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** **

 

** **

**United States**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

| **(Mark One)**                                              |
|-------------------------------------------------------------|
| **x**                                                       | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                  | ** ** | ** ** |
| **For the quarterly period ended  September 30, 2008** |
| ** **                                                  | ** ** | ** ** |
| **Or**                                                      |
| ** **                                                  | ** ** | ** ** |
| **o**                                                       | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15  (d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For the transition period from             to            **

 

**Commission File Number: 000-51708**

 

**Redpoint Bio Corporation**

(Exact name of Registrant as specified in its charter)

 

| **Delaware**                    | ** ** | **22-3393959**                       |
|---------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of |       | (I.R.S. Employer Identification No.) |
| incorporation or organization)  |       |                                 |

 

**Redpoint Bio Corporation, 7 GraphicsDrive, Ewing, New Jersey 08628**

(Address of principal executive offices) (Zip Code)

 

**(609) 637-9700**

(Registrant’s Telephone Number, Including Area Code)

 

 

(Former Name, Former Address and Former Fiscal Year,If Changed Since Last Report)

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. Yes  x  No  o

 

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

 

| Large accelerated filer o                                              |   | Accelerated filer x         |
|------------------------------------------------------------------------|--------|----------------------------------|
|                                                                   |   |                             |
| Non-accelerated filer o (Do not check if a smaller reporting  company) |   | Smaller reporting company o |

 

Indicate by check mark whether the registrant is a shellcompany (as defined in Rule 12b-2 of the Exchange Act).Yes  o   No  x

 

The number of shares of the registrant’s common stockoutstanding as of November 5, 2008 was 79,495,870.

 

 

 

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**REDPOINT BIO CORPORATION**

 

**TABLEOF CONTENTS**

 
| ** **        | ** **                                                                                  | ** ** | **Page** |
|-------------------|---------------------------------------------------------------------------------------------|------------|----------|
| **PART I:**  | **FINANCIAL  INFORMATION**                                                                  |       |     |
|              |                                                                                        |       |     |
| ITEM 1.           | FINANCIAL STATEMENTS  (unaudited):                                                          |       | 3        |
|              |                                                                                        |       |     |
|              | Balance  Sheets                                                                             |       | 3        |
|              |                                                                                        |       |     |
|              | Statements  of Operations                                                                   |       | 4        |
|              |                                                                                        |       |     |
|              | Statements  of Cash Flows                                                                   |       | 5        |
|              |                                                                                        |       |     |
|              | Notes  to Financial Statements                                                              |       | 6        |
|              |                                                                                        |       |     |
| ITEM 2.           | MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS |       | 14       |
|              |                                                                                        |       |     |
| ITEM 3.           | QUANTITATIVE AND QUALITATIVE DISCLOSURES  ABOUT MARKET RISK                                 |       | 20       |
|              |                                                                                        |       |     |
| ITEM 4.           | CONTROLS AND PROCEDURES                                                                     |       | 20       |
|              |                                                                                        |       |     |
| **PART II:** | **OTHER  INFORMATION**                                                                      |       |     |
|              |                                                                                        |       |     |
| ITEM 1.           | LEGAL PROCEEDINGS                                                                           |       | 21       |
|              |                                                                                        |       |     |
| ITEM 1A.          | RISK FACTORS                                                                                |       | 21       |
|              |                                                                                        |       |     |
| ITEM 2.           | UNREGISTERED  SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                |       | 36       |
|              |                                                                                        |       |     |
| ITEM 3.           | DEFAULTS UPON SENIOR  SECURITIES                                                            |       | 36       |
|              |                                                                                        |       |     |
| ITEM 6.           | EXHIBITS                                                                                    |       | 36       |
|              |                                                                                        |       |     |
| SIGNATURES        |                                                                                        |       | 37       |

 

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**PART I. FINANCIAL INFORMATION.**

 

**ITEM 1.  FINANCIAL STATEMENTS.**

 

**REDPOINTBIO CORPORATION(A DEVELOPMENT-STAGE ENTERPRISE)**

**BALANCE SHEETS**

**(UNAUDITED)**

 
| ** **                                                                                                                                                                                                    | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                                                                                                                                                                                                    | ** ** | **2007**              | ** ** | **2008**          | ** ** |
| **Assets**                                                                                                                                                                                                    | ** ** | ** **            | ** ** | ** **        | ** ** |
| Current assets:                                                                                                                                                                                               |       |                  |       |              |       |
| Cash and cash equivalents                                                                                                                                                                                     |       | $                     | 5,789,997  |              | $          | 5,579,876 |   |
| Marketable securities                                                                                                                                                                                         |       | 16,911,413            |       | 11,868,100        |       |
| Accounts receivable                                                                                                                                                                                           |       | 50,114                |       | 103,057           |       |
| Prepaid expenses and other current assets                                                                                                                                                                     |       | 505,994               |       | 368,552           |       |
| Total current assets                                                                                                                                                                                          |       | 23,257,518            |       | 17,919,585        |       |
| Property and equipment, net                                                                                                                                                                                   |       | 1,295,943             |       | 1,363,894         |       |
| Other assets                                                                                                                                                                                                  |       | 269,850               |       | 323,751           |       |
| Total assets                                                                                                                                                                                                  |       | $                     | 24,823,311 |              | $          | 19,607,230 |   |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                                 |       |                  |       |              |       |
| Current liabilities:                                                                                                                                                                                          |       |                  |       |              |       |
| Current portion of long-term debt                                                                                                                                                                             |       | $                     | 447,767    |              | $          | 574,214 |   |
| Accounts payable                                                                                                                                                                                              |       | 710,880               |       | 1,022,374         |       |
| Accrued expenses                                                                                                                                                                                              |       | 514,019               |       | 437,804           |       |
| Accrued compensation                                                                                                                                                                                          |       | 402,863               |       | 452,925           |       |
| Deferred revenue                                                                                                                                                                                              |       | 371,424               |       | 985,000           |       |
| Total current liabilities                                                                                                                                                                                     |       | 2,446,953             |       | 3,472,317         |       |
| Long-term debt                                                                                                                                                                                                |       | 187,576               |       | 1,253,778         |       |
| Deferred revenue                                                                                                                                                                                              |       | 650,007               |       | 371,436           |       |
| Total liabilities                                                                                                                                                                                             |       | 3,284,536             |       | 5,097,531         |       |
| Stockholders’ equity:                                                                                                                                                                                    |       |                  |       |              |       |
| Preferred stock; 10,000,000 shares  authorized, $0.0001 par value, none issued                                                                                                                                |       | —                |       | —            |       |
| Common stock; authorized 150,000,000  shares; $0.0001 par value, issued and outstanding 79,223,987 shares at  December 31, 2007 and issued and outstanding 79,495,870  shares at September 30, 2008 |       | 7,922                 |       | 7,949             |       |
| Additional paid-in-capital                                                                                                                                                                                    |       | 54,485,373            |       | 55,174,163        |       |
| Deficit accumulated during development  stage                                                                                                                                                                 |       | (32,996,231           | )          | (40,691,543       | )          |
| Accumulated other comprehensive income                                                                                                                                                                        |       | 41,711                |       | 19,130            |       |
| Total stockholders’ equity                                                                                                                                                                               |       | 21,538,775            |       | 14,509,699        |       |
| Total liabilities and stockholders’ equity                                                                                                                                                               |       | $                     | 24,823,311 |              | $          | 19,607,230 |   |

 

See accompanying notes to the unaudited financial statements.

 

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**REDPOINTBIO CORPORATION(A DEVELOPMENT-STAGE ENTERPRISE)**

**STATEMENTS OF OPERATIONS**

**(UNAUDITED** )

 
| ** **                                           | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended   September 30,** | ** ** | **August 16,  1995 (Inception) to** | ** ** |
|------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                           | ** ** | **2007**                                             | ** ** | **2008**                                                  | ** ** | **2007**                                           | ** ** | **2008** | ** ** | **September 30, 2008** | ** ** |
| Research and grant revenue                           |       | $                                                    | 710,123    |                                                      | $          | 1,057,174                                          |       | $ | 1,426,516 |   | $ | 2,997,084 |   | $ | 9,459,406 |   |
| Operating expenses:                                  |       |                                                 |       |                                                      |       |                                               |       |   |   |   |   |
| Research and development                             |       | 1,709,961                                            |       | 2,366,007                                                 |       | 5,520,302                                          |       | 6,524,573 |   | 26,314,868 |   |
| General and administrative                           |       | 1,162,759                                            |       | 1,395,604                                                 |       | 3,225,424                                          |       | 4,615,517 |   | 19,210,119 |   |
| Total operating expenses                             |       | 2,872,720                                            |       | 3,761,611                                                 |       | 8,745,726                                          |       | 11,140,090 |   | 45,524,987 |   |
| Operating loss                                       |       | (2,162,597                                           | )          | (2,704,437                                                | )          | (7,319,210                                         | )          | (8,143,006 | ) | (36,065,581 | ) |
| Interest income                                      |       | 275,904                                              |       | 107,708                                                   |       | 452,040                                            |       | 487,828 |   | 1,441,229 |   |
| Interest expense                                     |       | (22,451                                              | )          | (12,414                                                   | )          | (1,677,948                                         | )          | (40,134 | ) | (3,373,508 | ) |
| Loss before income taxes                             |       | (1,909,144                                           | )          | (2,609,143                                                | )          | (8,545,118                                         | )          | (7,695,312 | ) | (37,997,860 | ) |
| Income tax benefit                                   |       | —                                               |       | —                                                    |       | —                                             |       | — |   | 719,206 |   |
| Net loss                                             |       | (1,909,144                                           | )          | (2,609,143                                                | )          | (8,545,118                                         | )          | (7,695,312 | ) | $ | (37,278,654 | ) |
| Accretion of redeemable convertible  preferred stock |       | —                                               |       | —                                                    |       | (224,846                                           | )          | — |   |   |   |
| Net loss applicable to common stockholders           |       | $                                                    | (1,909,144 | )                                                         | $          | (2,609,143                                         | )          | $ | (8,769,964 | ) | $ | (7,695,312 | ) |   |   |
| Basic and diluted net loss per common share          |       | $                                                    | (0.02      | )                                                         | $          | (0.03                                              | )          | $ | (0.15 | ) | $ | (0.10 | ) |   |   |
| Weighted average of shares outstanding               |       | 78,916,157                                           |       | 79,495,870                                                |       | 57,990,405                                         |       | 79,426,078 |   |   |   |

 

See accompanying notes to the unaudited financial statements.

 

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**REDPOINTBIO CORPORATION**

**(ADEVELOPMENT-STAGE ENTERPRISE)**

**STATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

 
| ** **                                                                   | ** ** | **Nine Months Ended September 30,** | ** ** | **August 16, 1995  (Inception) to** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2007**                                                | ** ** | **2008**                                           | ** ** | **September 30, 2008** | ** ** |
| Cash flows from operating activities:                                        |       |                                                    |       |                                               |       |   |   |
| Net loss                                                                     |       | $                                                       | (8,545,118 | )                                                  | $          | (7,695,312 | ) | $ | (37,278,654 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |       |                                                    |       |                                               |       |   |   |
| Depreciation                                                                 |       | 351,645                                                 |       | 477,339                                            |       | 1,986,340 |   |
| Amortization of discounts and premiums on  marketable securities             |       | (54,338                                                 | )     | (266,461                                           | )          | (461,190 | ) |
| Options, warrants and stock issued for  services and dilution provisions     |       | 2,036,593                                               |       | 648,035                                            |       | 3,263,945 |   |
| Beneficial conversion feature                                                |       | 1,228,565                                               |       | —                                             |       | 1,228,565 |   |
| Amortization of discount on convertible  notes                               |       | 302,032                                                 |       | —                                             |       | 899,935 |   |
| Amortization of deferred financing costs                                     |       | 32,892                                                  |       | 5,793                                              |       | 139,615 |   |
| Debt inducement charge                                                       |       | —                                                  |       | —                                             |       | 361,598 |   |
| Interest expense on convertible notes                                        |       | —                                                  |       | —                                             |       | 136,075 |   |
| Changes in assets and liabilities:                                           |       |                                                    |       |                                               |       |   |   |
| Accounts receivable                                                          |       | (600,000                                                | )          | (52,943                                            | )          | (103,057 | ) |
| Prepaid expenses and other assets                                            |       | (168,202                                                | )          | 122,232                                            |       | (951,195 | ) |
| Accounts payable                                                             |       | 810,366                                                 |       | 286,963                                            |       | 1,196,634 |   |
| Accrued expenses and accrued compensation                                    |       | (175,244                                                | )          | (26,153                                            | )          | 1,022,339 |   |
| Deferred revenue                                                             |       | 1,774,288                                               |       | 335,005                                            |       | 1,356,436 |   |
| Net cash used in operating activities                                        |       | (3,006,521                                              | )          | (6,165,502                                         | )          | (27,202,614 | ) |
| Cash flows from investing activities:                                        |       |                                                    |       |                                               |       |   |   |
| Maturity and sale of marketable securities                                   |       | —                                                  |       | 21,496,994                                         |       | 27,246,994 |   |
| Purchases of marketable securities                                           |       | (16,326,440                                             | )     | (16,209,801                                        | )          | (38,634,774 | ) |
| Purchases of property and equipment                                          |       | (528,299                                                | )          | (520,759                                           | )          | (3,216,056 | ) |
| Net cash (used in) provided by investing  activities                         |       | (16,854,739                                             | )          | 4,766,434                                          |       | (14,603,836 | ) |
| Cash flows from financing activities:                                        |       |                                                    |       |                                               |       |   |   |
| Net proceeds from issuance of long-term  debt                                |       | —                                                  |       | 1,511,873                                          |       | 3,622,683 |   |
| Net proceeds from convertible notes                                          |       | —                                                  |       | —                                             |       | 5,253,811 |   |
| Repayment of debt                                                            |       | (425,332                                                | )          | (363,708                                           | )          | (1,839,175 | ) |
| Net proceeds from issuance of preferred  stock                               |       | —                                                  |       | —                                             |       | 11,883,447 |   |
| Net proceeds from issuance of common stock  and warrants                     |       | 28,622,701                                              |       | —                                             |       | 28,624,603 |   |
| Proceeds from exercise of common stock  options and warrants                 |       | 37,122                                                  |       | 40,782                                             |       | 124,078 |   |
| Common stock reacquired                                                      |       | —                                                  |       | —                                             |       | (283,121 | ) |
| Net cash provided by financing activities                                    |       | 28,234,491                                              |       | 1,188,947                                          |       | 47,386,326 |   |
| Net increase (decrease) in cash and cash  equivalents                        |       | 8,373,231                                               |       | (210,121                                           | )          | 5,579,876 |   |
| Cash and cash equivalents, beginning of  period                              |       | 974,378                                                 |       | 5,789,997                                          |       | — |   |
| Cash and cash equivalents, end of period                                     |       | $                                                       | 9,347,609  |                                               | $          | 5,579,876 |   | $ | 5,579,876 |   |
| Supplemental cash flow disclosures:                                          |       |                                                    |       |                                               |       |   |   |
| Noncash investing and financing activities:                                  |       |                                                    |       |                                               |       |   |   |
| Property and equipment included in accounts  payable                         |       | $                                                       | 266,505    |                                               | $          | 24,531 |   | $ | 24,531 |   |
| Conversion of notes payable and accrued  interest to preferred stock         |       | —                                                  |       | —                                             |       | 1,446,395 |   |
| Conversion of notes payable and accrued interest  to common stock            |       | 3,896,001                                               |       | —                                             |       | 3,896,001 |   |
| Conversion of preferred and junior  preferred stock to common stock          |       | 16,940,297                                              |       | —                                             |       | 16,940,297 |   |
| Accretion of preferred stock                                                 |       | 224,846                                                 |       | —                                             |       | 3,248,857 |   |
| Warrants issued in connection with notes  payable                            |       | —                                                  |       | —                                             |       | 1,258,642 |   |
| Cash paid for interest                                                       |       | 65,702                                                  |       | 34,700                                             |       | 447,577 |   |

 

See accompanying notes to the unaudited financial statements.

 

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**REDPOINTBIO CORPORATION**

**(ADEVELOPMENT-STAGE ENTERPRISE)**

**NOTES TO FINANCIAL STATEMENTS**

**(UNAUDITED)**

 

**1.****                         ****Description of the Businessand Basis of Presentation**

 

Redpoint Bio Corporation (“Redpoint” or the “Company”) is leveragingrecent discoveries in the molecular biology of taste to discover and developnovel taste modulators for the food, beverage and pharmaceuticalindustries.  The Company’s food andbeverage program is focused on identifying novel flavors that improve the tasteof existing ingredients and enable the development of better-tasting and morehealthful foods and beverages. The pharmaceutical program uses a biochemicalapproach aimed at suppressing the bitterness of medicines, which has thepotential to expand the range of formulation options and increase patientcompliance. The Company uses its technology to discover and develop productsfor partners and for its own pipeline.

