Osmotics Corporation and Ceragenix Corporation entered into an exclusive license agreement with Brigham Young University (“BYU”) for the intellectual property rights to the Ceragenin™ technology. The exclusive license agreement grants the U.S. and international rights to U.S. composition of matter patents: 6,350,738, 6,486,148 and 6,767,904 which are in effect until 2022. In connection with the Merger, Osmotics was removed as a co-licensee and Ceragenix Corporation is now the sole licensee under the agreement. The license agreement provides Ceragenix Corporation with the worldwide exclusive right to develop, use and sell all applications based on the Ceragenin™ technology until May 1, 2006. After May 1, 2006, the exclusive license extends only to those applications for which Ceragenix Corporation has conducted research or engaged in substantial commercialization efforts, including research or commercialization by strategic partners and sublicensees. To date, we have conducted research related to the Ceragenin™ technology for use as an antibiotic, antiviral agent, anticancer agent and antifungal agent. We believe such research meets the application definition to preserve exclusivity under the agreement. The rights of Ceragenix Corporation under the license agreement are subject to the right of BYU and the Church of Jesus Christ of Latter day Saints and the Church Education System to use the technology for continuing research and non-commercial academic and ecclesiastical uses without cost.

The BYU License requires quarterly research and development support fees of $22,500, and earned royalty payments equal to 2% - 10% of adjusted gross sales (as defined in the agreement) on any product using the licensed technology. The earned royalty is subject to an annual minimum royalty for which payment commenced in calendar year 2008. The minimum annual royalty is $100,000 in 2008, $200,000 in 2009, and $300,000 in 2010 and each year thereafter. We are also obligated to reimburse BYU for any legal expenses associated with patent protection and expansion. Unless terminated earlier by Ceragenix Corporation for any reason or by BYU due to Ceragenix Corporation’s breach, the license agreement terminates on the date of expiration of the last valid claim of any patent included in the technology.

The underlying patents and license agreements with the Regents and BYU are critically important to the Company’s business prospects. We have no proprietary technologies outside of these agreements. The loss of either of these license agreements, or if the underlying patents were declared invalid or could not be protected, would result in a material adverse effect on the Company.

TRADEMARKS

We believe that trademark protection is an important part of establishing product and brand recognition. The United States Patent and Trademark Office has approved EpiCeram® as a registered trademark and the following applications for registration subject to final approval of statements of use: NeoCeram™, Ceracide™, Ceragenins™, Ceragenix™ and Cerashield™. United States federal registrations for trademarks remain in force for ten years and may be renewed every ten years after issuance, provided the mark is still being used in commerce. We have also filed for EpiCeram trademark protection in the European Union, Canada, Korea, Malaysia, Singapore, Indonesia and the Philippines. However, any such trademark or service mark registrations may not afford us adequate protection, and we may not have the financial resources to enforce our rights under any such trademark or service mark registrations. If we are unable to protect our trademarks or service marks from infringement, any goodwill developed in such trademarks and service marks could be impaired.

GOVERNMENT REGULATION

The pharmaceutical industry is subject to regulation by the FDA under the Food, Drug and Cosmetic Act, by the states under state food and drug laws, and by similar agencies outside the United States. In order to clinically test, manufacture, and market products for therapeutic use, we generally must satisfy mandatory procedures and safety and effectiveness standards established by various regulatory bodies. We may spend a significant amount of money to obtain FDA and other regulatory approvals, which may never be granted. We cannot sell any of our planned products if we do not obtain and maintain government approvals.

Federal, state and international regulatory bodies govern or influence, among other things, warning letters, fines, injunctions, penalties, recall or seizure of products, total or partial suspension of production, denial or withdrawal of approval, and criminal prosecution. Accordingly, initial and ongoing regulation by governmental entities in the United States and other countries is a significant factor in the production and marketing of any pharmaceutical products that we may develop.

We expect that all of our prescription pharmaceutical products will require regulatory approval by governmental

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agencies before we can commercialize them. The nature and extent of the review process for our potential products will vary depending on the regulatory categorization of particular products. Prescription products can be cleared as either medical devices or new drugs. The clearance process for medical devices is typically shorter and less expensive than for a new drug. Within the medical device category, there are two approval paths: 510(k) or PMA. Typically, the 510(k) path is shorter and less expensive than the PMA. The 510(k) process is an abbreviated approval process that typically does not require clinical studies.

The FDA determines whether a product is a drug or device based on its primary mode of action. If a product is determined to be a device, in order to qualify for the 510(k) process, it must be demonstrated that the product is substantially equivalent to a previously approved device. If a product is determined to be a device, but not substantially equivalent to a previously approved device, then it would be subject to the PMA. A PMA application requires clinical studies and the approval time is longer (typically several years from filing).

We received marketing clearance for EpiCeram® under 510(k). We currently plan on marketing NeoCeram™ (if and when development is completed and a clinical trial is completed with favorable results) as a non prescription, Over The Counter (“OTC”) product which will not require FDA approval as there is precedent for use of topical emollients in the NICU that are OTC products. In the event that IRBs reject our proposed clinical trial, it may require us to conduct preclinical testing or require us to seek FDA approval (most likely as a 510(k)) which will delay the commercial launch of the product and increase our costs. Such a delay could result in us choosing not to pursue the product given the limited remaining patent life.

We believe that the appropriate approval path for our Cerashield™ antimicrobial coatings will be through the process established for medical devices. We base this belief on the guidelines published by the FDA as well as the approval paths followed by other antimicrobial coatings. In June 2006, the FDA notified us that a Ceragenin™ wound dressing would be regulated as a device and we believe that the same fact pattern would apply to antimicrobial coatings. However, there is no assurance that the FDA will agree that Cerashield™ coated devices should be regulated as medical devices. Systemic, topical and inhaled applications of the Ceragenins™ will be considered new drugs by the FDA and require the submission of an Investigational New Drug Application and a NDA.

Our products will also be subject to foreign regulatory requirements governing human clinical trials, manufacturing and market approval for pharmaceutical products. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement are similar, but not identical, to FDA requirements, and they vary widely from country to country. Product development and approval within this regulatory framework, and subsequent compliance with appropriate federal and foreign statutes and regulations, takes a number of years and involves the expenditure of substantial resources.

Manufacturing

The FDA regulates and inspects equipment, facilities, and processes used in the manufacturing of pharmaceutical products before providing approval to market a product. If after receiving clearance from the FDA, we make a material change in manufacturing equipment, location, or process, we may have to undergo additional regulatory review. We must apply to the FDA to change the manufacturer we use to produce any of our products. We and our contract manufacturers must adhere to current Good Manufacturing Practices (“cGMP”) and product-specific regulations enforced by the FDA through its facilities inspection program. The FDA also conducts regular, periodic visits to re-inspect equipment, facilities, and processes after the initial approval. If, as a result of these inspections, the FDA determines that our (or our contract manufacturers’) equipment, facilities, or processes do not comply with applicable FDA regulations and conditions of product approval, the FDA may seek sanctions and/or remedies against us, including suspension of our manufacturing operations. We do not plan on manufacturing any of our products using in-house facilities. Rather, we will outsource the manufacturing to experienced contractors with approved, cGMP facilities.

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Post-Approval Regulation

The FDA continues to review marketed products even after granting regulatory clearances, and if previously unknown problems are discovered or if we fail to comply with the applicable regulatory requirements, the FDA may restrict the marketing of a product or impose the withdrawal of the product from the market, recalls, seizures, injunctions or criminal sanctions. In its regulation of advertising, the FDA from time to time issues correspondence to pharmaceutical companies alleging that some advertising or promotional practices are false, misleading or deceptive. The FDA has the power to impose a wide array of sanctions on companies for such advertising practices.

Pharmacy Boards

It is possible that we could be required to be licensed with the state pharmacy boards as a manufacturer, wholesaler, or wholesale distributor. Many of the states allow exemptions from license if our products are distributed through a licensed wholesale distributor. We believe that we will be exempt from registration for EpiCeram® as a result of DRL’s distribution licenses. The regulations of each state are different, and receiving a license in one state will not authorize us to sell our products in other states. Accordingly, we will have to undertake an annual review of our license status to ensure compliance with the state pharmacy board requirements. We are currently not licensed with any state pharmacy board.

Fraud and Abuse Regulations

We are subject to various federal and state laws pertaining to health care “fraud and abuse,” including anti-kickback laws and false claims laws. The Office of Inspector General (“OIG”) of the U.S. Department of Health and Human Services has provided guidance that outlines several considerations for pharmaceutical manufacturers to be aware of in the context of marketing and promotion of products reimbursable by the federal health care programs. Effective July 1, 2005, pursuant to a new California law, all pharmaceutical companies doing business in California will be required to certify that they are in compliance with the OIG guidance.

The federal anti-kickback statute places constraints on business activities in the health care sector that are common business activities in other industries, including sales, marketing, discounting, and purchase relations. Practices that may be common or longstanding in other businesses are not necessarily acceptable or lawful when soliciting federal health care program business. Specifically, anti-kickback laws make it illegal for a prescription drug manufacturer to solicit or to offer or pay anything of value for patient referrals, or in return for purchasing, leasing, ordering, or arranging for or recommending the purchase, lease or ordering of, any item or service that is reimbursable in whole or part by a federal health care program, including the purchase or prescription of a particular drug. The federal government has published regulations that identify “safe harbors” or exemptions for certain payment arrangements that do not violate the anti-kickback statutes. We will seek to comply with the safe harbors where possible.

