Table of Contents

 

 

 

**United States**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**(MarkOne)**

 

**x****     QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

 

**For the quarterly period endedJune 30, 2009**

 

**Or**

 

**o****      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THESECURITIES 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 itscharter)

 

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

 

**7 Graphics Drive, Ewing, New Jersey08628**

(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) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.   Yes x  No o

 

Indicate by check mark whether the registranthas submitted electronically and posted on its corporate Web site, if any,every Interactive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (orfor such shorter period that the registrant was required to submit and postsuch files).   Yes o  No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seedefinitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

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

 

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

 

The number of shares of the registrant’s common stock outstanding as ofAugust 12, 2009 was 79,772,621.

 

 

 

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**REDPOINT BIO CORPORATION**

 

**TABLE OF CONTENTS**

 
| ** **        | ** **                                                                                  | **Page** |
|-------------------|---------------------------------------------------------------------------------------------|----------|
| **PART I:**  | **FINANCIAL INFORMATION**                                                                   | 1        |
|              |                                                                                        |     |
| ITEM 1.           | FINANCIAL STATEMENTS (unaudited):                                                           | 1        |
|              |                                                                                        |     |
|              | Balance Sheets                                                                              | 1        |
|              |                                                                                        |     |
|              | Statements of Operations                                                                    | 2        |
|              |                                                                                        |     |
|              | Statements of Cash Flows                                                                    | 3        |
|              |                                                                                        |     |
|              | Notes to Financial  Statements                                                              | 4        |
|              |                                                                                        |     |
| ITEM 2.           | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 13       |
|              |                                                                                        |     |
| ITEM 3.           | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                 | 18       |
|              |                                                                                        |     |
| ITEM 4T.          | CONTROLS AND  PROCEDURES                                                                    | 18       |
|              |                                                                                        |     |
| **PART II:** | **OTHER INFORMATION**                                                                       | 18       |
|              |                                                                                        |     |
| ITEM 1.           | LEGAL PROCEEDINGS                                                                           | 18       |
|              |                                                                                        |     |
| ITEM 1A.          | RISK FACTORS                                                                                | 19       |
|              |                                                                                        |     |
| ITEM 2.           | UNREGISTERED  SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                | 33       |
|              |                                                                                        |     |
| ITEM 3.           | DEFAULTS  UPON SENIOR SECURITIES                                                            | 33       |
|              |                                                                                        |     |
| ITEM 4.           | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS                                        | 33       |
|              |                                                                                        |     |
| ITEM 6.           | EXHIBITS                                                                                    | 34       |
|              |                                                                                        |     |
| SIGNATURES        |                                                                                        |     |

 

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**PART I. FINANCIAL INFORMATION.**

 

**ITEM1.  FINANCIAL STATEMENTS.**

 

**REDPOINT BIO CORPORATION(A DEVELOPMENT-STAGE ENTERPRISE)**

**BALANCESHEETS**

**(UNAUDITED)**

 
| ** **                                                                                                                                                                                               | ** ** | **December 31,** | ** ** | **June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                                                                                                                                                                                               | ** ** | **2008**              | ** ** | **2009**          | ** ** |
| **Assets**                                                                                                                                                                                               |       |                  |       |              |       |
| Current assets:                                                                                                                                                                                          |       |                  |       |              |       |
| Cash and cash equivalents                                                                                                                                                                                |       | $                     | 3,130,561  |              | $          | 6,267,681 |   |
| Marketable securities                                                                                                                                                                                    |       | 11,296,952            |       | 3,762,090         |       |
| Accounts receivable                                                                                                                                                                                      |       | 139,095               |       | —            |       |
| Prepaid expenses and other current assets                                                                                                                                                                |       | 313,456               |       | 219,167           |       |
| Total current assets                                                                                                                                                                                     |       | 14,880,064            |       | 10,248,938        |       |
| Property and equipment, net                                                                                                                                                                              |       | 1,240,514             |       | 961,070           |       |
| Other assets                                                                                                                                                                                             |       | 321,978               |       | 327,335           |       |
| Total assets                                                                                                                                                                                             |       | $                     | 16,442,556 |              | $          | 11,537,343 |   |
| **Liabilities and  Stockholders’ Equity**                                                                                                                                                           |       |                  |       |              |       |
| Current liabilities:                                                                                                                                                                                     |       |                  |       |              |       |
| Current portion of long-term debt                                                                                                                                                                        |       | $                     | 519,155    |              | $          | 422,512 |   |
| Accounts payable                                                                                                                                                                                         |       | 877,642               |       | 735,636           |       |
| Accrued expenses                                                                                                                                                                                         |       | 305,580               |       | 329,062           |       |
| Accrued compensation                                                                                                                                                                                     |       | 15,610                |       | 417,359           |       |
| Deferred revenue                                                                                                                                                                                         |       | 371,320               |       | —            |       |
| Total current liabilities                                                                                                                                                                                |       | 2,089,307             |       | 1,904,569         |       |
| Long-term debt                                                                                                                                                                                           |       | 1,147,952             |       | 966,541           |       |
| Deferred revenue                                                                                                                                                                                         |       | 278,582               |       | —            |       |
| Total liabilities                                                                                                                                                                                        |       | 3,515,841             |       | 2,871,110         |       |
| Commitments (Note 9)                                                                                                                                                                                     |       |                  |       |              |       |
| 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 79,495,870 shares at  December 31, 2008 and issued and outstanding 79,495,870 shares at  June 30, 2009 |       | 7,950                 |       | 7,950             |       |
| Additional paid-in-capital                                                                                                                                                                               |       | 55,371,501            |       | 55,754,076        |       |
| Deficit accumulated during development stage                                                                                                                                                             |       | (42,517,290           | )          | (47,098,416       | )          |
| Accumulated other comprehensive income                                                                                                                                                                   |       | 64,554                |       | 2,623             |       |
| Total stockholders’ equity                                                                                                                                                                          |       | 12,926,715            |       | 8,666,233         |       |
| Total liabilities and stockholders’ equity                                                                                                                                                          |       | $                     | 16,442,556 |              | $          | 11,537,343 |   |

 

Seeaccompanying notes to the unaudited financial statements.

 

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**REDPOINT BIO CORPORATION(A DEVELOPMENT-STAGE ENTERPRISE)**

**STATEMENTSOF OPERATIONS**

**(UNAUDITED**)

 
| ** **                                  | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** | **August 16,  1995 (Inception) to** | ** ** |
|---------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                  | ** ** | **2008**                                            | ** ** | **2009**                                          | ** ** | **2008**                                           | ** ** | **2009** | ** ** | **June 30, 2009** | ** ** |
| Research and grant revenue                  |       | $                                                   | 1,031,305  |                                              | $          | 809,687                                            |       | $ | 1,939,910 |   | $ | 1,868,428 |   | $ | 12,330,002 |   |
| Operating expenses:                         |       |                                                |       |                                              |       |                                               |       |   |   |   |   |
| Research and development                    |       | 2,172,853                                           |       | 1,485,586                                         |       | 4,158,566                                          |       | 3,407,077 |   | 31,844,804 |   |
| General and administrative                  |       | 1,587,710                                           |       | 1,366,857                                         |       | 3,219,913                                          |       | 3,026,122 |   | 23,228,033 |   |
| Total operating expenses                    |       | 3,760,563                                           |       | 2,852,443                                         |       | 7,378,479                                          |       | 6,433,199 |   | 55,072,837 |   |
| Operating loss                              |       | (2,729,258                                          | )          | (2,042,756                                        | )          | (5,438,569                                         | )          | (4,564,771 | ) | (42,742,835 | ) |
| Interest income                             |       | 147,395                                             |       | 46,531                                            |       | 380,120                                            |       | 102,192 |   | 1,620,770 |   |
| Interest expense                            |       | (12,437                                             | )          | (66,498                                           | )          | (27,720                                            | )          | (118,547 | ) | (3,549,440 | ) |
| Loss before income taxes                    |       | (2,594,300                                          | )          | (2,062,723                                        | )          | (5,086,169                                         | )          | (4,581,126 | ) | (44,671,505 | ) |
| Income tax benefit                          |       | —                                              |       | —                                            |       | —                                             |       | — |   | 985,978 |   |
| Net loss                                    |       | (2,594,300                                          | )          | (2,062,723                                        | )          | (5,086,169                                         | )          | (4,581,126 | ) | $ | (43,685,527 | ) |
| Basic and diluted net loss per common share |       | $                                                   | (0.03      | )                                                 | $          | (0.03                                              | )          | $ | (0.06 | ) | $ | (0.06 | ) |   |   |
| Weighted average of shares outstanding      |       | 79,462,299                                          |       | 79,495,870                                        |       | 79,390,799                                         |       | 79,495,870 |   |   |   |

 

Seeaccompanying notes to the unaudited financial statements.

 

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**REDPOINT BIO CORPORATION**

**(A DEVELOPMENT-STAGE ENTERPRISE)**

**STATEMENTSOF CASH FLOWS**

**(UNAUDITED)**

 
| ** **                                                                   | ** ** | **Six Months Ended June 30,** | ** ** | **August 16, 1995  (Inception) to** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2008**                                          | ** ** | **2009**                                           | ** ** | **June 30, 2009** | ** ** |
| Cash flows from operating activities:                                        |       |                                              |       |                                               |       |   |   |
| Net loss                                                                     |       | $                                                 | (5,086,169 | )                                                  | $          | (4,581,126 | ) | $ | (43,685,527 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities: |       |                                              |       |                                               |       |   |   |
| Depreciation                                                                 |       | 323,205                                           |       | 285,296                                            |       | 2,419,132 |   |
| Amortization of discounts and premiums on  marketable securities             |       | (214,995                                          | )          | 1,979                                              |       | (483,121 | ) |
| Options, warrants and stock issued for services  and dilution provisions     |       | 426,641                                           |       | 382,575                                            |       | 3,843,859 |   |
| Beneficial conversion feature                                                |       | —                                            |       | —                                             |       | 1,228,565 |   |
| Amortization of discount on convertible notes                                |       | —                                            |       | —                                             |       | 899,935 |   |
| Amortization of deferred financing costs                                     |       | 15,038                                            |       | 8,893                                              |       | 153,667 |   |
| Debt inducement charge                                                       |       | —                                            |       | —                                             |       | 361,598 |   |
| Interest expense on convertible notes                                        |       | —                                            |       | —                                             |       | 136,075 |   |
| Changes in assets and liabilities:                                           |       |                                              |       |                                               |       |   |   |
| Accounts receivable                                                          |       | (66,836                                           | )          | 139,095                                            |       | — |   |
| Prepaid expenses and other assets                                            |       | 92,120                                            |       | 80,039                                             |       | (811,473 | ) |
| Accounts payable                                                             |       | (35,194                                           | )          | (142,006                                           | )          | 1,036,005 |   |
| Accrued expenses and accrued compensation                                    |       | (241,094                                          | )          | 425,231                                            |       | 878,031 |   |
| Deferred revenue                                                             |       | 447,888                                           |       | (649,902                                           | )          | — |   |
| Net cash used in operating activities                                        |       | (4,339,396                                        | )          | (4,049,926                                         | )          | (34,023,254 | ) |
| Cash flows from investing activities:                                        |       |                                              |       |                                               |       |   |   |
| Maturity and sale of marketable securities                                   |       | 14,496,994                                        |       | 10,490,000                                         |       | 43,236,994 |   |
| Purchases of marketable securities                                           |       | (9,864,006                                        | )          | (3,019,048                                         | )          | (46,513,341 | ) |
| Purchases of property and equipment                                          |       | (450,701                                          | )          | (5,852                                             | )          | (3,372,132 | ) |
| Net cash provided by (used in) investing  activities                         |       | 4,182,287                                         |       | 7,465,100                                          |       | (6,648,479 | ) |
| Cash flows from financing activities:                                        |       |                                              |       |                                               |       |   |   |
| Proceeds from issuance of long-term debt                                     |       | —                                            |       | —                                             |       | 3,614,710 |   |
| Net proceeds from convertible notes                                          |       | —                                            |       | —                                             |       | 5,253,811 |   |
| Repayment of debt                                                            |       | (249,369                                          | )          | (278,054                                           | )          | (2,278,114 | ) |
| Net proceeds from issuance of preferred stock                                |       | —                                            |       | —                                             |       | 11,883,447 |   |
| Net proceeds from issuance of common stock and  warrants                     |       | —                                            |       | —                                             |       | 28,624,603 |   |
| Proceeds from exercise of common stock options and  warrants                 |       | 40,782                                            |       | —                                             |       | 124,078 |   |
| Common stock reacquired                                                      |       | —                                            |       | —                                             |       | (283,121 | ) |
| Net cash provided by (used in) financing  activities                         |       | (208,587                                          | )          | (278,054                                           | )          | 46,939,414 |   |
| Net increase (decrease) in cash and cash  equivalents                        |       | (365,696                                          | )          | 3,137,120                                          |       | 6,267,681 |   |
| Cash and cash equivalents, beginning of period                               |       | 5,789,997                                         |       | 3,130,561                                          |       | — |   |
| Cash and cash equivalents, end of period                                     |       | $                                                 | 5,424,301  |                                               | $          | 6,267,681 |   | $ | 6,267,681 |   |
| Supplemental cash flow disclosures:                                          |       |                                              |       |                                               |       |   |   |
| Noncash investing and financing activities:                                  |       |                                              |       |                                               |       |   |   |
| Property and equipment included in accounts  payable                         |       | $                                                 | 7,537      |                                               | $          | — |   | $ | — |   |
| 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 |   |
| Conversion of preferred and junior preferred stock  to common stock          |       | —                                            |       | —                                             |       | 16,940,297 |   |
| Accretion of preferred stock                                                 |       | —                                            |       | —                                             |       | 3,248,857 |   |
| Warrants issued in connection with notes payable                             |       | —                                            |       | —                                             |       | 1,258,642 |   |
| Cash paid for interest                                                       |       | 26,001                                            |       | 91,104                                             |       | 591,231 |   |

 

Seeaccompanying notes to the unaudited financial statements.