 

The Company is subject to those risks associated with any biotechnologycompany that has substantial expenditures for research and development. Therecan be no assurance that the Company’s research and development projects willbe successful, that products developed will obtain necessary regulatoryapproval, or that any approved product will be commercially viable. Inaddition, the Company operates in an environment of rapid technological changeand is largely dependent on the services of its employees and consultants. Forthe Company to fund its operations and to commercially develop its products,additional equity and/or debt financing will be required. There is no assurancethat such financing will be available to the Company as needed.

 

The accompanying unaudited financial statements of the Company havebeen prepared in accordance with generally accepted accounting principles forinterim financial information and pursuant to the rules and regulations ofthe Securities and Exchange Commission, referred to herein as the SEC. Accordingly,they do not include all of the information and footnotes required by generallyaccepted accounting principles for complete financial statements.

 

In the opinion of management, all adjustments (consisting of normalrecurring adjustments) considered necessary for a fair presentation have beenincluded (See Note 2 for discussion of the impact of the Reverse Merger (asdefined below)).  Operating results for the three and nine months ended September 30,2008 are not necessarily indicative of the results that may be expected for theyear ending December 31, 2008.

 

For further information, refer to the 2007 financial statements andfootnotes thereto of Redpoint included in the Company’s financial statementsincluded in the Company’s Annual Report on Form 10-K for the year ended December 31,2007.

 

**2.****                         ****Reverse Triangular Merger,Financing and Reincorporation Merger**

 

*Completion of Merger*

 

Robcor Properties, Inc., a Florida corporation (“Robcor”), and itsnewly-formed subsidiary, Robcor Acquisition Corp., a Delaware corporation(“Merger Sub”) entered into an Agreement and Plan of Merger (the “MergerAgreement”), dated as of March 12, 2007, by and among, Redpoint, formerlya privately-held Delaware corporation, on the one hand, and Robcor, Merger Sub,Robcor LLC, a Kentucky limited liability company and wholly-owned subsidiary ofRobcor (“Robcor LLC”) and Halter Financial Investments, L.P., a Texas limitedpartnership (“Halter”), and Michael Heitz (“Heitz”), as stockholders of Robcor,on the other hand.  Pursuant to the Merger Agreement, Merger Sub, whichRobcor had incorporated in the state of Delaware for the purpose of completingthe transaction, merged into Redpoint (the “Reverse Merger”) on March 12,2007 (the “Closing” or the “Closing Date”) with Redpoint continuing as thesurviving entity in the Reverse Merger.  As a result of the ReverseMerger, Redpoint became a wholly-owned subsidiary of Robcor.  Inconnection with the Reverse Merger, each share of capital stock of Redpoint wasconverted into 2.7820 shares of common stock of Robcor and all of Redpoint’sconvertible promissory notes were converted into shares of common stock ofRobcor.

 

Redpoint was deemed to have been the accounting acquirer in the ReverseMerger.  Accordingly, the financial statements of the Company presentedreflect the historical results of Redpoint prior to the Reverse Merger, and ofthe combined entities following the Reverse Merger, and do not include the historicalfinancial results of Robcor prior to the consummation of the Reverse Merger.  In connection with the Reverse Merger,Redpoint issued 

 

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1,391,000shares of common stock to Robcor shareholders which have been treated asissuance costs in connection with Private Placement.

 

*Private Placement*

 

Concurrently with the completion of the Reverse Merger, Robcor received$17.2 million in net proceeds from the initial closing of a private placementof approximately 24.7 million shares of common stock at a price of $0.81 pershare, and warrants to purchase approximately 6.2 million shares of Robcorcommon stock at an exercise price of $1.35 per share (the “PrivatePlacement”).  The initial closing of the Private Placement occurredon March 12, 2007, concurrently with the completion of the Reverse Merger.

 

In connection with the Private Placement, Redpoint engaged twoplacement agents which were issued five-year warrants to buy approximately 2.0million shares of Robcor common stock equal to 10% of the number of shares ofcommon stock sold in the Private Placement at an exercise price of $0.97 pershare; provided, however, no warrants were issued to the placement agents withrespect to shares and warrants sold to existing Redpoint stockholders.

 

On April 6, 2007, Robcor sold an additional 16.1 million shares ofcommon stock and warrants to purchase 4.0 million shares of common stockwhich resulted in net proceeds of approximately $11.4 million.  In connectionwith the April closing, warrants to purchase an additional 1.6 millionshares of common stock were issued to the placement agents.

 

*Reincorporation Merger*

 

On June 15, 2007, Robcor was merged with and into Redpoint, itswholly-owned subsidiary, with Redpoint being the surviving corporation pursuantto the Agreement and Plan of Merger dated May 3, 2007.  As a result of the merger, the Company’sstate of incorporation changed from Florida to Delaware.

 

In connection with the reincorporation merger, the authorized number ofshares of common stock was decreased from 1,000,000,000 shares of common stock,no par value per share, to 150,000,000 shares of common stock, $0.0001 parvalue per share, and the authorized number of shares of preferred stock was decreasedfrom 20,000,000 shares of preferred stock, no par value per share, to10,000,000 shares of preferred stock, $0.0001 par value per share.  The Company’s share data and capital stockhave been retrospectively adjusted for all periods presented to reflect thereincorporation merger.

 

In addition, the maximum number of shares of common stock reserved forissuance under the Company’s 2007 Omnibus Equity Compensation Plan wasincreased from 13,511,562 to 17,644,267 shares.

 

**3.****                         ****Summary of Significant AccountingPolicies**

 

***(a)*****        *****Use ofEstimates***

 

The preparation of financial statements in conformity with U.S.generally accepted accounting principles requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. Actual results could differ from such estimates.

 

***(b)******        ******Cash andCash Equivalents***

 

The Company considers all highly liquid investments that havematurities of three months or less when acquired to be cash equivalents.

 

***(c)******         ******MarketableSecurities***

 

Marketable securities include investments in corporate debt securitiesand government-sponsored enterprise debt securities having original maturitiesof greater than three months. These marketable securities are treated forfinancial reporting purposes as available-for-sale and as such are reported attheir fair market values. Unrealized gains and losses have been recorded as aseparate component of stockholders’ equity. All realized gains and losses arerecorded in the results of operations.

 

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***(d)******        ******Concentrationsof Credit Risk***

 

Financial instruments that potentially subject the Company toconcentrations of credit risk consist of cash equivalents and marketablesecurities. The Company has established guidelines relating to diversificationand maturities that allows the Company to manage risk.

 

***(e)******         ******RevenueRecognition***

 

Revenue from corporate collaborations and licensing agreements consistsof up-front fees, research and development funding, and milestone payments.

 

*License Fees and Multiple Element Arrangements*

 

Non-refundable upfront fees are recognized as revenue when (i) wehave a contractual right to receive such payment, (ii) the contract priceis fixed or determinable, (iii) the collection of the resulting receivableis reasonably assured, and (iv) we have no further performance obligationsunder the license agreement.

 

Multiple element arrangements are analyzed to determine whether thedeliverables, which often include license and performance obligations, such asresearch and development services, can be separated or whether they must beaccounted for as a single unit of accounting in accordance with Emerging IssuesTask Force (EITF) Issue No. 00-21, *Accounting for RevenueArrangements with Multiple Deliverables*. If the fair value of theundelivered performance obligations can be determined, such obligations wouldthen be accounted for separately as performed. However, if the elements areconsidered to either (i) not have stand-alone value, or (ii) havestandalone value but the fair value of any of the undelivered performanceobligations cannot be determined, the arrangement would then be accounted foras a single unit of accounting and all of the payments recognized as revenueover the estimated period of when the performance obligations areperformed.  Whenever we determine that anarrangement should be accounted for as a single unit of accounting, we mustdetermine the period over which the performance obligations will be performedand revenue will be recognized. Significant management judgment is required indetermining the period over which we are expected to complete our performanceobligations under an arrangement.

 

*Substantive Milestone Payments*

 

Our collaboration agreements may also contain substantive milestonepayments that are recognized upon achievement of the milestone only if all ofthe following conditions are met:

 

·                  the milestone payments are non-refundable;

 

·                  achievement of the milestone involves adegree of risk and was not reasonably assured at the inception of thearrangement;

 

·                  substantive effort is involved in achievingthe milestone;

 

·                  a reasonable amount of time passes betweenthe up-front license payment and the first milestone payment as well as betweeneach subsequent milestone payment; and

 

·                  the amount of the milestone payment isreasonable in relation to the effort expended or the risk associated withachievement of the milestone.

 

Determination as to whether a payment meets the aforementionedconditions involves management’s judgment. If any of these conditions are notmet, the resulting payment would not be considered a substantive milestone, andtherefore the resulting payment would be considered part of the considerationfor the single unit of accounting and be recognized as revenue as suchperformance obligations are performed.

 

*Reimbursement of Research and Development Costs*

 

Reimbursement of research and development costs is recognized asrevenue, provided the provisions of EITF Issue No. 99-19, *Reporting Revenue Gross as a Principal Versus Net as an Agent*,are met, the amounts are fixed and determinable, and collection of the relatedreceivable is reasonably assured.

 

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*** ***

***(f)******           ******Propertyand Equipment***

 

Property and equipment are recorded at cost and depreciated on astraight-line basis over their estimated useful lives. The Company uses a lifeof four to five years for laboratory equipment, three to seven years for officeequipment and furniture, and the lesser of the useful life or the remaininglife of the underlying facility lease for leasehold improvements. Expendituresfor repairs and maintenance are charged to expense as incurred, while majorrenewals and betterments are capitalized. Upon disposition of assets, the costand related accumulated depreciation are removed from the accounts and anyresulting gain or loss is included in the Statements of Operations.

 

***(g)******        ******Researchand Development***

 

Research and development costs, including those incurred in relation tothe Company’s collaborative agreements, are charged to expense as incurred.These expenses include internal research and development as well as amountspaid to third parties to conduct research on the Company’s behalf. Costsincurred in obtaining technology licenses are charged immediately to research anddevelopment expense if the technology licensed has not reached technologicalfeasibility and has no alternative future uses.

 

***(h)******        ******Impairmentof Long-Lived Assets***

 

In accordance with Statement of Financial Accounting Standards (SFAS) No. 144,*Accounting for the Impairment or Disposal ofLong-Lived Assets*, long-lived assets, such as property andequipment, are reviewed for impairment whenever events or changes incircumstances indicate that the carrying amount of an asset may not berecoverable. Recoverability of assets to be held and used is measured by acomparison of the carrying amount of an asset to the estimated undiscountedfuture cash flows expected to be generated by the asset. If the carrying amountof an asset exceeds its estimated future cash flows, then an impairment chargeis recognized in the amount by which the carrying amount of the asset exceedsthe fair value of the asset.  The Companyhas not recorded any impairment charges pursuant to SFAS No. 144.

 

***(i)******           ******IncomeTaxes***

 

Income taxes are accounted for under the asset-and-liability method.Deferred tax assets and liabilities are recognized for the future taxconsequences attributable to differences between the financial statementcarrying amounts of existing assets and liabilities and their respective taxbases and operating loss and tax credit carryforwards. Deferred tax assets andliabilities are measured using enacted tax rates expected to apply to taxableincome in the years in which those temporary differences are expected to berecovered or settled. The effect on deferred tax assets and liabilities of achange in tax rates is recognized in income in the period that includes theenactment date.

 

***(j)******           ******Stock-BasedCompensation***

 

Effective January 1, 2006, the Company adopted SFAS No. 123(revised 2004), *Share-Based Payment*(SFAS 123R) using the prospective method of adoption. UnderSFAS 123R, the Company recognizes compensation cost for awards toemployees and nonemployee board members based on the grant-date fair value ofstock-based awards over the period during which an award holder is required toprovide service in exchange for the award. No compensation cost is recognizedfor awards for which the award holder does not render the requisite service.

 

The fair value of stock options is determined using the Black Scholesoption-pricing model and is recognized as expense over the requisite serviceperiod using the straight-line method.

 

To satisfy the exercise of options, the Company plans to issue newshares rather than purchase shares on the open market.

 

***(k)******        ******Net Lossper Common Share***

 

Basic net loss per common share is computed in accordance with SFAS No. 128,*Earnings per Share* , by dividing the netloss allocable to common stockholders by the weighted average number of sharesof common stock outstanding for the period. Diluted net loss per common shareis computed by dividing net loss allocable to common stockholders by the sum ofthe weighted-average number of common shares outstanding for the period and thenumber of additional shares that would have been outstanding if dilutivepotential common shares had been issued. Potential common shares are excludedfrom the calculation of diluted net loss per common share if the effect on netloss per share is antidilutive. In all periods presented, our diluted net lossper common share is equal to basic net loss per common share because givingeffect in the computation of diluted net loss per common share to the exerciseof outstanding options and warrants and the conversion of convertible preferredstock would have been antidilutive.

 

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***(l)******           ******Fair Valueof Financial Instruments***

 

The fair value of our financial instruments is the amount for which theinstrument could be exchanged in a current transaction between willing parties.As of December 31, 2007 and September 30, 2008, the carrying valuesof cash and cash equivalents, accounts receivable, prepaid expenses and othercurrent assets, accounts payable, accrued expenses, and accrued compensationequaled or approximated their respective fair values because of the shortduration of these instruments. In addition, we believe the carrying value ofour debt instruments, which do not have readily ascertainable market values,approximate their fair values, given that the interest rates on outstandingborrowings approximate market rates.

 

***(m)******     ******RecentAccounting Pronouncements***

 

In February 2007, the FASB issued SFAS No. 159, *The Fair Value Option for Financial Assets and Financial Liabilities —Including an amendment of FASB Statement No. 115* (“SFAS No. 159”).  Under this Standard, the Company mayelect to report marketable securities and certain other items at fair value ona contract-by-contract basis with changes in value reported in earnings. Thiselection is irrevocable.  SFAS No. 159is effective for the Company for the fiscal year beginning January 1,2008.  The Company has elected not toapply the fair value option to any of its currently eligible financial assetsand liabilities.

 

In September 2006, the FASB issued SFAS No. 157, *Fair Value Measurements* (“SFAS No. 157”).  SFAS No. 157 clarifies the definition offair value, establishes a framework for measuring fair value and expandsdisclosures on fair value measurements. In February 2008, the FASB issued two final staff positions (“FSP”)amending SFAS No. 157.  FSP SFAS 157-1 amends SFAS No. 157 toexclude SFAS No. 13, *“Accounting for Leases”*and its related interpretive accounting pronouncements that address leasingtransactions.  FSP SFAS 157-2 delays the effective date of SFAS No. 157until fiscal years beginning after November 15, 2008 for nonfinancialassets and nonfinancial liabilities that are recognized or disclosed at fairvalue in the financial statements on a nonrecurring basis.  The Company adopted SFAS No. 157 on January 1,2008, except for the items covered by FSP SFAS 157-2.

 

SFAS No. 157 establishes a three-tier fair value hierarchy, whichprioritize the inputs used in measuring fair value as follows:

 

·                  Level 1: Observable inputs such as quotedprices in active markets;

 

·                  Level 2: Inputs, other than the quoted pricesin active markets, that are observable either directly or indirectly; and

 

·                  Level 3: Unobservable inputs in which thereis little or no market data, which require the reporting entity to develop itsown assumptions.

 

The Company’s marketable securities are reported at fair value on thebalance sheet based on quoted prices in active markets for identical assets(Level 1).