False claims laws prohibit anyone from knowingly and willingly presenting, or causing to be presented for payment to third party payors (including Medicare and Medicaid) claims for reimbursed drugs or services that are false or fraudulent, claims for items or services not provided as claimed, or claims for medically unnecessary items or services. Our planned activities relating to the sale and marketing of our products may be subject to scrutiny under these laws.

Violations of fraud and abuse laws may be punishable by criminal and/or civil sanctions, including fines and civil monetary penalties, as well as the possibility of exclusion from federal health care programs (including Medicare and Medicaid).

EMPLOYEES

As of March 1, 2009, we had seven full-time employees. We do not carry key man life insurance on any of our employees. We are not part of any collective bargaining agreement. There have been no work stoppages and we believe our employee relations are good.

Item 1A. Risk Factors

An investment in our securities is speculative and involves a high degree of risk. Please carefully consider the following risk factors, as well as the possibility of the loss of your entire investment, before deciding to invest in our securities. There are many factors that affect our business and results of operations, some of which are beyond our control. The following section describes important factors that may cause actual results of our operations in future periods to differ materially from the results currently expected or desired and in turn materially affect our future developments and performance. Accordingly, you should evaluate all forward-looking statements with the understanding of their inherent uncertainty. Due to the following factors, we believe that quarter-to-quarter comparisons of our results of operations are not a good indication of our future performance.

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Risks Related to Our Business

Our securities represent a highly speculative investment.

We have not had sufficient capital to fund all of our capital resource needs since our formation, and you cannot assume that our plans will either materialize or prove successful. There is no assurance that our operations will ever produce sufficient revenue to fund our capital resource needs. If our plans are unsuccessful, the price and liquidity of our common stock will be adversely affected and you could lose your entire investment.

Our auditors have expressed substantial doubt about our ability to continue as a going concern.

We believe that existing cash on hand in combination with projected operating cash flows should be sufficient to fund our planned corporate activities, all current contractual obligations and planned development activities through at least the early part of the third quarter of 2009. Accordingly, we will require additional funding within the next six months. As of the date of this Form 10-K, we have no firm commitments for raising additional capital and as described in further detail in Management’s Discussion and Analysis “Liquidity and Capital Resources,” our ability to access the capital markets may be severely limited for a variety of reasons that we do not see changing in the near term. There is no assurance that we will be able to raise additional capital within the timeframe described above. Even if we are successful, it could be on terms that substantially dilute our current shareholders. If we are unsuccessful in raising additional capital we may not be able to continue our business operations and our securities may have little or no value.

We cannot predict our future capital needs and we may not be able to secure additional financing.

Our projection of future capital needs is based on our operating plan, which in turn is based on assumptions that may prove to be incorrect. As a result, our financial resources may not be sufficient to satisfy our future capital requirements. Should these assumptions prove incorrect, there is no assurance that we can raise additional financing on a timely basis or on favorable terms. If funding is insufficient at any time in the future, we may not be able to repay our debt obligations, develop or commercialize our products or services, take advantage of business opportunities or respond to competitive pressures, any of which could harm our business.

Future financings may result in dilution to our shareholders and restrictions on our business operations.

If we raise additional funds by issuing equity or convertible debt securities, further dilution to our shareholders could occur. Additionally, we may grant registration rights to investors purchasing equity or debt securities. Debt financing, if available, may involve pledging some or all of our assets and may contain restrictive covenants with respect to raising future capital and other financial and operational matters. If we are unable to obtain necessary additional capital, we may be unable to execute our business strategy, which would have a material adverse effect on our business, financial condition and results of operations.

The DRL Agreement will increase our cash requirements

Under the terms of the DRL Agreement, we are responsible for manufacturing (through a contract manufacturer) and supplying EpiCeram®. This results in us having to pay our vendors for the cost of the product prior to receiving payment from DRL. This creates a working capital requirement which is expected to increase over time as sales of EpiCeram® increase. We may not have sufficient cash on hand to meet all purchase orders from DRL. If we cannot provide product to DRL within the timeframes called for under the DRL Agreement, DRL could assume manufacturing responsibilities which will serve to reduce the profits we earn on the sale of EpiCeram®.

Under the terms of our amended convertible debt agreements, all of our net revenue (as defined in the agreements) from the DRL Agreement is required to be used to service the debt. Accordingly, we will not generate any net cash from the DRL Agreement until such time that the convertible debt is paid in full.

The existence of our convertible debt will make it difficult to raise additional capital

We will require additional capital to execute our business plan and continue as a going concern. As of December 31, 2008, we had $9,087,525 outstanding in secured convertible debt. Repayment of these obligations is secured by a first lien on all of our assets, including all of our intellectual property rights and intellectual property licenses. While we believe the amended repayment terms of our debt agreements are more favorable to the Company, the convertible debt agreements contain a number of provisions which new investors could find problematic and could deter investment. See discussion in Management’s Discussion and Analysis “Liquidity and Capital Resources” for a discussion of the specific

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terms of the convertible debt agreements that new investors could find problematic. If we default on any of the covenants or other requirements of our debt agreements, the debt holders will be able to foreclose on our assets by which their debts are secured which would likely cause you to lose your entire investment. Such foreclosure would likely force us out of business. Furthermore, if the debt holders choose to convert their debt into shares of common stock it is possible that the sale of such shares could have a depressive effect on the share price of our common stock.

Recent interpretations by the SEC of Rule 415 of the Securities Act may affect our ability to register securities on a delayed or continuous basis.

Recently, the SEC provided guidance to certain issuers that based upon the nature and size of their private securities transactions, it may require that the private placements be registered as primary offerings listing the investors in the transaction as the selling securityholders and underwriters. This is a change from past practice in which private placements and the securities underlying such transactions qualified for registration on resale registration statements pursuant to Rule 415(a)(1)(x). The implication is that private placements by companies in which a large amount of securities become eligible for resale, in comparison to the company’s public float, will be considered primary offerings in which the investors are considered the underwriters. As a primary offering, resales of such securities must be made by the selling securityholders at a fixed, pre-determined price, and are not eligible to be sold into the trading market from time to time at prevailing prices. In the private placement, investors would be required to choose one price at which to re-sell all of their shares purchased from the issuer and would not profit from subsequent price increases, if any. As this practice will restrict an investor’s ability to invest in and profit from private placements, we can provide no assurance that this limitation on our ability to register securities underlying our private placements will not impact our ability to raise capital in the future through private placements.

Until such time as Osmotics consummates its planned exchange offering (see discussion below), our public float for Rule 415 purposes excludes the 12,004,569 shares of common stock Osmotics has placed in escrow. As a result, it further limits the number of underlying shares sold in a private placement that we can register at any one time. Accordingly, this could result in us having to file multiple registration statements over a period of time to register all of the underlying shares purchased in a private placement transaction. This may serve to further limit our ability to raise capital through private placements or result in the investors in such transactions seeking additional economic compensation. If we are unable to raise additional capital in private placement transactions, it could have a material adverse affect on our liquidity and business prospects.

A substantial number of our outstanding common shares are controlled by one shareholder.

Osmotics owns 12,222,170 shares, or 69%, of our outstanding common stock. Osmotics has placed 12,004,569 of these shares into escrow for a planned common stock exchange with their shareholders and debtholders. Pursuant to a registration rights agreement we have with Osmotics we were obligated to register such shares with the SEC. We filed such a registration statement in February 2007, however, based on discussions with the SEC, we withdrew such registration statement. After subsequent discussions with the SEC, we believe that we will have to register the Osmotics exchange transaction on Form S-4 in order to avoid Rule 415 limitations. We cannot file the S-4 until Osmotics comes to an agreement with its debtholders regarding how many of the escrowed shares will be used to satisfy their debt obligations. We do not know when Osmotics will complete this negotiation. Osmotics has signed a limited standstill agreement which requires that the shares currently held in escrow be released into the trading market over a 24 month period commencing on the later of June 30, 2008 or the consummation of the planned exchange. Once these shares have been registered and distributed by Osmotics, such shares will be freely tradable and could have a depressive effect on the price of our stock. The recipients of these shares will be subject to the provisions of the limited standstill agreement. Additionally, the planned release of these shares into the trading market could prevent or limit our ability to raise additional capital during this time period.

Our convertible debt agreements contain repricing provisions.

Our secured convertible debt agreements contain provisions that provide for the conversion price of the debt and exercise price of common stock purchase warrants to be reduced under certain circumstances. In the event that the conversion price of such debt, or the exercise price of the warrants, is reduced, the holders will receive more shares of our common stock upon conversion of the debt, or the exercise of warrants, than they would with the current conversion price. This would result in current shareholders experiencing dilution to their holdings and could result in a depressive effect on the share price of our common stock. There is no assurance that conversion price reductions will not take place in the future.

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Our near term revenues will be dependent upon the efforts of DRL.

The commercial success of EpiCeram® will in large part be dependent upon the efforts of DRL. While we believe that DRL is committed to providing the necessary resources to promote and market EpiCeram® to prescribing physicians and patients, there is no assurance that DRL will do so. We cannot terminate the agreement if sales do not reach our expectations.

