Tableof Contents

 

 

 

**United States**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

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

 

**For thetransition period from             to             **

 

**CommissionFile Number:  000-51708**

 

**Redpoint Bio Corporation**

(Exact name of Registrant asspecified in its charter)

 

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

 

**RedpointBio Corporation, 7 Graphics Drive, Ewing, New Jersey 08628**

(Address of principalexecutive offices) (Zip Code)

 

**(609)637-9700**

(Registrant’s TelephoneNumber, Including Area Code)

 

 

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

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to file suchreports), and (2) has been subject to such filing requirements for thepast 90 days. Yes  x  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 x          |
|------------------------------------------------------------------------|--------|-----------------------------------|
|                                                                   |   |                              |
| Non-accelerated filer o (Do not check if a smaller reporting  company) |   | Smaller reporting  company o |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).Yes  o   No  x

 

The number of shares of theregistrant’s common stock outstanding as of August 7, 2008 was 79,495,870.

 

 

 

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**REDPOINTBIO CORPORATION**

 

**TABLE OFCONTENTS**

 
| ** **        | ** **                                                                                  | ** ** | **Page** |
|-------------------|---------------------------------------------------------------------------------------------|------------|----------|
| **PART I:**  | **FINANCIAL INFORMATION**                                                                   |       |     |
|              |                                                                                        |       |     |
| ITEM 1.           | FINANCIAL  STATEMENTS (unaudited):                                                          |       | 1        |
|              |                                                                                        |       |     |
|              | Balance Sheets                                                                              |       | 1        |
|              |                                                                                        |       |     |
|              | Statements of  Operations                                                                   |       | 2        |
|              |                                                                                        |       |     |
|              | Statements of  Cash Flows                                                                   |       | 3        |
|              |                                                                                        |       |     |
|              | Notes to Financial Statements                                                               |       | 5        |
|              |                                                                                        |       |     |
| ITEM 2.           | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |       | 12       |
|              |                                                                                        |       |     |
| ITEM 3.           | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                 |       | 17       |
|              |                                                                                        |       |     |
| ITEM 4.           | CONTROLS AND  PROCEDURES                                                                    |       | 18       |
|              |                                                                                        |       |     |
| **PART II:** | **OTHER INFORMATION**                                                                       |       |     |
|              |                                                                                        |       |     |
| ITEM 1.           | LEGAL PROCEEDINGS                                                                           |       | 19       |
|              |                                                                                        |       |     |
| 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                                        |       | 34       |
|              |                                                                                        |       |     |
| ITEM 6.           | EXHIBITS                                                                                    |       | 34       |
|              |                                                                                        |       |     |
| SIGNATURES        |                                                                                        | 36         |

 

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**PART I. FINANCIAL INFORMATION.**

 

**ITEM 1.  FINANCIAL STATEMENTS.**

 