 

***(n)******        ******ComprehensiveLoss***

 

We apply SFAS No. 130, *Reporting ComprehensiveIncome*.  This statementrequires the classification of items of other comprehensive income (loss) bytheir nature and disclosure of the accumulated balance of other comprehensiveincome (loss) separately from accumulated deficit and additional paid-incapital, in the stockholders’ equity section of our balance sheet.  Other comprehensive income (loss) consistedof unrealized gains and losses on marketable securities for the three and ninemonths ended September 30, 2008. For the three and nine months ended September 30, 2008 and 2007,comprehensive loss was:

 
| ** **                             | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                             | ** ** | **2007**                                             | ** ** | **2008**                                            | ** ** | **2007** | ** ** | **2008** | ** ** |
| Net loss                               |       | $                                                    | (1,909,144 | )                                                   | $          | (2,609,143 | ) | $ | (8,545,118 | ) | $ | (7,695,312 | ) |
| Other comprehensive income (loss) |       | 38,047                                               |       | (714                                                | )          | 38,047 |   | (22,581 | ) |
| Comprehensive loss                     |       | $                                                    | (1,871,097 | )                                                   | $          | (2,609,857 | ) | $ | (8,507,071 | ) | $ | (7,717,893 | ) |

 

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**4. Debt**

** **

**(a)****         ****Master Security Agreements**

** **

TheCompany has entered into Master Security Agreements with two finance companies.Amounts borrowed are evidenced with promissory notes and are repayable in equalmonthly payments, over 36 to 48 months, and are collateralized by the purchasedequipment.  The notes bear interest atrates varying between 9.5% and 12.1%.  InSeptember 2008, we borrowed approximately $1.5 million pursuant to a loan andsecurity agreement. As of September 30, 2008, the principal amounts due onthe notes were repayable as follows:

 
| 2008                 |   | $         | 160,885   |   |
|----------------------|--------|-----------|-----------|--------|
| 2009                 |   | 519,154   |      |
| 2010                 |   | 374,110   |      |
| 2011                 |   | 422,100   |      |
| 2012                 |   | 351,743   |      |
|                 |   | 1,827,992 |      |
| Less current portion |   | (574,214  | )         |
|                 |   | $         | 1,253,778 |   |

 

Interestexpense on notes payable for the three and nine months ended September 30,2008 and 2007, was $12,414, $40,134, $22,451, and $77,803 respectively.

 

**(b) Convertible Notes Payable**

 

In May, June and October 2006, the Company entered into aconvertible debt financing agreement with certain of its existing investorswhich provided for $4,116,774 in funding. The Company issued 5% securedpromissory notes (the “Promissory Notes”) with principal amounts totaling$4,093,024 and warrants to purchase shares of a new series of preferred stockthat may be designated in the future in a Qualified Financing, as defined insuch Promissory Notes.  The Promissory Notes were due on the earliest tooccur of: (i) demand by holders of a majority of the outstanding principalat any time after the one year anniversary of the initial May closing; (ii) aLiquidation Event, as defined in such Promissory Notes; and (iii) thetwo-year anniversary of the initial May closing.  In connection withthe Reverse Merger, the Promissory Notes and accrued interest were convertedinto 5,223,522 shares of common stock and warrants were exercised resulting inthe issuance of 2,033,175 shares of common stock.

 

In accordance with APB Opinion No. 14, *Accountingfor Convertible Debt and Debt Issued with Stock Purchase Warrants*,the Company allocated the proceeds from the financing between the PromissoryNotes and warrants based on their relative estimated fair values.  Therelative fair value of the warrants of $1,228,565 was recorded against thecarrying value of the Promissory Notes as an original issue discount (OID)which was being amortized as interest expense over the one year anniversary ofthe initial May issuance date of the Promissory Notes until the closing ofReverse Merger. During the nine months ended September 30, 2007 theCompany recognized a noncash charge to interest expense of $302,032 for theamortization of the remaining OID.

 

In accordance with EITF No. 00-27, *Applicationof Issue No. 98-5 to Certain Convertible Instruments*, and EITF No. 98-5,*Accounting for Convertible Securities withBeneficial Conversion Features or Contingently Adjustable Ratios*,after considering the allocation of the proceeds to the Promissory Notes, theCompany determined that the Promissory Notes contained a contingent beneficialconversion feature (Contingent BCF). The Contingent BCF existed at the date ofthe issuance of the Promissory Notes due to the fact that the original carryingvalue of the Promissory Notes, after allocation of the proceeds, would be lessthan the purchase price of the new series of preferred stock paid by investorsin the new series. In accordance with EITF No. 98-5, the Contingent BCF of$1,228,565 was recognized as additional interest expense during the nine monthsended September 30, 2007 when the Promissory Notes were converted intoshares of the common stock.

 

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**5.****                         ****Marketable Securities**

 

The following is a summary of available-for-sale securities as of September 30,2008 and December 31, 2007:

 
| ** **                                       | ** ** | ** **              | ** ** | **Gross Unrealized** | ** ** | ** ** | ** ** |
|--------------------------------------------------|------------|-------------------------|------------|---------------------------|------------|------------|------------|
| **As of September 30, 2008** | ** ** | **Amortized Cost** | ** ** | **Gains**                 | ** ** | **Losses** | ** ** | **Fair Value** | ** ** |
| Corporate debt securities                        |       | $                       | 6,601,114  |                      | $          | 28,456     |       | $ | — |   | $ | 6,629,570 |   |
| Government-sponsored enterprise debt             |       | 5,247,856               |       | 279                       |       | (9,605     | )          | 5,238,530 |   |
|                                             |       |                    |       |                      |       |       |       |   |   |
| Total                                            |       | $                       | 11,848,970 |                      | $          | 28,735     |       | $ | (9,605 | ) | $ | 11,868,100 |   |

 
| ** **                                      | ** ** | ** **              | ** ** | **Gross Unrealized** | ** ** | ** ** | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|---------------------------|------------|------------|------------|
| **As of December 31, 2007** | ** ** | **Amortized Cost** | ** ** | **Gains**                 | ** ** | **Losses** | ** ** | **Fair Value** | ** ** |
| Corporate debt securities                       |       | $                       | 13,885,003 |                      | $          | 38,655     |       | $ | — |   | $ | 13,923,658 |   |
| Asset-backed securities                         |       | 2,984,699               |       | 3,056                     |       | —     |       | 2,987,755 |   |
|                                            |       |                    |       |                      |       |       |       |   |   |
| Total                                           |       | $                       | 16,869,702 |                      | $          | 41,711     |       | $ | — |   | $ | 16,911,413 |   |

 

As of September 30, 2008, all available-for-sale securities maturewithin one year. During the three and nine months ended September 30, 2008and 2007, amortization of discounts and premiums related to marketablesecurities resulted in income of $51,466, $266,461, $54,338, and $54,338,respectively.

 

**6.****                         ****Stockholders’ Equity**

 

***(a)******        ******CommonStock***

 

The Company was party to a number of agreements that provided fordilution protection to certain investors.  In connection with the ReverseMerger and closing of the Private Placement, the Company issued approximately2.0 million shares of common stock to a founder and shareholder of the Companyas a result of such anti-dilution protection.  During the nine monthsended September 30, 2007, the Company recorded a charge of$1.6 million to research and development expenses related to the issuanceof such shares of common stock, which represents the fair value of theseshares.

** **

***(b)******        ******Warrants***

 

As of September 30, 2008, the Company had the following warrantsto purchase Common Stock outstanding:

 

| **Number of shares** | ** ** | **Exercise price** | ** ** | **Expiration** | ** **         |
|--------------------------------|------------|-------------------------|------------|----------------|--------------------|
|                           |       |                    |       |           |               |
| 53,039                         |       | $                       | 0.75       |           | December 2012 |   |
|                           |       |                    |       |           |               |
| 6,182,287                      |       | $                       | 1.35       |           | March 2010    |   |
|                           |       |                    |       |           |               |
| 4,015,059                      |       | $                       | 1.35       |           | April 2010    |   |
|                           |       |                    |       |           |               |
| 3,574,906                      |       | $                       | 0.97       |           | April 2012    |   |

 

***(c)******         ******StockOption Plans***

 

In November 2003, the Company adopted the 2003 Stock IncentivePlan, as amended (the “2003 Plan”), that authorized the Company to grant up to6,523,790 shares of Common Stock to eligible employees, directors, andconsultants to the Company in the form of restricted stock and stock options.The amount and terms of grants were determined by the board of directors. Theterm of the options could have been up to 10 years, and options wereexercisable in cash or as otherwise determined by the board of directors.Generally, options vested 25% upon the first anniversary of the date of grantand ratably each month thereafter through the fourth anniversary of the date ofgrant.

 

On March 12, 2007, the Company adopted the Redpoint Bio Corporation2007 Omnibus Equity Compensation Plan (“2007 Plan”), which provided for theissuance of up to 13,511,562 shares of common stock, subject to adjustment incertain circumstances.  In connection with the adoption of the 2007 Plan,the 2003 Plan 

 

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merged with and into the2007 Plan and no additional grants may be made thereafter under the 2003Plan.  Outstanding grants under the 2003 Plan will continue in effect inaccordance with their terms as in effect before March 12, 2007 and theshares with respect to outstanding grants under the 2003 Plan will be issued ortransferred under the 2007 Plan.  The 2007 Plan is now the Company’s onlyplan in effect.

 

On April 20, 2007, the Company approved an amendment to the 2007Plan, which increased the maximum number of shares of common stock reserved forissuance under the 2007 Plan by an additional 4,132,705 shares from 13,511,562to 17,644,267 shares of common stock.

 

The following is a summary of stock option activity under the Planduring the nine months ended September 30, 2008:

 
| ** **                             | ** ** | ** **         | ** ** | ** **              | ** ** | **Weighted-**   | ** ** | ** **    | ** ** |
|----------------------------------------|------------|--------------------|------------|-------------------------|------------|-----------------|------------|---------------|------------|
| ** **                             | ** ** | ** **         | ** ** | **Weighted-**           | ** ** | **average**     | ** ** | ** **    | ** ** |
| ** **                             | ** ** | **Number of** | ** ** | **average**             | ** ** | **contractual** | ** ** | **Intrinsic** | ** ** |
| ** **                             | ** ** | **shares**         | ** ** | **exercise price** | ** ** | **term**        | ** ** | **Value**     | ** ** |
| Outstanding at December 31, 2007  |       | 9,603,961          |       | $                       | 0.49       |            |       |          |       |   |
| Granted                                |       | 1,679,938          |       | 0.65                    |       |            |       |          |       |
| Exercised                              |       | (271,883           | )          | 0.15                    |       |            |       |          |       |
| Forfeited                              |       | —             |       | —                  |       |            |       |          |       |
| Outstanding at September 30, 2008 |       | 11,012,016         |       | $                       | 0.52       |            | 7.70       |          | $          | 1,524,216 |   |
|                                        |            |                    |            |                         |            |                 |            |               |            |  |  |

 

All options granted to date have exercise prices equal to the fairvalue of the underlying common stock on the date of grant. Prior to theeffectiveness of the registration statement on Form S-1, which occurred onJuly 20, 2007, all options were granted with an exercise price equal tothe estimated fair value of the underlying common stock as determined by theboard of directors. Subsequent to that date, all options have been granted withan exercise price equal to the most recent trading price of the Company’scommon stock on the date of grant. As of September 30, 2008, there were5,908,262 shares of common stock available for grant under the 2007 Plan.

 

The per-share weighted average fair value of options granted during thenine months ended September 30, 2008 and 2007 was estimated at $0.41 and$0.53, respectively, on the date of grant using the Black-Scholesoption-pricing model.

 

The Company recognized $221,394 $648,035, $140,161 and $404,885 ofcompensation expense pursuant to SFAS 123R for the three and nine monthsended September 30, 2008 and 2007, respectively. As of September 30,2008, there was approximately $2.1 million of unrecognized compensationexpense related to unvested stock options granted to employees and non-employeedirectors, which is expected to be recognized over a weighted average period of2.7 years.

 

***(d)******        ******RegistrationRights***

 

On June 5, 2007, the Company filed a “resale” registrationstatement with the SEC covering all shares of common stock issued in the PrivatePlacement and in connection with the Reverse Merger, including shares of commonstock into which certain warrants are exercisable.  Such registrationstatement was declared effective on July 20, 2007.  The Company willuse its best efforts to maintain its effectiveness until such time as allsecurities registered under the registration statement have been sold or areotherwise able to be sold under Rule 144 of the Securities Act withoutregard to volume limitations, whichever is earlier.

 

**7.****                         ****Research and DevelopmentCollaboration**

 

*Givaudan*.    In March 2007, the Company entered into a JointResearch and Development and License Agreement (the “Givaudan Agreement”) withGivaudan Schweiz AG, a Swiss company (“Givaudan”) for the development andcommercialization of compounds that enhance sweetness or savory sensation, aswell as compounds that block or desensitize bitter taste for use in the foodand beverage industry. Under the terms of the Givaudan Agreement, Redpointreceived an upfront payment of $1,300,000 and will receive research fundingover the initial 3.5 year term of the Givaudan Agreement, of up to$11,600,000.  If certain conditions havenot been achieved in certain timeframes as set forth in the Givaudan Agreement,then Givaudan may terminate the agreement with us prior to the expiration ofthe initial 3.5 year term**.**  Redpoint is also eligible to receivereimbursement for costs incurred in connection with obtaining certainregulatory approvals.  Redpoint will alsobe eligible to receive milestone payments of up to $2,500,000 upon theachievement of specified development and commercialization events as well asroyalty payments based on net sales of Givaudan products that contain flavorsystems incorporating compounds developed under the collaboration. The upfrontpayment of $1,300,000 is being 

 

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recognized as revenue on astraight-line basis over the initial term of the Givaudan Agreement.  During the three and nine months ended September 30,2008 and 2007, the Company recognized approximately $93,000, $279,000, $93,000and $186,000, respectively, of revenue attributable to the amortization of theupfront fee and approximately $695,000, $1,965,000, $600,000 and $1,200,000 ofrevenue from research funding, respectively.

 

*Coca-Cola*.    In December 2007, the Company entered into aresearch agreement (the “Coca-Cola Agreement”) with The Coca-Cola Company(“Coca-Cola”) for the development of certain technology for use innon-alcoholic beverages. Under the terms of the Coca-Cola Agreement, Redpointwill receive up to $900,000 over the initial one year term for researchfunding. In February 2008, Coca-Cola made a non-refundable payment of$450,000 for the initial six months of the agreement. Coca-Cola will alsoreimburse the Company for certain related clinical research organization (CRO)costs that the Company incurs. Redpoint is also eligible to receive a milestonepayment of $200,000 upon the achievement of specified development events setforth in the Coca-Cola Agreement.  Theinitial term of the Coca-Cola Agreement is for 12 months, subject toextension upon mutual agreement of the parties. The Coca-Cola Agreement may be terminated early by the parties upontheir mutual agreement.  The initial oneyear term of the Coca-Cola Agreement is set to expire in December 2008 andbased upon our recent discussions with Coca-Cola, it is unlikely that we willreach an agreement with Coca-Cola to extend the one year term.  During the three and nine months ended September 30,2008, the Company recognized approximately $228,000 and $711,000 of revenuefrom research funding.

 
| **ITEM 2.** | ** ** | **MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS** |
|-------------|------------|-------------------------------------------------------------------------------------------------|

 

**Cautionary Note RegardingForward-Looking Statements**

 

The Securities and Exchange Commission, referred to herein as the SEC,encourages companies to disclose forward-looking information so that investorscan better understand a company’s future prospects and make informed investmentdecisions.  Certain statements that we may make from time to time,including, without limitation, statements contained in this Quarterly Report onForm 10-Q, referred to herein as the Quarterly Report, constitute“forward-looking statements” within the meaning of the Private SecuritiesLitigation Reform Act of 1995.  These statements may be made directly inthis Quarterly Report, and they may also be made a part of this QuarterlyReport by reference to other documents filed with the SEC, which is known as“incorporation by reference.”

 

Words such as “may,” “anticipate,” “estimate,” “expects,” “projects,”“intends,” “plans,” “believes” and words and terms of similar substance used inconnection with any discussion of future operating or financial performance,identify forward-looking statements.  All forward-looking statements aremanagement’s present expectations of future events and are subject to a numberof risks and uncertainties that could cause actual results to differ materiallyfrom those described in the forward-looking statements.  These risks anduncertainties include, among other things:

 

·                  our need for additional capital to fund thecurrent level of our research and development programs, our inability tofurther identify, develop and achieve commercial success for new products andtechnologies;

 

·                  the possibility of delays in the research anddevelopment necessary to select drug development candidates and delays inclinical trials;

 

·                  challenges that we may face relating to theintroduction of compounds that we may discover as food ingredients;

 

·                  the risk that clinical trials may not resultin marketable products;

 

·                  the risk that we may be unable tosuccessfully finance and secure regulatory approval of and market our drugcandidates;

 

·                  our dependence upon food, ingredient andpharmaceutical and biotechnology collaborations;

 

·                  the levels and timing of payments under ourcollaborative agreement;

 

·                  uncertainties about our ability to obtain newcorporate collaborations and acquire new technologies on satisfactory terms, ifat all;

 

·                  the development of competing diagnostic andtherapeutic products;

 

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·                  our ability to protect our proprietarytechnologies;

 

·                  patent-infringement claims;

 

·                  risks of new, changing and competitivetechnologies and regulations in the United States and internationally; and

 

·                  other factors discussed under the headingItem 1A “Risk Factors” in this Quarterly Report.