 

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**REDPOINT BIO CORPORATION**

**(A DEVELOPMENT-STAGE ENTERPRISE)**

**NOTES TOFINANCIAL STATEMENTS**

**(UNAUDITED)**

 

**1.****                         ****Description of theBusiness, Basis of Presentation, and Liquidity**

 

*Description*

 

RedpointBio Corporation (“Redpoint” or the “Company”) is leveraging recent discoveriesin the molecular biology of taste to discover and develop novel tastemodulators for the food and beverage industries.  Redpoint’s food and beverage program isfocused on identifying novel flavor modifiers that improve the taste ofexisting ingredients, enabling the development of better-tasting, less costly,and more healthful foods and beverages. The Company’s unique understanding ofthe biology of taste and its relationship to metabolic processes, satiety, anddiabetes impact both the development of healthier foods and, potentially, newapproaches to the treatment of diabetes and obesity.  Redpoint’s research in diabetes and obesitystems from the observation that taste signaling in the gastrointestinal tractis involved in important hormone secretion processes enabling the Company toleverage its research on lingual taste modulation to important therapeuticapplications.

 

*Basis of Presentation*

 

The accompanyingunaudited financial statements of the Company have been prepared in accordancewith generally accepted accounting principles for interim financial informationand pursuant to the rules and regulations of the Securities and ExchangeCommission, referred to herein as the SEC. Accordingly, they do not include allof the information and footnotes required by generally accepted accountingprinciples for complete financial statements.

 

In the opinion ofmanagement, all adjustments (consisting of normal recurring adjustments)considered necessary for a fair presentation have been included (See Note 2 fordiscussion of the impact of the Reverse Merger (as defined below)). Operating results for the three and six months ended June 30, 2009 are notnecessarily indicative of the results that may be expected for the year ending December 31,2009.

 

For furtherinformation, refer to the 2008 financial statements and footnotes thereto ofRedpoint included in the Company’s financial statements included in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2008.

 

*Liquidity*

 

Our continuedresearch and development efforts have led us to certain advances within ourtaste technology platform, including our recent announcement concerning the identificationof RP44, an all-natural sweetness enhancer, and we are beginning to understandhow our technology platform plays a role in treating metabolic disorders suchas diabetes and obesity.  However, since December 2007,we have not entered into any new funded corporate collaborations other than anexpanded feasibility agreement with Schering Corporation, a subsidiary ofSchering-Plough Corporation, in the area of taste science research forpharmaceutical applications.  However, weare currently not pursuing our research program in this area.  Redpoint was also unable to renew its oneyear research agreement with The Coca-Cola Company and our agreement withGivaudan was terminated on May 1, 2009 (see note 7).  Givaudan cited the fact that certain collaborationobjectives had not been achieved during the collaboration as its reasoning forterminating the Agreement.  Furthermore,we recognize the current difficult financing environment that has significantlyimpacted the biotechnology sector and required the Company to seek ways toconserve cash. Consequently, in February 2009, we announced arestructuring which reduced our workforce by approximately 33%.  In May 2009, we further reduced ourworkforce to bring our number of employees to 14, and we may need to makefurther reductions in our expenses.  Weare currently not pursuing our research program aimed at suppressing thebitterness of oral medicines. In addition, in November 2008, the Companyretained Burrill & Company to advise us on strategic alternatives. Webelieve that our current capital resources should be sufficient to meet ouroperating and capital requirements at least through September 2010.

 

We expect thatsubstantially all of our cash-inflows for the foreseeable future will come fromfuture corporate collaborations, future license agreements and interest earnedon marketable securities.  There can beno assurance that we will enter into any future corporate collaborations orfuture license agreements.  We aresubject to those risks associated with any biotechnology company that hassubstantial expenditures for research and development. There can be noassurance that our research and development projects will be successful, thatproducts developed will obtain necessary regulatory approval, or that anyapproved product will be commercially viable. In addition, we operate in anenvironment of rapid technological change and we are largely dependent on theservices of our employees and consultants. The stock market in general hasrecently experienced large price and volume fluctuations and the market 

 

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price of our common stockhas experienced significant volatility.  For us to fund our operations andto commercially develop our products, additional equity and/or debt financingwill be required. There is no assurance that such financing will be availableto us as needed and as a result, we may need to pursue other strategicalternatives.

 

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

 

*Completion of Merger*

 

Robcor Properties, Inc.,a Florida corporation (“Robcor”), and its newly-formed subsidiary, RobcorAcquisition Corp., a Delaware corporation (“Merger Sub”) entered into anAgreement and Plan of Merger (the “Merger Agreement”), dated as of March 12,2007, by and among, Redpoint, formerly a privately-held Delaware corporation,on the one hand, and Robcor, Merger Sub, Robcor LLC, a Kentucky limitedliability company and wholly-owned subsidiary of Robcor (“Robcor LLC”) andHalter Financial Investments, L.P., a Texas limited partnership (“Halter”), andMichael Heitz (“Heitz”), as stockholders of Robcor, on the other hand. Pursuant to the Merger Agreement, Merger Sub, which Robcor had incorporated inthe state of Delaware for the purpose of completing the transaction, mergedinto Redpoint (the “Reverse Merger”) on March 12, 2007 (the “Closing” orthe “Closing Date”) with Redpoint continuing as the surviving entity in theReverse Merger.  As a result of the Reverse Merger, Redpoint became awholly-owned subsidiary of Robcor.  In connection with the Reverse Merger,each share of capital stock of Redpoint was converted into 2.7820 shares ofcommon stock of Robcor and all of Redpoint’s convertible promissory notes wereconverted into shares of common stock of Robcor.

 

Redpoint wasdeemed to have been the accounting acquirer in the Reverse Merger. Accordingly, the financial statements of the Company presented reflect thehistorical results of Redpoint prior to the Reverse Merger, and of the combinedentities 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 1,391,000 shares ofcommon stock to Robcor shareholders which have been treated as issuance costsin connection with Private Placement.

 

*Private Placement*

 

Concurrently withthe completion of the Reverse Merger, Robcor received $17.2 million in netproceeds from the initial closing of a private placement of approximately 24.7million shares of common stock at a price of $0.81 per share, and warrants topurchase approximately 6.2 million shares of Robcor common stock at an exerciseprice of $1.35 per share (the “Private Placement”).  The initialclosing of the Private Placement occurred on March 12, 2007, concurrentlywith the completion of the Reverse Merger.

 

In connection withthe Private Placement, Redpoint engaged two placement agents which were issuedfive-year warrants to buy approximately 2.0 million shares of Robcor commonstock equal to 10% of the number of shares of common stock sold in the PrivatePlacement at an exercise price of $0.97 per share; provided, however, nowarrants were issued to the placement agents with respect to shares andwarrants sold to existing Redpoint stockholders.

 

On April 6,2007, Robcor sold an additional 16.1 million shares of common stock andwarrants to purchase 4.0 million shares of common stock which resulted innet proceeds of approximately $11.4 million.  In connection with the April closing,warrants to purchase an additional 1.6 million shares of common stock wereissued to the placement agents.

 

*Reincorporation Merger*

 

On June 15,2007, Robcor was merged with and into Redpoint, its wholly-owned subsidiary,with Redpoint being the surviving corporation pursuant to the Agreement andPlan of Merger dated May 3, 2007.  As a result of the merger, theCompany’s state of incorporation changed from Florida to Delaware.

 

In connection withthe reincorporation merger, the authorized number of shares of common stock wasdecreased from 1,000,000,000 shares of common stock, no par value per share, to150,000,000 shares of common stock, $0.0001 par value per share, and theauthorized number of shares of preferred stock was decreased from 20,000,000shares of preferred stock, no par value per share, to 10,000,000 shares ofpreferred stock, $0.0001 par value per share.  The Company’s share dataand capital stock have been retrospectively adjusted for all periods presentedto reflect the reincorporation merger.

 

In addition, themaximum number of shares of common stock reserved for issuance under theCompany’s 2007 Omnibus Equity Compensation Plan was increased from 13,511,562to 17,644,267 shares.

 

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**3.****                         ****Summary of SignificantAccounting Policies**

 

***(a)*****        *****Use of Estimates***

 

The preparation offinancial statements in conformity with U.S. generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period. Actual resultscould differ from such estimates. Illiquid credit markets, volatile equity, and declines in consumerspending have combined to increase the uncertainty inherent in such estimatesand assumptions.  As future events andtheir effects cannot be determined with precision, actual results could differsignificantly from these estimates. Changes in those estimates resulting from continuing changes in theeconomic environment will be reflected in the financial statements in thosefuture periods.

 

***(b)*****        *****Cash and CashEquivalents***

 

The Companyconsiders all highly liquid investments that have maturities of three months orless when acquired to be cash equivalents. As of June 30, 2009, cash and cash equivalents include amountsinvested in money markets.

 

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

 

Marketablesecurities include investments in debt securities having original maturities ofgreater 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. The Company’s marketable securities are reported at fair value on thebalance sheet based on quoted prices in active markets for identical assets.

 

***(d)*****        *****Concentrations ofCredit Risk***

 

Financialinstruments that potentially subject the Company to concentrations of creditrisk consist of cash equivalents and marketable securities. The Company hasestablished guidelines relating to diversification and maturities that allowsthe Company to manage risk.

 

***(e)*****         *****Revenue Recognition***

 

Revenue fromcorporate collaborations and licensing agreements consists of up-front fees,research and development funding, and milestone payments.

 

*License Fees and Multiple Element Arrangements*

 

Non-refundableupfront fees are recognized as revenue when (i) we have a contractualright to receive such payment, (ii) the contract price is fixed ordeterminable, (iii) the collection of the resulting receivable isreasonably assured, and (iv) we have no further performance obligationsunder the license agreement.

 

Multiple elementarrangements are analyzed to determine whether the deliverables, which ofteninclude license and performance obligations, such as research and developmentservices, can be separated or whether they must be accounted for as a singleunit of accounting in accordance with Emerging Issues Task Force (EITF) Issue No. 00-21,*Accounting for Revenue Arrangements withMultiple Deliverables*. If the fair value of the undeliveredperformance obligations can be determined, such obligations would then beaccounted for separately as performed. However, if the elements are consideredto either (i) not have stand-alone value, or (ii) have standalonevalue but the fair value of any of the undelivered performance obligationscannot be determined, the arrangement would then be accounted for as a singleunit of accounting and all of the payments recognized as revenue over theestimated period of when the performance obligations are performed. Whenever we determine that an arrangement should be accounted for as a singleunit of accounting, we must determine the period over which the performanceobligations will be performed and revenue will be recognized. Significantmanagement judgment is required in determining the period over which we areexpected to complete our performance obligations under an arrangement.

 

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*Substantive Milestone Payments*

 

Our collaboration agreements may also containsubstantive milestone payments that are recognized upon achievement of themilestone only if all of the following conditions are met:

 

·                  the milestone payments are non-refundable;

 

·                  achievement of the milestone involves a degree of riskand was not reasonably assured at the inception of the arrangement;

 

·                  substantive effort is involved in achieving themilestone;

 

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

 

·                  the amount of the milestone payment is reasonable inrelation to the effort expended or the risk associated with achievement ofthe milestone.

 

Determination asto whether a payment meets the aforementioned conditions involves management’sjudgment. If any of these conditions are not met, the resulting payment wouldnot be considered a substantive milestone, and therefore the resulting paymentwould be considered part of the consideration for the single unit of accountingand be recognized as revenue as such performance obligations are performed.

 

*Reimbursement of Research and Development Costs*

 

Reimbursement ofresearch and development costs is recognized as revenue, provided theprovisions of EITF Issue No. 99-19, *ReportingRevenue Gross as a Principal Versus Net as an Agent*, are met, theamounts are fixed and determinable, and collection of the related receivable isreasonably assured.

 

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

 

Property andequipment are recorded at cost and depreciated on a straight-line basis overtheir estimated useful lives. The Company uses a life of four to five years forlaboratory equipment, three to seven years for office equipment and furniture,and the lesser of the useful life or the remaining life of the underlyingfacility lease for leasehold improvements. Expenditures for repairs andmaintenance are charged to expense as incurred, while major renewals andbetterments are capitalized. Upon disposition of assets, the cost and relatedaccumulated depreciation are removed from the accounts and any resulting gainor loss is included in the Statements of Operations.

 

***(g)*****        *****Research andDevelopment***

 

Research anddevelopment costs, including those incurred in relation to the Company’scollaborative agreements, are charged to expense as incurred. These expensesinclude internal research and development as well as amounts paid to thirdparties to conduct research on the Company’s behalf. Costs incurred inobtaining technology licenses are charged immediately to research anddevelopment expense if the technology licensed has not reached technologicalfeasibility and has no alternative future uses.

 

***(h)*****        *****Impairment ofLong-Lived Assets***

 

In accordance withStatement 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 in circumstancesindicate that the carrying amount of an asset may not be recoverable.Recoverability of assets to be held and used is measured by a comparison of thecarrying amount of an asset to the estimated undiscounted future cash flowsexpected to be generated by the asset. If the carrying amount of an assetexceeds its estimated future cash flows, then an impairment charge isrecognized in the amount by which the carrying amount of the asset exceeds thefair value of the asset.  The Company has not recorded any impairmentcharges pursuant to SFAS No. 144.