We do not know whether EpiCeram® will be reimbursed by third party payors.

The market acceptance of EpiCeram® will in part depend upon the amount of reimbursement coverage third party payors will provide for EpiCeram®. Under the terms of the DRL Agreement, DRL is responsible for managing the reimbursement process. If third party payors do not provide sufficient reimbursement for EpiCeram®, it may inhibit physicians from prescribing and/or prevent certain patients from purchasing the product. Additionally, inadequate reimbursement coverage could result in DRL having to reduce the sales price per unit. All of these factors would result in reducing our revenues from EpiCeram®.

The patents underlying our Barrier Repair technology have relatively short patent lives remaining.

The patents underlying EpiCeram® will expire in July 2014, which will likely serve to limit the revenues we will be able to generate from this product.

Our anti-infective products are at a very early stage of development.

Our Ceragenin™ technology is at a very early stage of development. While we have received encouraging results from testing the technology in vitro, there is substantial additional development to be done as well as preclinical and clinical testing before we, or a commercialization partner, can market a product. We have only recently begun certain animal model testing. We currently do not have sufficient cash on hand to develop this technology as rapidly or extensively as we would like. Accordingly, there may be delays in developing this technology. Additionally, as of the date of this Form 10-K, we have very limited data on toxicity. See the discussion under the heading “Government Regulation.” As we progress through the development and approval process of different applications of the Ceragenin™ technology, there are numerous factors that could prevent us from ever generating revenue from the Ceragenin™ technology. Accordingly, there is no assurance that the Ceragenin™ technology will ever generate revenue for us.

Current levels of market volatility could have a negative effect on our business, results of operations and financial condition.

The capital and credit markets have been experiencing extreme volatility and disruption for more than 12 months. If the current levels of market disruption and volatility continue or worsen, there can be no assurance that we will not experience adverse effects, which may be material, on our ability to access capital and on our results of operations. We are unable to predict the likely duration and severity of the current disruption in financial markets and adverse economic conditions in the U.S. Deteriorating market and liquidity conditions may also give rise to issues which may impact our lenders’ ability or their willingness to waive any future defaults or enter into further debt amendments. Due to the existing uncertainty in the capital and credit markets, and current adverse changes in the global economy, our access to capital may not be available on terms feasible to us or we may not have access to capital at all.

We have limited human resources; we need to attract and retain highly skilled personnel; and we may be unable to manage our growth with our limited resources effectively.

We expect that the expansion of our business will place a significant strain on our limited managerial, operational, and financial resources. We will be required to expand our operational and financial systems significantly and to expand, train and manage our work force in order to manage the expansion of our operations. Our future success will depend in large part on our ability to attract, train, and retain additional highly skilled executive level management with experience in the pharmaceutical industry. Competition is intense for these types of personnel from more established organizations, many of which have significantly larger operations and greater financial, marketing, human, and other resources than we have. We may not be successful in attracting and retaining qualified personnel on a timely basis, on competitive terms or at all. If we are not successful in attracting and retaining these personnel, our business, prospects, financial condition and operating results would be materially adversely affected. Further, our ability to manage our growth effectively will require us to continue to improve our operational, financial and management controls, reporting systems and procedures, to install new management information and control systems and to train, motivate and manage employees. If we are unable to manage growth effectively and new employees are unable to achieve adequate performance levels, our business, prospects, financial condition and operating results could be materially adversely affected.

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We depend on licenses from others for all of our products.

We have licensed patents and proprietary technologies owned by third parties under two license agreements. These agreements may be terminated if we fail to perform our obligations under these licenses in accordance with their terms including, but not limited to, our ability to make all payments due under such agreements. Our inability to continue to license these technologies could materially adversely affect our business, prospects, financial condition, and operating results. In addition, our strategy depends on the successful development of these licensed technologies into commercial products, and, therefore, any limitations on our ability to utilize these technologies may impair our ability to market and sell our products, delay new product introductions, and/or adversely affect our reputation, any of which could have a material adverse effect on our business, prospects, financial condition, and operating results.

If clinical trials of our current or future product candidates do not produce results necessary to support regulatory approval in the United States or elsewhere, we will be unable to commercialize these products.

To receive regulatory approval for the commercial sale of our product candidates that we may develop or out-license, we, or our potential partners, must conduct, adequate and well controlled clinical trials to demonstrate efficacy and safety in humans. Clinical testing is expensive, takes many years and has an uncertain outcome. Clinical failure can occur at any stage of the testing. Our clinical trials may produce negative or inconclusive results, and we, or our partners, may decide, or regulators may require us, to conduct additional clinical and/or non-clinical testing. Our failure to adequately demonstrate the efficacy and safety of any product candidate that we may develop or out-license would prevent receipt of regulatory approval and, ultimately, the commercialization of that product candidate.

Even if our product candidates receive regulatory approval, they may still face future development and regulatory difficulties.

Even if U.S. regulatory approval or clearance is obtained, the FDA can impose significant restrictions on a product’s indicated uses or marketing or may impose ongoing requirements for potentially costly post-approval studies. Any of these restrictions or requirements could adversely affect our potential product revenues. Our product candidates will also be subject to ongoing FDA requirements for the labeling, packaging, storage, advertising, promotion, record-keeping and submission of safety and other post-market information on the drug. In addition, approved products, manufacturers and manufacturers’ facilities are subject to continual review and periodic inspections. If a regulatory agency discovers previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, a regulatory agency may impose restrictions on that product or us, including requiring withdrawal of the product from the market. If our product candidates fail to comply with applicable regulatory requirements, such as cGMP, a regulatory agency may:

·	issue warning letters or untitled letters;
·	require us to enter into a consent decree, which can include imposition of various fines, reimbursements for inspection costs, required due dates for specific actions and penalties for noncompliance;
·	impose other civil or criminal penalties;
·	suspend regulatory approval;
·	suspend any ongoing clinical trials;
·	refuse to approve pending applications or supplements to approved applications filed by us;
·	impose restrictions on operations, including costly new manufacturing requirements; or
·	seize or detain products or require a product recall.

Our ability to successfully commercialize our products will greatly depend on the success of our clinical trials.

Our commercialization efforts will be greatly dependent upon our ability to demonstrate product efficacy in clinical trials. Without compelling supporting data, pharmacies and other dispensing facilities will be reluctant to order our products, and medical practitioners will be reluctant to prescribe our products. While we believe that our products will be effective for our planned indications, there is no assurance that this will be proven in clinical trials. The failure to demonstrate efficacy in our clinical trials, or a delay or failure to complete our clinical trials, would have a material adverse effect on our business, prospects, financial condition and operating results.

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Delays in the commencement or completion of clinical testing could result in increased costs to us and delay or limit our ability to obtain regulatory approval for our product candidates.

Delays in the commencement or completion of clinical testing could significantly affect our product development costs. Our clinical trials for EpiCeram® took longer to complete than planned and our NeoCeram™ clinical trial has not yet commenced as originally planned. Accordingly, any future clinical trials may not begin on time or be completed on schedule, if at all. The commencement and completion of clinical trials requires us to identify and maintain a sufficient number of trial sites, many of which may already be engaged in other clinical trial programs for the same indication as our product candidates or may not be eligible to participate in or may be required to withdraw from a clinical trial as a result of changing standards of care. The commencement and completion of clinical trials can be delayed for a variety of other reasons, including delays related to:

·	reaching agreements on acceptable terms with prospective clinical research organizations, or CROs, and trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;
·	obtaining regulatory approval to commence a clinical trial;
·	obtaining institutional review board approval to conduct a clinical trial at a prospective site;
·	recruiting and enrolling patients to participate in clinical trials for a variety of reasons, including competition from other clinical trial programs for the same indication as our product candidates; and
·	retaining patients who have initiated a clinical trial but may be prone to withdraw due to the treatment protocol, lack of efficacy, personal issues, side effects from the therapy or who are lost to further follow-up.

A clinical trial may be suspended or terminated by us, the FDA or other regulatory authorities due to a number of factors.

A clinical trial may be suspended or terminated by us, the FDA or other regulatory authorities due to a number of factors, including:

·	failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols;
·	inspection of the clinical trial operations or trial sites by the FDA or other regulatory authorities resulting in the imposition of a clinical hold;
·	unforeseen safety issues or any determination that a trial presents unacceptable health risks; or
·	lack of adequate funding to continue the clinical trial, including the incurrence of unforeseen costs due to enrollment delays, requirements to conduct additional trials and studies and increased expenses associated with the services of our CROs and other third parties.

Additionally, changes in regulatory requirements and guidance may occur and we may need to amend clinical trial protocols to reflect these changes. Amendments may require us to resubmit our clinical trial protocols to institutional review boards for reexamination, which may impact the cost, timing or successful completion of a clinical trial. If we experience delays in the completion of, or if we terminate, our clinical trials, the commercial prospects for our product candidates will be harmed, and our ability to generate product revenues will be delayed. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of a product candidate. Even if we are able to ultimately commercialize our product candidates, other therapies for the same indications may have been introduced to the market and established a competitive advantage.

Our failure to convince medical practitioners to prescribe products or use our technologies will limit our revenue and profitability.