 

In light of these assumptions, risks and uncertainties, the results andevents discussed in the forward-looking statements contained in this QuarterlyReport or in any document incorporated by reference might not occur.  Youare cautioned not to place undue reliance on forward-looking statements, whichspeak only as of the date of this Quarterly Report or the date of the documentincorporated by reference in this Quarterly Report.  We are not under anyobligation, and we expressly disclaim any obligation, to update or alter anyforward-looking statements, whether as a result of new information, futureevents or otherwise, except as may be required by applicable law.  Allsubsequent forward-looking statements attributable to Redpoint, or to anyperson authorized to act on our behalf are expressly qualified in their entiretyby the cautionary statements contained or referred to in this section.

 

**Overview**

 

Redpoint is a development stage biotechnology company leveraging recentdiscoveries in the molecular biology of taste to discover and develop noveltaste modulators for the food, beverage and pharmaceutical industries. Our foodand beverage program is focused on identifying novel flavors that improve thetaste of existing ingredients and enable the development of better-tasting andmore healthful foods and beverages. Our pharmaceutical program uses abiochemical approach aimed at suppressing the bitterness of medicines, whichhas the potential to expand the range of formulation options and increasepatient compliance. We use our technology to discover and develop products forpartners and for our own pipeline.

 

Since its inception in 1995, Redpoint has incurred losses and negativecash flows from operations, and such losses have continued subsequent to September 30,2008. As of September 30, 2008, Redpoint had an accumulated deficit of$40.7 million and anticipates incurring additional losses for at least thenext several years. We expect to spend significant resources over the nextseveral years to enhance our technologies and to fund research and developmentof our pipeline of potential products.

 

Through September 30, 2008, our revenue has come solely fromcorporate collaborations, license agreements, and government grants. In orderto achieve profitability, we must continue to develop products and technologiesthat can be commercialized by us or through existing and future collaborations.

 

On March 12, 2007, we completed the first closing of our privateplacement of shares of common stock and warrants to purchase shares of commonstock raising approximately $17.2 million of net proceeds. On April 6,2007, we completed the final closing of the private placement raising anadditional $11.4 million of net proceeds, bringing the total privateplacement net proceeds to $28.6 million.

 

In March 2007, we entered into a Joint Research and Developmentand License Agreement with Givaudan Schweiz AG for the development andcommercialization of compounds that enhance sweetness or savory sensation, aswell as compounds that block or desensitize bitter taste for use in the foodand beverage industry. Under the terms of the agreement, Redpoint and Givaudanare collaborating exclusively with each other to discover and develop compoundsthat act primarily through the modulation of the TRPM5 channel. Inconsideration of our agreement to conduct research and develop compounds andgrant exclusive licenses and other rights, Givaudan paid us an upfronttechnology fee of $1.3 million and agreed to provide research funding tous over the initial 3.5 year term of the agreement of up to $11.6 million.If certain conditions have not been achieved in certain timeframes as set forthin the Givaudan Agreement, then Givaudan may terminate the agreement with usprior to the expiration of the initial 3.5 year term.  Givaudan will also reimburse us for costs weincur in connection with obtaining certain regulatory approvals. Through September 30,2008, including the upfront fee, we have received $5.7 million in researchand development funding. We are also eligible to receive milestone payments ofup to $2.5 million upon the achievement of specified development andcommercialization events as well as royalty payments based on net sales ofGivaudan products that contain flavor systems incorporating compounds developedunder the collaboration.

 

In December 2007, we entered into a research agreement withCoca-Cola for the development of certain technology for use in non-alcoholicbeverages. In consideration of our agreement to conduct research for thedevelopment of certain technology and grant exclusive licenses and other rightsto Coca-Cola pursuant to the terms 

 

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and conditions of theagreement, Coca-Cola agreed to pay us $900,000 over the initial one yearterm.  In connection therewith, in February 2008,Coca-Cola made a non-refundable payment in the amount of $450,000, which shallbe applied to the aforementioned costs for the initial six months of theagreement.  Coca-Cola will also reimburseus for certain related CRO costs that we incur. In addition, Coca-Cola also agreed to pay us a milestone payment of$200,000 upon the achievement of specified development events set forth in theResearch Agreement.  The initial term ofthe agreement is for 12 months, subject to extension upon mutual agreementof the parties.  The agreement may beterminated early by the parties upon their mutual agreement.  The initial one year term of the Coca-ColaAgreement is set to expire in December 2008 and based upon our recentdiscussions with Coca-Cola, it is unlikely that we will reach an agreement withCoca-Cola to extend the one year term.

 

Our discovery programs capitalize on advances in taste science and ourknow-how to create new products. We believe these products may have thepotential to make processed foods and beverages healthier and enhance theacceptability, safety and efficacy of many types of pharmaceutical products. Wehave developed an integrated discovery platform and identified prototypecompounds for both enhancement of sweet and savory taste and blocking bittertaste. To leverage our technology in the food and beverage markets, we haveentered into research and development agreements with Givaudan, the world’sleading company in the flavors and fragrances industry, and Coca-Cola, theworld’s largest beverage company. In addition, we plan to use our technology todiscover aversive taste blockers, principally to develop a pipeline ofproprietary taste-modified pharmaceutical products. We may develop suchproducts ourselves or partner with pharmaceutical companies who are seeking toextend the patent life or enhance the performance of their products. We haveidentified several categories of products where patient acceptability, or thepotential for novel formulation options, are currently limited due to theintense bitter or other aversive taste of the active pharmaceutical ingredient(API). We plan to incorporate the proprietary bitter taste or aversive tasteblockers found through our discovery programs with drugs of proven safety andefficacy to create novel, valued-added formulations. We have not yet developedany products that are commercially available.

 

During the last quarter, we believe our scientists made progress in Redpoint’sdiscovery program for bitter blockers. Specifically, improvements in the potency of Redpoint’s bitter blockers,designed to allow the development of more palatable pharmaceuticalformulations, have been achieved.  Forthe first time, double blinded human taste panel studies have shown thatRedpoint compounds are able to reduce the bitterness of salicin, a naturalbitter compound from willow bark related to aspirin.  Although additional chemical optimizationwill be required to develop commercially practical bitter blockers, the humantest data provides corroboration of the underlying biological hypothesis.

 

Our research and development efforts, both partnered and unpartnered,involve both technology development and discovery programs aimed at theidentification of novel compounds for taste modification. We are working toidentify a compound(s) that can be used to enhance the taste of both sweetand savory flavors in a wide variety of food and beverage applications.Additionally, we are working to identify a compound(s) that could act as auniversal bitter taste blocker for use both in our pharmaceutical productpipeline and for collaborative formulation development programs with majorpharmaceutical companies. We intend to design our taste modifier compounds tobe safe and effective in minute quantities, and to be able to incorporate theminto food and pharmaceutical products through the GRAS (Generally Recognized asSafe) determination/notification process. Although the GRAS process involvesextensive testing to insure safety in use, the overall time required (estimatedto be 12-18 months) and development costs incurred (estimated to be$1-2 million per compound) are modest compared to the size of theaccessible markets. Moreover, a single GRAS-determined taste enhancer canpotentially be used in a wide range of food applications. In addition, a GRASdetermination is heavily relied upon by the Food and Drug Administration (FDA)to evaluate the safety and inclusion of flavor modifiers into pharmaceuticalproducts. A single aversive taste blocker can potentially be used to create amultitude of new drug formulations that in many cases may be patentable intheir own right. New drug product or product variations will require FDAapproval through the new drug approval, or NDA, process. We believe there maybe additional potential applications for our technology for the modification ofaversive taste sensations in food products, as well as potential fordiscovering novel compounds for other pharmaceutical applications.

 

Our initial programs focused on modulation of the TRPM5 ion channel, akey signaling element in taste sensation, in order to discover novel compoundsthat modulate the taste of food, beverage, and pharmaceutical products. We alsobelieve that the TRPM5 ion channel may be an attractive target for theidentification and development of a new diabetes or obesity therapeuticcompound. Recent scientific research, including research conducted by membersof our Scientific Advisory Board, suggest that in addition to taste cells onthe tongue, TRPM5 is expressed as part of a nutrient-sensing signaltransduction chain in the gastrointestinal tract and potentially also in thepancreas.  We are in the early stages ofdetermining whether we can leverage the research we have already conducted onthe discovery of modulators of the TRPM5 ion channel to further explorepotential opportunities for the discovery of new diabetes or obesitytherapeutics.

 

**Revenue**

 

To date, our revenue has come solely from corporate collaborations,licensing agreements and government grants. Since our inception, we haveundertaken research projects for which we were the recipient of several Small 

 

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Business InnovativeResearch, or SBIR, Awards. The SBIR Awards were sponsored by the NationalInstitutes of Health. The last SBIR related research project was completed in2004.

 

To leverage our technology in the food and beverage markets, in March 2007,we entered into the Givaudan Agreement where we are collaborating exclusivelywith each other to discover and develop Enhancer Compounds and Bitter BlockerCompounds that act primarily through the modulation of the TRPM5 channel. Also,in December 2007, we entered into a research agreement with Coca-Cola forthe development of certain technology for use in non-alcoholic beverages. Wemay also partner with other major ingredient suppliers, or food and beveragecompanies, to develop and commercialize taste enhancers that act through avariety of other newly discovered mechanisms of taste sensation in exchange fortechnology access fees, research funding, product development milestones, andproduct royalties.

 

In addition to developing our own pharmaceutical formulations, we planto form agreements with pharmaceutical companies to develop and market liquidand innovative pharmaceutical formulations in exchange for technology accessfees, research funding, product development milestones and product royalties.We have identified a broad selection of potential products for development,including both liquid formulations and innovative formulations that we believewould be attractive licensing candidates. In general, our strategy involves thedevelopment of a prototype formulation demonstrating the effectiveness of ourtechnology by combining the target API with our GRAS-approved bitter or otheraversive taste blocker. Some products could incorporate third-party APIs thatcould constitute line extensions to be marketed to the API patent holder.Additional prototype products could be developed with either soon-to-be orpatent-expired APIs. These products could either be licensed to the originalpatent holder to create a line extension, or to a generics company wishing tomarket a differentiated or branded generic product.

 

Any failure to maintain or establish licensing or collaborationarrangements on favorable terms could adversely affect our business prospects,financial condition or ability to develop and commercialize our productcandidates.

 

**Research and Development**

 

Ourresearch and development expenses consist primarily of internal costsassociated with our bitter blocker and taste enhancer research programs as wellas amounts paid to third parties to conduct research on our behalf. Ourinternal research and development costs are comprised of salaries and relatedbenefits, facilities and depreciation on laboratory equipment, compoundacquisition costs and research supplies. We charge research and developmentcosts to operations as incurred. We anticipate that research and developmentexpenses will continue to increase as we advance our research and developmentprograms, including our recently initiated diabetes/obesity drug discoveryeffort where we are in the early stages of leveraging the research we havealready conducted on the discovery of modulators of the TRPM5 ion channel tofurther explore potential opportunities for the discovery of new diabetes orobesity therapeutics.

 

**General and Administrative**

 

Our general and administrative expenses consist primarily of salariesand related benefit expenses for business development, financial, legal andother administrative functions. In addition, we incur external costs forprofessional fees for legal, patent and accounting services. We expect that ourgeneral and administrative expenses, both internal and external, will increaseas we are now a public company.

 

**Results of Operations**

 

***Three Months Ended September 30, 2008Compared to Three Months Ended September 30, 2007***

 

*Research and Grant Revenue*.  For the three months ended September 30,2008, we recorded revenue of $1.1 million, which included$0.8 million from our Givaudan Agreement, which began on March 27,2007, for the development and commercialization of compounds that enhancesweetness or savory sensation as well as compounds that block or desensitizebitter taste for use in the food and beverage industry. The revenues fromGivaudan include $0.1 million attributable to the upfront fee which isbeing recognized as revenue over the initial 3.5 year term of theagreement and $0.7 million of research funding. The remaining$0.3 million of revenue was primarily from our Coca-Cola Agreement, whichbegan on December 13, 2007, for the development of certain technology foruse in non-alcoholic beverages. During the three months ended September 30,2007, we recorded $0.7 million from our Givaudan Agreement including$0.1 million attributable to the upfront fee and $0.6 million ofresearch funding.

 

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*Research and Development Expenses*.  Ourresearch and development expenses were $2.4 million for the three monthsended September 30, 2008 compared to $1.7 million for the threemonths ended September 30, 2007. During the three months ended September 30, 2008, we experiencedincreased costs associated with our bitter blocker and taste enhancer researchprograms as well as amounts paid to third parties to conduct research on ourbehalf and cost related to salaries and related benefits.

 

*General and Administrative Expenses*.  Ourgeneral and administrative expenses were $1.4 million for the three monthsended September 30, 2008 compared to $1.2 million for the threemonths ended September 30, 2007. The increase of $0.2 million was related to increases in businessdevelopment and investor relations activities as well as expenses associated withpatent filings.

 

*Interest Income*.  Interest income was $0.1 million for thethree months ended September 30, 2008 compared to $0.3 million duringthe three months ended September 30, 2007.

 

*Interest Expense.*.  Interest expense has notmaterially changed for the three months ended September 30, 2008 comparedto the three months ended September 30, 2007.

 

***Nine Months Ended September 30, 2008Compared to Nine Months Ended September 30, 2007***

 

*Research and Grant Revenue*.  For the nine months ended September 30,2008, we recorded revenue of $3.0 million, which included$2.2 million from our Givaudan Agreement, which began on March 27,2007, for the development and commercialization of compounds that enhancesweetness or savory sensation as well as compounds that block or desensitizebitter taste for use in the food and beverage industry. The revenues from theGivaudan Agreement include $0.3 million attributable to the upfront feewhich is being recognized as revenue over the initial 3.5 year term of theagreement and $1.9 million of research funding.  The remaining $0.8 million of revenuewas primarily from our Coca-Cola Agreement, which began on December 13,2007, for the development of certain technology for use in non-alcoholicbeverages.  During the nine months ended September 30,2007, we recorded revenue of $1.4 million from our Givaudan Agreementincluding $0.2 million attributable to the upfront fee and$1.2 million of research funding.

 

*Research and Development Expenses*.  Ourresearch and development expenses were $6.5 million for the nine monthsended September 30, 2008 compared to $5.5 million for the nine monthsended September 30, 2007.  Duringthe nine months ended September 30, 2007, the Company recorded a$1.6 million non-cash charge in connection with the issuance ofapproximately 2.0 million shares of our common stock related toanti-dilution protection for Dr. Margolskee, the Company’s founder. Dr. Margolskee’santi-dilution protection terminated upon completion of the final closing of thePrivate Placement on April 6, 2007. During the nine months ended September 30,2008, we experienced increased costs associated with our bitter blocker andtaste enhancer research programs as well as amounts paid to third parties toconduct research on our behalf. In particular, our facilities costs increasedas a result of our move to our new location in Ewing, New Jersey, effective in May 2007.Our new, state-of-the-art facility in Ewing, New Jersey is enabling us to moveahead with the continued expansion of our research and development operations.In addition, salaries and related benefits and R&D supplies costsincreased.

 

*General and Administrative Expenses*.  Ourgeneral and administrative expenses were $4.6 million for the nine monthsended September 30, 2008 compared to $3.2 million for the nine monthsended September 30, 2007. The increase of $1.4 million was related tocosts associated with Redpoint becoming a public company, such as increases inaccounting, legal and investor relations fees, as well as expenses associatedwith business development and patent filings and our move to our new facility.In addition, during the nine months ended September 30, 2008, werecognized non-cash compensation expense of approximately $0.5 millionpursuant to SFAS 123R and $0.1 million during the nine months ended September 30,2007.

 

*Interest Income*.  Interest income has not materially changedfor the nine months ended September 30, 2008 compared to the nine monthsended September 30, 2007.

 

*Interest Expense*.  Interest expense for the nine months ended September 30,2008 decreased approximately $1.6 million from the nine months ended September 30,2007. In May, June and October 2006, we entered into a convertibledebt financing agreement with certain of our investors, which provided for$4.1 million in funding. In addition to the issuance of 5% securedpromissory notes, our investors received warrants to purchase additional sharesof our stock. We allocated the proceeds from the financing between the notesand the warrants based on their relative fair values. The fair value of thewarrants was recorded against the carrying value of the notes 

 

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as an original issuediscount (OID) which was being amortized as interest expense over a one-yearperiod from the original issuance date of the notes. During the nine months September 30,2007, we recognized a non-cash charge to interest expense of $0.3 millionfor the amortization of the OID, which was fully expensed upon the completionof the first closing of our private placement when the promissory notes wereconverted to common stock. Furthermore, in accordance with EITF No. 00-27,*Application of Issue No. 98-5 to CertainConvertible Instruments*, and EITF No. 98-5, *Accounting for Convertible Securities with Beneficial ConversionFeatures or Contingently Adjustable Ratios*, after considering theallocation of the proceeds to the promissory notes, the Company determined thatthe promissory notes contained a contingent beneficial conversion feature(Contingent BCF). The Contingent BCF existed at the date of the issuance of thepromissory notes due to the fact that the original carrying value of promissorynotes, after allocation of the proceeds, would be less than the purchase priceof the new series of stock paid by investors in the new series. In accordancewith EITF No. 98-5, during the nine months ended September 30, 2007,the Contingent BCF of $1.2 million was recognized as additional non-cashinterest expense when the promissory notes were converted into shares of commonstock.