 

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

 

Income taxes areaccounted for under the asset-and-liability method. Deferred tax assets andliabilities are recognized for the future tax consequences attributable todifferences between the financial statement carrying amounts of existing assetsand liabilities 

 

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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) usingthe prospective method of adoption. Under SFAS 123R, the Companyrecognizes compensation cost for awards to employees and nonemployee boardmembers based on the grant-date fair value of stock-based awards over theperiod during which an award holder is required to provide service in exchangefor the award. No compensation cost is recognized for awards for which theaward holder does not render the requisite service.

 

The fair value ofstock options is determined using the Black Scholes option-pricing model and isrecognized as expense over the requisite service period using the straight-linemethod.

 

To satisfy theexercise of options, the Company plans to issue new shares rather than purchaseshares on the open market.

 

***(k)*****        *****Net Loss per CommonShare***

 

Basic net loss percommon 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. Stock options and warrants to purchase an aggregate of 24,013,373 and24,787,307, common shares were excluded from our computation of diluted netloss per common share for the three and six months ended June 30, 2009 and2008, respectively.  In all periodspresented, our diluted net loss per common share is equal to basic net loss percommon share because giving effect in the computation of diluted net loss percommon share to the exercise of outstanding options and warrants would havebeen antidilutive.

 

***(l)*****           *****FairValue of 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 31,2008 and June 30, 2009, the carrying values of cash and cash equivalents,accounts receivable, prepaid expenses and other current assets, accountspayable, accrued expenses, and accrued compensation equaled or approximatedtheir respective fair values because of the short duration of theseinstruments. In addition, we believe the carrying value of our debtinstruments, which do not have readily ascertainable market values, approximatetheir fair values, given that the interest rates on outstanding borrowingsapproximate market rates.

 

***(m)*****     *****Recent AccountingPronouncements***

 

In September 2006, the Financial Accounting Standard Board (“FASB”)issued SFAS No. 157,*Fair Value Measurements* (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuringfair value and expands disclosures on fair value measurements.  We adoptedSFAS No. 157 on January 1, 2008, as required for our financial assetsand financial liabilities.  However, theFASB deferred the effective date of SFAS No. 157 for one year as itrelates to fair value measurement requirements for nonfinancial assets andnonfinancial liabilities that are not recognized or disclosed at fair value ona recurring basis.  We adopted these remainingprovisions of SFAS No. 157 on January 1, 2009.  The adoption of SFAS No. 157 did nothave a material impact on our financial statements.

 

In May 2009,the FASB issued SFAS No. 165, “*SubsequentEvents*” (“SFAS No. 165”).  SFAS No. 165 establishesgeneral standards of accounting for and disclosure of events that occur afterthe balance sheet date but beforethefinancial statements are issued or are available to beissued.  In particular, SFAS No. 165 establishes thatcompanies must evaluate subsequent eventsthrough the date the financial statements are issued, the circumstances underwhich a subsequent event should be recognized, and the circumstances for whicha subsequent event should be disclosed. It also requirescompanies to disclose the date throughwhich subsequent events are evaluated. The adoption of SFASNo. 165 did not have a material impacton our interim financialstatements.  We evaluated subsequent events through August 13, 2009.

 

In June 2009,the FASB issued SFAS No. 168, “*The FASBAccounting Standards Codification and the Hierarchy of Generally AcceptedAccounting Principles*” (“SFAS No. 168”). SFAS No. 168 willbe effective for the Company beginning July 1, 

 

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2009.  The FinancialAccounting Standards Board Accounting Standards Codification (the “Codification”)will officially become the single source of authoritative nongovernmental GAAP,superseding existing FASB, American Institute of Certified Public Accountants (“AICPA”),Emerging Issues Task Force (“EITF”), and related accounting literature. Afterthat date, only one level of authoritative GAAP will exist. All otheraccounting literature will be considered non-authoritative. The Codificationreorganizes the thousands of GAAP pronouncements into roughly 90 accountingtopics and displays them using a consistent structure. Also included in theCodification is relevant SEC guidance organized using the same topicalstructure in separate sections within the Codification. This will have animpact on the disclosures included in our financial statements.

 

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

 

We apply SFAS No. 130, *Reporting Comprehensive Income.*  This statementrequires the classification of items of other comprehensive income (loss) by their nature anddisclosure of the accumulated balance of other comprehensive income (loss)separately from accumulated deficit and additional paid-in capital in thestockholders’ equity section of our balance sheet.  Other comprehensiveincome (loss) consisted of unrealized gains and losses on marketable securitiesfor the three and six months ended June 30, 2009.  For the three andsix months ended June 30, 2008 and 2009, comprehensive loss was:

 
| ** **                        | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                        | ** ** | **2008**                                            | ** ** | **2009**                                          | ** ** | **2008** | ** ** | **2009** | ** ** |
| Net Loss                          |       | $                                                   | (2,594,300 | )                                                 | $          | (2,062,723 | ) | $ | (5,086,169 | ) | $ | (4,581,126 | ) |
| Other comprehensive income (loss) |       | (87,143                                             | )          | (16,574                                           | )          | (21,867 | ) | (61,931 | ) |
| Comprehensive income (loss)       |       | $                                                   | (2,681,443 | )                                                 | $          | (2,079,297 | ) | $ | (5,108,036 | ) | $ | (4,643,057 | ) |

 

**4.****                         ****Debt** — **Master SecurityAgreements**

 

In February 2005,the Company entered into a Master Security Agreement with a finance companythat provided for borrowings up to $3,200,000, subject to certain conditions, throughDecember 2005. During 2005, the Company borrowed $2,001,810 under theMaster Security Agreement in order to finance the purchase of laboratory andoffice equipment. Amounts borrowed are evidenced with promissory notes and arerepayable in equal monthly payments, over 36 to 48 months, and arecollateralized by the purchased equipment. The notes bear interest at ratesvarying between 9.4% and 10.4%.  As of December 31,2008 and June 30, 2009, $187,577 and $70,311, respectively, wasoutstanding under the Master Security Agreement.

 

In connection withthe borrowings under the Master Security Agreement, the Company issued thefinance company warrants to purchase 53,039 shares of the Company’s commonstock at an exercise price of $0.75 per share. The estimated fair value of thewarrants of $30,074, determined using the Black-Scholes option-pricing model,was accounted for as deferred financing costs and is being amortized tointerest expense over the remaining term of the notes.

 

In September 2008, the Company entered into aLoan and Security Agreement with another finance company that provided forborrowings of up to $2,000,000 to be used for the purchase of certain equipmentand for working capital purposes.  During2008, the Company borrowed $1,556,357 under the Loan and SecurityAgreement.  As of December 31, 2008and June 30, 2009, $1,479,530 and $1,318,742, respectively, wasoutstanding under the Loan and Security Agreement. Amounts borrowed areevidenced with a promissory note, are repayable in equal monthly payments over48 months, and are collateralized by the purchased equipment.  The note bears interest of 12.1%.  TheLoan and Security Agreement contains certain provisions, including a materialadverse change clause (as defined in the Loan and Security Agreement) whichrestricts the Company’s abilityto borrow additional money and also enables the finance company to request fullrepayment of the loan if such a change has occurred.  As of June 30, 2009, the Company was incompliance with these provisions.

 

Thescheduled maturities of long-term debt outstanding at June 30, 2009 are asfollows:

 

| 2009                 |   | 241,100   |          |
|----------------------|--------|-----------|---------------|
| 2010                 |   | 374,111   |          |
| 2011                 |   | 422,100   |          |
| 2012                 |   | 351,742   |          |
|                 |   | 1,389,053 |          |
| Less current portion |   | (422,512  | )             |
|                 |   | $         |  966,541 |   |
|                      |        |           |               |  |

 

Interest expenseon notes payable for the three months ended June 30, 2008 and 2009 was$10,557 and $43,224, respectively. Interest expense on notes payable for the six months ended June 30,2008 and 2009 was $23,960 and $90,574, respectively.

 

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

 

The following is a summary of available-for-salesecurities:

 
| ** **                             | ** ** | ** **              | ** ** | **Gross Unrealized** | ** ** | ** ** | ** ** |
|----------------------------------------|------------|-------------------------|------------|---------------------------|------------|------------|------------|
| **As of December 31,  2008** | ** ** | **Amortized Cost** | ** ** | **Gains**                 | ** ** | **Losses** | ** ** | **Fair Value** | ** ** |
| Corporate commercial paper             |       | $                       | 4,125,301  |                      | $          | 24,185     |       | $ | — |   | $ | 4,149,486 |   |
| Government-sponsored enterprise debt   |       | 6,597,497               |       | 40,440                    |       | —     |       | 6,637,937 |   |
| United States treasury notes           |       | 509,600                 |       | —                    |       | (71        | )          | 509,529 |   |
|                                   |       |                    |       |                      |       |       |       |   |   |
| Total                                  |       | $                       | 11,232,398 |                      | $          | 64,625     |       | $ | (71 | ) | $ | 11,296,952 |   |

 
| ** **                              | ** ** | ** **              | ** ** | **Gross Unrealized** | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|-------------------------|------------|---------------------------|------------|------------|------------|
| **As of June 30,  2009** | ** ** | **Amortized Cost** | ** ** | **Gains**                 | ** ** | **Losses** | ** ** | **Fair Value** | ** ** |
| Corporate debt securities               |       | $                       | 749,058    |                      | $          | 807        |       | $ | — |   | $ | 749,865 |   |
| Government-sponsored enterprise debt    |       | 3,010,409               |       | 1,816                     |       | —     |       | 3,012,225 |   |
|                                    |       |                    |       |                      |       |       |       |   |   |
| Total                                   |       | $                       | 3,759,467  |                      | $          | 2,623      |       | $ | — |   | $ | 3,762,090 |   |

 

As of June 30,2009, all available-for-sale securities mature within one year. During thethree and six months ended June 30, 2008, amortization of discounts andpremiums related to marketable securities resulted in income of $102,382 and$214,995, respectively.  During the threeand six months ended June 30, 2009, amortization of discounts and premiumsrelated to marketable securities resulted in expense of $19,081 and $1,979,respectively.

 

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

 

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

 

The Company wasparty to a number of agreements that provided for dilution protection tocertain investors.  In connection with the Reverse Merger and closing ofthe Private Placement, the Company issued approximately 2.0 million shares ofcommon stock to a founder and shareholder of the Company as a result of suchanti-dilution protection.  During 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.  As of June 30, 2009, noneof the Company’s existing agreements contain dilution protection provisions.

 

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

 

As of June 30, 2009, the Company had thefollowing warrants to purchase Common Stock outstanding:

 
| **Number of shares** | ** ** | **Exercise price** | ** ** | **Expiration** | ** **                  |
|--------------------------------|------------|-------------------------|------------|----------------|-----------------------------|
|                           |       |                    |       |           |                        |
| 53,039                         |       | $                       | 0.75       |           | February-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 Incentive Plan, as amended (the “2003 Plan”),that authorized the Company to grant up to 6,523,790 shares of Common Stock toeligible employees, directors, and consultants to the Company in the form ofrestricted stock and stock options. The amount and terms of grants weredetermined by the board of directors. The term of the options could have beenup to 10 years, and options were exercisable in cash or as otherwisedetermined by the board of directors. Generally, options vested 25% upon thefirst anniversary of the date of grant and ratably each month thereafterthrough the fourth anniversary of the date of grant.

 

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On March 12,2007, the Company adopted the Redpoint Bio Corporation 2007 Omnibus EquityCompensation Plan (“2007 Plan”), which provided for the issuance of up to 13,511,562shares of common stock, subject to adjustment in certain circumstances. Inconnection with the adoption of the 2007 Plan, the 2003 Plan merged with andinto the 2007 Plan and no additional grants were to be made thereafter underthe 2003 Plan.  Outstanding grants under the 2003 Plan continued in effectin accordance with their terms as in effect before March 12, 2007 and theshares with respect to outstanding grants under the 2003 Plan have been or willbe issued or transferred under the 2007 Plan.  The 2007 Plan is now theCompany’s only plan in effect.

 

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

 

The following is a summary of stock option activityunder the Plan during the six months ended June 30, 2009:

 
| ** **                            | ** ** | ** **         | ** ** | ** **              | ** ** | **Weighted-**   | ** ** | ** **    | ** ** |
|---------------------------------------|------------|--------------------|------------|-------------------------|------------|-----------------|------------|---------------|------------|
| ** **                            | ** ** | ** **         | ** ** | **Weighted-**           | ** ** | **average**     | ** ** | ** **    | ** ** |
| ** **                            | ** ** | **Number of** | ** ** | **average**             | ** ** | **contractual** | ** ** | **Intrinsic** | ** ** |
| ** **                            | ** ** | **shares**         | ** ** | **exercise price** | ** ** | **term**        | ** ** | **Value**     | ** ** |
| Outstanding at December 31, 2008 |       | 11,022,016         |       | $                       | 0.52       |            |       |          |       |   |
| Granted                               |       | 1,055,000          |       | 0.07                    |       |            |       |          |       |
| Exercised                             |       | —             |       | —                  |       |            |       |          |       |
| Forfeited/Cancelled                   |       | (1,888,934         | )          | 0.53                    |       |            |       |          |       |
| Outstanding at June 30, 2009     |       | 10,188,082         |       | $                       | 0.47       |            | 6.29       |          | $          | 50,312 |   |
|                                       |            |                    |            |                         |            |                 |            |               |            |  |  |

 

During the sixmonths ended June 30, 2009, the Company granted options to employees topurchase an aggregate of 930,000 shares of common stock and options todirectors to purchase an aggregate of 125,000 shares of common stock.