If we, or our commercialization partners, fail to convince medical practitioners to prescribe products using our technologies, we will not be able to sell our products or license our technologies in sufficient volume for our business to become profitable. We, or our commercialization partners, will need to make leading physicians aware of the benefits of products using our technologies through published papers, presentations at scientific conferences and favorable results from our clinical studies. Failure to be successful in these efforts would make it difficult for us to convince medical practitioners to prescribe products using our technologies for their patients. Failure to convince medical practitioners to prescribe our products will damage our commercialization efforts and would have a material adverse effect on our business, prospects, financial condition and operating results.

Some of our ingredients come from sole source providers.

While we have supply agreements in place for certain key ingredients used in the formulation of EpiCeram®, two of these ingredients come from sole source providers. To date, we have not had any difficulties in acquiring any of these ingredients. While we believe that similar ingredients are available from other sources, there is no assurance that they will work

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as well as the ingredients currently used, and in certain cases, a change in ingredients could require us to receive clearance from the FDA. Any delays in manufacturing resulting from an inability to purchase ingredients or waiting on FDA clearance could have a material adverse effect on our business prospects, financial condition and operating results. Further, any reduction in product efficacy resulting from using alternative ingredients could also have a material adverse effect on our business prospects, financial condition and operating results. Such delays or reduction in efficacy could result in DRL terminating the DRL Agreement.

If we lose the support of our key scientific collaborators, it may be difficult to establish products using our technologies as a standard of care for various indications, which may limit our revenue growth and profitability.

We have established relationships with leading scientists around the world. We have formalized certain of these relationships by establishing a scientific advisory board. We believe that such relationships are key to establishing products using our technologies as commercially viable for various indications. We have entered into consulting agreements with our scientific advisory board members, but such agreements provide for termination with 30 days notice. Additionally, there is no assurance that our current research partners will continue to work with us or we will be able to attract additional research partners. The inability to maintain and build on our existing scientific relationships could have a material adverse effect on our business, prospects, financial condition and operating results.

We may not be able to successfully manufacture Ceragenins™ in commercial quantities.

To date, we have only produced Ceragenin™ compound in a laboratory. We do not know whether we will be able to produce quantities sufficient for commercial use in a cGMP manufacturing facility. If we cannot manufacture these compounds in commercial quantities it could have a material adverse effect on our business prospects.

We may not be able to market or generate sales of our products to the extent anticipated.

Assuming that we are successful in receiving regulatory clearances to market any of our products, our ability to successfully penetrate the market and generate sales of those products may be limited by a number of factors, including the following:

·	Certain of our competitors in the field have already received regulatory approvals for and have begun marketing similar products in the United States, the EU, Japan and other territories, which may result in greater physician awareness of their products as compared to ours.
·	Information from our competitors or the academic community indicating that current products or new products are more effective than our products could, if and when it is generated, impede our market penetration or decrease our existing market share.
·	Physicians may be reluctant to switch from existing treatment methods, including traditional therapy agents, to our products.
·	The price for our products, as well as pricing decisions by our competitors, may have an effect on our revenues.
·	Our revenues may diminish if third party payors, including private health coverage insurers and health maintenance organizations, do not provide adequate coverage or reimbursement for our products.
·	If any of our future marketed products were to become the subject of problems related to their efficacy, safety, or otherwise, or if new, more effective treatments were to be introduced, our revenues from such marketed products could decrease.
·	If any of our current or future marketed products become the subject of problems, including those related to, among others: efficacy or safety concerns with the products, even if not justified; unexpected side effects; regulatory proceedings subjecting the products to potential recall; publicity affecting doctor prescription or patient use of the product; pressure from competitive products; or introduction of more effective treatments.

For example, efficacy or safety concerns may arise, whether or not justified, that could lead to the recall or withdrawal of such marketed products. In the event of a recall or withdrawal of a product, our revenues would significantly decline.

If the government or third-party payors fail to provide coverage and adequate coverage and payment rates for our future products, if any, or if hospitals choose to use therapies that are less expensive, our revenue and prospects for profitability will be limited.

In both domestic and foreign markets, our sales of any future products will depend in part upon the availability of coverage and reimbursement from third-party payors. Such third-party payors include government health programs such as Medicare, managed care providers, private health insurers and other organizations. In particular, many U.S. hospitals receive a

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fixed reimbursement amount per procedure for certain surgeries and other treatment therapies they perform. Because this amount may not be based on the actual expenses the hospital incurs, hospitals may choose to use therapies which are less expensive when compared to our product candidates. We may need to conduct post-marketing studies in order to demonstrate the cost-effectiveness of any future products to the satisfaction of hospitals, other target customers and their third-party payors. Such studies might require us to commit a significant amount of management time and financial and other resources. Our future products might not ultimately be considered cost-effective. Adequate third-party coverage and reimbursement might not be available to enable us to maintain price levels sufficient to realize an appropriate return on investment in product development.

Governments continue to propose and pass legislation designed to reduce the cost of healthcare.

In the United States, we expect that there will continue to be federal and state proposals to implement similar governmental controls. For example, in December 2003, Congress enacted a limited prescription drug benefit for Medicare beneficiaries in the Medicare Prescription Drug, Improvement, and Modernization Act of 2003. Under this program, drug prices for certain prescription drugs are negotiated by drug plans, with the goal to lower costs for Medicare beneficiaries. In some foreign markets, the government controls the pricing of prescription pharmaceuticals. In these countries, pricing negotiated with governmental authorities can take six to 12 months or longer after the receipt of regulatory marketing approval for a product. Cost control initiatives could decrease the price that we would receive for any products in the future, which would limit our revenue and profitability. Accordingly, legislation and regulations affecting the pricing of pharmaceuticals might change before our product candidates are approved for marketing. Adoption of such legislation could further limit reimbursement for pharmaceuticals.

None of our potential products may reach the commercial market for a number of reasons.

Successful research and development of pharmaceutical products is highly risky. Most products and development candidates fail to reach the market. Our success depends on the discovery of new drugs or devices that we can commercialize. It is possible that our potential products may never reach the market for a number of reasons. They may be found to be toxic, ineffective or may cause harmful side effects during pre-clinical testing or clinical trials or fail to receive necessary regulatory approvals. We may find that certain products cannot be manufactured on a commercial scale basis and, therefore, they may not be economical to produce. Our products could also fail to achieve market acceptance or be precluded from commercialization by proprietary rights of third parties. We have a number of product candidates in various stages of development, but do not expect the majority of them to be commercially available for a number of years, if at all. If our competitors succeed in developing products and technologies that are more effective than our own, or if scientific developments change our understanding of the potential scope and utility of our products, then our products and technologies may be rendered less competitive.

We will face significant competition from industry participants that are pursuing similar products and technologies that we are pursuing and are developing pharmaceutical products that are competitive with our planned products and potential products.

Nearly all of our industry competitors have greater capital resources, larger overall research and development staffs and facilities, and a longer history in drug discovery and development, obtaining regulatory approval and pharmaceutical product manufacturing and marketing than we do. With these additional resources, our competitors may be able to respond to the rapid and significant technological changes in the biotechnology and pharmaceutical industries faster than we can. Our future success will depend in large part on our ability to maintain a competitive position with respect to these technologies. Rapid technological development, as well as new scientific developments, may result in our compounds, products or processes becoming obsolete before we can recover any of the expenses incurred to develop them. For example, changes in our understanding of the appropriate population of patients who should be treated with a targeted therapy we are developing may limit the product’s market potential if it is subsequently demonstrated that only certain subsets of patients should be treated with the targeted therapy.

Our reliance on third parties, such as clinical research organizations, may result in delays in completing, or a failure to complete, clinical trials if they fail to perform under our agreements with them.

In the course of product development, we may engage clinical research organizations to conduct and manage clinical studies and to assist us in guiding our products through the FDA review and approval process. If we engage clinical research organizations to help us obtain market approval for our drug candidates, many important aspects of this process have been and will be out of our direct control. If the clinical research organizations fail to perform their obligations under our agreements with them or fail to perform clinical trials in a satisfactory manner, we may face delays in completing our clinical trials, as well as commercialization of one or more drug candidates. Furthermore, any loss or delay in obtaining contracts with such entities may also delay the completion of our clinical trials and the market approval of drug candidates.

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If the manufacturers upon whom we rely fail to produce our product candidates in the volumes that we require on a timely basis, or to comply with stringent regulations applicable to pharmaceutical drug manufacturers, we may face delays in the development and commercialization of, or be unable to meet demand for, our products and may lose potential revenues.

We do not manufacture any of our product candidates, and we do not currently plan to develop any capacity to do so. Any problems or delays we experience in manufacturing of EpiCeram® or any other product candidate may impair our ability to manufacture commercial quantities, which would adversely affect our business. For example, our manufacturers will need to produce specific batches of our product candidates to demonstrate acceptable stability under various conditions and for commercially viable lengths of time. Furthermore, if our commercial manufacturers fail to deliver the required commercial quantities of bulk drug or device substance or finished product on a timely basis and at commercially reasonable prices, we would likely be unable to meet demand for our products and we would lose potential revenues.