 

**Liquidity and Capital Resources**

 

AtSeptember 30, 2008, we had cash, cash equivalents and marketablesecurities of $17.4 million and working capital of $14.4 million.Since inception, we have used $27.2 million of cash to fund our operatingactivities and $3.2 million for capital expenditures. Through September 30,2008, we have funded substantially all of our operations and capitalexpenditures through private placements of equity and convertible debtsecurities totaling $45.8 million, cash received from corporatecollaborations totaling $8.9 million, government grants totaling$1.8 million, and capital equipment financing totaling $3.6 million.

 

In September 2008, weentered into a Loan and Security Agreement in which we are authorized to borrowup to $2.0 million for the purchase of certain equipment, a portion of theproceeds which may be used for general corporate working capital purposes. Asof September 30, 2008, we borrowed approximately $1.5 million pursuant tothe Loan and Security Agreement, of which approximately $1.0 million was forequipment previously purchased and approximately $0.5 million was for generalworking capital.

 

On March 12, 2007, we completed the first closing of our PrivatePlacement of shares of common stock and warrants to purchase shares of commonstock raising approximately $17.2 million of net proceeds. On April 6,2007 we completed the final closing of our Private Placement raising anadditional $11.4 million of net proceeds, bringing the total privateplacement net proceeds to $28.6 million. On March 27, 2007, weentered into the Givaudan Agreement for the development and commercializationof compounds that enhance sweetness or savory sensation as well as compoundsthat block or desensitize bitter taste for use in the food and beverageindustry. Pursuant to the Givaudan Agreement, Givaudan agreed to pay us anupfront technology fee of $1.3 million and provide research funding to usover the initial 3.5 year term of the Givaudan Agreement of up to$11.6 million. On December 13, 2007, we entered into a researchagreement with Coca-Cola for the development of certain technology for use innon-alcoholic beverages. Pursuant to the Coca-Cola Agreement, Coca-Cola agreedto provide research funding of $0.9 million over the initial one yearterm.  We believe that our currentcapital resources and the funding we expect to continue to receive from Givaudanshould be sufficient to meet our operating and capital requirements at leastthrough March 2010.

 

We expect that substantially all of our cash-flow for the foreseeablefuture will come from corporate collaborations, license agreements and interestearned on the proceeds from our sales of marketable securities. During 2008, weexpect to recognize approximately $3.8 million as revenue, primarily fromthe Givaudan and Coca-Cola Agreements, which includes $0.4 million of theupfront technology fee that we received from Givaudan and which is beingrecognized as revenue over the related performance period and $3.4 millionpursuant to research funding. We are subject to those risks associated with anybiotechnology company that has substantial expenditures for research anddevelopment. There can be no assurance that our research and developmentprojects will be successful, that products developed will obtain necessaryregulatory approval, or that any approved product will be commercially viable.In addition, we operate in an environment of rapid technological change and weare largely dependent on the services of our employees and consultants. Thestock market in general has recently experienced large price and volumefluctuations and the market price of our common stock has experiencedsignificant volatility.  For us to fundour operations and to commercially develop our products, additional equityand/or debt financing will be required. There is no assurance that such financingwill be available to us as needed and as a result, we may need to pursue otherstrategic alternatives.

 

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** **

**Summary of Contractual Obligations**

** **

The following tablesummarizes our obligations to make future payments under our currentcontractual obligations as of September 30, 2008:

 
|             |   | **Payments Due by Period** |      |
|------------------|--------|-------------------------------------------|-----------|
|             |   | **Total**                                 |      | **2008** |   | **2009-2010** |   | **2011-2012** |   | **Thereafter** |   |
| Operating leases |   | $                                         | 7,040,000 |   | $ | 216,000 |   | $ | 1,690,000 |   | $ | 1,686,000 |   | $ | 3,448,000 |   |
| Long-term debt   |   | 1,828,000                                 |      | 161,000 |   | 893,000 |   | 774,000 |   | — |   |
| License payments |   | 275,000                                   |      | — |   | 50,000 |   | 50,000 |   | 175,000 |   |
|             |   | $                                         | 9,143,000 |   | $ | 377,000 |   | $ | 2,633,000 |   | $ | 2,510,000 |   | $ | 3,623,000 |   |

 

**Critical Accounting Policies**

 

Our discussion and analysis of our financial condition and results ofoperations are based on our financial statements, which have been prepared inaccordance with U.S. generally accepted accounting principles, or GAAP. Thepreparation of these financial statements requires us to make estimates andjudgments that affect the reported amounts of assets, liabilities, thedisclosure of contingent assets and liabilities at the date of the financialstatements, and reported amount of revenue and expenses during the reportingperiod. On an ongoing basis, we evaluate our judgments and estimates, includingthose related to revenue recognition, long-lived assets, accrued liabilities,share-based payments and income taxes. We base our judgment and estimates onhistorical experience and various other factors that we believe to bereasonable under the circumstances, the results of which form the basis formaking judgments about the carrying values of assets and liabilities. Actualresults may differ from these estimates under different assumptions orconditions.  A more detailed review ofour critical accounting policies is contained in our Annual Report on Form 10-Kfiled with the Securities and Exchange Commission.  During the first nine months of 2008, therehave been no material changes in our critical accounting policies.

 
| **ITEM 3.** | ** ** | **QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK** |
|-------------|------------|-----------------------------------------------------------------|

 

Our carrying values of cash and cash equivalents, marketablesecurities, accounts receivable, accounts payable, accrued expenses and debtare a reasonable approximation of their fair value. The estimated fair valuesof financial instruments have been determined by us using available marketinformation and appropriate valuation methodologies.

 

We have not entered into and do not expect to enter into, financialinstruments for trading or hedging purposes.  We do not currentlyanticipate entering into interest rate swaps and/or similar instruments. We have no material currency exchange risk exposure as of September 30,2008.  Our primary market risk exposurewith regard to financial instruments is to changes in interest rates, whichwould impact interest income earned on such instruments. A one percent change(100 basis points) in interest rates on our investments would have impactedinterest income by approximately $40,000 and $140,000 for the three and ninemonths ended September 30, 2008, respectively.

 
| **ITEM 4.** | ** ** | **CONTROLS  AND PROCEDURES** |
|-------------|------------|------------------------------|

 

Our management, with the participation of our chiefexecutive officer and chief financial officer, evaluated the effectiveness ofour disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Exchange Act) as of September 30, 2008. Based onthis evaluation, our chief executive officer and chief financial officerconcluded that, as of September 30, 2008, our disclosure controls andprocedures were (1) effective in that they were designed to ensure thatmaterial information relating to us, including our consolidated subsidiaries,is made known to our chief executive officer and chief financial officer byothers within those entities, as appropriate, to allow timely decisionsregarding required disclosures, and (2) effective in that they providereasonable assurance that information required to be disclosed by us in ourreports that we file or submit under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the SEC’s rules andforms.

 

No changes in our internal control over financialreporting (as defined in Rules 13a-15(f) and 15d-15(f) under theExchange Act) occurred during the fiscal quarter ended September 30, 2008that have materially affected, or are reasonably likely to materially affect,our internal control over financial reporting.

 

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**PART II. OTHER INFORMATION**

 

**ITEM 1.****                                                    ****LEGAL PROCEEDINGS**

 

The Company’s managementknows of no material existing or pending legal proceedings or claims againstthe Company, nor is the Company involved as a plaintiff in any materialproceeding or pending litigation.  To the Company’s knowledge, nodirector, officer or affiliate of the Company, and no owner of record orbeneficial owner of more than five percent (5%) of the Company’s securities, orany associate of any such director, officer or security holder is a partyadverse to the Company or has a material interest adverse to the Company inreference to pending litigation.

 

**ITEM 1A.****                                           ****RISK FACTORS**

 

*Youshould carefully consider the following risks and all of the other informationset forth in this Quarterly Report before deciding to invest in shares of ourcommon stock. The risks described below are not the only ones facing us.Additional risks not presently known to us or that we currently deem immaterialmay also impair our business operations.*

 

*If any ofthe following risks actually occurs, our business, financial condition orresults of operations would likely suffer. In such case, the market price ofour common stock would likely decline due to the occurrence of any of theserisks, and you may lose all or part of your investment.*

 

**Risks Related To Our Business and Our Industry**

 

***Redpoint is a development-stage company. We have incurredlosses since inception and expect to incur additional net losses for at leastthe next several years.***

 

Since our inception wehave incurred significant losses and negative cash flows from operations. As ofSeptember 30, 2008, we had an accumulated deficit of $40.7 million,and anticipate incurring additional losses for at least the next several years.We expect to spend significant resources over the next several years to enhanceour technologies and to fund research and development of our pipeline ofpotential products. We have not generated significant revenues in anyparticular year since our inception. To date, substantially all of our revenuehas been derived from corporate collaborations, license agreements, andgovernment grants. In order to achieve profitability, we must develop productsand technologies that can be commercialized by us or through futurecollaborations. Our ability to generate revenues and become profitable willdepend on our ability, alone or with potential collaborators, to timely,efficiently and successfully complete the development of our productcandidates, which may include conducting pre-clinical and clinical tests,obtaining necessary regulatory approvals, and manufacturing and marketing ourproduct candidates. There can be no assurance that any such events will occuror that we will ever become profitable. Even if we do achieve profitability, wecannot predict the level of such profitability. If we sustain losses over anextended period of time, we may be unable to continue our business.

 

***We will need substantial additional funding to develop ourproducts and for our future operations. If we are unable to obtain the fundsnecessary to do so, we may be required to delay, scale back or eliminate ourproduct development or may be unable to continue our business.***

 

The development of ourproduct candidates will require a commitment of substantial funds to conductthe costly and time-consuming research, which may include pre-clinical andclinical testing, necessary to obtain regulatory approvals and bring our productsto market. We believe our current capital resources will satisfy our operatingplan through March 2010.  Our futurerequirements will depend on many factors, including:

 

·                  the progress of our research and development programs,including our ability to discover and develop taste enhancers and aversivetaste blockers;

 

·                  our ability, or our partners’ ability and willingness,to formulate these taste enhancers and aversive taste blockers into food,beverage and pharmaceutical products;

 

·                  the cost of prosecuting, defending and enforcingpatent claims and other intellectual property rights;

 

·                  the progress, scope and results of our pre-clinicaland clinical testing of any future pharmaceutical products;

 

·                  the time and cost involved in obtaining regulatory approvals;

 

·                  the cost of manufacturing our product candidates;

 

·                  competing technological and market developments; and

 

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·                  our ability to establish and maintain collaborativeand other arrangements with third parties to assist in bringing our products tomarket and the cost of such arrangements.

 

There can be no assurancethat we will not need additional capital sooner than currently anticipated.

 

We will need to raisesubstantial additional capital to fund our future operations. We cannot becertain that additional financing will be available on acceptable terms, or atall. In recent years, it has been difficult for companies to raise capital dueto a variety of factors, which may or may not continue. To the extent we raiseadditional capital through the sale of equity securities, the ownershipposition of our existing stockholders could be substantially diluted. Ifadditional funds are raised through the issuance of preferred stock or debtsecurities, these securities are likely to have rights, preferences andprivileges senior to our common stock. Fluctuating interest rates could alsoincrease the costs of any debt financing we may obtain.

 

Failure to successfullyaddress ongoing liquidity requirements will have a material adverse effect onour business. If we are unable to obtain additional capital on acceptable termswhen needed, we may be required to take actions that harm our business and ourability to achieve cash flow in the future, including possibly the surrender ofour rights to some technologies or product opportunities, delaying our clinicaltrials or curtailing or ceasing operations.

 

***We are an early stage company and currently have no productsavailable for sale, license or use. Our product candidates require additionalresearch, development, testing, expert reviews and/or and regulatory approvalsbefore marketing. We may be unable to develop, obtain regulatory approval ormarket any of our product candidates. If our product candidates are delayed orfail, our financial condition will be negatively affected, and we may have tocurtail or cease our operations.***

 

We are in the early stageof product development and we are dependent on new discoveries. We currently donot sell or license any products to third parties and do not expect to have anyproducts commercially available for several years, if at all. You must evaluateus in light of the uncertainties and complexities affecting an early stagebiotechnology company. Our product candidates require additional research anddevelopment, pre-clinical testing, clinical testing (for our pharmaceuticalproducts) and regulatory review and/or approvals clearances before marketing.There are many reasons that our product candidates may fail or not advance tocommercialization, including the possibility that:

 

·                  our product candidates may be ineffective, unsafe orassociated with unacceptable side effects;

 

·                  our product candidates may fail to receive thenecessary regulatory approvals or otherwise fail to meet applicable regulatorystandards;

 

·                  experts may not agree that our food product candidatesare generally recognized as safe;

 

·                  our product candidates may be too expensive todevelop, manufacture or market;

 

·                  other parties may hold or acquire proprietary rightsthat could prevent us or our potential collaborators from developing ormarketing our product candidates;

 

·                  physicians, patients, third-party payers or themedical community in general may not accept or use our contemplatedpharmaceutical products;

 

·                  our potential collaborators may withdraw support foror otherwise impair the development and commercialization of our productcandidates; or

 

·                  others may develop equivalent or superior products.

 

In addition, we may notsucceed in developing taste enhancers and aversive taste blockers with theappropriate attributes required for use in successful commercial products.Successful taste enhancers and aversive taste blockers require, among otherthings, appropriate biological activity, including the correct taste enhancerand aversive taste blocker properties for the product application, anacceptable safety profile, including lack of toxicity or allergenicity, andappropriate physical or chemical properties, including relative levels ofstability, volatility and resistance to heat. Successful taste enhancers andaversive taste blockers must also be cost-efficient. We may not be able todevelop taste enhancers and aversive taste blockers that meet these criteria.

 

If our product candidatesare delayed or we fail to successfully develop and commercialize our productcandidates, our financial condition may be negatively affected, and we may haveto curtail or cease our operations.

 

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***We may not successfully establish and maintain collaborativeand licensing arrangements, which could adversely affect our ability to developand commercialize our product candidates.***

 

A key element of our foodand beverage strategy is to commercialize our taste enhancers through productdiscovery and development collaborations with major ingredient suppliers and/orend users, such as the Givaudan Agreement and the Coca-Cola Agreement. Ourpharmaceutical strategy includes developing our own taste-improved drugformulations as well as establishing collaborations and licensing agreementswith major pharmaceutical, over-the-counter and generic companies. We may notbe able to maintain or expand these licenses and collaborations or establishadditional licensing and collaboration arrangements necessary to develop andcommercialize our product candidates. Each of our collaboration agreements,such as the Givaudan Agreement and the Coca-Cola Agreement, provide each of ourcollaborators with the ability to terminate its agreement with us prior to theexpiration of the term as set forth in the agreements. Even if we are able tomaintain or establish licensing or collaboration arrangements, thesearrangements may not be on favorable terms and may contain provisions that willrestrict our ability to develop, test and market our product candidates. Theinitial one-year term of the Coca-Cola Agreement is set to expire in December2008 and based open our recent discussions with Coca-Cola, it is unlikely thatwe will reach an agreement with Coca-Cola to extend the one year term. Anyfailure to maintain or establish licensing or collaboration arrangements onfavorable terms could adversely affect our business prospects, financialcondition or ability to develop and commercialize our product candidates.

 

We expect to rely atleast in part on third party collaborators to perform a number of activitiesrelating to the development and commercialization of our product candidates,including the manufacturing of product materials, the design and conduct ofclinical trials for our pharmaceutical formulations, and potentially theobtaining of regulatory approvals and marketing and distribution of anysuccessfully developed products. Our collaborative partners may also have oracquire rights to control aspects of our product development and clinicalprograms. As a result, we may not be able to conduct these programs in themanner or on the time schedule we currently contemplate. In addition, if any ofthese collaborative partners withdraw support for our programs or productcandidates or otherwise impair their development, our business could benegatively affected. To the extent we undertake any of these activitiesinternally, our expenses may increase.

 

In addition, our successdepends on the performance of our collaborators of their responsibilities underthese arrangements. Some potential collaborators may not perform theirobligations in a timely fashion or in a manner satisfactory to us. Because suchagreements may be exclusive, we may not be able to enter into a collaborationagreement with any other company covering the same product field during theapplicable collaborative period. In addition, our collaborators’ competitorsmay not wish to do business with us at all due to our relationship with ourcollaborators. If we are unable to enter into additional product discovery anddevelopment collaborations or maintain our existing arrangements, our abilityto sustain or expand our business will be significantly diminished.