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

**BALANCE SHEETS**

**(UNAUDITED)**

 
| ** **                                                                                                                                                                                        | ** ** | **December 31,** | ** ** | **June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                                                                                                                                                                                        | ** ** | **2007**              | ** ** | **2008**          | ** ** |
| **Assets**                                                                                                                                                                                        | ** ** | ** **            | ** ** | ** **        | ** ** |
| Current assets:                                                                                                                                                                                   |       |                  |       |              |       |
| Cash and cash equivalents                                                                                                                                                                         |       | $                     | 5,789,997  |              | $          | 5,424,301 |   |
| Marketable securities                                                                                                                                                                             |       | 16,911,413            |       | 12,471,553        |       |
| Accounts receivable                                                                                                                                                                               |       | 50,114                |       | 116,950           |       |
| Prepaid expenses and other current assets                                                                                                                                                         |       | 505,994               |       | 363,365           |       |
| Total current assets                                                                                                                                                                              |       | 23,257,518            |       | 18,376,169        |       |
| Property and equipment, net                                                                                                                                                                       |       | 1,295,943             |       | 1,430,976         |       |
| Other assets                                                                                                                                                                                      |       | 269,850               |       | 305,321           |       |
| Total assets                                                                                                                                                                                      |       | $                     | 24,823,311 |              | $          | 20,112,466 |   |
| **Liabilities  and Stockholders’ Equity**                                                                                                                                                    |       |                  |       |              |       |
| Current liabilities:                                                                                                                                                                              |       |                  |       |              |       |
| Current portion of long-term debt                                                                                                                                                                 |       | $                     | 447,767    |              | $          | 315,663 |   |
| Accounts payable                                                                                                                                                                                  |       | 710,880               |       | 683,223           |       |
| Accrued expenses                                                                                                                                                                                  |       | 514,019               |       | 328,284           |       |
| Accrued compensation                                                                                                                                                                              |       | 402,863               |       | 347,504           |       |
| Deferred revenue                                                                                                                                                                                  |       | 371,424               |       | 1,005,026         |       |
| Total current liabilities                                                                                                                                                                         |       | 2,446,953             |       | 2,679,700         |       |
| Long-term debt                                                                                                                                                                                    |       | 187,576               |       | 70,311            |       |
| Deferred revenue                                                                                                                                                                                  |       | 650,007               |       | 464,293           |       |
| Total liabilities                                                                                                                                                                                 |       | 3,284,536             |       | 3,214,304         |       |
| Stockholders’ equity:                                                                                                                                                                        |       |                  |       |              |       |
| Preferred stock; 10,000,000 shares  authorized, $0.0001 par value, none issued                                                                                                                    |       | —                |       | —            |       |
| Common stock; authorized 150,000,000  shares; $0.0001 par value, issued and outstanding 79,223,987 at  December 31, 2007 and issued and outstanding 79,495,870 shares at  June 30, 2008 |       | 7,922                 |       | 7,949             |       |
| Additional paid-in-capital                                                                                                                                                                        |       | 54,485,373            |       | 54,952,769        |       |
| Deficit accumulated during development  stage                                                                                                                                                     |       | (32,996,231           | )          | (38,082,400       | )          |
| Accumulated other comprehensive income                                                                                                                                                            |       | 41,711                |       | 19,844            |       |
| Total stockholders’ equity                                                                                                                                                                   |       | 21,538,775            |       | 16,898,162        |       |
| Total liabilities and stockholders’ equity                                                                                                                                                   |       | $                     | 24,823,311 |              | $          | 20,112,466 |   |

 

See accompanying notes to the unaudited financial statements.

 

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

**STATEMENTS OF OPERATIONS**

**(UNAUDITED** )

 
| ** **                                           | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** | **August 16,  1995 (Inception) to** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                           | ** ** | **2007**                                            | ** ** | **2008**                                          | ** ** | **2007**                                           | ** ** | **2008** | ** ** | **June 30, 2008** | ** ** |
| Research and grant revenue                           |       | $                                                   | 675,542    |                                              | $          | 1,031,305                                          |       | $ | 716,393 |   | $ | 1,939,910 |   | $ | 8,402,232 |   |
| Operating expenses:                                  |       |                                                |       |                                              |       |                                               |       |   |   |   |   |
| Research and development                             |       | 1,241,841                                           |       | 2,172,853                                         |       | 3,810,341                                          |       | 4,158,566 |   | 23,948,861 |   |
| General and administrative                           |       | 1,151,406                                           |       | 1,587,710                                         |       | 2,062,665                                          |       | 3,219,913 |   | 17,814,515 |   |
| Total operating expenses                             |       | 2,393,247                                           |       | 3,760,563                                         |       | 5,873,006                                          |       | 7,378,479 |   | 41,763,376 |   |
| Operating loss                                       |       | (1,717,705                                          | )          | (2,729,258                                        | )          | (5,156,613                                         | )          | (5,438,569 | ) | (33,361,144 | ) |
| Interest income                                      |       | 155,162                                             |       | 147,395                                           |       | 176,136                                            |       | 380,120 |   | 1,333,521 |   |
| Interest expense                                     |       | (25,962                                             | )          | (12,437                                           | )          | (1,655,497                                         | )          | (27,720 | ) | (3,361,094 | ) |
| Loss before income taxes                             |       | (1,588,505                                          | )          | (2,594,300                                        | )          | (6,635,974                                         | )          | (5,086,169 | ) | (35,388,717 | ) |
| Income tax benefit                                   |       | —                                              |       | —                                            |       | —                                             |       | — |   | 719,206 |   |
| Net loss                                             |       | (1,588,505                                          | )          | (2,594,300                                        | )          | (6,635,974                                         | )          | (5,086,169 | ) | $ | (34,669,511 | ) |
| Accretion of redeemable convertible  preferred stock |       | —                                              |       | —                                            |       | (224,846                                           | )          | — |   |   |   |
| Net loss applicable to common stockholders           |       | $                                                   | (1,588,505 | )                                                 | $          | (2,594,300                                         | )          | $ | (6,860,820 | ) | $ | (5,086,169 | ) |   |   |
| Basic and diluted net loss per common share          |       | $                                                   | (0.02      | )                                                 | $          | (0.03                                              | )          | $ | (0.14 | ) | $ | (0.06 | ) |   |   |
| Weighted average of shares outstanding               |       | 77,657,121                                          |       | 79,462,299                                        |       | 47,354,110                                         |       | 79,390,799 |   |   |   |