The manufacture of pharmaceutical products requires significant expertise and capital investment, including the development of advanced manufacturing techniques and process controls. Manufacturers of pharmaceutical products often encounter difficulties in production, particularly in scaling up initial production. These problems include difficulties with production costs and yields, quality control, including stability of the product candidate and quality assurance testing, shortages of qualified personnel, as well as compliance with strictly enforced federal, state and foreign regulations. Our manufacturers may not perform as agreed. If our manufacturers were to encounter any of these difficulties, our ability to provide product to commercialization partners or product candidates to patients in our clinical trials would be jeopardized. In addition, all manufacturers of our product candidates must comply with cGMP requirements enforced by the FDA through its facilities inspection program. These requirements include quality control, quality assurance and the maintenance of records and documentation. Manufacturers of our product candidates may be unable to comply with these cGMP requirements and with other FDA, state and foreign regulatory requirements. We have little control over our manufacturers’ compliance with these regulations and standards. A failure to comply with these requirements may result in fines and civil penalties, suspension of production, suspension or delay in product approval, product seizure or recall, or withdrawal of product approval. If the safety of any quantities supplied is compromised due to our manufacturers’ failure to adhere to applicable laws or for other reasons, we may not be able to obtain regulatory approval for or successfully commercialize our product candidates.

We will rely on third parties to market our products.

We currently plan on licensing our planned products to third parties and/or utilizing third parties to market our planned products. In such cases, the amount of revenue we receive will be dependent upon the success of such third parties. In all likelihood, our products will not be the only products sold or marketed by such parties and they may not devote the necessary resources to successfully sell our products. Accordingly, these arrangements may result in our products not reaching their full revenue potential which could have an adverse affect on our operations, liquidity and business prospects .

The use of any of our potential products in clinical trials and the sale of any approved products exposes us to liability claims.

The nature of our business exposes us to potential liability risks inherent in the testing, manufacturing and marketing of drug candidates and products. If any of our drug candidates in clinical trials or our marketed products harm people or allegedly harm people, we may be subject to costly and damaging product liability claims. A number of patients who participate in trials are already critically ill when they enter a trial. The waivers we obtain may not be enforceable and may not protect us from liability or the costs of product liability litigation. Although we believe we have adequate product liability insurance, we are subject to the risk that our insurance will not be sufficient to cover claims. There is also a risk that adequate insurance coverage will not be available in the future on commercially reasonable terms, if at all. The successful assertion of an uninsured product liability or other claim against us could cause us to incur significant expenses to pay such a claim, could adversely affect our product development, could generate adverse publicity regarding our product, and could cause a decline in our product revenues. Even a successfully defended product liability claim could cause us to incur significant expenses to defend such a claim, could adversely affect our product development and could cause a decline in our product revenues.

Our future success depends, in part, on the continued service of our management team.

Our success is dependent in part upon the availability of our senior executive officers and our scientific advisors. The loss or unavailability to us of any of these individuals or key research, development, sales and marketing personnel, particularly, if lost to competitors, could have a material adverse effect on our business, prospects, financial condition, and operating results. We have no key man insurance on any of our employees.

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Recent proposed legislation may permit re-importation of drugs from foreign countries into the United States, including foreign countries where the drugs are sold at lower prices than in the United States, which could materially adversely affect our operating results and our overall financial condition.

Legislation has been introduced in Congress that, if enacted, would permit more widespread re-importation of drugs from foreign countries into the United States, which may include re-importation from foreign countries where the drugs are sold at lower prices than in the United States. Such legislation, or similar regulatory changes, could decrease the price we receive for any approved products which, in turn, could materially adversely affect our operating results and our overall financial condition.

The difficulty and cost of protecting our proprietary rights makes it difficult to ensure their protection.

Our commercial success will depend in part on maintaining patent protection and trade secret protection for our products, as well as successfully defending these patents against third-party challenges. We will only be able to protect our technologies from unauthorized use by third parties to the extent that valid and enforceable patents or trade secrets cover them. The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal and factual questions for which important legal principles remain unresolved. No consistent policy regarding the breadth of claims allowed in pharmaceutical or biotechnology patents has emerged to date in the United States. The patent situation outside the United States is even more uncertain. Changes in either the patent laws or in interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property. Accordingly, we cannot predict the breadth of claims that may be allowed or enforced in our patents or in third-party patents.

The degree of future protection for our proprietary rights is uncertain because legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep our competitive advantage. For example :

·	our licensors might not have been the first to make the inventions covered by each of our pending patent applications and issued patents;
·	our licensors might not have been the first to file patent applications for these inventions;
·	others may independently develop similar or alternative technologies or duplicate any of our product candidates or technologies;
·	it is possible that none of the pending patent applications licensed to us will result in issued patents;
·	the issued patents covering our product candidates may not provide a basis for commercially viable active products, may not provide us with any competitive advantages, or may be challenged by third parties;
·	we may not develop additional proprietary technologies that are patentable; or
·	patents of others may have an adverse effect on our business.

In the event that a third party has also filed a U.S. patent application relating to our product candidates or a similar invention, we may have to participate in interference proceedings declared by the U.S. Patent and Trademark Office to determine priority of invention in the United States. The costs of these proceedings could be substantial and it is possible that our efforts would be unsuccessful, resulting in a material adverse effect on our U.S. patent position. It is also possible that we may not have the financial resources to pursue infringement actions on a timely basis, if at all. Furthermore, we may not have identified all U.S. and foreign patents or published applications that affect our business either by blocking our ability to commercialize our drugs or by covering similar technologies that affect our drug market.

In addition, some countries, including many in Europe, do not grant patent claims directed to methods of treating humans, and in these countries patent protection may not be available at all to protect our drug or device candidates. Even if patents issue, we cannot guarantee that the claims of those patents will be valid and enforceable or provide us with any significant protection against competitive products, or otherwise be commercially valuable to us.

We may also rely on trade secrets to protect our technology, particularly where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. While we use reasonable efforts to protect our trade secrets, our licensors, employees, consultants, contractors, outside scientific collaborators and other advisors may unintentionally or willfully disclose our information to competitors. Enforcing a claim that a third party illegally obtained and is using our trade secrets is expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States are sometimes less willing to protect trade secrets. Moreover, our competitors may independently develop equivalent knowledge, methods and know-how.

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If our licensors or we fail to obtain or maintain patent protection or trade secret protection for our products, third parties could use our proprietary information, which could impair our ability to compete in the market and adversely affect our ability to generate revenues and achieve profitability.

If we are sued for infringing intellectual property rights of third parties, it will be costly and time consuming, and an unfavorable outcome in any litigation would harm our business.

Our ability to develop, manufacture, market and sell our products depends upon our ability to avoid infringing the proprietary rights of third parties. There is a substantial amount of litigation involving patent and other intellectual property rights in the biotechnology and biopharmaceutical industries generally. If a third party claims that we infringe on their products or technology, we could face a number of issues, including:

·	*infringement and other intellectual property claims which, with or without merit, can be expensive and time consuming to litigate and can divert management’s attention from our core business;*
·	*substantial damages for past infringement which we may have to pay if a court decides that our product infringes on a competitor’s patent;*
·	*a court prohibiting us from selling or licensing our product unless the patent holder licenses the patent to us, which it is not required to do;*
·	*if a license is available from a patent holder, we may have to pay substantial royalties or grant cross licenses to our patents; and*
·	*redesigning our processes so they do not infringe which may not be possible or could require substantial funds and time.*

Our corporate charter places certain limitations on director liability.

Our Certificate of Incorporation provides, as permitted by Delaware law, that our directors shall not be personally liable to the corporation or our stockholders for monetary damages for breach of fiduciary duty as a director, with certain exceptions. These provisions may discourage stockholders from bringing suit against a director for breach of fiduciary duty and may reduce the likelihood of derivative litigation brought by stockholders on behalf of us against directors. In addition, our Certificate of Incorporation and bylaws provide for mandatory indemnification of directors and officers to the fullest extent permitted by Delaware law.

Members of our management have conflicts of interest.

Our directors, are, or may become in their individual capacity, officers, and directors, controlling shareholders and/or partners of other entities engaged in a variety of businesses. Thus, the involvement of these individuals with such other business entities may create conflicts of interest including, among other things, time, effort, and corporate opportunity. The amount of time that our directors will devote to our business will be limited. Additionally, our Chief Executive Officer retains a significant ownership interest in Osmotics (approximately 10%) and is married to the Chief Executive Officer of Osmotics. Accordingly, he is conflicted in all Company matters dealing with Osmotics. Further, a certain other director also retains a small ownership interest in Osmotics (less than 1%). It is possible that Osmotics may have interests that are in conflict with our best interests.

There are trading risks for low priced stocks.

Our common stock is currently traded in the over the counter market on the “Electronic Bulletin Board” of the National Association of Securities Dealers, Inc. As a consequence, an investor could find it more difficult to dispose of, or to obtain accurate quotations as to the price of, our securities.

The Securities Enforcement and Penny Stock Reform Act of 1990 requires additional disclosure, relating to the market for penny stocks, in connection with trades in any stock defined as a penny stock. The Securities and Exchange Commission (the “SEC”) recently adopted regulations that generally define a penny stock to be any equity security that has a market price of less than $5.00 per share, subject to certain exceptions. Such exceptions include any equity security listed on NASDAQ and any equity security issued by an issuer that has (i) net tangible assets of at least $2,000,000, if such issuer has been in continuous operation for three (3) years, (ii) net tangible assets of at least $5,000,000, if such issuer has been in continuous operation for less than three (3) years, or (iii) average annual revenue of at least $6,000,000, if such issuer has been in continuous operation for less than three (3) years. Unless an exception is available, the regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the risks associated therewith.