 

***If we or our collaborators are unable to obtain and maintainthe GRAS determination or regulatory approval required before any tasteenhancers or aversive taste blockers can be incorporated into products that aresold, we would be unable to commercialize our taste enhancers and aversivetaste blockers and our business would be adversely affected.***

 

In the United States, thedevelopment, sale and incorporation of our taste enhancers and aversive tasteblockers into products are subject to regulation by the FDA, and in someinstances, other government bodies. Obtaining and maintaining a GRASdetermination or regulatory approval is typically costly and can take manyyears.

 

Depending on the amountor intended use of a particular taste enhancer or aversive taste blocker addedto a product and the number of product categories in which the flavor or flavorenhancer will be incorporated, specific testing, safety assessment protocols,and regulatory processes must be satisfied before we or our collaborators cancommercially market and sell products containing any taste enhancers andaversive taste blockers that we may discover. A key element of our strategy isto develop flavors and flavor enhancers that will be evaluated by the FEMA(Flavor and Extracts Manufacturers Association) GRAS Panel, which we expectwill take 18 to 24 months and which is less expensive than the alternativeof filing a food additive petition with the FDA, which can take eight years ormore. The FEMA GRAS review process may take longer than 24 months and costmore than we currently anticipate if additional safety studies are requested bythe FEMA GRAS Panel or are necessary to explain unexpected safety studyfindings. There is a risk that one or more of our product candidates may notqualify for a FEMA GRAS determination. This may occur for a variety of reasons,including the taste enhancer’s or aversive taste blocker’s intended use, theamount of the taste enhancer or aversive taste blocker intended to be added topackaged foods and beverages, the number of product categories in which thetaste enhancers or aversive taste blockers will be incorporated, whether thetaste enhancer imparts sweetness, the safety profile of the taste enhancers oraversive taste blockers and the FEMA GRAS Panel’s interpretation of the safetydata. Even if we obtain a GRAS 

 

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determination with respect to a taste enhancer or aversive tasteblocker, the FDA has the ability to challenge such determination, which couldmaterially adversely affect our ability to market products on schedule or atall. In the event that a particular taste enhancer or aversive taste blockerdoes not qualify for a FEMA GRAS determination, we may be required to pursue alengthy FDA approval process to reach the U.S. market, or dedicate ourdevelopment efforts to alternative compounds, which would further delaycommercialization. In addition, laws, regulations or FDA practice governing theregulatory approval process, the availability of the GRAS determination processor the manufacture or labeling of such products, may change in a manner thatcould adversely affect our ability to commercialize products on schedule or atall.

 

Sales of our tasteenhancers and aversive taste blockers outside of the United States will besubject to foreign regulatory requirements. In most cases, whether or not aGRAS determination or FDA approval has been obtained, approval of a product bythe comparable regulatory authorities of foreign countries must still beobtained prior to manufacturing or marketing the product in those countries. AGRAS determination or FDA approval in the United States or in any otherjurisdiction does not ensure approval in other jurisdictions because therequirements from jurisdiction to jurisdiction may vary widely. Obtainingforeign approvals could result in significant delays, difficulties and costsfor us and require additional safety studies and additional expenses. If wefail to comply with these regulatory requirements or to obtain and maintainrequired approvals, our ability to generate revenue will be diminished.

 

We and our collaboratorsmay not be successful in overcoming these regulatory hurdles, which couldresult in product launch delays, unanticipated expenses, termination ofcollaborations, and flavors and flavor enhancers not being approved forincorporation into consumer products. These consequences would have a materialadverse effect on our business financial condition and results of operations.

 

***Even if we or our collaborators receive a GRAS determinationor regulatory approval and incorporate our taste enhancers or aversive tasteblockers into products, those products may never be commercially successful.***

 

Even if we discover anddevelop taste enhancers and aversive taste blockers that obtain the necessaryGRAS determination or regulatory approval, our success depends to a significantdegree upon the commercial success of packaged food and beverage products andpharmaceutical products incorporating those taste enhancers or aversive tasteblockers. If these products fail to achieve or subsequently maintain marketacceptance or commercial viability, our business would be significantly harmedbecause our royalty revenue is dependent upon consumer sales of these products.In addition we could be unable to maintain our existing collaborations orattract new product discovery and development collaborators. Many factors mayaffect the market acceptance and commercial success of any potential productsincorporating taste enhancers or aversive taste blockers that we may discover,including:

 

·                  health concerns, whether actual or perceived, orunfavorable publicity regarding our taste enhancers and aversive taste blockersor those of our competitors;

 

·                  the timing of market entry as compared to competitiveproducts;

 

·                  the rate of adoption of products by our collaboratorsand other companies in the flavor industry; and

 

·                  any product labeling that may be required by the FDAor other United States or foreign regulatory agencies for productsincorporating our taste enhancers and aversive taste blockers.

 

***We may experience delays in clinical trials and regulatoryapproval relating to our products that could adversely affect our financialresults and our commercial prospects for our pharmaceutical products.***

 

Our pharmaceuticalstrategy is to incorporate our taste enhancers and aversive taste blockers intoproprietary formulations of medicines that potentially offer improvedacceptability and compliance, thus enhancing efficacy and possibly providingbroader indications or patient populations. In addition to the regulatory orother requirements for our taste enhancers and aversive taste blockers, we willalso require regulatory approvals of our pharmaceutical formulations. In suchcase, we may be required to conduct clinical trials to demonstrate safety andefficacy of the new formulation. For product candidates that advance toclinical testing, we cannot be certain that we or a collaborator willsuccessfully complete the clinical trials necessary to receive regulatoryproduct approvals. This process is lengthy and expensive.

 

We intend to seekapproval for our pharmaceutical formulations through the FDA 505(b)(2) approvalprocess. If we are unable to approve our pharmaceutical formulations throughthe 505(b)(2) process, we may be required to pursue the more expensive andtime consuming 505(b)(1) approval process. Section 505(b) of theFederal Food, Drug, and Cosmetic Act describes two types of NDA applicationsthat an applicant may submit for 

 

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approval of innovator medicines. The first type of NDA, described undersection 505(b)(1), consists of a full report of investigations of safetyand effectiveness conducted by or for the applicant or for which the applicanthas the right of reference for the information. The second type of NDA,described under section 505(b)(2), consists of a full report ofinvestigations of safety and effectiveness where at least some portion of theinformation submitted for approval comes from sources other than studiesperformed or sponsored by the applicant. Drugs that may be approved via the505(b)(2) process include drugs that have the same active ingredients aspreviously approved products, but now are formulated in a different deliverymechanism or other new dosage forms or with different indications. The basisfor the 505(b)(2) application is that there already is a certain amount ofinformation that is known about the active ingredient. As such, repeating allthe clinical studies required for a 505(b)(1) application would besignificantly more expensive and time consuming than the 505(b)(2) process.

 

To obtain regulatoryapprovals, we must, among other requirements, complete clinical trials showingthat our products are safe and effective for a particular indication. Under the505(b)(2) approval process, although we may not have performed some of thestudies ourselves, we must submit clinical and non-clinical data to demonstratethe medication is safe and effective. We also must be able to provide data andinformation, including bioavailability or comparative bioavailability studies,to establish sufficiently the appropriateness of relying on material withoutthe right of reference.

 

We do not know whenclinical trials for our products will commence or whether we will complete anyof our clinical trials on schedule or at all. There can be no assurance thatclinical trials will in fact demonstrate that our products are safe oreffective.

 

Additionally,we may not be able to find acceptable patients or may experience delays inenrolling patients for our clinical trials. The FDA or we may suspend ourclinical trials at any time if either believes that we are exposing thesubjects participating in the trials to unacceptable health risks. The FDA orinstitutional review boards and/or institutional biosafety committees at themedical institutions and healthcare facilities where we seek to sponsorclinical trials may not permit a trial to proceed or may suspend any trialindefinitely if they find deficiencies in the conduct of the trials.

 

Product development coststo us and our potential collaborators will increase if we have delays intesting or approvals or if we need to perform more or larger clinical trialsthan planned. We expect to continue to rely on third party clinicalinvestigators at medical institutions and healthcare facilities to conduct ourclinical trials, and, as a result, we may face additional delaying factorsoutside our control. Significant delays may adversely affect our financialresults and the commercial prospects for our product candidates and delay ourability to become profitable.

 

***If our pharmaceutical product candidates, including anyproduct candidates we may develop under our early stage diabetes program, donot successfully complete the clinical trial process, we will not be able tomarket them. Even successful clinical trials may not result in a marketableproduct and may not be entirely indicative of a product’s safety or efficacy.***

 

Many factors, known andunknown, can adversely affect clinical trials and the ability to evaluate aproduct’s efficacy. During the course of treatment, patients can die or sufferother adverse events for reasons that may or may not be related to the proposedproduct being tested. Even if unrelated to our product, certain events cannevertheless adversely impact our clinical trials. As a result, our ability toultimately develop and market the products and obtain revenues would suffer.

 

Even promising results inpre-clinical studies and initial clinical trials do not ensure successfulresults in later clinical trials, which test broader human use of our products.Many companies in our industry have suffered significant setbacks in advancedclinical trials, despite promising results in earlier trials. Even successfulclinical trials may not result in a marketable product or be indicative of theefficacy or safety of a product. Many factors or variables could affect theresults of clinical trials and cause them to appear more promising than theymay otherwise be. Product candidates that successfully complete clinical trialscould ultimately be found to be unsafe or ineffective.

 

In addition, our abilityto complete clinical trials depends on many factors, including obtainingadequate clinical supplies and having a sufficient rate of patient recruitment.For example, patient recruitment is a function of many factors, including:

 

·                  the size of the patient population;

 

·                  the proximity of patients to clinical sites;

 

·                  the eligibility criteria for the trial;

 

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·                  the perceptions of investigators and patientsregarding safety; and

 

·                  the availability of other treatment options.

 

Even if patients aresuccessfully recruited, we cannot be sure that they will complete the treatmentprocess. Delays in patient enrollment or treatment in clinical trials mayresult in increased costs, program delays or both.

 

With respect to marketsin other countries, we or a partner will also be subject to regulatoryrequirements governing clinical trials in those countries. Even if we completeclinical trials, we may not be able to submit a marketing application. If wesubmit an application, the regulatory authorities may not review or approve itin a timely manner, if at all.

 

***Because we cannot predict whether or when we will obtainregulatory approval to commercialize our pharmaceutical product candidates, wecannot predict the timing of any future revenue from these product candidates.***

 

We cannot commercializeany of our pharmaceutical product candidates to generate revenue until theappropriate regulatory authorities have reviewed and approved the applicationsfor our product candidates. We cannot assure you that the regulatory agencieswill complete their review processes in a timely manner or that we will obtainregulatory approval for any product candidate we or our potential collaboratorsdevelop. Satisfaction of regulatory requirements typically takes many years, isdependent upon the type, complexity and novelty of the product and requires theexpenditure of substantial resources. Regulatory approval processes outside theUnited States include all or many of the risks associated with the FDA approvalprocess and potentially others as well. In addition, we may experience delaysor rejections based upon additional government regulation from futurelegislation or administrative action or changes in FDA policy, or the policiesof other relevant governmental or nongovernmental entities during the period ofproduct development, pre-clinical and clinical trials and FDA regulatoryreview.

 

***We will rely on third parties to manufacture tasteenhancers, aversive taste blockers and pharmaceutical product candidates. Therecan be no guarantee that we can obtain sufficient and acceptable quantities ofour taste enhancers or aversive taste blockers or pharmaceutical productcandidates on acceptable terms, which may delay or impair our ability todevelop, test and market such products.***

 

Our business strategyrelies on third parties to manufacture and produce our taste enhancers andaversive taste blockers and pharmaceutical product candidates in accordancewith good manufacturing practices established by the FDA, or similarregulations in other countries. Our taste enhancers and aversive taste blockersand pharmaceutical product candidates may be in competition with other productsfor access to these facilities and may be subject to delays in manufacture ifthird parties give other products greater priority than our product candidates.These third parties also may not deliver sufficient quantities of our tasteenhancers and aversive taste blockers and pharmaceutical product candidates,manufacture our taste enhancers and aversive taste blockers and pharmaceuticalproduct candidates in accordance with specifications, or comply with applicablegovernment regulations. Additionally, if the manufactured products fail toperform as specified, our business and reputation could be severely impacted.

 

We expect to enter intomanufacturing agreements for the production of product materials. If anymanufacturing agreement is terminated or any third party collaboratorexperiences a significant problem that could result in a delay or interruptionin the supply of product materials to us, there are very few contractmanufacturers who currently have the capability to produce our taste enhancersand aversive taste blockers and pharmaceutical product candidates on acceptableterms, or on a timely and cost-effective basis. There can be no assurance thatmanufacturers on whom we will depend will be able to successfully produce ourtaste enhancers and aversive taste blockers and pharmaceutical productcandidates on acceptable terms, or on a timely or cost-effective basis. Therecan also be no assurance that manufacturers will be able to manufacture ourproducts in accordance with our product specifications, or will meet FDA orother requirements. We must have sufficient and acceptable quantities of ourproduct materials to conduct our clinical trials and to market our productcandidates, if and when such products have been approved by the FDA formarketing. If we are unable to obtain sufficient and acceptable quantities ofour product material, we may be required to delay the clinical testing andmarketing of our products.

 

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***If we do not comply with applicable regulatory requirementsin the manufacture and distribution of our product candidates, we may incurpenalties that may inhibit our ability to commercialize our products andadversely affect our revenue.***

 

Our failure or thefailure of our potential collaborators or third party manufacturers to complywith applicable FDA or other regulatory requirements including manufacturing,quality control, labeling, safety surveillance, promoting and reporting mayresult in criminal prosecution, civil penalties, recall or seizure of ourproducts, total or partial suspension of production or an injunction, as wellas other regulatory action against our product candidates or us. Discovery ofpreviously unknown problems with a product, supplier, manufacturer or facilitymay result in restrictions on the sale of our products, including a withdrawalof such products from the market. The occurrence of any of these events wouldnegatively impact our business and results of operations.

 

***If we are unable to create and maintain sales, marketing anddistribution capabilities or enter into agreements with third parties toperform those functions, we will not be able to commercialize our productcandidates.***

 

We currently have nosales, marketing or distribution capabilities. Therefore, to commercialize ourproduct candidates, if and when such products have been approved and are readyfor marketing, we expect to collaborate with third parties to perform thesefunctions. We have no experience in developing, training or managing a salesforce and will incur substantial additional expenses if we decide to market anyof our future products directly. Developing a marketing and sales force is alsotime consuming and could delay launch of our future products. In addition, wewill compete with many companies that currently have extensive and well-fundedmarketing and sales operations.  Ourmarketing and sales efforts may be unable to compete successfully against thesecompanies.

 

***Many potential competitors, including those who have greaterresources and experience than we do, may develop products or technologies thatmake ours obsolete or noncompetitive.***

 

We believe our tastetechnology approach is applicable to a wide range of food, beverage andpharmaceutical products representing many and diverse competitive companies andapproaches. The life sciences and other technology industries are characterizedby rapid technological change, and the area of sensory or taste research is arapidly evolving field. Our future success will depend on our ability tomaintain a competitive position with respect to technological advances.Technological developments by others may result in our taste enhancers oraversive taste blockers and technologies, as well as our pharmaceuticalformulations, becoming obsolete.

 

We face substantialcompetition from companies pursuing the commercialization of products andservices relevant to taste using various methods for the discovery of tasteenhancers and aversive taste blockers. These competitors include leading flavorcompanies, such as International Flavors & Fragrances Inc.,Givaudan SA, Symrise and Firmenich. Among food manufacturers, at leastNestlé has an active program cloning and expressing receptors for in vitroscreening assays. In addition, Senomyx, Inc. is a public biotechnologycompany taking a biochemical approach to taste modulation, both in foods andpharmaceutical products.  Senomyx isprincipally focused in the area of taste enhancement for food products and useshigh throughput screening technology and synthetic and natural productschemistry to discover novel flavor enhancers, which it licenses to end users inthe food industry. Senomyx was initially focused on sweetness, savory and saltyflavor enhancers, but is now also developing programs to discover bitterblockers for food and pharmaceutical products. Chemcom is another company that is developing a biotechnology approachto finding novel taste enhancers. We currently compete and will continue tocompete in the future with these companies in collaborating with and sellingflavor products and technologies to manufacturers of packaged food and beverageproducts.