 

All optionsgranted to date have exercise prices equal to the fair value of the underlyingcommon stock on the date of grant. Prior to the effectiveness of theregistration statement on Form S-1, which occurred on July 20, 2007,all options were granted with an exercise price equal to the estimated fairvalue of the underlying common stock as determined by the board of directors.Subsequent to that date, all options have been granted with an exercise priceequal to the most recent trading price of the Company’s common stock on thedate of grant. As of June 30, 2009, there were 6,732,190 shares of commonstock available for grant under the 2007 Plan.

 

The per-shareweighted average fair value of options granted during the six months ended June 30,2008 and 2009 was estimated at $0.42 and $0.04, respectively, on the date ofgrant using the Black-Scholes option-pricing model.

 

The Companyrecognized $231,492 and $154,641 of compensation expense pursuant to SFAS 123Rfor the three months ended June 30, 2008 and 2009, respectively.  The Company recognized $426,641 and $382,575of compensation expense pursuant to SFAS 123R for the six months ended June 30,2008 and 2009, respectively. As of June 30, 2009, there was approximately$1.1 million of unrecognized compensation expense related to unvestedstock options granted to employees and directors, which is expected to berecognized over a weighted average period of 1.9 years.

 

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

 

On June 5,2007, the Company filed a “resale” registration statement with the SEC coveringall shares of common stock issued in the Private Placement and in connectionwith the Reverse Merger, including shares of common stock into which certainwarrants are exercisable.  Such registration statement was declared effectiveon July 20, 2007.  The Company will use its best efforts to maintainits effectiveness until such time as all securities registered under theregistration statement have been sold or are otherwise able to be sold under Rule 144of the Securities Act without regard to volume limitations, whichever isearlier.

 

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

 

*Givaudan*.     In March 2007,the Company entered into a Joint Research and Development and License Agreement(the “Givaudan Agreement”) with Givaudan Schweiz AG, a Swiss company (“Givaudan”)for the development and commercialization of compounds that enhance sweetnessor savory sensation, as well as compounds that block or desensitize bittertaste for use in the food and beverage industry.  In consideration of the Company’s agreementto conduct research and develop compounds and grant exclusive licenses andother rights to Givaudan, Redpoint received an upfront payment of $1,300,000and Givaudan provided research funding to the Company over the term of theAgreement.  Givaudan terminated theAgreement, effective as of May 1, 2009, and Givaudan reserved its rightsunder the Agreement with respect to certain collaboration compounds.  The upfront payment of $1,300,000 was beingrecognized as revenue on a straight-line basis over the initial term of theGivaudan Agreement.  As of May 1,2009, the remaining unamortized portion of the upfront payment wasapproximately $557,000 and, as a result of the termination, was 

 

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recognized as revenueupon termination of the Agreement.   During the three months ended June 30,2008 and 2009, the Company recognized approximately $93,000 and $557,000,respectively, of revenue attributable to the amortization of the upfront feeand approximately $614,000 and $253,000 of revenue from research funding,respectively.  During the six monthsended June 30, 2008 and 2009, the Company recognized approximately$186,000 and $650,000, respectively, of revenue attributable to theamortization of the upfront fee and approximately $1,228,000 and $1,065,000 ofrevenue from research funding, respectively.

 

*Coca-Cola*.     In December 2007,the Company entered into a research agreement (the “Coca-Cola Agreement”) withThe Coca-Cola Company for the development of certain technology for use in softdrinks and non-alcoholic beverages. The initial term of the Coca-Cola Agreementwas for 12 months, subject to extension upon mutual agreement of theparties.  The agreement expired by its terms in December of2008.  Pursuant to the Coca-Cola Agreement, during the three and sixmonths ended June 30, 2008, the Company recognized approximately $268,000and $470,000 of revenue from research funding.

 

**8. Restructuring**

 

Duringthe six months ended June 30, 2009, the Company announced tworestructurings which reduced its workforce by approximately 60% bringing the current number of employeesto 14.  In connection with the restructurings,the Company incurred severance costs of $531,418 which are included in generaland administrative expenses on the accompanying statements of operations forthe six months ended June 30, 2009. The Company had the following accrualrelated to severance which is included in accrued compensation on theaccompanying balance sheet as of June 30, 2009:

 
| ** **             | ** ** | **December 31,  2008** | ** ** | **2009 Expense** | ** ** | **2009 Payments** | ** ** | **June 30, 2009** | ** ** |
|------------------------|------------|-----------------------------|------------|------------------|------------|-------------------|------------|------------------------|------------|
| Severance and benefits |       | $                           | —     |             | $          | 531,418           |       | $                      | (306,733   | ) | $ | 224,685 |   |
|                   |       | $                           | —     |             | $          | 531,418           |       | $                      | (306,733   | ) | $ | 224,685 |   |

 

**9. Commitments**

 

***Leases***

 

Future minimum lease payments as of June 30,2009 are as follows:

 

| **Year Ending December 31,** | ** ** | **Amount** | ** ** |
|-----------------------------------|------------|------------|------------|
| 2009                              |       | $          | 444,000    |   |
| 2010                              |       | 833,000    |       |
| 2011                              |       | 840,000    |       |
| 2012                              |       | 846,000    |       |
| 2013                              |       | 852,000    |       |
| Thereafter                        |       | 2,897,000  |       |
|                              |       | $          | 6,712,000  |   |

 

InOctober 2006, the Company paid a $250,000 deposit for its new facilitywhich has been recorded in other assets on the accompanying balance sheet.

 

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

 

**Cautionary Note RegardingForward-Looking Statements**

 

The Securities andExchange Commission, referred to herein as the SEC, encourages companies todisclose forward-looking information so that investors can better understand acompany’s future prospects and make informed investment decisions. Certain statements that we may make from time to time, including, withoutlimitation, statements contained in this Quarterly Report on Form 10-Q,referred to herein as the Quarterly Report, constitute “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995.  These statements may be made directly in this Quarterly Report,and they may also be made a part of this Quarterly Report by reference to otherdocuments 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 similarsubstance used in connection with any discussion of future operating orfinancial performance, identify forward-looking statements.  Allforward-looking statements are management’s present expectations of futureevents and are subject to a number of risks and uncertainties that could causeactual results to differ materially from those described in the forward-lookingstatements.  These risks and uncertainties include, among other things:

 

·                  our ability to enter into and maintain food,ingredient and pharmaceutical and biotechnology collaborations;

 

·                  our need for additional capital to fund the currentlevel of our research and development programs, our inability to furtheridentify, develop and achieve commercial success for new products andtechnologies;

 

·                  our ability to protect our proprietary technologies,including our newly discovered sweetener enhancers;

 

·                  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;

 

·                  patent-infringement claims;

 

·                  the risk that clinical trials may not result inmarketable products;

 

·                  the risk that we may be unable to successfully financeand secure regulatory approval of and market our drug candidates;

 

·                  the levels and timing of payments under futurecollaborative 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;

 

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

 

·                  other factors discussed under the heading Item 1A “RiskFactors” in this Quarterly Report.

 

In light of theseassumptions, risks and uncertainties, the results and events discussed in theforward-looking statements contained in this Quarterly Report or in anydocument incorporated by reference might not occur.  You are cautioned notto place undue reliance on forward-looking statements, which speak only as ofthe date of this Quarterly Report or the date of the document incorporated byreference in this Quarterly Report.  We are not under any obligation, andwe expressly disclaim any obligation, to update or alter any forward-lookingstatements, whether as a result of new information, future events or otherwise,except as may be required by applicable law.  All subsequentforward-looking statements attributable to Redpoint, or to any personauthorized to act on our behalf are expressly qualified in their entirety bythe cautionary statements contained or referred to in this section.

 

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**Overview**

 

Redpoint Bio is adevelopment stage biotechnology company leveraging recent discoveries in themolecular biology of taste to discover and develop novel taste modulators forthe food and beverage industries. Our food and beverage program is focused onidentifying novel flavor modifiers that improve the taste of existing ingredients,enabling the development of better-tasting, less costly, and more healthfulfoods and beverages. We believe that our unique understanding of the biology oftaste and its relationship to metabolic processes, satiety, and diabetes impactboth the development of healthier foods and, potentially, new approaches to thetreatment of diabetes and obesity. Our research in diabetes and obesity stemsfrom the observation that taste signaling in the gastrointestinal tract isinvolved in important hormone secretion processes enabling us to leverage ourresearch on lingual taste modulation to important therapeutic applications.

 

Since itsinception in 1995, Redpoint has incurred losses and negative cash flows fromoperations, and such losses have continued subsequent to June 30, 2009. Asof June 30, 2009, Redpoint had an accumulated deficit of$47.1 million and anticipates incurring additional losses for theforeseeable future. 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. We have not yet developed any products that are commercially available.

 

Through June 30,2009, our revenue has come solely from corporate collaborations, licenseagreements, and government grants. In order to achieve profitability, we mustcontinue to develop products and technologies that can be commercialized by usor through existing and future collaborations.

 

On March 12,2007, we completed the first closing of our private placement of shares ofcommon stock and warrants to purchase shares of common stock raisingapproximately $17.2 million of net proceeds. On April 6, 2007, wecompleted the final closing of the private placement raising an additional$11.4 million of net proceeds, bringing the total private placement netproceeds to $28.6 million.

 

In March 2007,we entered into a Joint Research and Development and License Agreement withGivaudan Schweiz AG for the development and commercialization of compounds thatenhance sweetness or savory sensation, as well as compounds that block ordesensitize bitter taste for use in the food and beverage industry.  Under the terms of the agreement, Redpointand Givaudan were collaborating exclusively with each other to discover anddevelop compounds that act primarily through the modulation of the TRPm5channel. In consideration of the Company’s agreement to conduct research anddevelop compounds and grant exclusive licenses and other rights to Givaudan,Redpoint received an upfront payment of $1.3 million and Givaudan providedresearch funding to the Company over the term of the Agreement.  Givaudan terminated the Agreement, effectiveas of May 1, 2009, and Givaudan reserved its rights under the Agreementwith respect to certain collaboration compounds. Givaudan cited the fact thatcertain collaboration objectives had not been achieved during the collaborationas its reasoning for terminating the Agreement. Through June 30, 2009,including the upfront fee, we received $6.9 million in research anddevelopment funding.

 

In December 2007,we entered into a one year research agreement with The Coca-Cola Company,referred to herein as Coca-Cola, for the development of certain technology foruse in soft drinks and other non-alcoholic beverages. In consideration of ouragreement to conduct research for the development of certain technology andgrant exclusive licenses and other rights, Coca-Cola paid us approximately $0.9million. The agreement expired by its terms in December of 2008.

 

Our continuedresearch and development efforts have led us to certain advances within ourtaste technology platform, including our recent announcement concerning theidentification of RP44, an all-natural sweetness enhancer, we are alsobeginning to understand how our technology platform plays a role in treatingmetabolic disorders such as diabetes and obesity.  However, since December 2007, we havenot entered into any new funded corporate collaborations other than an expandedfeasibility agreement with Schering Corporation, a subsidiary ofSchering-Plough Corporation, in the area of taste science research forpharmaceutical applications.  However, weare currently not pursuing our research program in this area. Redpoint was alsounable to renew its one year research agreement with Coca-Cola and ouragreement with Givaudan ended on May 1, 2009.  Furthermore, we recognize the currentdifficult financing environment that has significantly impacted thebiotechnology sector and required the Company to seek ways to conserve cash.Consequently, in February 2009, we announced a restructuring which reducedour workforce by approximately 33%.  In May 2009,we further reduced our work force to bring our number of employees to 14 and wemay need to make further reductions in our expenses. We are currently notpursuing our research program aimed at suppressing the bitterness of oralmedicines. In addition, in November 2008, the Company retained Burrill &Company to advise us on strategic alternatives.

 

InJune 2009, we announced that we had identified an all-natural sweetnessenhancer, RP44. Taste tests conducted by an independent research laboratorydemonstrate that RP44 enables the reduction of up to 25% of the caloricsweeteners in product prototypes, while maintaining the taste quality of thefully sweetened product. As a result, RP44 has the potential to reduce overallingredient costs for manufacturers while creating a healthier product forconsumers due to lower calorie content.  RP44has demonstrated enhancement results with several common sweeteners includingsucrose (sugar), fructose and high-fructose corn syrup. 

 

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Asa result of these studies, we initiated development activities for RP44. Weintend to develop RP44 through the GRAS (Generally Recognized as Safe)determination/notification process. The GRAS process involves extensive testingto ensure safety in use and usually requires 12-18 months to complete. RP44 isintended to be used in relatively small quantities in concert with nutritivesweeteners. It acts by amplifying the sweetness intensity thereby reducing theamount of nutritive sweetener required, while retaining the desirable temporalcharacteristics and “clean sweet taste” associated with sugar. We have filedpatent applications relating to RP44.

 

Our initialprograms focused on modulation of the TRPm5 ion channel, a key signalingelement in taste sensation, in order to discover novel compounds that modulatethe taste of food, beverage, and pharmaceutical products. We also believe thatthe TRPm5 ion channel may be an attractive target for the identification anddevelopment of a new diabetes or obesity therapeutic compound. A growing bodyof scientific research suggests that the taste pathways that we have beeninvestigating are also found as part of a nutrient-sensing system located inthe gastrointestinal tract. This could lead to potential opportunities for the discoveryof new diabetes or obesity therapeutics. We have recently initiated a programdesigned to leverage the research we have already conducted on taste modulatorsto further explore this opportunity.

 

**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 SmallBusiness Innovative Research, or SBIR, Awards. The SBIR Awards were sponsored bythe National Institutes of Health. The last SBIR related research project wascompleted in 2004.