If our securities are not quoted on NASDAQ, or we do not have $2,000,000 in net tangible assets, trading in our securities will be covered by Rules 15(g)(1) through 15(g)(6) promulgated under the Exchange Act for non NASDAQ and

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nonexchange listed securities. Under such rules, broker dealers who recommend such securities to persons other than established customers and accredited investors must make a special written suitability determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement in connection with any transaction. Securities are exempt from these rules if the market price of the common stock is at least $5.00 per share.

Our ability to issue additional securities without shareholder approval could have substantial dilutive and other adverse effects on existing stockholders and investors in this offering.

We have the authority to issue additional shares of common stock and to issue options and warrants to purchase shares of our common stock without shareholder approval. Future issuance of common stock could be at values substantially below the exercise price of the warrants, and therefore could represent further substantial dilution to you as an investor in this offering. In addition, we could issue large blocks of voting stock to fend off unwanted tender offers or hostile takeovers without further shareholder approval. As of December 31, 2008, we had outstanding options exercisable to purchase up to 5,796,750 shares of common stock at a weighted average exercise price of $1.50 per share, and outstanding warrants exercisable to purchase up to 10,842,609 shares of common stock at a weighted average exercise price of $1.00 per share. Exercise of these warrants and options could have a further dilutive effect on existing stockholders and potential investors.

Item 1B. Unresolved Staff Comments

Not applicable.

Item 2. Properties

Our principal offices are located at 1444 Wazee Street, Suite 210, Denver, Colorado 80202. Our telephone number is (720) 946-6440. We currently utilize office space provided by Osmotics pursuant to a shared services agreement under which we pay Osmotics $5,000 per month for office space and certain administrative services. The shared services agreement expires on December 31, 2009. We believe that our facility is adequate for its intended purpose. Should we increase our staffing levels or should the shared services agreement expire without being extended, we will be required to locate additional or substitute office space, which we believe is readily available to us. As manufacturing is contracted to third parties, we do not have, nor do we require, property for that purpose.

Item 3. Legal Proceedings

We are not currently involved in any legal proceedings.

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

None.

EXECUTIVE OFFICERS OF THE REGISTRANT

The following table shows information about our executive officers as of March 1, 2009.

Name	Age	Position	Director/Officer Since
Steven S. Porter	59	Chief Executive Officer, Chairman and Director	2005
Jeffrey Sperber	44	Chief Financial Officer and Director	2005
Carl Genberg	57	Senior Vice President	2005
Russell L. Allen	62	Vice President of Corporate Development	2005

Steven S. Porter has served as the Company’s Chief Executive Officer and Chairman since May 2005. Prior to joining us, he served as Chief Executive Officer and Chairman of the Board of Osmotics from its inception in August 1993 until May 2005. He served as a director of Osmotics Corporation through December 2007. He has served as Chief Executive Officer and Chairman of Ceragenix Corporation since February 2002. In January 1986, Mr. Porter and two other individuals founded GDP Technologies, Inc. (GDP), a medical imaging company, completing major strategic partnerships with Olympus Optical, Japan, GE Medical and Bruel & Kjaer, Denmark. From that time until August 1993, Mr. Porter served as Executive Vice President of GDP. Prior to 1986, Mr. Porter was the National Sales Manager for Protronyx Research, Inc., a large scale scientific computer systems company, working with the United States Department of Energy, United States Department of Defense, Boeing and the National Security Agency. Mr. Porter has a Bachelor of Arts degree in Economics from UCLA.

Jeffrey S. Sperber has served as the Company’s Chief Financial Officer since May 2005. Prior to joining us, he served as the Chief Financial Officer of Osmotics Corporation from June 2004 until May 2005. He has served as Chief Financial Officer of Ceragenix Corporation since June 2004. From January 2004 through May 2004, Mr. Sperber worked as an

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Carl Genberg has served as the Company’s Senior Vice President of Research and Development since May 2005. Prior to joining us, he served as Senior Vice President, Research and Development and Business Development of Osmotics Corporation from August 1999 until May 2005. He served as President of Ceragenix Corporation from February 2002 through December 2004 and as Senior Vice President of Research and Development for Ceragenix Corporation since January 2005. Mr. Genberg has an extensive background in licensing and product development. From 1989 to 1999, Mr. Genberg served in a variety of executive capacities with Neuromedical Systems, Inc., and its regional licensees, Cytology West, Inc. and Papnet of Ohio, Inc., medical imaging companies that applied artificial intelligence to the analysis of pathology samples. Neuromedical Systems was a venture funded company whose major investor was Goldman Sachs Limited Partners Fund and which undertook an IPO in 1996 that raised over $100 million dollars. Mr. Genberg was instrumental in the design of Neuromedical Systems’ FDA clinical study and the recruitment of key research investigators. He has a Bachelor of Science Degree in Life Sciences from Cornell University and a Juris Doctor from the Ohio State University College of Law. Mr. Genberg filed a Chapter 13 Petition in May of 2004 which was dismissed in 2006.

Russell L. Allen was appointed as our Vice President of Corporate Development in June 2005. Prior to joining us, he worked as an independent consultant. Previously, he served from 2002 to 2004 as Senior Vice President Corporate Development for Cellular Genomics Inc., a private drug discovery biopharmaceutical firm. From 1997 to 2001, he served as Vice President, Corporate Development and Strategic Planning at Ligand Pharmaceuticals, where he was responsible for concluding a wide variety of business development transactions including major strategic alliances with pharmaceutical firms. Between 1985 and 1996, Mr. Allen held senior positions with Sanofi Winthrop (including preceding corporate entities Sterling Winthrop and Eastman Pharmaceuticals), including being General Manager for Central American pharmaceutical operations and holding Vice President and Director level positions in business development and strategic planning. Prior experience includes more than 10 years of marketing and business development related positions with Bristol Myers Squibb and Procter & Gamble in Rx, OTC, and nutritional products. Mr. Allen received his B.A. from Amherst College and his MBA from the Harvard Graduate School of Business Administration.

PART II

Item 5 .

Market for the Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

PRICE RANGE OF OUR COMMON STOCK

Our shares of common stock commenced trading on the OTC Bulletin Board (“OTCBB”) on February 3, 2004. Prior to June 27, 2005, our trading symbol was “OSCE.” On June 27, 2005, to reflect our new name, our trading symbol was changed to “CGXP.” The OTCBB is a regulated quotation service that displays real-time quotes, last-sale prices, and volume information in over-the-counter equity securities. An OTCBB equity security generally is any equity that is not listed or traded on NASDAQ or a national securities exchange. The reported high and low bid and ask prices for the common stock are shown below for each quarterly period from January 1, 2007 through December 31, 2008 as derived from NASDAQ trading reports.

	Bid				Ask
	High		Low		High		Low
2007 Fiscal Year
Jan. 1 — Mar. 31, 2007	$	2.44	$	1.20	$	2.46	$	1.55
Apr. 1 — June 30, 2007	$	2.10	$	1.65	$	2.15	$	1.70
July 1 — Sept. 30, 2007	$	1.85	$	1.06	$	1.91	$	1.10
Oct. 1 — Dec. 31, 2007	$	1.85	$	0.92	$	1.94	$	0.95
2008 Fiscal Year
Jan. 1 — Mar. 31, 2008	$	1.05	$	0.76	$	1.13	$	0.80
Apr. 1 — June 30, 2008	$	0.96	$	0.58	$	1.01	$	0.65
July 1 — Sept. 30, 2008	$	0.98	$	0.53	$	1.25	$	0.63
Oct. 1 — Dec. 31, 2008	$	0.65	$	0.16	$	0.70	$	0.19

The bid and ask prices of our common stock as of March 23, 2009 were $.56 and $.69, respectively, as reported on the Bulletin Board. The Bulletin Board prices are bid and ask prices which represent prices between broker dealers and do not include retail mark ups and mark downs or any commissions to the broker dealer. The prices do not reflect prices in actual transactions. As of March 1, 2009, there were approximately 800 record owners of our common stock.

Our common stock is subject to rules adopted by the SEC regulating broker dealer practices in connection with

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transactions in “penny stocks.” Those disclosure rules applicable to “penny stocks” require a broker dealer, prior to a transaction in a “penny stock” not otherwise exempt from the rules, to deliver a standardized list disclosure document prepared by the Securities and Exchange Commission. That disclosure document advises an investor that investment in “penny stocks” can be very risky and that the investor’s salesperson or broker is not an impartial advisor but rather paid to sell the shares. The disclosure contains further warnings for the investor to exercise caution in connection with an investment in “penny stocks,” to independently investigate the security, as well as the salesperson with whom the investor is working and to understand the risky nature of an investment in this security. The broker dealer must also provide the customer with certain other information and must make a special written determination that the “penny stock” is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. Further, the rules require that, following the proposed transaction, the broker provide the customer with monthly account statements containing market information about the prices of the securities.