 

We also face substantialcompetition from a number of companies in the pharmaceutical formulationsindustry.  Taste masking has a longhistory in the pharmaceutical industry. A traditional method of taste maskingfor pharmaceutical products is to mix the active pharmaceutical ingredient withflavorings and sugar syrup to mask unpleasant taste.  This approach is most commonly used forpediatric liquid formulations as well as many over-the-counter cough-coldremedies. FlavorRx supplies flavors at drug store pharmacies that can becompounded by the pharmacist to make certain liquid formulations morepalatable.  In the pharmaceutical sectorthere are a number of drug delivery companies that have developed proprietarytaste masking technologies that include both traditional and novelpharmaceutical approaches. These competing technologies and companies includebut are not limited to OraSolv® and DuraSolv® from CIMA Labs (a Cephalon company), MicroCaps® and Liquitard® from Eurand, FlavorTechTM,LiquetteTM and MicroMaskTM from KV Pharmaceuticals, EnVel® from Catalent,CEFORM from Biovail and WOWTab® from Astellas. Virtually all of theseapproaches including OralSolv, DuraSolv, MicroCap, Liquitard, CEFORM, EnVel andthe technology used in Zydis products utilize a physical approach to sequesterthe active drug substance away from the taste receptors on the tongue.  These include coating the drug, micro 

 

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encapsulation, immobilization, use of cyclodextran carriers, orstabilization of the drug in a micellar or insoluble phase, as the principlemeans of taste masking.

 

Many of these companieshave substantially greater capital resources, research and developmentresources and experience, manufacturing capabilities, regulatory expertise,sales and marketing resources, established relationships with consumer productscompanies and production facilities.

 

We may in the future facecompetition from life sciences and other technology companies and othercommercial enterprises. These entities engage as we do in biotechnology,biology or chemistry and could apply this technology to the discovery anddevelopment of taste enhancers and aversive taste blockers and new formulationsof pharmaceutical products. We cannot guarantee that products developed as aresult of our competitors’ existing or future collaborations will not competewith our taste enhancers and aversive taste blockers and new pharmaceuticalformulations.

 

Universities and publicand private research institutions are also potential competitors. While theseorganizations primarily have educational objectives, they may developproprietary technologies related to the sense of taste or secure patentprotection that we may need for the development of our technologies andproducts. We may attempt to license these proprietary technologies, but theselicenses may not be available to us on acceptable terms, if at all.

 

Our competitors, eitheralone or with their collaborative partners, may succeed in developingtechnologies or discovering taste enhancers and aversive taste blockers thatare more effective, safer, more affordable or more easily commercialized thanours, and our competitors may obtain intellectual property protection orcommercialize products sooner than we do. Developments by others may render ourproduct candidates or our technologies obsolete.  In addition, our current product discoveryand development collaborators are not prohibited from entering into researchand development collaboration agreements with third parties in any productfield. Our failure to compete effectively would have a significant adverseeffect on our business, financial condition and results of operations.

 

***If we are unable to attract and retain key personnel andadvisors, it may adversely affect our ability to obtain financing, pursuecollaborations or develop our product candidates.***

 

We are highly dependenton F. Raymond Salemme, Ph.D., our Chief Executive Officer and President, aswell as other executive and scientific officers, including Scott Horvitz, ChiefFinancial Officer, Scott Siegel, Ph.D., Vice President, Corporate Developmentand Robert Bryant, Ph.D., Vice President, Discovery Research.

 

Our future successdepends on our ability to attract, retain and motivate highly qualifiedmanagement and scientific, development and commercial personnel andadvisors.  To pursue our businessstrategy, we will need to hire or otherwise engage qualified personnel andmanagers, including personnel with expertise in discovery, development,clinical trials, government regulation, manufacturing, marketing and sales.Competition for qualified personnel is intense among companies, academicinstitutions and other organizations. If we are unable to attract and retainkey personnel and advisors, it may negatively affect our ability tosuccessfully develop, test and commercialize our product candidates.

 

***We use hazardous and biological materials in ourbusiness.  Any claims relating toimproper handling, storage or disposal of these materials could be timeconsuming and costly.***

 

Our products andprocesses will involve the controlled storage, use and disposal of certainhazardous and biological materials and waste products. We and our suppliers andother collaborators are subject to federal, state and local regulationsgoverning the use, manufacture, storage, handling and disposal of materials andwaste products. Even if we and these suppliers and collaborators comply withthe standards prescribed by law and regulation, the risk of accidentalcontamination or injury from hazardous materials cannot be completelyeliminated.  In the event of an accident,we could be held liable for any damages that result, and any liability couldexceed the limits or fall outside the coverage of any insurance we may obtainand exceed our financial resources. We may not be able to maintain insurance onacceptable terms, or at all.  We mayincur significant costs to comply with current or future environmental laws andregulations.

 

***We may be sued for product liability, which could adverselyaffect our business.***

 

Because our businessstrategy involves the development and sale by either us or our collaborators ofcommercial products incorporating our taste enhancers or aversive tasteblockers, we may be sued for product liability. We may be held liable if anyproduct we develop and commercialize, or any product our collaboratorscommercialize that incorporates any of our taste enhancers or aversive tasteblockers, causes injury or is found otherwise unsuitable during producttesting, manufacturing, marketing, sale or consumer use. In addition, thesafety 

 

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studies we must perform and the FEMA GRAS determination we must obtainprior to incorporating our taste enhancers and aversive taste blockers into acommercial product, and the regulatory approvals required to commercialize ourpharmaceutical products, will not protect us from any such liability.

 

If we and ourcollaborators commence sale of commercial products we will need to obtainproduct liability insurance, and this insurance may be prohibitively expensive,or may not fully cover our potential liabilities. Inability to obtainsufficient insurance coverage at an acceptable cost or otherwise to protectagainst potential product liability claims could prevent or inhibit the commercializationof products developed by us or our product discovery and developmentcollaborators. We may be obligated to indemnify our product discovery anddevelopment collaborators for product liability or other losses they incur as aresult of our taste enhancers and aversive taste blockers. Any indemnificationwe receive from such collaborators for product liability that does not arisefrom our taste enhancers or aversive taste blockers may not be sufficient tosatisfy our liability to injured parties. If we are sued for any injury causedby our taste enhancers or aversive taste blockers or products incorporating ourtaste enhancers or aversive taste blockers or any other products we develop,our liability could exceed our total assets.

 

**RisksRelated To Intellectual Property**

 

***If our product candidates are not effectively protected byvalid, issued patents or if we are not otherwise able to protect ourproprietary information and technologies, it could harm our business.***

 

The success of ouroperations will depend in part on our ability and that of our licensors to:

 

·                  obtain patent protection for our taste screeningtechnology and our taste enhancers and aversive taste blockers both in theUnited States and in other countries with substantial markets;

 

·                  obtain patent protection for our pharmaceuticalformulations including those created using our taste enhancers as well as ourdiabetes and obesity therapeutic compounds;

 

·                  defend patents once obtained;

 

·                  maintain trade secrets and operate without infringingupon the patents and proprietary rights of others; and

 

·                  obtain appropriate licenses upon reasonable terms topatents or proprietary rights held by others that are necessary or useful to usin commercializing our technology, both in the United States and in othercountries with substantial markets.

 

In the event we are notable to protect our intellectual property and proprietary information, ourbusiness will be materially harmed.

 

***We may not have adequate protection for our unpatentedproprietary information, which could adversely affect our competitive position.***

 

In addition to patents,we will substantially rely on trade secrets, know-how, continuing technologicalinnovations and licensing opportunities to develop and maintain our competitiveposition. However, others may independently develop substantially equivalentproprietary information and techniques or otherwise gain access to our tradesecrets or disclose our technology. To protect our trade secrets, we may enterinto confidentiality agreements with employees, consultants and potentialcollaborators. However, these agreements may not provide meaningful protectionof our trade secrets or adequate remedies in the event of unauthorized use ordisclosure of such information. Likewise, our trade secrets or know-how maybecome known through other means or be independently discovered by ourcompetitors. Any of these events could hinder us from developing orcommercializing our product candidates.

 

***Our ability to compete in the ingredient, food and beveragemarket and the pharmaceutical market may decline if we do not adequatelyprotect our proprietary technologies.***

 

Because of thesubstantial length of time and expense associated with the development of newproducts, we, along with the rest of the ingredient, food and beverage industryand pharmaceutical industry, place considerable importance on obtaining andmaintaining patent protection for new technologies, products and processes. Oursuccess depends in part on our ability to obtain and maintain intellectualproperty that protects our technologies, taste enhancers or aversive tasteblockers and our pharmaceutical products. Patent positions may be highlyuncertain and may involve complex legal and factual questions, including theability to establish patentability of sequences relating to taste receptors,proteins, chemical synthesis techniques, compounds and methods for using themto modulate taste for which we seek patent protection. No consistent standardregarding the allowance or 

 

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enforceability of claims in many of our pending patent applications hasemerged to date. As a result, we cannot predict the breadth of claims that willultimately be allowed in our patent applications, if any, including those wehave in-licensed or the extent to which we may enforce these claims against ourcompetitors. The degree of future protection for our proprietary rights istherefore highly uncertain and we cannot assure you that:

 

·                  we, or our Licensors, were the first to file patentapplications or to invent the subject matter claimed in patent applicationsrelating to the technologies upon which we rely;

 

·                  others will not independently develop similar oralternative technologies or duplicate any of our technologies;

 

·                  others did not publicly disclose our claimedtechnology before we conceived the subject matter included in any of our patentapplications;

 

·                  any of our patent applications will result in issuedpatents;

 

·                  any of our patent applications will not result ininterferences or disputes with third parties regarding priority of invention;

 

·                  any patents that may be issued to us, ourcollaborators or our licensors will provide a basis for commercially viableproducts or will provide us with any competitive advantages or will not bechallenged by third parties;

 

·                  we will develop additional proprietary technologiesthat are patentable;

 

·                  the patents of others will not have an adverse effecton our ability to do business; or

 

·                  new proprietary technologies from third parties,including existing licensors, will be available for licensing to us onreasonable commercial terms, if at all.

 

In addition, patent lawoutside the United States is uncertain and in many countries intellectualproperty laws are undergoing review and revision. The laws of some countries donot protect intellectual property rights to the same extent as domestic laws.It may be necessary or useful for us to participate in opposition proceedingsto determine the validity of our competitors’ patents or to defend the validityof any of our or our licensor’s future patents, which could result insubstantial costs and would divert our efforts and attention from other aspectsof our business.

 

Technologies licensed tous by others, or in-licensed technologies, are important to our business. Inparticular, we depend on certain technologies relating to taste biologylicensed from the Mount Sinai School of Medicine. In addition, we may in thefuture acquire rights to additional technologies by licensing such rights fromexisting licensors or from third parties. Such in-licenses may be costly. Also,we generally do not control the patent prosecution, maintenance or enforcementof in-licensed technologies. Accordingly, we are unable to exercise the samedegree of control over this intellectual property as we do over our internallydeveloped technologies. Moreover, some of our academic institution licensors,collaborators and scientific advisors have rights to publish data andinformation to which we have rights. If we cannot maintain the confidentialityof our technologies and other confidential information in connection with ourcollaborations, our ability to protect our proprietary information or obtainpatent protection in the future may be impaired, which could have a significantadverse effect on our business, financial condition and results of operations.

 

***Many of the patent applications we and our licensors havefiled have not yet been substantively examined and may not result in patentsbeing issued.***

 

Many of the patentapplications filed by us and our licensors were filed recently with the UnitedStates Patent and Trademark Office and most have not been substantivelyexamined and may not result in patents being issued. It is difficult to predictwhether any of our or our licensors’ applications will ultimately be found tobe patentable or, if so, to predict the scope of any allowed claims. Inaddition, the disclosure in our or our licensors’ patent applications, particularlyin respect of the utility of our claimed inventions, may not be sufficient tomeet the statutory requirements for patentability in all cases. As a result, itis difficult to predict whether any of our or our licensors’ applications willbe allowed, or, if so, to predict the scope of any allowed claims or theenforceability of the patents. Even if enforceable, others may be able todesign around any patents or develop similar technologies that are not withinthe scope of such patents. Our and our licensors’ patent applications may notissue as patents that will provide us with any protection or competitiveadvantage.

 

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***Disputes concerning the infringement or misappropriation ofour proprietary rights or the proprietary rights of others could be timeconsuming and extremely costly and could delay our research and developmentefforts.***

 

Our commercial success,if any, will be significantly harmed if we infringe the patent rights of thirdparties or if we breach any license or other agreements that we have enteredinto with regard to our technology or business.

 

We are aware of othercompanies and academic institutions that have been performing research in theareas of taste modulation and taste enhancers and aversive taste blockers. Inparticular, other companies and academic institutions have announced that theyhave conducted taste-receptor research and have published data on tastereceptor sequence information and taste receptors or filed patent applicationsor obtained patent protection on taste modulation or taste receptors and theiruses. To the extent any of these companies or academic institutions currentlyhave, or obtain in the future, broad patent claims, such patents could blockour ability to use various aspects of our discovery and development process andmight prevent us from developing or commercializing newly discovered tasteenhancers and aversive taste blockers or otherwise conducting our business. Inaddition, it is possible that some of the taste enhancers or aversive tasteblockers that are discovered using our technology may not be patentable or maybe covered by intellectual property of third parties.

 

With respect tothird-party patent rights in the area of the TRPM5 receptor specifically, weare aware of pending U.S. and foreign patent applications by competitors andothers that have claims directed to the TRPM5 receptor and/or methods of usingthe TRPM5 receptor to identify novel taste modulating compounds. Although thesepatent applications are currently undergoing examination by the U.S. Patent andTrademark Office, and it is possible that they will not be granted or will notbe granted with the current claims, it is also possible that patents will begranted on these applications with claims that are relevant to our current orfuture commercialization plans. To the extent we determine that we need alicense to these or other patents relating to the TRPM5 receptor and are unableto obtain such licenses on commercially reasonable terms or at all, we may berestricted in our ability to commercialize our own TRPM5 technologies.

 

We are not currently aparty to any litigation, interference, opposition, protest, reexamination orany other potentially adverse governmental, ex parte or inter-party proceedingwith regard to our patent or trademark positions. However, the life sciencesand other technology industries are characterized by extensive litigationregarding patents and other intellectual property rights. Many life sciencesand other technology companies have employed intellectual property litigationas a way to gain a competitive advantage. If we become involved in litigation,interference proceedings, oppositions, reexaminations, protests or otherpotentially adverse intellectual property proceedings as a result of allegedinfringement by us of the rights of others or as a result of priority ofinvention disputes with third parties, we might have to spend significantamounts of money, time and effort defending our position and we may not besuccessful. In addition, any claims relating to the infringement of third-partyproprietary rights or proprietary determinations, even if not meritorious,could result in costly litigation, lengthy governmental proceedings, divertmanagement’s attention and resources, or require us to enter into royalty orlicense agreements that are not advantageous to us.

 

Should any person havefiled patent applications or obtained patents in the United States that claiminventions also claimed by us, we may have to participate in an interferenceproceeding declared by the relevant patent regulatory agency to determinepriority of invention and, thus, the right to a patent for these inventions inthe United States. Such a proceeding could result in substantial cost to useven if the outcome is favorable. Even if successful on priority grounds, aninterference action may result in loss of claims based on patentability groundsraised in the interference action. Litigation, interference proceedings orother proceedings could divert management’s time and efforts. Even unsuccessfulclaims could result in significant legal fees and other expenses, diversion ofmanagement’s time and disruption in our business. Uncertainties resulting frominitiation and continuation of any patent proceeding or related litigationcould harm our ability to compete and could have a significant adverse effecton our business, financial condition and results of operations.

 

An adverse ruling arisingout of any intellectual property dispute, including an adverse decision as tothe priority of our inventions, could undercut or invalidate our intellectualproperty position. An adverse ruling could also subject us to significantliability for damages, including possible treble damages, prevent us from usingtechnologies or developing products, or require us to negotiate licenses todisputed rights from third parties. Although patent and intellectual propertydisputes in the technology area are often settled through licensing or similararrangements, costs associated with these arrangements may be substantial andcould include license fees and ongoing royalties. Furthermore, necessarylicenses may not be available to us on satisfactory terms, if at all. 

 

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Failure to obtain a license in such a case could have a significantadverse effect on our business, financial condition and results of operations.