 

To leverage our technology, in March 2007, we entered into theGivaudan Agreement where we were collaborating exclusively with each other todiscover and develop Enhancer Compounds and Bitter Blocker Compounds that actprimarily through the modulation of the TRPm5 channel.  The agreement with Givaudan was terminated byGivaudan on May 1, 2009.  Also, in December 2007,we entered into a one year research agreement with Coca-Cola for thedevelopment of certain technology for use in soft drinks and othernon-alcoholic beverages. The agreement with Coca-Cola expired by its terms in December 2008.  In November 2008, we announced that wehad signed a feasibility agreement with Schering Corporation, a subsidiary ofSchering-Plough Corporation, in the area of taste science research forpharmaceutical applications. However, as a result of our restructurings, we arecurrently notpursuing our research program in this area.

 

We may also partner with other major ingredient suppliers, or food andbeverage companies, to develop and commercialize taste enhancers that actthrough a variety of other newly discovered mechanisms of taste sensation inexchange for technology access fees, research funding, product developmentmilestones, and product royalties. We are also seeking collaborations withmajor pharmaceutical companies for the further development and optimization ofour compounds for therapeutic applications in diabetes and obesity.

 

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**

 

Our research anddevelopment expenses consist primarily of internal costs associated with ourtaste modulator and diabetes/obesity research programs as well as amounts paidto third parties to conduct research on our behalf. Our internal research anddevelopment costs are comprised of salaries and related benefits, facilitiesand depreciation on laboratory equipment, compound acquisition costs andresearch supplies. We charge research and development costs to operations asincurred.

 

**General and Administrative**

 

Our general andadministrative expenses consist primarily of salaries and related benefitexpenses for business development, financial, legal and other administrativefunctions. In addition, we incur external costs for professional fees for legal,patent and accounting services.

 

**Results of Operations**

 

***Three months ended June 30,2009 compared to three months ended June 30, 2008***

 

*Researchand Grant Revenue*. For the three months ended June 30, 2009, we recorded revenue of$0.8 million related to 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.  

 

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The revenues fromGivaudan include $0.6 million attributable to the upfront fee which wasoriginally being recognized as revenue over the initial 3.5 year term ofthe agreement and $0.2 million of research funding. Givaudan terminated theAgreement, effective as of May 1, 2009. As of May 1, 2009, the remaining unamortized portion of the upfrontpayment was approximately $0.6 million and was recognized as revenue upontermination. For the three months ended June 30, 2008, we recorded revenueof $1.0 million, which included $0.7 million related to our GivaudanAgreement, including $0.1 million attributable to the upfront fee and$0.6 million of research funding. The remaining $0.3 million ofrevenue related to our Coca-Cola Agreement, which began on December 13,2007 for the development of certain technology for use in soft drinks andnon-alcoholic beverages and which expired by its terms in December 2008.As of June 30, 2009, the Company does not have any current sources ofrevenue.

 

*Researchand Development Expenses*.  Our research and development expenses were $1.5 millionfor the three months ended June 30, 2009 compared to $2.2 million forthe three months ended June 30, 2008.  The decrease in expenses wasprimarily attributable to reductions in workforce as a result of the corporaterestructurings the Company undertook in February and May of2009.  As a result of the restructurings,we are currently not pursuing our research program aimed at suppressing thebitterness of oral medicines. Our research and development expenses consistprimarily of internal costs associated with our taste modulator and diabetes researchprograms as well as amounts paid to third parties to conduct research on ourbehalf.  Our internal research anddevelopment costs are comprised of salaries and related benefits, facilitiesand depreciation on laboratory equipment, compound acquisition costs andresearch supplies.

 

*Generaland Administrative Expenses*.  Our general and administrative expenses were$1.4 million for the three months ended June 30, 2009 compared to$1.6 million for the three months ended June 30, 2008.  During the three months ended June 30,2009, we recognized costs associated with our restructuring of approximately$0.2 million which was offset by reduced expenditures associated with investorrelations and other professional fees.

 

*InterestIncome*. Interest income was less than $0.1 million for the three months ended June 30,2009 compared to $0.1 million during the three months ended June 30,2008. The decrease was the result of decreasing cash and investment balances.

 

*InterestExpense*. Interest expense was less than $0.1 million for the three months ended June 30,2009 and June 30, 2008. In September 2008, we entered into a Loan andSecurity Agreement in which we are authorized to borrow up to $2.0 millionfor the purchase of certain equipment, a portion of the proceeds which may beused for general corporate working capital purposes. As of June 30, 2009,we have borrowed approximately $1.6 million pursuant to the Loan andSecurity Agreement.

 

***Six months ended June 30,2009 compared to the six months ended June 30, 2008***

 

*Researchand Grant Revenue*.  For the six months ended June 30, 2009,we recorded revenue of $1.9 million, which included $1.7 millionrelated to our Givaudan Agreement, which began on March 27, 2007 for thedevelopment and commercialization of compounds that enhance sweetness or savorysensation as well as compounds that block or desensitize bitter taste for usein the food and beverage industry.  Therevenues from Givaudan include $0.7 million attributable to the upfrontfee which was originally being recognized as revenue over the initial3.5 year term of the agreement and $1.0 million of research funding.  Givaudan terminated the Givaudan Agreement,effective as of May 1, 2009.  As of May 1,2009, the remaining unamortized portion of the upfront payment wasapproximately $0.6 million and was recognized as revenue upon termination.The remaining $0.2 million of revenue was from other agreements including afeasibility research program we conducted with Schering-Plough Corporation inthe area of taste science research for pharmaceutical applications.  During the six months ended June 30,2008, we recorded revenue of $1.9 million, which included $1.4 millionrelated to our Givaudan Agreement including $0.2 million attributable tothe upfront fee which was being recognized as revenue over the initial3.5 year term of the agreement and $1.2 million of researchfunding.  The remaining $0.5 millionof revenue was primarily related to our Coca-Cola Agreement, which began on December 13,2007, for the development of certain technology for use in non-alcoholicbeverages which expired by its terms in December 2008.

 

*Researchand Development Expenses*.  Our research and developmentexpenses were $3.4 million for the six months ended June 30, 2009compared to $4.2 million for the six months ended June 30, 2008.  The decrease in expenses was primarilyattributable to reductions in workforce as a result of the corporaterestructurings the Company undertook in February and May of2009.  As a result of the restructurings,we are currently not pursuing our research program aimed at suppressing thebitterness of oral medicines. Our research and development expenses consistprimarily of internal costs associated with our taste modulator and diabetesresearch programs as well as amounts paid to third parties to conduct researchon our behalf.  Our internal research anddevelopment costs are comprised of salaries and related benefits, facilities,and depreciation of laboratory equipment, compound acquisition costs andresearch supplies.

 

*Generaland Administrative Expenses*.  Our generaland administrative expenses were $3.0 million for the six months ended June 30,2009 compared to $3.2 million for the six months ended June 30, 2008.During the six months ended June 30, 2009, we recognized costs associatedwith our restructuring of approximately $0.5 million which was offset byreduced expenditures associated with patent, investor relations and otherprofessional fees.

 

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*Interest Income*. Interest income was $0.1 million for the six months ended June 30, 2009 compared to$0.4 million duringthe six months ended June 30, 2008. The decrease was primarily the resultof decreasing cash and investment balances.

 

*Interest Expense*. Interest expense was $0.1 for the six months ended June 30, 2009 and was less than $0.1million for the sixmonths ended June 30, 2008.

 

**Liquidity and Capital Resources**

 

At June 30,2009, we had cash, cash equivalents and marketable securities of approximately$10.0 million and working capital of approximately $8.3 million.Since inception, we have used $34.0 million of cash to fund our operatingactivities and $3.4 million for capital expenditures. Through June 30,2009, 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 $10.4 million, government grants totaling$1.8 million, and capital equipment financing totaling $3.6 million.

 

In September 2008, we entered into a Loan andSecurity Agreement in which we are authorized to borrow up to $2.0 millionfor the purchase of certain equipment, a portion of the proceeds which may beused for general corporate working capital purposes. As of June 30, 2009,we have borrowed approximately $1.6 million pursuant to the Loan andSecurity Agreement, of which approximately $1.0 million was for equipmentpreviously purchased and approximately $0.6 million was for generalworking capital.

 

On March 12,2007, we completed the first closing of our Private Placement of shares ofcommon stock and warrants to purchase shares of common stock raisingapproximately $17.2 million of net proceeds. On April 6, 2007 wecompleted the final closing of our Private Placement raising an additional$11.4 million of net proceeds, bringing the total private placement netproceeds to $28.6 million.

 

Our continuedresearch and development efforts have led us to certain advances within ourtaste technology platform, including our recent announcement concerning theidentification of RP44, an all-natural sweetness enhancer, and we are beginningto understand how our technology platform plays a role in treating metabolicdisorders such as diabetes and obesity. However, since December 2007, we have not entered into any newfunded corporate collaborations other than an expanded feasibility agreementwith Schering Corporation, a subsidiary of Schering-Plough Corporation, in thearea of taste science research for pharmaceutical applications.  However, we are currently not pursuing ourresearch program in this area. Redpoint was also unable to renew its one yearresearch agreement with The Coca-Cola Company and our agreement with Givaudanended on May 1, 2009.  Givaudancited the fact that certain collaboration objectives had not been achievedduring the collaboration as its reasoning for terminating the agreement.  Furthermore, we recognize the currentdifficult financing environment that has significantly impacted thebiotechnology sector and required the Company to seek ways to conserve cash.Consequently, in February 2009, we announced a restructuring which reducedour workforce by approximately 33%.  In May 2009,we further reduced our workforce to bring our number of employees to 14, and wemay need to make further reductions in our expenses. We are currently notpursuing our research program aimed at suppressing the bitterness of oralmedicines. In addition, in November 2008, the Company retained Burrill &Company to advise us on strategic alternatives. We believe that our currentcapital resources should be sufficient to meet our operating and capitalrequirements at least through September 2010.

 

We expect thatsubstantially all of our cash-inflows for the foreseeable future will come fromfuture corporate collaborations, future license agreements and interest earnedon marketable securities.  There can beno assurance that we will enter into any future corporate collaborations orfuture license agreements.  We aresubject to those risks associated with any biotechnology company that hassubstantial expenditures for research and development. There can be noassurance that our research and development projects will be successful, thatproducts developed will obtain necessary regulatory approval, or that anyapproved product will be commercially viable. In addition, we operate in anenvironment of rapid technological change and we are largely dependent on theservices of our employees and consultants. The stock market in general hasrecently experienced large price and volume fluctuations and the market priceof our common stock has experienced significant volatility.  For us tofund our operations and to commercially develop our products, additional equityand/or debt financing will be required. There is no assurance that suchfinancing will be available to us as needed and as a result, we may need topursue other strategic alternatives.

 

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**Summary of Contractual Obligations**

 

The following tablesummarizes our obligations to make future payments under our currentcontractual obligations as of June 30, 2009:

 
| ** **       | ** ** | **Payments Due by Period** | ** ** |
|------------------|------------|----------------------------|------------|
| ** **       | ** ** | **Total**                  | ** ** | **2009** | ** ** | **2010-2011** | ** ** | **2012-2013** | ** ** | **Thereafter** | ** ** |
| Operating leases |       | $                          | 6,712,000  |   | $ | 444,000 |   | $ | 1,673,000 |   | $ | 1,698,000 |   | $ | 2,897,000 |   |
| Long-term debt   |       | 1,389,000                  |       | 241,000 |   | 796,000 |   | 352,000 |   | — |   |
| License payments |       | 275,000                    |       | 25,000 |   | 50,000 |   | 50,000 |   | 150,000 |   |
|             |       | $                          | 8,376,000  |   | $ | 710,000 |   | $ | 2,519,000 |   | $ | 2,100,000 |   | $ | 3,047,000 |   |

 

**Critical Accounting Policies**

 

Our discussion andanalysis of our financial condition and results of operations are based on ourfinancial statements, which have been prepared in accordance with U.S.generally accepted accounting principles, or GAAP. The preparation of thesefinancial statements requires us to make estimates and judgments that affectthe reported amounts of assets, liabilities, the disclosure of contingentassets and liabilities at the date of the financial statements, and reportedamount of revenue and expenses during the reporting period. On an ongoingbasis, we evaluate our judgments and estimates, including those related torevenue recognition, long-lived assets, accrued liabilities, share-basedpayments and income taxes. We base our judgment and estimates on historicalexperience and various other factors that we believe to be reasonable under thecircumstances, the results of which form the basis for making judgments aboutthe carrying values of assets and liabilities. Actual results may differ fromthese estimates under different assumptions or conditions.  A moredetailed review of our critical accounting policies is contained in our AnnualReport on Form-K filed with the Securities and Exchange Commission for the yearended December 31, 2008.  During the quarter ended June 30,2009, there have been no material changes in our critical accounting policies.

 

**ITEM 3.****                                                    ****QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Our carryingvalues of cash and cash equivalents, marketable securities, accountsreceivable, accounts payable, accrued expenses and debt are a reasonableapproximation of their fair value. The estimated fair values of financialinstruments have been determined by us using available market information andappropriate valuation methodologies.

 

We have notentered into and do not expect to enter into, financial instruments for tradingor hedging purposes.  We do not currently anticipate entering intointerest rate swaps and/or similar instruments.  We have no materialcurrency exchange risk exposure as of June 30, 2009.  Our primarymarket risk exposure with regard to financial instruments is to changes ininterest rates, which would impact interest income earned on such instruments.A one percent change (100 basis points) in interest rates on our investmentswould have impacted interest income by approximately $0.1 million for the threemonths ended June 30, 2009.