These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for our common stock. Many brokers may be unwilling to engage in transactions in our common stock because of the added disclosure requirements, thereby making it more difficult for stockholders to dispose of their shares.

Dividend Policy

We have not declared or paid cash dividends on our common stock since our inception. We intend to retain all future earnings, if any, to fund the operation of our business, and, therefore, do not anticipate paying dividends in the foreseeable future. The terms of our convertible debt securities prevent the payment of common stock dividends. Future cash dividends, if any, will be determined by our board of directors.

Unregistered Sales of Equity Securities and Use of Proceeds

None.

Issuer Purchases of Equity Securities

None.

Item 6. Selected Financial Data

Not Applicable

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This discussion summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity and cash flows of the Company for the fiscal years ended December 31, 2008 and December 31, 2007. The following discussion and analysis should be read in conjunction with the consolidated financial statements of the Company and the notes thereto included elsewhere in this Form 10-K.

BUSINESS OVERVIEW

We are an emerging medical device company focused on prescription products for infectious disease and dermatology. Since our inception in February 2002, our principal activities have involved raising capital, identifying and licensing technology, researching applications for the licensed technology, and testing the licensed technology. Nearly all of our planned products require marketing clearance from the FDA. In April 2006, we received clearance from the FDA to market our first product, EpiCeram®. In November 2007, we entered into an exclusive supply and distribution agreement with DRL for the commercialization of EpiCeram® in the United States. In October 2008, DRL officially launched EpiCeram® sales and marketing efforts.

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RESULTS OF OPERATIONS AND CERTAIN EVENTS DURING 2008 AND 2007

Our historical operating results consist primarily of expenditures on corporate activities, research and development costs, payments due under our license agreements and interest expense. In order of magnitude, our expenditures have generally consisted of the following cash expenses:

· Payroll and related costs;

· Interest;

· Fees paid to third parties for clinical trials and other development costs;

· Professional fees (legal and accounting);

· Licensing fees;

· Travel;

· Insurance;

· Investor and public relations;

· Director fees; and

· Consulting

Until November 2007, we did not record revenue. During 2008, we commenced manufacturing (through a contract manufacturer) and shipment of EpiCeram® to DRL under the terms of the DRL Agreement. This has required us to expand our activities to include those related to procurement of raw materials, providing oversight of the third party manufacturer(s), managing the quality control and shipment processes, and billing and collection activities related to product shipments. Accordingly, during the three months ended September 30, 2008, we exited the “development stage” for financial reporting purposes.

During 2007 and 2008, we announced the following significant events:

In January 2007, we announced that researchers at the University of Utah selected Cerashield™ as the product it planned to test pursuant to government grants to help find ways to reduce infections associated with artificial limbs. This testing was completed in February 2009. The small, pilot study, demonstrated that Cerashield™ treated surgical screws did not have any adverse biological, histological or hematological effects on bone tissue healing or remodeling compared to untreated screws. However, given the small number of animals (n=2), the study did not allow for extended interpretations or provide statistically conclusive data.

In March 2007, we announced the development of a prototype contact lens disinfectant solution that demonstrated the ability to virtually eradicate the bacterial and fungal strains that the FDA specifies for testing pursuant to its published guidance document in in vitro testing. Given our focus on antimicrobial coatings, we currently do not view this as a strategic application and will not pursue further development in the foreseeable future.

In March 2007, we announced that Ceragenin™ treated hemodialysis catheters were able to virtually prevent bacterial colonization in a 21 day in vitro study.

In April 2007, we announced the results of the multicenter study comparing the efficacy of EpiCeram® to Cutivate in patients with moderate to severe eczema. The study found that there was no statistically significant difference between EpiCeram® and Cutivate® in treating the symptoms associated with eczema after 28 days of therapy.

In April 2007, we announced that we had begun enrolling patients in a multicenter pediatric clinical study designed to assess the efficacy of EpiCeram® compared to Elidel®, the leading topical immunosuppressant prescribed for treating patients with mild-to-moderate eczema. The randomized, double blind study was to consist of 50 to 100 children between the ages of 2 and 18 years. Study enrollment was terminated at 38 patients as the rate of enrollment at the two sites did not anticipate timely

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completion of the full cohort of patients. The study demonstrated that there were no statistically significant differences between the groups treated with EpiCeram® compared to those treated with Elidel® as measured by EASI (Eczema Area and Severity Index) scores at Day 28. There was a statistically significant difference in median EASI score reduction at Week 2 with the Elidel® group showing faster improvement at this timepoint. Both EpiCeram® and Elidel® produced significant relief from itching after 28 days of treatment with no statistically significant difference between the two products.

In June 2007, we announced that the FDA’s Office of Combination Products, in response to a formal request, had determined that the primary mode of action for an antimicrobial wound dressing that was under development by the Company was that of a device and would be assigned to the FDA’s Center for Devices and Radiologic Health (“CDRH”) for lead review upon filing of a PMA.

In July 2007, we announced that researchers at the University of Pennsylvania in collaboration with Dr. Paul B. Savage of Brigham Young University, had demonstrated in a series of in vitro experiments that CSA-13 shows promise as a potential therapy to treat multidrug resistant Pseudomonas aeuroginosa infections which are a leading cause of morbidity and mortality in patients with cystic fibrosis. However, given our focus on antimicrobial coatings, we currently do not view this as a strategic application and will not pursue further development in the foreseeable future.

In November 2007, we announced that we had entered into the DRL Agreement.

In November 2007, the holders of the convertible notes that we sold in November 2005 agreed to extend the maturity date of the notes from November 28, 2007 to June 30, 2008 in exchange for increasing their principal balance by 10% ($282,017). See further discussion in the Notes to Consolidated Financial Statements included elsewhere in this Form 10-K.

In November 2007, the holders of the 2006 Debentures agreed to extend commencement of the monthly redemption payments from December 1, 2007 to June 30, 2008 in exchange for increasing their principal balance by 10% ($500,000). See further discussion in the Notes to Consolidated Financial Statements included elsewhere in this Form 10-K.

In December 2007, we announced that researchers at the Eugene Appelbaum College of Pharmacy at the Wayne State University, in collaboration with JMI Laboratories Brigham Young University, had demonstrated in a series of in vitro experiments that CSA-13 showed rapid killing activity and synergistic activity with conventional antibiotics against multidrug resistant Pseudomonas aeuroginosa bacterial strains. P. aeuroginosa is a leading cause of morbidity and mortality in patients with pneumonia and other respiratory diseases.

In March 2008, we announced that we had entered into a license agreement with FirstPoint Biotech, Inc. (“FPBT”) for the development of CSA-54 and other members of the Ceragenix™ family of preclinical compounds for use as potential systemic and topical therapies in the treatment and prevention of HIV and sexually transmitted diseases. Under terms of the agreement, FPBT has the responsibility to undertake clinical development an d commercialization of these compounds within the fields of use. The agreement provides for payment of milestones and royalties to Ceragenix. As of the date of this Report, we have not earned any payments from FPBT under the agreement.

In April 2008, we announced that preclinical testing of Cerashield™ coated silicone urinary catheters demonstrated the ability to provide complete protection against E.Coli bacterial colonization for the entire duration of the 21 day study when challenged with daily inocula of 1,000 colony forming units of E. Coli.

In September 2008, we announced that we had negotiated amendments with the holders of our convertible debt securities which extended the maturity dates of such instruments to December 31, 2011. See further discussion in the Notes to Consolidated Financial Statements included elsewhere in this Form 10-K.

In October 2008, we announced that Promius Pharma, LLC, a wholly owned subsidiary of DRL, launched EpiCeram®.

Critical Accounting Policies

We have identified the policies described below as critical to our business and results of operations. For further discussion on the application of these and other accounting policies, see Note 3 to our audited financial statements as of and for the years ended December 31, 2008 as filed on this Form 10-K. Our reported results are impacted by the application of the following accounting policies, certain of which require management to make subjective or complex judgments. These judgments involve making estimates about the effect of matters that are inherently uncertain and may significantly impact quarterly or annual results of operations. For all of these policies, management cautions that future events rarely develop exactly as expected, and the best estimates routinely require adjustment. Specific risks associated with these critical accounting policies

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are described in the following paragraphs.

Revenue Recognition

We recognize revenue in accordance with Staff Accounting Bulletin (“SAB”) No. 101 as modified by SAB No. 104, “Revenue Recognition in Financial Statements,” EITF Issue 00-21 “Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”), and SAB Topic 13A1. We recognize revenue when there is persuasive evidence that an arrangement exists, when title has passed, the price is fixed or determinable, and we are reasonably assured of collecting the resulting receivable. Revenue arrangements that include multiple deliverables are divided into separate units of accounting if the deliverables meet certain criteria. We will recognize product revenues net of revenue reserves which consist of allowances for discounts, returns, rebates and chargebacks. This accounting policy for revenue recognition may have a substantial impact on our reported results and relies on certain estimates that can require difficult, subjective and complex judgments on the part of management.

For the years ended December 31, 2008 and 2007, our sole source of revenue was the sale of EpiCeram® in the United States pursuant to the DRL Agreement. We record (or will record) revenue under the DRL Agreement as follows:

Advance Fees — The DRL Agreement calls for non-sales milestone payments based on the accomplishment of certain events including the launch of the product. We believe that the payment of these fees and our continuing performance obligation related to supplying EpiCeram® are an integrated package. Accordingly, we record receipt of advance fees as deferred revenue and recognize revenue systematically over the periods that the fees are earned. We are recognizing revenue on a straight-line basis over the period of our performance obligations under the DRL Agreement (20 years).