 

See accompanying notes to the unaudited financial statements.

 

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**REDPOINTBIO CORPORATION**

**(ADEVELOPMENT-STAGE ENTERPRISE)**

**STATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

 
| ** **                                                                   | ** ** | **Six Months Ended June 30,** | ** ** | **August 16, 1995  (Inception) to** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2007**                                          | ** ** | **2008**                                           | ** ** | **June 30, 2008** | ** ** |
| Cash flows from operating activities:                                        |       |                                              |       |                                               |       |   |   |
| Net loss                                                                     |       | $                                                 | (6,635,974 | )                                                  | $          | (5,086,169 | ) | $ | (34,669,511 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |       |                                              |       |                                               |       |   |   |
| Depreciation                                                                 |       | 225,868                                           |       | 323,205                                            |       | 1,832,206 |   |
| Amortization of discounts and premiums on  marketable securities             |       | —                                            |       | (214,995                                           | )          | (409,724 | ) |
| Options, warrants and stock issued for  services and dilution provisions     |       | 1,896,431                                         |       | 426,641                                            |       | 3,042,551 |   |
| Beneficial conversion feature                                                |       | 1,228,565                                         |       | —                                             |       | 1,228,565 |   |
| Amortization of discount on convertible  notes                               |       | 302,032                                           |       | —                                             |       | 899,935 |   |
| Amortization of deferred financing costs                                     |       | 32,892                                            |       | 15,038                                             |       | 148,860 |   |
| Debt inducement charge                                                       |       | —                                            |       | —                                             |       | 361,598 |   |
| Interest expense on convertible notes                                        |       | —                                            |       | —                                             |       | 136,075 |   |
| Changes in assets and liabilities:                                           |       |                                              |       |                                               |       |   |   |
| Accounts receivable                                                          |       | (30,000                                           | )          | (66,836                                            | )          | (116,950 | ) |
| Prepaid expenses and other assets                                            |       | (133,159                                          | )          | 92,120                                             |       | (981,307 | ) |
| Accounts payable                                                             |       | 643,440                                           |       | (35,194                                            | )          | 874,477 |   |
| Accrued expenses and accrued compensation                                    |       | (272,332                                          | )          | (241,094                                           | )          | 807,398 |   |
| Deferred revenue                                                             |       | 1,884,411                                         |       | 447,888                                            |       | 1,469,319 |   |
| Net cash used in operating activities                                        |       | (857,826                                          | )          | (4,339,396                                         | )          | (25,376,508 | ) |
| Cash flows from investing activities:                                        |       |                                              |       |                                               |       |   |   |
| Maturity and sale of marketable securities                                   |       | —                                            |       | 14,496,994                                         |       | 20,246,994 |   |
| Purchases of marketable securities                                           |       | —                                            |       | (9,864,006                                         | )          | (32,288,979 | ) |
| Purchases of property and equipment                                          |       | (61,345                                           | )          | (450,701                                           | )          | (3,145,998 | ) |
| Net cash provided by (used in) investing  activities                         |       | (61,345                                           | )          | 4,182,287                                          |       | (15,187,983 | ) |
| Cash flows from financing activities:                                        |       |                                              |       |                                               |       |   |   |
| Proceeds from issuance of long-term debt                                     |       | —                                            |       | —                                             |       | 2,110,810 |   |
| Net proceeds from convertible notes                                          |       | —                                            |       | —                                             |       | 5,253,811 |   |
| Repayment of debt                                                            |       | (280,101                                          | )          | (249,369                                           | )          | (1,724,836 | ) |
| Net proceeds from issuance of preferred  stock                               |       | —                                            |       | —                                             |       | 11,883,447 |   |
| Net proceeds from issuance of common stock  and warrants                     |       | 28,718,753                                        |       | —                                             |       | 28,624,603 |   |
| Proceeds from exercise of common stock  options and warrants                 |       | 37,122                                            |       | 40,782                                             |       | 124,078 |   |
| Common stock reacquired                                                      |       | —                                            |       | —                                             |       | (283,121 | ) |
| Net cash provided by (used in) financing  activities                         |       | 28,475,774                                        |       | (208,587                                           | )          | 45,988,792 |   |
| Net increase (decrease) in cash and cash  equivalents                        |       | 27,556,603                                        |       | (365,696                                           | )          | 5,424,301 |   |
| Cash and cash equivalents, beginning of  period                              |       | 974,378                                           |       | 5,789,997                                          |       | — |   |
| Cash and cash equivalents, end of period                                     |       | $                                                 | 28,530,981 |                                               | $          | 5,424,301 |   | $ | 5,424,301 |   |
| Supplemental cash flow disclosures:                                          |       |                                              |       |                                               |       |   |   |
| Noncash investing and financing activities:                                  |       |                                              |       |                                               |       |   |   |
| Property and equipment included in accounts  payable                         |       | $                                                 | 431,366    |                                               | $          | 7,537 |   | $ | 7,537 |   |
| Conversion of notes payable and accrued  interest to preferred stock         |       | —                                            |       | —                                             |       | 1,446,395 |   |