 

**ITEM 4T.****                                            ****CONTROLS AND PROCEDURES**

 

Ourmanagement, with the participation of our chief executive officer and chieffinancial officer, evaluated the effectiveness of our disclosure controls andprocedures (as defined in Rules 13a-15(e) and 15d-15(e) underthe Exchange Act) as of June 30, 2009. Based on this evaluation, our chiefexecutive officer and chief financial officer concluded that, as of June 30,2009, our disclosure controls and procedures were (1) effective in thatthey were designed to ensure that material information relating to us,including our consolidated subsidiaries, is made known to our chief executiveofficer and chief financial officer by others within those entities, asappropriate, to allow timely decisions regarding required disclosures, and (2) effectivein that they provide reasonable assurance that information required to bedisclosed by us in our reports that we file or submit under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin the SEC’s rules and forms.

 

Nochanges in our internal control over financial reporting (as defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act) occurred during the fiscal quarter endedJune 30, 2009 that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

 

**PART II.  OTHER INFORMATION**

 

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

 

The Company’smanagement knows of no material existing or pending legal proceedings or claimsagainst the Company, nor is the Company involved as a plaintiff in any materialproceeding or pending litigation.  To the Company’s knowledge, nodirector, 

 

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officer or affiliate ofthe Company, and no owner of record or beneficial owner of more than fivepercent (5%) of the Company’s securities, or any associate of any suchdirector, officer or security holder is a party adverse to the Company or has amaterial interest adverse to the Company in reference 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.*

 

*Ifany of the following risks actually occurs, our business, financial conditionor results of operations would likely suffer. In such case, the market price of our common stock would likely declinedue to the occurrence of any of these risks, and you may lose all or part ofyour investment.*

 

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

 

***Redpoint is adevelopment-stage company. We have incurred losses since inception and expectto incur additional net losses for at least the next several years.***

 

Since ourinception we have incurred significant losses and negative cash flows fromoperations. As of June 30, 2009, we had an accumulated deficit of$47.1 million, and anticipate incurring additional losses for theforeseeable future. 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. We have not generated significantrevenues in any particular year since our inception. To date, substantially allof our revenue has been derived from corporate collaborations, licenseagreements, and government grants. In order to achieve profitability, we mustdevelop products and technologies that can be commercialized by us or throughfuture collaborations. Our ability to generate revenues and become profitablewill depend on our ability, alone or with potential collaborators, to timely,efficiently and successfully complete the development of our product candidates,which may include conducting pre-clinical and clinical tests, obtainingnecessary regulatory approvals, and manufacturing and marketing our productcandidates. There can be no assurance that any such events will occur or thatwe will ever become profitable. Even if we do achieve profitability, we cannotpredict the level of such profitability. If we sustain losses over an extendedperiod of time, we may be unable to continue our business.

 

***We will needsubstantial additional funding to develop our products and for our futureoperations. If we are unable to obtain the funds necessary to do so, we may berequired to delay, scale back or eliminate our product development or may beunable to continue our business.***

 

The development of our product candidates will requirea commitment of substantial funds to conduct the costly and time-consumingresearch, which may include pre-clinical and clinical testing, necessary toobtain regulatory approvals and bring our products to market. We believe thatour current capital resources should be sufficient to meet our operating andcapital requirements at least through September 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;

 

·                  our ability to discover and develop new diabetes orobesity therapeutic compounds;

 

·                  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 regulatoryapprovals;

 

·                  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 noassurance that we will not need additional capital sooner than currentlyanticipated.

 

We will need toraise substantial additional capital to fund our future operations. We cannotbe certain that additional financing will be available on acceptable terms, orat all. In recent years, it has been difficult for companies to raise capitaldue to a variety of factors, which may or may not continue. To the extent weraise additional 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 tosuccessfully address ongoing liquidity requirements will have a materialadverse effect on our business. If we are unable to obtain additional capitalon acceptable terms when needed, we may be required to take actions that harmour business and our ability to achieve cash flow in the future, includingpossibly the surrender of our rights to some technologies or product opportunities,delaying our clinical trials or curtailing or ceasing operations.

 

***We are an earlystage company and currently have no products available for sale, license oruse. Our product candidates require additional research, development, testing,expert reviews and/or regulatory approvals before marketing. We may be unableto develop, obtain regulatory approval or market any of our product candidates.If our product candidates are delayed or fail, our financial condition will benegatively affected, and we may have to curtail or cease our operations.***

 

We are in the early stage of product development andwe are dependent on new discoveries. We currently do not sell or license anyproducts to third parties and do not expect to have any products commerciallyavailable for several years, if at all. You must evaluate us in light of theuncertainties and complexities affecting an early stage biotechnology company.Our product candidates require additional research and development,pre-clinical testing, clinical testing (for our pharmaceutical products) andregulatory review and/or approvals clearances before marketing. There are manyreasons 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 collaboratorsmay withdraw support for or otherwise impair the development andcommercialization of ourproduct candidates; or

 

·                  others may develop equivalent or superior products.

 

In addition, wemay not succeed in developing taste enhancers and aversive taste blockers withthe appropriate 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 productcandidates are delayed or we fail to successfully develop and commercialize ourproduct candidates, our financial condition may be negatively affected, and wemay have to curtail or cease our operations.

 

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***We may notsuccessfully establish and maintain collaborative and licensing arrangements,which could adversely affect our ability to develop and commercialize ourproduct candidates.***

 

A key element ofour food and beverage strategy is to commercialize our taste enhancers throughproduct discovery and development collaborations with major ingredientsuppliers and/or end users. Our pharmaceutical strategy depends on establishingcollaborations and licensing agreements with major pharmaceutical, over-the-counterand generic companies. We may not be able to maintain or expand these licensesand collaborations or establish additional licensing and collaborationarrangements necessary to develop and commercialize our product candidates. Forexample, we were unable to renew our one year research agreement with TheCoca-Cola Company and our agreement with Givaudan ended on May 1,2009.  Even if we are able to maintain orestablish licensing or collaboration arrangements, these arrangements may notbe on favorable terms and may contain provisions that will restrict our abilityto develop, test and market our product candidates. Any failure to maintain orestablish licensing or collaboration arrangements on favorable terms couldadversely affect our business prospects, financial condition or ability todevelop and commercialize our product candidates.

 

We expect to relyat least 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 candidates, 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 activities internally,our expenses may increase.

 

In addition, oursuccess depends on the performance of our collaborators of theirresponsibilities under these arrangements. Some potential collaborators may notperform their obligations in a timely fashion or in a manner satisfactory tous. Because such agreements may be exclusive, we may not be able to enter intoa collaboration agreement with any other company covering the same productfield during the applicable collaborative period. In addition, ourcollaborators’ competitors may not wish to do business with us at all due toour relationship with our collaborators. If we are unable to enter intoadditional product discovery and development collaborations or maintain ourexisting arrangements, our ability to sustain or expand our business will besignificantly diminished.

 

***If we or ourcollaborators are unable to obtain and maintain the GRAS determination orregulatory approval required before any taste enhancers or aversive tasteblockers can be incorporated into products that are sold, we would be unable tocommercialize our taste enhancers and aversive taste blockers and our businesswould be adversely affected.***

 

In the UnitedStates, the development, sale and incorporation of our taste enhancers andaversive taste blockers into products are subject to regulation by the FDA, andin some instances, other government bodies. Obtaining and maintaining a GRASdetermination or regulatory approval is typically costly and can take manyyears.

 

Depending on theamount or intended use of a particular taste enhancer or aversive taste blockeradded to a product and the number of product categories in which the flavor orflavor enhancer will be incorporated, specific testing, safety assessmentprotocols, and regulatory processes must be satisfied before we or ourcollaborators can commercially market and sell products containing any tasteenhancers and aversive taste blockers that we may discover. A key element ofour strategy is to develop flavors and flavor enhancers that will be evaluatedby the FEMA (Flavor and Extracts Manufacturers Association) GRAS Panel, whichwe expect will take 18 to 24 months and which is less expensive than thealternative of filing a food additive petition with the FDA, which can takeeight years or more. The FEMA GRAS review process may take longer than24 months and cost more than we currently anticipate if additional safetystudies are requested by the FEMA GRAS Panel or are necessary to explainunexpected safety study findings. There is a risk that one or more of ourproduct candidates may not qualify for a FEMA GRAS determination. This mayoccur for a variety of reasons, including the taste enhancer’s or aversivetaste blocker’s intended use, the amount of the taste enhancer or aversivetaste blocker intended to be added to packaged foods and beverages, the numberof product categories in which the taste enhancers or aversive taste blockerswill be incorporated, whether the taste enhancer imparts sweetness, the safetyprofile of the taste enhancers or aversive taste blockers and the FEMA GRASPanel’s interpretation of the safety data. Even if we obtain a GRASdetermination with respect to a taste enhancer or aversive taste blocker, theFDA has the ability to challenge such determination, which could materiallyadversely affect our ability to market products on schedule or at all. In theevent that a particular taste enhancer or aversive taste blocker does notqualify for a FEMA GRAS determination, we may be required to pursue a lengthyFDA approval process to reach the U.S. market, or dedicate our developmentefforts to alternative compounds, which would further delay commercialization.In addition, laws, regulations or FDA practice governing the regulatoryapproval process, the availability of the GRAS determination process or themanufacture or labeling of such products, may change in a manner that couldadversely affect our ability to commercialize products on schedule or at all.

 

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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 costs forus and require additional safety studies and additional expenses. If we fail tocomply with these regulatory requirements or to obtain and maintain requiredapprovals, our ability to generate revenue will be diminished.

 

We and ourcollaborators may not be successful in overcoming these regulatory hurdles,which could result in product launch delays, unanticipated expenses,termination of collaborations, and flavors and flavor enhancers not beingapproved for incorporation into consumer products. These consequences wouldhave a material adverse effect on our business financial condition and resultsof operations.

 

***Even if we or ourcollaborators receive a GRAS determination or regulatory approval andincorporate our taste enhancers or aversive taste blockers into products, thoseproducts may never be commercially successful.***

 

Even if we discover and develop taste enhancers andaversive taste blockers that obtain the necessary GRAS determination orregulatory approval, our success depends to a significant degree upon thecommercial success of packaged food and beverage products and pharmaceuticalproducts incorporating those taste enhancers or aversive taste blockers. Ifthese products fail to achieve or subsequently maintain market acceptance orcommercial viability, our business would be significantly harmed because ourroyalty revenue is dependent upon consumer sales of these products. In additionwe could be unable to maintain our existing collaborations or attract newproduct discovery and development collaborators. Many factors may affect themarket 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 experiencedelays in clinical trials and regulatory approval relating to our products thatcould adversely affect our financial results and our commercial prospects forour pharmaceutical product candidates.***

 

Any uses of our taste modulators that we develop as drugs acting tomodulate incretin secretion with potential utility as therapeutic agents fordiabetes or obesity, will be subject to full FDA 505(b)(1) safety testingand clinical trials demonstrating therapeutic efficacy as required to developan NDA. We will be required to conduct clinical trials to demonstrate safetyand efficacy of our product candidates for each intended use. For productcandidates that advance to clinical testing, we cannot be certain that we or acollaborator will successfully complete the clinical trials, and will obtainthe results necessary to receive regulatory approvals for the drug. Theseprocesses are lengthy, expensive and can have uncertain outcomes. Regulatory authorities may disagree with our interpretations of the clinicaltrial results.  There can be no assurance that clinical trials will bedeemed by regulatory authorities as demonstrating that our product candidatesare safe and effective to obtain approval for commercial distribution.

 

We do not know when clinical trials for our products will commence orwhether we will complete any of our clinical trials on schedule or at all. We may not be able to identify and successfully contract with an adequatenumber of clinical trial sites and clinical investigators.  We may not beable to find a sufficient number of study subjects or may experience delays inenrolling patients for our clinical trials.  Trial sites may not be ableto meet the targets for recruiting study subjects, because of limited patientpools, or strict criteria for enrolling in the trial.

 

Additionally, the FDA, the IRB or we may suspend our clinical trials atany time if there is reason to believe that we are exposing the subjectsparticipating 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 or patientsdevelop an unacceptable number or severity of adverse events.

 

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Product development costs to us and our potential collaborators willincrease if we have delays in testing or approvals or if we need to performmore or larger clinical trials than planned. We expect to continue to rely onthird party clinical investigators at medical institutions and healthcare facilitiesto conduct our clinical trials, and, as a result, we may face additionaldelaying factors outside our control. Significant delays may adversely affectour financial results and the commercial prospects for our product candidatesand delay our ability to become profitable.

 

***If ourpharmaceutical product candidates, including any product candidates we maydevelop under our early stage diabetes program, do not successfully completethe clinical trial process, we will not be able to market them. Even successfulclinical trials may not result in a marketable product and may not be entirelyindicative of a product’s safety or efficacy.***

 

Many factors,known and unknown, can adversely affect clinical trials and the ability toevaluate a product’s efficacy. During the course of treatment, patients can dieor suffer other adverse events for reasons that may or may not be related tothe proposed product being tested. Even if unrelated to our product, certainevents can nevertheless adversely impact our clinical trials. As a result, ourability to ultimately develop and market the products and obtain revenues wouldsuffer.

 

Even promisingresults in pre-clinical studies and initial clinical trials do not ensuresuccessful results in later clinical trials, which test broader human use ofour products. Many companies in our industry have suffered significant setbacksin advanced clinical trials, despite promising results in earlier trials. Evensuccessful clinical trials may not result in a marketable product or be indicativeof the efficacy or safety of a product. Many factors or variables could affectthe results of clinical trials and cause them to appear more promising thanthey may otherwise be. Product candidates that successfully complete clinicaltrials could ultimately be found to be unsafe or ineffective.