Product Sales — Our supply price under the DRL Agreement consists of two components; (i) our cost of producing EpiCeram® (the “Cost Component”) and (ii) a percentage of EpiCeram® “net sales” (as defined in the DRL Agreement) (the “Net Sales Component”). We recognize revenue for the Cost Component when title passes to DRL (upon delivery) subject to certain true up adjustments as provided for in the DRL Agreement. We recognize the Net Sales Component once the amount can be reliably estimated based upon reports provided by DRL or when payment is received if reliable estimates cannot be provided.

Net Sales Milestones — The DRL Agreement provides for the payment of milestone payments based on cumulative net sales over the life of the agreement. We will recognize revenue from net sales milestones once the amount can be reliably estimated based upon reports provided by DRL or when DRL communicates to us that an additional milestone payment has been triggered if reliable estimates cannot be provided.

Derivatives

We follow the provisions of SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”) along with related interpretations EITF No. 00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” (“EITF 00-19”) and EITF No. 05-2 “The Meaning of ‘Conventional Convertible Debt Instrument’ in Issue No. 00-19” (“EITF 05-2”). SFAS No. 133 requires every derivative instrument (including certain derivative instruments embedded in other contracts) to be recorded in the balance sheet as either an asset or liability measured at its fair value, with changes in the derivative’s fair value recognized currently in earnings unless specific hedge accounting criteria are met. We value these derivative securities under the fair value method at the end of each reporting period (quarter), and their value is marked to market at the end of each reporting period with the gain or loss recognition recorded against earnings. We continue to revalue these instruments each quarter to reflect their current value in light of the current market price of our common stock. We utilize the Black-Scholes option-pricing model to estimate fair value. Key assumptions of the Black-Scholes option-pricing model include applicable volatility rates, risk-free interest rates and the instrument’s expected remaining life. These assumptions require significant management judgment.

Share-Based Payments

We account for stock option compensation in accordance with SFAS No. 123 (revised), “Share-Based Payment” (“SFAS 123R”). SFAS No. 123R requires measurement of compensation cost for all stock-based awards at fair value on date of grant and recognition of compensation over the service period for awards expected to vest, using the modified prospective method. The estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results differ from our estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. We consider various factors when estimating expected forfeitures, including historical experience. Actual results may differ substantially from these estimates.

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We determine the fair value of stock options granted to employees and directors using the Black-Scholes valuation model, which considers the exercise price relative to the market value of the underlying stock, the expected stock price volatility, the risk-free interest rate and the dividend yield, and the estimated period of time option grants will be outstanding before they are ultimately exercised. Had we made different assumptions about our stock price volatility or the estimated time option and warrant grants will be outstanding before they are ultimately exercised, the related stock based compensation expense and our net loss and net loss per share amounts could have been significantly different, in 2008 and 2007.

YEAR ENDED DECEMBER 31, 2008 COMPARED TO YEAR ENDED DECEMBER 31, 2007

Revenue

For the years ended December 31, 2008 and 2007, our sole source of revenue was the DRL Agreement. Revenue consists of the following components:

	2008		2007
Product revenue	$	642,037	$	—
Milestone recognition	114,187		9,375
	$	756,224	$	9,375

Cost of Goods Sold

For the year ended December 31, 2008, cost of goods sold was $558,857 compared to $0 for 2007.

Licensing Fees and Royalties

We pay licensing fees and royalties under separate license agreements with two entities: The Regents of the University of California (for Barrier Repair technology) and Brigham Young University (for Ceragenin™ technology). For the years ended December 31, 2008 and 2007, licensing fees and royalties were as follows:

	2008		2007
Ceragenin™ Technology	$	206,667	$	140,000
Barrier Repair Technology	36,269		25,000
	$	242,936	$	165,000

The increase in fees paid for the Ceragenin™ technology is the result of an increase in the minimum amount due under the Brigham Young University license agreement during 2008. The increase in Barrier Repair technology royalties is the result of the launch of EpiCeram® during 2008.

Research and Development

Research and development expense for the year ended December 31, 2008, decreased by $490,352 or approximately 68% compared to the year ended 2007. The decrease is the result of two clinical trials that took place during 2007 for EpiCeram®. There were no comparable clinical trials during 2008. Our ability to conduct research and development activities is greatly dependent upon our financial resources. Because of our limited financial resources, we do not expect to incur significant research and development costs during 2009. In order to develop Cerashield™ and NeoCeram™ in a more timely manner, we will require additional financial resources. No assurance can be given that necessary additional financing will be available on terms acceptable to us, if at all. If adequate additional funds are not available when required, we may have to delay, scale-back or eliminate certain aspects of our research, testing and/or development activities.

General and Administrative

General and administrative expenses for the year ended December 31, 2008, increased by $380,912 or approximately 9% compared to the year ended 2007. The increase in expense between years was primarily due to increases in legal and compensation related costs.

Loss from Operations

As a result of the factors described above, the loss from operations for the year ended December 31, 2008 decreased by $219,496 compared to 2007.

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Other Expense

Other expense for the years ended December 31, 2008 and 2007 was approximately the same. This was the net result of an increase in interest expense between years offset by an increase in the gain on value of derivative liabilities.

Net Loss

As a result of the factors described above, the net loss for year ended December 31, 2008 decreased by $227,885 compared to the prior year.

Preferred Stock Dividends

Preferred stock dividends for the year ended December 31, 2008 decreased by $160,000 compared to 2007. The decrease in dividends between years is the result of the conversion of Series A Preferred Stock into common shares during 2008.

Loss Attributable to Common Shareholders

As a result of the factors described above, the loss attributable to common shareholders decreased by $387,885 for the year ended December 31, 2008 compared to the prior year.

LIQUIDITY AND CAPITAL RESOURCES

Raising sufficient capital to fund our business activities has historically been, and continues to be, our most significant challenge. Typically, we have never had more than 12 to 15 months of cash on hand at any given time and often we have had much less. The costs and time associated with developing a technology into an FDA cleared medical device or new drug is substantial. Because of our limited capital resources we have not been able to advance development of our technologies as broadly or as rapidly as otherwise possible with greater resources. Our capital resource constraints have also impacted our business strategy as follows:

· We are focusing our development efforts on products that can be regulated as medical devices instead of new drugs;

· We plan to commercialize our products primarily through out-license and/or supply and distribution agreements with third parties instead of fielding an internal sales force; and

· We are willing to enter into out-license agreements or collaboration arrangements at early stages of development.

While this strategy will serve to reduce the amount of capital required by the Company, it also may serve to limit the value we create for our shareholders from our technologies.

Our ability to raise additional capital is constrained by the following factors related to our capital structure and market for our common stock:

· The existence and terms of our convertible debt securities (see discussion provided under Note 5 to our audited financial statements included elsewhere in this Form 10-K) contain a number of provisions which many new investors may find problematic including the following:

· The conversion price of the debt and warrants is to be adjusted downward under a number of circumstances which creates uncertainty for new investors;

· We are required to utilize a significant portion of our future revenue streams to service and retire debt. New investors would likely prefer that these cash flows be retained by the Company to defray or fund our operating costs;

· As of December 31, 2008, there were 20,218,618 common shares underlying the conversion of the debt and exercise of warrants held by the debtholders. This represents a significant overhang and creates uncertainty for new investors;

· There are several circumstances in which we would be required to obtain approval from the debtholders in order to execute a future funding transaction; and

· Any, or all, of these provisions could result in a new investor seeking a waiver, or permanent amendment, to the debt agreements in order to consummate a funding transaction. There is no assurance that the debtholders would agree to a waiver or any change to the terms of the debt agreements.

· The overhang of 12,004,569 shares of our common stock held by Osmotics for exchange with their shareholders and debtholders creates uncertainty for new investors p

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Forward Looking Statements		1
PART I		1
Item 1.	Description of Business	1
	The Company	1
	Our Strategy	2
	Our Technology	3
	Product and Product Candidates	7
	Product Markets	8
	Sales and Marketing	9
	Competition	9
	License Agreements and Proprietary Rights	10
	Trademarks	11
	Government Regulation	11
	Employees	13
Item 1A.	Risk Factors	13
Item 1B.	Unresolved Staff Comments	24
Item 2.	Properties	24
Item 3.	Legal Proceedings	24
Item 4.	Submission of Matters to a Vote of Security Holders	24
Executive Officers of the Registrant		24

Item 5.	Market for the Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	26
Item 6.	Selected Financial Data	27
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	35
Item 8.	Financial Statements and Supplementary Data	36
Item 9.	Changes In and Disagreements With Accountants on Accounting and Financial Disclosure	65
Item 9A.	Controls and Procedures	65
Item 9B.	Other Information	66

PART III
Item 10.	Directors, Executive Officers and Corporate Governance	66
Item 11.	Executive Compensation	70
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	77
Item 13.	Certain Relationships and Related Transactions, and Director Independence	78
Item 14.	Principal Accountant Fees and Services	80

PART IV
Item 15.	Exhibits.	81
SIGNATURES		84