 

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| ** **                                                          | ** ** | **Six Months Ended June 30,** | ** ** | **August 16, 1995  (Inception) to** | ** ** |
|---------------------------------------------------------------------|------------|---------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                          | ** ** | **2007**                                          | ** ** | **2008**                                           | ** ** | **June 30, 2008** | ** ** |
| Conversion of notes payable and accrued  interest to common stock   |       | 3,896,001                                         |       | —                                             |       | 3,896,001 |   |
| Conversion of preferred and junior  preferred stock to common stock |       | 16,940,297                                        |       | —                                             |       | 16,940,297 |   |
| Accretion of preferred stock                                        |       | 224,846                                           |       | —                                             |       | 3,248,857 |   |
| Warrants issued in connection with notes  payable                   |       | —                                            |       | —                                             |       | 1,258,642 |   |
| Cash paid for interest                                              |       | 51,593                                            |       | 26,001                                             |       | 438,878 |   |

 

See accompanying notes to the unaudited financial statements.

 

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**REDPOINTBIO CORPORATION**

**(ADEVELOPMENT-STAGE ENTERPRISE)**

**NOTES TO FINANCIAL STATEMENTS**

**(UNAUDITED)**

 

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

 

Redpoint Bio Corporation (“Redpoint” or the “Company”) is leveragingrecent discoveries in the molecular biology of taste to discover and developnovel taste modulators for the food, beverage and pharmaceutical industries.The Company’s food and beverage program is focused on identifying novel flavorsthat improve the taste of existing ingredients and enable the development ofbetter-tasting and more healthful foods and beverages. The pharmaceuticalprogram uses a biochemical approach aimed at suppressing the bitterness ofmedicines, which has the potential to expand the range of formulation optionsand increase patient compliance. The Company uses its technology to discoverand develop products for partners and for its own pipeline.

 

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

 

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

 

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

 

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

 

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

 

*Completion of Merger*

 

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

 

Redpoint was deemed to have been the accounting acquirer in the ReverseMerger.  Accordingly, the financial statements of the Company presentedreflect the historical results of Redpoint prior to the Reverse Merger, and ofthe combined entities following the Reverse Merger, and do not include thehistorical financial results of Robcor prior to the consummation of the ReverseMerger.  In connection with the ReverseMerger, Redpoint issued 1,391,000 shares of common stock to Robcor shareholderswhich have been treated as issuance costs in connection with Private Placement.

 

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*Private Placement*

 

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

 

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

 

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

 

*Reincorporation Merger*

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Marketable securities include investments in corporate commercial paperand debt securities having original maturities of greater than three months.These marketable securities are treated for financial reporting purposes asavailable-for-sale and as such are reported at their fair market values.Unrealized gains and losses have been recorded as a separate component ofstockholders’ equity. All realized gains and losses are recorded in the resultsof operations.