 

In addition, our ability to complete clinical trialsdepends on many factors, including obtaining adequate clinical supplies andhaving a sufficient rate of patient recruitment. For example, patientrecruitment 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;

 

·                  the perceptions of investigators and patientsregarding safety; and

 

·                  the availability of other treatment options.

 

Even if patientsare successfully recruited, we cannot be sure that they will complete thetreatment process. Delays in patient enrollment or treatment in clinical trialsmay result in increased costs, program delays or both.

 

With respect tomarkets in 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 cannotpredict whether or when we will obtain regulatory approval to commercialize ourpharmaceutical product candidates, we cannot predict the timing of any futurerevenue from these product candidates.***

 

We cannotcommercialize any of our pharmaceutical product candidates to generate revenueuntil the appropriate regulatory authorities have reviewed and approved theapplications for our product candidates. We cannot assure you that theregulatory agencies will complete their review processes in a timely manner orthat we will obtain regulatory approval for any product candidate we or ourpotential collaborators develop. Satisfaction of regulatory requirementstypically takes many years, is dependent upon the type, complexity and noveltyof the product and requires the expenditure of substantial resources.Regulatory approval processes outside the United States include all or many ofthe risks associated with the FDA approval process and potentially others aswell. In addition, we may experience delays or rejections based upon additionalgovernment regulation from future legislation or administrative action orchanges in FDA policy, or the policies of other relevant governmental ornongovernmental entities during the period of product development, pre-clinicaland clinical trials and FDA regulatory review.

 

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***We will rely onthird parties to manufacture taste enhancers, aversive taste blockers andpharmaceutical product candidates. There can be no guarantee that we can obtainsufficient and acceptable quantities of our taste enhancers or aversive tasteblockers or pharmaceutical product candidates on acceptable terms, which maydelay or impair our ability to develop, test and market such products.***

 

Our businessstrategy relies on third parties to manufacture and produce our taste enhancersand aversive 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 enterinto manufacturing 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 our productsin accordance with our product specifications, or will meet FDA or otherrequirements. We must have sufficient and acceptable quantities of our productmaterials to conduct our clinical trials and to market our product candidates,if and when such products have been approved by the FDA for marketing. If weare unable to obtain sufficient and acceptable quantities of our productmaterial, we may be required to delay the clinical testing and marketing of ourproducts.

 

***If we do not complywith applicable regulatory requirements in the manufacture and distribution ofour product candidates, we may incur penalties that may inhibit our ability tocommercialize our products and adversely 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 tocreate and maintain sales, marketing and distribution capabilities or enterinto agreements with third parties to perform those functions, we will not beable to commercialize our product candidates.***

 

We currently haveno sales, marketing or distribution capabilities. Therefore, to commercializeour product candidates, if and when such products have been approved and areready for marketing, we expect to collaborate with third parties to performthese functions. We have no experience in developing, training or managing asales force and will incur substantial additional expenses if we decide tomarket any of our future products directly. Developing a marketing and salesforce is also time consuming and could delay launch of our future products. Inaddition, we will compete with many companies that currently have extensive andwell-funded marketing and sales operations. Our marketing and sales efforts maybe unable to compete successfully against these companies.

 

***Many potentialcompetitors, including those who have greater resources and experience than wedo, may develop products or technologies that make ours obsolete ornoncompetitive.***

 

We believe ourtaste technology 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 becoming obsolete.

 

We facesubstantial competition from companies pursuing the commercialization ofproducts and services relevant to taste using various methods for the discoveryof taste enhancers and aversive taste blockers. These competitors includeleading flavor companies, such as International Flavors &Fragrances Inc., Givaudan SA, Symrise and Firmenich. Senomyx isprincipally focused in the area of taste enhancement for food products and usesa high throughput screening technology and synthetic chemistry to discover 

 

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novel flavor enhancers,which it licenses to end users in the food industry. Senomyx was initiallyfocused on sweetness and savory flavor enhancers, but is now also developingprograms to discover bitter blockers for food and pharmaceutical products.During the last 2 years, Senomyx has announced success at developingsweetener enhancers for both sucrose and sucralose, although these have not yetreached the marketplace. Nutrinova, a German ingredients company, is alsodeveloping a biotechnology approach to finding novel taste enhancers incollaboration with the German Biotechnology Research and Information Network.We currently compete and will continue to compete in the future with thesecompanies in collaborating with and selling flavor products and technologies tomanufacturers of packaged food and beverage products.

 

We also facesubstantial competition with respect or our diabetes program. Type 2diabetes is a disease characterized by persistent hyperglycemia due to the body’sinability to produce enough or respond to insulin, a hormone regulating theabsorption of sugar. Most treatments, outside of insulin replacement, focus oncorrecting high blood sugar by either stimulating the pancreas to produce moreinsulin, enhancing tissue sensitivity to insulin, or by inhibiting theproduction and release of glucose from the liver. There are many drugscurrently available for treating diabetes and metabolic disease, either aloneor in combination with other drugs. There are several classes of anti-diabetictreatments, either orally available or injectable, including insulin, GLP-1receptor agonists, sulfonylureas, DPP-IV inhibitors, PPAR agonists, andbiguanides. Many of these drugs exhibit not only limited efficacy, but are alsoassociated with less than desired tolerability and significant mechanism-basedside effects. Several new classes of anti-diabetic treatments have recentlybeen developed, including incretin mimetics such as Exendin-4, a GLP-1 mimetic,which enhance glucose-dependent insulin secretion by the pancreatic beta-celland slows gastric emptying, and DPP-IV inhibitors which work by preventing theinactivation of endogenous GLP-1. Additionally, new mechanisms suchas GPR119 receptor agonists are being developed as glucose-dependentinsulin and GLP-1 secretagogues expected to lower postprandial glucose andreduce weight gain.

 

If successful, our core diabetes program will face competition. Themajor competitors to TPRM5 modulators would likely include several new classes of anti-diabetictreatments, including the incretin mimetic Byetta® (marketed by Eli Lilly andCompany and Amylin Pharmaceuticals), DPP-IV inhibitors (including JanuviaTMmarketed by Merck & Co., Inc.), and GPR119 receptoragonists, currently in development by Metabolex, Inc., OSIPharmaceuticals, GlaxoSmithKline, and Arena Pharmaceuticals, Inc./Johnson &Johnson.

 

Many of thesecompanies have substantially greater capital resources, research anddevelopment resources and experience, manufacturing capabilities, regulatoryexpertise, sales and marketing resources, established relationships withconsumer products companies and production facilities.

 

We may in thefuture face competition from life sciences and other technology companies andother commercial 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. We cannot guaranteethat products developed as a result of our competitors’ existing or futurecollaborations will not compete with our taste enhancers and aversive tasteblockers.

 

Universities andpublic and private research institutions are also potential competitors. Whilethese organizations 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 and products.We may attempt to license these proprietary technologies, but these licensesmay not be available to us on acceptable terms, if at all.

 

Our competitors,either alone 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 currentproduct discovery and development collaborators are not prohibited fromentering into research and development collaboration agreements with third partiesin any product field. Our failure to compete effectively would have asignificant adverse effect on our business, financial condition and results ofoperations.

 

***If we are unable toattract and retain key personnel and advisors, it may adversely affect ourability to obtain financing, pursue collaborations or develop our productcandidates.***

 

We are highly dependent on F. Raymond Salemme, Ph.D., our ChiefExecutive Officer and President, as well as Scott Horvitz, our Chief Financial Officer.

 

Our future successdepends on our ability to attract, retain and motivate highly qualifiedmanagement and scientific, development and commercial personnel and advisors.To pursue our business strategy, we will need to hire or otherwise engagequalified personnel and managers, including personnel with expertise indiscovery, development, clinical trials, government regulation, manufacturing,marketing and sales. Competition for qualified personnel is intense amongcompanies, academic 

 

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institutions and otherorganizations. If we are unable to attract and retain key personnel andadvisors, it may negatively affect our ability to successfully develop, testand commercialize our product candidates.

 

***We use hazardousand biological materials in our business. Any claims relating to improperhandling, storage or disposal of these materials could be time consuming andcostly.***

 

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 completely eliminated.In the event of an accident, we could be held liable for any damages thatresult, and any liability could exceed the limits or fall outside the coverageof any insurance we may obtain and exceed our financial resources. We may notbe able to maintain insurance on acceptable terms, or at all. We may incursignificant costs to comply with current or future environmental laws andregulations.

 

***We may be sued forproduct liability, which could adversely affect our business.***

 

Because ourbusiness strategy involves the development and sale by either us or ourcollaborators of commercial products incorporating our taste enhancers oraversive taste blockers, we may be sued for product liability. We may be heldliable if any product we develop and commercialize, or any product ourcollaborators commercialize that incorporates any of our taste enhancers oraversive taste blockers, causes injury or is found otherwise unsuitable duringproduct testing, manufacturing, marketing, sale or consumer use. In addition,the safety studies we must perform and the FEMA GRAS determination we mustobtain prior to incorporating our taste enhancers and aversive taste blockersinto a commercial product, and the regulatory approvals required tocommercialize our pharmaceutical products, will not protect us from any suchliability.

 

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 thecommercialization of products developed by us or our product discovery anddevelopment collaborators. We may be obligated to indemnify our productdiscovery and development collaborators for product liability or other lossesthey incur as a result of our taste enhancers and aversive taste blockers. Anyindemnification we receive from such collaborators for product liability thatdoes not arise from our taste enhancers or aversive taste blockers may not besufficient to satisfy our liability to injured parties. If we are sued for anyinjury caused by our taste enhancers or aversive taste blockers or productsincorporating our taste enhancers or aversive taste blockers or any otherproducts we develop, our liability could exceed our total assets.

 

**Risks Related To Intellectual Property**

 

***If our productcandidates are not effectively protected by valid, issued patents or if we arenot otherwise able to protect our proprietary information and technologies, itcould harm our business.***

 

The success of our operations will depend in part onour 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 diabetes and obesitytherapeutic compounds;

 

·                  maintain patents once obtained;

 

·                  maintain trade secrets and operate without infringingupon the intellectual property 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 weare not adequately able to protect our intellectual property and proprietaryinformation, our business will be materially harmed.

 

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***We may not haveadequate protection for our unpatented proprietary information, which couldadversely affect our competitive position.***

 

In addition topatents, we will substantially rely on trade secrets, know-how, continuingtechnological innovations and licensing opportunities to develop and maintainour competitive position. However, it is conceivable that others mayindependently develop substantially equivalent proprietary information andtechniques or otherwise gain access to our trade secrets or disclose ourtechnology. To protect our trade secrets, we may enter into confidentialityagreements with employees, consultants and potential collaborators. However, theseagreements may not provide meaningful protection of our trade secrets oradequate remedies in the event of unauthorized use or disclosure of suchinformation. Likewise, our trade secrets or know-how may become known throughother means or be independently discovered by our competitors. Any of theseevents could hinder us from developing or commercializing our productcandidates.

 

***Our ability tocompete in the ingredient, food and beverage market and the pharmaceuticalmarket may decline if we do not adequately protect our proprietarytechnologies, including RP44.***

 

Because of the substantial length of time and expenseassociated with the development of new products, we, along with the rest of theingredient, food and beverage industry and pharmaceutical industry, placeconsiderable importance on obtaining and maintaining patent protection for newtechnologies, products and processes. Our success depends in part on ourability to obtain and maintain intellectual property that protects ourtechnologies, taste enhancers or aversive taste blockers and our pharmaceuticalproducts. Patent positions may be highly uncertain and may involve complexlegal and taste receptors, proteins, chemical synthesis techniques, compoundsand methods for using them to modulate taste for which we seek patentprotection. No consistent pattern regarding the allowability or scope of claimsin many of our pending patent applications has emerged to date. As a result, wecannot predict the breadth of claims that will ultimately be allowed in ourpatent applications, if any, including those we have in-licensed or the extentto which we may enforce these claims against our competitors. The degree offuture protection for our proprietary rights is therefore highly uncertain andwe 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, thelegal standard for patents outside the United States vary greatly and in manycountries intellectual property laws are undergoing review and revision. Thelaws of some countries do not protect intellectual property rights to the sameextent as domestic laws. It may be necessary or useful for us to participate inopposition proceedings to determine the validity of our competitors’ patents orto defend the validity of any of our or our licensor’s future patents, whichcould result in substantial costs and would divert our efforts and attentionfrom other aspects of our business.

 

Technologies licensed to us by others, or in-licensedtechnologies, are important to our business. In particular, we depend oncertain technologies relating to taste biology licensed from the Mount SinaiSchool of Medicine. In addition, we may in the future acquire rights toadditional technologies by licensing such rights from existing licensors orfrom third parties. Such in-licenses may be costly. Also, we do not alwayscontrol the patent prosecution, maintenance or enforcement of in-licensedtechnologies. Accordingly, we are unable to exercise the same degree of controlover this intellectual property as we do over our internally developed 

 

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technologies.Moreover, some of our academic institution licensors, collaborators andscientific advisors have rights to publish data and information to which wehave rights. If we cannot maintain the confidentiality of our technologies andother confidential information in connection with our collaborations, ourability to protect our proprietary information or obtain patent protection inthe future may be impaired, which could have a significant adverse effect onour business, financial condition and results of operations.

 

***Many of the patentapplications we and our licensors have filed have not yet been substantivelyexamined and may not result in patents being 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,particularly in respect of the utility of our claimed inventions, may not be sufficientto meet the statutory requirements for patentability in all cases. As a result,it is difficult to predict whether any of our or our licensors’ applicationswill be 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.

 

***Disputes concerningthe infringement or misappropriation of our proprietary rights or theproprietary rights of others could be time consuming and extremely costly andcould delay our research and development efforts.***

 

Our commercialsuccess, if any, will be significantly harmed if we infringe the patent rightsof third parties or if we breach any license or other agreements that we haveentered into with regard to our technology or business.