 

**RisksRelated to Our Fluctuating Operating Results, Possible Acquisitions andManagement of Growth**

 

***We expect that our results of operations will fluctuate fromperiod to period, and this fluctuation could cause our stock price to decline,causing investor losses.***

 

Our operating resultshave fluctuated in the past and are likely to vary significantly in the futurebased upon a number of factors, many of which we have little or no controlover. We operate in a highly dynamic industry and future results could besubject to significant fluctuations. These fluctuations could cause us to failto meet or exceed financial expectations of securities analysts or investors,which could cause our stock price to decline rapidly and significantly. Revenueand expenses in future periods may be greater or less than revenue and expensesin the immediately preceding period or in the comparable period of the prioryear. Therefore, period-to-period comparisons of our operating results are notnecessarily a good indication of our future performance. Some of the factorsthat could cause our operating results to fluctuate include:

 

·                  our ability to discover and develop taste enhancersand aversive taste blockers;

 

·                  our ability or the ability of our product discoveryand development collaborators to incorporate our taste enhancers and aversivetaste blockers into packaged food and beverage products and pharmaceuticalproducts;

 

·                  our receipt of milestone payments in any particularperiod;

 

·                  the ability and willingness of collaborators tocommercialize products incorporating our taste enhancers and aversive tasteblockers on expected timelines, or at all;

 

·                  our ability to enter into product discovery anddevelopment collaborations and technology collaborations, or to extend theterms of any existing collaboration agreements, and our payment obligations,expected revenue and other terms of any other agreements of this type;

 

·                  our ability, or our collaborators’ ability, tosuccessfully satisfy all pertinent regulatory requirements;

 

·                  the demand for our future products and ourcollaborators’ products containing our taste enhancers or aversive tasteblockers; and

 

·                  general and industry specific economic conditions,which may affect our collaborators’ research and development expenditures.

 

***If we acquire products, technologies or other businesses, wewill incur a variety of costs, may have integration difficulties and mayexperience numerous other risks that could adversely affect our business.***

 

To remain competitive, wemay decide to acquire additional businesses, products and technologies. Wecurrently have no commitments or agreements with respect to, and are notactively seeking, any material acquisitions. We have limited experience inidentifying acquisition targets, successfully acquiring them and integratingthem into our current infrastructure. We may not be able to successfullyintegrate any businesses, products, technologies or personnel that we mightacquire in the future without a significant expenditure of operating, financialand management resources, if at all. In addition, future acquisitions couldrequire significant capital infusions and could involve many risks, including,but not limited to, the following:

 

·                  we may have to issue convertible debt or equitysecurities to complete an acquisition, which would dilute our stockholders andcould adversely affect the market price of our common stock;

 

·                  an acquisition may negatively impact our results ofoperations because it may require us to incur large one-time charges toearnings, amortize or write down amounts related to goodwill and otherintangible assets, or incur or assume substantial debt or liabilities, or itmay cause adverse tax consequences, substantial depreciation or deferredcompensation charges;

 

·                  we may encounter difficulties in assimilating andintegrating the business, technologies, products, personnel or operations ofcompanies that we acquire;

 

·                  certain acquisitions may disrupt our relationship withexisting collaborators who are competitive to the acquired business;

 

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·                  acquisitions may require significant capital infusionsand the acquired businesses, products or technologies may not generatesufficient revenue to offset acquisition costs;

 

·                  an acquisition may disrupt our ongoing business,divert resources, increase our expenses and distract our management;

 

·                  acquisitions may involve the entry into a geographicor business market in which we have little or no prior experience; and

 

·                  key personnel of an acquired company may decide not towork for us.

 

Any of the foregoingrisks could have a significant adverse effect on our business, financial conditionand results of operations.

 

***To the extent we enter markets outside of the United States,our business will be subject to political, economic, legal and social risks inthose markets, which could adversely affect our business.***

 

There are significant regulatoryand legal barriers in markets outside the United States that we must overcometo the extent we enter or attempt to enter markets in countries other than theUnited States. We will be subject to the burden of complying with a widevariety of national and local laws, including multiple and possibly overlappingand conflicting laws. We also may experience difficulties adapting to newcultures, business customs and legal systems. Any sales and operations outsidethe United States would be subject to political, economic and socialuncertainties including, among others:

 

·                  changes and limits in import and export controls;

 

·                  increases in custom duties and tariffs;

 

·                  changes in currency exchange rates;

 

·                  economic and political instability;

 

·                  changes in government regulations and laws;

 

·                  absence in some jurisdictions of effective laws toprotect our intellectual property rights; and

 

·                  currency transfer and other restrictions andregulations that may limit our ability to sell certain products or repatriateprofits to the United States.

 

Any changes related tothese and other factors could adversely affect our business to the extent weenter markets outside the United States.

 

***We may encounter difficulties managing our growth, whichcould adversely affect our business.***

 

Our strategy includesentering into and working on simultaneous taste enhancer and aversive tasteblocker discovery and development programs across multiple markets that includeboth the food and beverage industry and the pharmaceutical industry. We expectto continue to grow to meet our strategic objectives. If our growth continues,it will continue to place a strain on us, our management and our resources. Ourability to effectively manage our operations, growth and various projectsrequires us to continue to improve our operational, financial and managementcontrols, reporting systems and procedures and to attract and retain sufficientnumbers of talented employees. We may not be able to successfully implementthese tasks on a larger scale and, accordingly, we may not achieve ourresearch, development and commercialization goals. If we fail to improve ouroperational, financial and management information systems, or fail toeffectively monitor or manage our new and future employees or our growth, ourbusiness would suffer significantly. In addition, no assurance can be made thatwe will be able to secure adequate facilities to house our staff, conduct ourresearch or achieve our business objectives.

 

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***An economic downturn and adverse economic conditions mayharm our business.***

 

The recent economicdownturn and adverse conditions in the national and global markets maynegatively affect our operations in the future. Our revenues are contingentupon the expenditures of the pharmaceutical, biotech, and food and beverage industries,and as these industries cut costs in response to the economic downturn, ourrevenues will be similarly decreased.  Furthermore, while our revenues maydecrease, our costs may remain fixed, resulting in decreased earnings.

 

**RisksRelated to our Common Stock; Liquidity Risks**

 

***The sale of a significant number of our shares of commonstock in the public market could depress the market price of common stock.***

 

The sale of a significantnumber of shares of our common stock in the public market could harm the marketprice of our common stock. As additional shares of common stock have becomeavailable for resale in the public market pursuant to the registrationstatement and releases of lock-up agreements, the market supply of shares ofcommon stock has increased, which could decrease its market price. The numberof shares that may be sold into the marketplace pursuant to the registrationstatement is significant. We believe that such sales may severely depress themarket price of our common stock. In addition, some or all of the shares ofcommon stock may be offered from time to time in the open market pursuant to Rule 144(or pursuant to an additional registration statement, if one is effective), andthese sales may also have a depressive effect on the market for the shares ofcommon stock. In general, a person who is deemed to be an affiliate who hasheld shares for a period of six months may, upon filing of a notification on Form 144with the SEC, sell into the market common stock in an amount up to the greaterof 1% of the outstanding shares or the average weekly number of shares sold inthe last four weeks before such sale. Such sales may be repeated once eachthree months. A non-affiliate holding restricted shares may sell such shareswithout restrictions after they have been held six months, subject only to thecurrent public information requirement. After an additional six months havelapsed, a non-affiliate may sell such shares without any restrictions.

 

***The price of our common stock is expected to be volatile.***

 

The market price of ourcommon stock, and the market prices for securities of biotechnology companiesin general, are expected to be highly volatile. The following factors, inaddition to other risk factors described in this Quarterly Report on Form 10-Q,and the potentially low volume of trades in our common stock, may have asignificant impact on the market price of our common stock, some of which arebeyond our control:

 

·                  announcements of technological innovations anddiscoveries by the Company or its competitors;

 

·                  developments concerning any research and development,clinical trials, manufacturing, and marketing collaborations;

 

·                  new products or services that the Company or itscompetitors offer;

 

·                  actual or anticipated variations in operating results;

 

·                  the initiation, conduct and/or outcome of intellectualproperty and/or litigation matters;

 

·                  changes in financial estimates by securities analysts;

 

·                  conditions or trends in bio-pharmaceutical or otherhealthcare industries;

 

·                  regulatory developments in the United States and othercountries;

 

·                  changes in the economic performance and/or marketvaluations of other biotechnology and flavor companies;

 

·                  the Company’s announcement of significantacquisitions, strategic partnerships, joint ventures or capital commitments;

 

·                  additions or departures of key personnel;

 

·                  global unrest, terrorist activities, and economic andother external factors; and

 

·                  sales or other transactions involving common stock.

 

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The stock market ingeneral has recently experienced relatively large price and volumefluctuations. In particular, market prices of securities of biotechnologycompanies have experienced fluctuations that often have been unrelated ordisproportionate to the operating results of these companies. Continued marketfluctuations could result in extreme volatility in the price of our commonstock, which could cause a decline in the value of our common stock. Investorsshould also be aware that price volatility may be worse if the trading volumeof our common stock is low.

 

***We do not expect to pay cash dividends in the foreseeablefuture.***

 

We currently intend toretain any future earnings to finance the growth and development of ourbusiness; therefore, we do not expect to pay any cash dividends in theforeseeable future. Any future dividends will depend on our earnings, if any,and our financial requirements.

 

***Because Redpoint became a public company as a result of theReverse Merger and Reincorporation Merger and not through a traditionalunderwritten initial public offering of securities, the Company may not attractthe attention of major brokerage firms. Additionally, as a public company, weincur substantial expenses.***

 

As a result of theReverse Merger and Reincorporation Merger, Redpoint became a publicly-tradedcompany and, accordingly, will be subject to the information and reportingrequirements of the United States securities laws. The costs to publiccompanies of preparing and filing annual and quarterly reports, proxystatements and other information with the SEC and furnishing audited reports tostockholders have caused the Company’s expenses to be higher than they would beif it were a privately-held company. In addition, the Company will incursubstantial expenses in connection with the preparation of the registrationstatement and related documents with respect to the registration of the commonstock issued in the Private Placement and the Reverse Merger. Security analystsof major brokerage firms may not provide coverage of the Company. No assurancecan be given that brokerage firms will want to conduct any secondary offeringson behalf of the Company in the future.

 

***We have discretion on how we use any proceeds we receivefrom the exercise of warrants and options.***

 

Our management has broaddiscretion on how to use and spend any proceeds we receive as a result of oursecurity holders exercising their warrants and options. Our stockholders maynot agree with our decision on how to use such proceeds. If we fail to spendthe proceeds effectively, our business and financial condition could be harmedand we may need to seek additional financing sooner than expected.

 

***It is not anticipated that there will be an active publicmarket for shares of our common stock in the near term and stockholders mayhave to hold their shares of common stock for an indefinite period of time.Stockholders may be unable to resell a large number of their shares of commonstock within a short time frame or at or above their purchase price.***

 

To have purchased sharesof our common stock and warrants to purchase common stock in the PrivatePlacement, an investor must have represented that it was acquiring such sharesand warrants for investment and not with a view to distribution or resale, thatthe investor understood that neither the common stock nor the warrants arereadily transferable and, in any event, that it must bear the economic risk ofan investment in the common stock for an indefinite period of time.

 

***If we do not comply with registration rights granted tocertain holders of our restricted securities, we may be required to pay damagesto such holders.***

 

We filed a “resale”registration statement with the SEC covering all shares of common stock issuedin connection with the Private Placement, including shares of common stock intowhich any warrants are exercisable, within 60 days after the final closingof the Private Placement. Such registration statement has been declaredeffective by the SEC. We will use our best efforts to have such “resale”registration statement maintain its effectiveness until such time as allsecurities registered under the registration statement have been sold or areotherwise able to be sold under Rule 144 of the Securities Act withoutregard to volume limitations, whichever is earlier. We cannot assure you thatwe will be able to obtain or maintain such effective registration statement.

 

***Our common stock may be considered “a penny stock” and maybe difficult to sell.***

 

The SEC has adoptedregulations that generally define “penny stock” to be an equity security thathas a market or exercise price of less than $5 per share, subject to specificexemptions. Initially, the market price of our common stock is likely to beless than $5 per share and therefore may be designated a “penny stock” underSEC rules. This designation requires any broker or dealer selling our commonstock to disclose certain information about the transaction, obtain a writtenagreement from the investor and determine that the investment in our common stock

 

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by the investor is a reasonably suitable investment for such investor.These rules may restrict the ability of brokers or dealers to sell ourcommon stock and, as a result, may affect the ability of investors to selltheir shares. In addition, unless and until our common stock is listed fortrading on the American Stock Exchange or NASDAQ Capital Market or similarmarket, investors may experience a lack of buyers to purchase such stock or alack of market makers to support the stock price. Resale restrictions ontransferring “penny stocks” are sometimes imposed by some states, which maymake transactions in our stock more difficult and may reduce the value of yourinvestment.

 

***Substantial future issuances of our common stock coulddepress our stock price.***

 

The market price for ourcommon stock could decline, perhaps significantly, as a result of issuances ofa large number of shares of our common stock in the public market or even theperception that such issuances could occur. Under our Registration RightsAgreement, certain holders of our outstanding shares of our common stock andother securities have demand and Form S-3 registration rights. Sales of asubstantial number of these shares of common stock, or the perception thatholders of a large number of shares intend to sell their shares, could depressthe market price of our common stock. The existence of such registration rightscould also make it more difficult for us to raise funds through futureofferings of our equity securities.

 

***Our stockholders may experience additional dilution upon theexercise of warrants or options.***

 

As of the final closingof the Private Placement, we issued warrants to investors to acquireapproximately 10.2 million shares of common stock and warrants to theplacement agents to acquire approximately 3.6 million shares of commonstock in the Private Placement. In addition, there are 17.2 million sharesof common stock underlying options that have been or may be granted pursuant tothe Redpoint Bio Corporation 2007 Omnibus Equity Compensation Plan. If thesewarrants are exercised or converted, or if the options are exercised, you mayexperience dilution in the net tangible book value of our common stock.

 

***Directors and officers of the Company have a highconcentration of our common stock ownership.***

 

Based on the aggregatenumber of shares of our common stock that are outstanding as of September 30,2008, our officers and directors beneficially own approximately 17.7% of ouroutstanding common stock. Such a high level of ownership by such persons mayhave a significant effect in delaying, deferring or preventing any potentialchange in control of the Company. Additionally, as a result of their high levelof ownership, our officers and directors might be able to strongly influencethe actions of the Company’s board of directors, and the outcome of actionsbrought to our stockholders for approval. Such a high level of ownership mayadversely affect the voting and other rights of our stockholders.

 

**ITEM 2.****                                                    ****UNREGISTERED SALES OF EQUITYSECURITIES AND USE OF PROCEEDS**

 

None.

 

**ITEM 3.****                                                    ****DEFAULTS UPON SENIORSECURITIES**

 

Not applicable.

 

**ITEM 6.****                                                    ****EXHIBITS**

 
| **Exhibit No****.** | ** ** | ** **                                                                                                                                             |
|--------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **               | ** ** | ** **                                                                                                                                             |
| 10.1                     |       | Loan and Security Agreement, dated  September 25, 2008, by and between Redpoint Bio Corporation and CIT  Healthcare LLC (filed herewith).         |
|                     |       |                                                                                                                                                   |
| 31.1                     |       | Certification of principal executive officer  pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 (filed  herewith).                |
|                     |       |                                                                                                                                                   |
| 31.2                     |       | Certification of principal accounting and  financial officer pursuant to Section 302(a) of the Sarbanes-Oxley  Act of 2002 (filed herewith). |
|                     |       |                                                                                                                                                   |
| 32.1                     |       | Certification of principal executive officer  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished  herewith).                    |
|                     |       |                                                                                                                                                   |
| 32.2                     |       | Certification of principal accounting and  financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of  2002 (furnished herewith).     |

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
|             | REDPOINT BIO CORPORATION                         |
|------------------|--------------------------------------------------|
|             |                                             |   |
| November 7, 2008 | By:                                              | /s/ F. Raymond Salemme |
|             | F. Raymond Salemme                               |
|             | President and Chief Executive Officer            |
|             | (Principal Executive Officer)                    |
|             |                                             |   |
| November 7, 2008 | By:                                              | /s/ Scott M. Horvitz |
|             | Scott M. Horvitz                                 |
|             | Chief Financial Officer, Treasurer and Secretary |
|             | (Principal Financial and Accounting Officer)     |

 

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**EXHIBIT INDEX**

 
| **Exhibit No.** | ** ** | ** **                                                                                                                                             |
|----------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                   |
| 10.1                 |       | Loan and Security Agreement, dated  September 25, 2008, by and between Redpoint Bio Corporation and CIT  Healthcare LLC (filed herewith).         |
|                 |       |                                                                                                                                                   |
| 31.1                 |       | Certification of principal executive officer  pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 (filed  herewith).                |
|                 |       |                                                                                                                                                   |
| 31.2                 |       | Certification of principal accounting and  financial officer pursuant to Section 302(a) of the Sarbanes-Oxley  Act of 2002 (filed herewith). |
|                 |       |                                                                                                                                                   |
| 32.1                 |       | Certification of principal executive officer  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished  herewith).                    |
|                 |       |                                                                                                                                                   |
| 32.2                 |       | Certification of principal accounting and  financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of  2002 (furnished herewith).     |

 

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