 

We are aware ofother companies and academic institutions that have been performing research inthe areas of taste modulation and taste enhancers and aversive taste blockers.In particular, other companies and academic institutions have announced thatthey have 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.  Additionally, we may be subject to disputeswith our collaborative partners relating to the scope of our research, ourrelated agreements and the resulting rights or ownership of any discoveries.

 

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 notcurrently a party to any litigation, interference, opposition, protest, reexaminationor any other potentially adverse governmental, ex parte or inter-partyproceeding with regard to our patent or trademark positions. However, the lifesciences and other technology industries are characterized by extensivelitigation regarding patents and other intellectual property rights. Many lifesciences and other technology companies have employed intellectual propertylitigation as a way to gain a competitive advantage. If we become involved inlitigation, interference proceedings, oppositions, reexaminations, protests orother potentially adverse intellectual property proceedings as a result, forexample, of alleged infringement by us of the rights of others or as a resultof priority of invention disputes with third parties, we might have to spendsignificant amounts of money, time and effort defending our position and we maynot be successful. In addition, any claims relating to the infringement ofthird-party proprietary rights or proprietary determinations, even if notmeritorious, could result in costly litigation, lengthy governmentalproceedings, diversion of management’s attention and resources, or require usto enter into royalty or license agreements that are not advantageous to us.

 

Should any personhave filed patent applications or obtained patents in the United States thatclaim inventions also claimed by us, we may have to participate in aninterference proceeding declared by U.S. Patent and Trademark Office todetermine priority of invention and, thus, the right to a patent for theseinventions in the United States. Such a proceeding could result in substantialcost to us even if the outcome is favorable. Even if successful on prioritygrounds, an interference action may result in loss of claims based on 

 

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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 rulingarising out of any intellectual property dispute, including an adverse decisionas to the priority of our inventions, could undercut or invalidate ourintellectual property position. An adverse ruling could also subject us tosignificant liability for damages, including possible treble damages, preventus from using technologies or developing products, or require us to negotiatelicenses to disputed rights from third parties. Although patent andintellectual property disputes in the technology area are often settled throughlicensing or similar arrangements, costs associated with these arrangements maybe substantial and could include license fees and ongoing royalties.Furthermore, necessary licenses may not be available to us on satisfactoryterms, if at all. Failure to obtain a license in such a case could have asignificant adverse effect on our business, financial condition and results ofoperations.

 

**Risks Related to Our Fluctuating Operating Results, PossibleAcquisitions and Management of Growth**

 

***We expect that ourresults of operations will fluctuate from period to period, and thisfluctuation could cause our stock price to decline, causing investor losses.***

 

Our operating results have fluctuated in the past andare likely to vary significantly in the future based upon a number of factors,many of which we have little or no control over. We operate in a highly dynamicindustry and future results could be subject to significant fluctuations. Thesefluctuations could cause us to fail to meet or exceed financial expectations ofsecurities analysts or investors, which could cause our stock price to declinerapidly and significantly. Revenue and expenses in future periods may begreater or less than revenue and expenses in the immediately preceding periodor in the comparable period of the prior year. Therefore, period-to-period comparisonsof our operating results are not necessarily a good indication of our futureperformance. Some of the factors that could cause our operating results tofluctuate include:

 

·                  our ability to discover anddevelop taste enhancers and aversive taste blockers;

 

·                  our ability to discover and develop newdiabetes or obesity therapeutic compounds;

 

·                  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 acquireproducts, technologies or other businesses, we will incur a variety of costs,may have integration difficulties and may experience numerous other risks thatcould 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 

 

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infusions and could involve many risks, including, butnot 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;

 

·                  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, divertresources, 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 theforegoing risks could have a significant adverse effect on our business,financial condition and results of operations.

 

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

 

There are significant regulatory and legal barriers inmarkets outside the United States that we must overcome to the extent we enteror attempt to enter markets in countries other than the United States. We willbe subject to the burden of complying with a wide variety of national and locallaws, including multiple and possibly overlapping and conflicting laws. We alsomay experience difficulties adapting to new cultures, business customs andlegal systems. Any sales and operations outside the United States would besubject to political, economic and social uncertainties including, amongothers:

 

·                  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 changesrelated to these and other factors could adversely affect our business to theextent we enter markets outside the United States.

 

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***We may encounterdifficulties managing our growth, which could adversely affect our business.***

 

Our strategyincludes entering into and working on simultaneous taste enhancer and aversivetaste blocker discovery and development programs across multiple markets thatinclude both the food and beverage industry and the pharmaceutical industry. Weexpect to continue to grow to meet our strategic objectives. If our growthcontinues, it will continue to place a strain on us, our management and ourresources. Our ability to effectively manage our operations, growth and variousprojects requires us to continue to improve our operational, financial andmanagement controls, reporting systems and procedures and to attract and retainsufficient numbers of talented employees. We may not be able to successfullyimplement these tasks on a larger scale and, accordingly, we may not achieveour research, development and commercialization goals. If we fail to improveour operational, 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.

 

***An economicdownturn and adverse economic conditions may harm our business.***

 

The recenteconomic downturn 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 beverageindustries, and as these industries continue to cut costs in response to theeconomic downturn, our revenues will be similarly decreased. Furthermore, whileour revenues may decrease, our costs may remain fixed, resulting in decreasedearnings.

 

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

 

***The sale of asignificant number of our shares of common stock in the public market coulddepress the market price of common stock.***

 

The sale of asignificant number of shares of our common stock in the public market couldharm the market price of our common stock. As additional shares of common stockhave become available for resale in the public market pursuant to theregistration statement, the market supply of shares of common stock hasincreased, which could decrease its market price. The number of shares that maybe sold into the marketplace pursuant to the registration statement issignificant. We believe that such sales may severely depress the market priceof our common stock. In addition, some or all of the shares of common stock maybe offered from time to time in the open market pursuant to Rule 144 (orpursuant 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 ourcommon stock is expected to continue to be volatile.***

 

The market price of our common stock, and the marketprices for securities of biotechnology companies in general, have been, and areexpected to be, highly volatile. The following factors, in addition to otherrisk factors described in this Quarterly Report on Form 10-Q, and thepotentially low volume of trades in our common stock, may have a significantimpact on the market price of our common stock, some of which are beyond ourcontrol:

 

·                  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;

 

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·                  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.

 

The stock marketin general 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 topay cash dividends in the foreseeable future.***

 

We currentlyintend to retain any future earnings to finance the growth and development ofour business; 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 Redpointbecame a public company as a result of the Reverse Merger and ReincorporationMerger and not through a traditional underwritten initial public offering ofsecurities, the Company may not attract the attention of major brokerage firms.Additionally, as a public company, we incur 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 incurredsubstantial 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 discretionon how we use any proceeds we receive from the exercise of warrants andoptions.***

 

Our management hasbroad discretion on how to use and spend any proceeds we receive as a result ofour security holders exercising their warrants and options. Our stockholdersmay not agree with our decision on how to use such proceeds. If we fail tospend the proceeds effectively, our business and financial condition could beharmed and we may need to seek additional financing sooner than expected.

 

***It is notanticipated that there will be an active public market for shares of our commonstock in the near term and stockholders may have to hold their shares of commonstock for an indefinite period of time. Stockholders may be unable to resell alarge number of their shares of common stock within a short time frame or at orabove their purchase price.***

 

To have purchasedshares of 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 complywith registration rights granted to certain holders of our restrictedsecurities, we may be required to pay damages to 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 

 

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“resale” registrationstatement maintain its effectiveness until such time as all securitiesregistered under the registration statement have been sold or are otherwiseable to be sold under Rule 144 of the Securities Act without regard tovolume limitations, whichever is earlier. We cannot assure you that we will beable to obtain or maintain such effective registration statement.

 

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

 

The SEC hasadopted regulations that generally define “penny stock” to be an equitysecurity that has a market or exercise price of less than $5 per share, subjectto specific exemptions. Initially, the market price of our common stock islikely to be less than $5 per share and therefore may be designated a “pennystock” under SEC rules. This designation requires any broker or dealer sellingour common stock to disclose certain information about the transaction, obtaina written agreement from the investor and determine that the investment in ourcommon stock by the investor is a reasonably suitable investment for suchinvestor. These rules may restrict the ability of brokers or dealers tosell our common stock and, as a result, may affect the ability of investors tosell their 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 futureissuances of our common stock could depress our stock price.***

 

The market pricefor our common stock could decline, perhaps significantly, as a result ofissuances of a large number of shares of our common stock in the public marketor even the perception that such issuances could occur. Under our RegistrationRights Agreement, certain holders of our outstanding shares of our common stockand other securities have demand and Form S-3 registration rights. Salesof a substantial 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 stockholdersmay experience additional dilution upon the exercise of warrants or options.***

 

As of the finalclosing of the Private Placement, we issued warrants to investors to acquire approximately10.2 million shares of common stock and warrants to the placement agentsto acquire approximately 3.6 million shares of common stock in the PrivatePlacement. In addition, as of June 30, 2009, there were 16.9 millionshares of common stock underlying options that have been or may be grantedpursuant to the Redpoint Bio Corporation 2007 Omnibus Equity Compensation Plan.If these warrants are exercised or converted, or if the options are exercised,you may experience dilution in the net tangible book value of our common stock.

 

***Directors andofficers of the Company have a high concentration of our common stockownership.***

 

Based on theaggregate number of shares of our common stock that are outstanding as of June 30,2009, our officers and directors beneficially own approximately 11.34% 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 OFEQUITY SECURITIES AND USE OF PROCEEDS**

 

None.

 

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

 

Not applicable.

 

**ITEM 4.****                                                    ****SUBMISSION OF MATTERS TOA VOTE OF SECURITY HOLDERS**

 

Ourannual meeting of stockholders, or the Annual Meeting, was held on June 4,2009. There were present at the Annual Meeting in person or by proxystockholders holding an aggregate of 50,656,374 shares of our common stock outof a total number of 79,495,870 shares of common stock issued and outstandingand entitled to vote at the meeting.

 

Thematters that were voted on at the Annual Meeting were:

 

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(A)       To elect seven directors, each of whomshall serve for a term of one year.

 

Dr. Raymond SalemmeDr. Joseph MollicaDr. Allen BloomMr. Robert ChefitzDr. Leif KjaergaardDr. Irwin Scher andMr. Richard P. Shanley

 

(B)        Toratify the appointment of KPMG LLP as Redpoint’s independent registered publicaccounting firm to audit Redpoint’s financial statements for the fiscal yearending December 31, 2009 and the effectiveness of internal control overfinancial reporting as of December 31, 2009.

 

The results of the votes of the Annual Meeting were asfollows:

 
| ** **                                       | ** ** | **Number of Shares of  Common Stock** | ** ** |
|--------------------------------------------------|------------|-----------------------------------------------------------|------------|
| **Proposal**                                     | ** ** | **For**                                                   | ** ** | **Withheld** | ** ** |
| Election of the following nominees as Directors: |       |                                                      |       |   |   |
| Dr. Raymond Salemme                         |       | 41,733,388                                                |       | 8,922,986 |   |
| Dr. Joseph Mollica                          |       | 42,436,870                                                |       | 8,219,504 |   |
| Dr. Allen Bloom                             |       | 42,742,890                                                |       | 7,913,484 |   |
| Mr. Robert Chefitz                          |       | 42,687,250                                                |       | 7,969,124 |   |
| Dr. Leif Kjaergaard                         |       | 42,742,890                                                |       | 7,913,484 |   |
| Dr. Irwin Scher                             |       | 42,742,890                                                |       | 7,913,484 |   |
| Mr. Richard P. Shanley                      |       | 42,742,890                                                |       | 7,913,484 |   |

 
| ** **                                                                                                                                                                                                                                                                                                 | ** ** | **Number of Shares of  Common Stock** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| **Proposal**                                                                                                                                                                                                                                                                                               | ** ** | **For**                                                   | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker Non-Votes** | ** ** |
| To ratify the appointment of KPMG LLP as  Redpoint’s independent registered public accounting firm to audit Redpoint’s  financial statements for the fiscal year ending December 31, 2009 and the effectiveness of internal  control over financial reporting as of December 31, 2009. |       | 45,051,675                                                |       | 5,450,269 |   | 154,430 |   | 0 |   |

 

Accordingly,our stockholders elected Dr. Raymond Salemme, Dr. Joseph Mollica, Dr. AllenBloom, Mr. Robert Chefitz, Dr. Leif Kjaergaard, Dr. Irwin Scherand Mr. Richard P. Shanley to serve as Directors until our 2010 annualmeeting of stockholders and until their respective successors have been dulyelected and qualified.

 

Our stockholders also approved and ratified theselection by the audit committee of our board of directors of KPMG LLP as our independent registered public accountingfirm for the year ending December 31, 2009.

 

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

 
| **Exhibit No.** | ** ** | ** **                                                                                                                                             |
|----------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                   |
| 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                         |
|-----------------------|---------------------------------------------------|
|                  |                                              |   |
| August 13,  2009 | By:                                               | /s/ F. Raymond  Salemme |
|                  | F. Raymond  Salemme                               |
|                  | President and  Chief Executive Officer            |
|                  | (Principal  Executive Officer)                    |
|                  |                                              |   |
| August 13,  2009 | By:                                               | /s/ Scott M.  Horvitz |
|                  | Scott M. Horvitz                                  |
|                  | Chief Financial  Officer, Treasurer and Secretary |
|                  | (Principal  Financial and Accounting Officer)     |

 

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**EXHIBITINDEX**

 
| **Exhibit No.** | ** ** | ** **                                                                                                                                             |
|----------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                   |
| 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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