 

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

 

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

 

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

 

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

 

*License Fees and Multiple Element Arrangements*

 

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

 

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

 

*Substantive Milestone Payments*

 

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

 

·                  the milestone payments are non-refundable;

 

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

 

·                  substantive effort is involved in achievingthe milestone;

 

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

 

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

 

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

 

*Reimbursement of Research and Development Costs*

 

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

 

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

 

Property and equipment are recorded at cost and depreciated on astraight-line basis over their estimated useful lives. The Company uses a lifeof four to five years for laboratory equipment, three to seven years for officeequipment and furniture, and the lesser of the useful life or the remaininglife of the underlying facility lease for leasehold improvements. Expendituresfor repairs and maintenance are charged to expense as incurred, while major renewalsand betterments are capitalized. Upon disposition of assets, the 

 

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costand related accumulated depreciation are removed from the accounts and anyresulting gain or loss is included in the Statements of Operations.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

The fair value of our financial instruments is the amount for which theinstrument could be exchanged in a current transaction between willing parties.As of December 31, 2007 and June 30, 2008, the carrying values ofcash and cash equivalents, accounts receivable, prepaid expenses and othercurrent assets, accounts payable, accrued expenses, and accrued compensationequaled or approximated their respective fair values because of the shortduration of these instruments. In addition, we believe the carrying value 

 

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ofour debt instruments, which do not have readily ascertainable market values,approximate their fair values, given that the interest rates on outstandingborrowings approximate market rates.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 
| ** **               | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **               | ** ** | **2007**                                            | ** ** | **2008**                                          | ** ** | **2007** | ** ** | **2008** | ** ** |
| Net Loss                 |       | $                                                   | (1,588,505 | )                                                 | $          | (2,594,300 | ) | $ | (6,635,974 | ) | $ | (5,086,169 | ) |
| Other comprehensive loss |       | —                                              |       | (87,143                                           | )          | — |   | (21,867 | ) |
| Comprehensive loss       |       | $                                                   | (1,588,505 | )                                                 | $          | (2,681,443 | ) | $ | (6,635,974 | ) | $ | (5,108,036 | ) |

 

**4.****                         ****Convertible Notes Payable**

 

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

 

In accordance with APB Opinion No. 14, *Accountingfor Convertible Debt and Debt Issued with Stock Purchase Warrants*,the Company allocated the proceeds from the financing between the PromissoryNotes and warrants based on their relative estimated fair values.  Therelative fair value of the warrants of $1,228,565 was recorded against thecarrying value of the Promissory Notes as 

 

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anoriginal issue discount (OID) which was being amortized as interest expenseover the one year anniversary of the initial May issuance date of thePromissory Notes until the closing of Reverse Merger. During the three monthsended March 31, 2007 the Company recognized a noncash charge to interestexpense of $302,032 for the amortization of the remaining OID.

 

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

 

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

 

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

 
| ** **                                  | ** ** | **Gross Unrealized** | ** ** |
|---------------------------------------------|------------|---------------------------|------------|
| **As of June 30, 2008** | ** ** | **Amortized Cost**   | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Fair Value** | ** ** |
| Corporate debt securities                   |       | $                         | 11,952,516 |   | $ | 22,008 |   | $ | (3,396 | ) | $ | 11,971,128 |   |
| Asset-backed securities                     |       | 499,193                   |       | 1,232 |   | — |   | 500,425 |   |
|                                        |       |                      |       |   |   |   |   |   |   |
|                                        |       | $                         | 12,451,709 |   | $ | 23,240 |   | $ | (3,396 | ) | $ | 12,471,553 |   |

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

 

As of June 30, 2008, all available-for-sale securities mature withinone year. During the three and six months ended June 30, 2008 and 2007,amortization of discounts and premiums related to marketable securitiesresulted in income of $112,613, $214,995, $0, and $0, respectively.

 

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

 

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

 

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

 

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

 

As of June 30, 2008, the Company had the following warrants topurchase Common Stock outstanding:

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

 

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

 

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

 

On March 12, 2007, the Company adopted the Redpoint BioCorporation 2007 Omnibus Equity Compensation Plan (“2007 Plan”), which providedfor the issuance of up to 13,511,562 shares of common stock, subject toadjustment in certain circumstances.  In connection with the adoption of the2007 Plan, the 2003 Plan merged with and into the 2007 Plan and no additionalgrants may be made thereafter under the 2003 Plan.  Outstanding grantsunder the 2003 Plan will continue in effect in accordance with their terms asin effect before March 12, 2007 and the shares with respect to outstandinggrants under the 2003 Plan will be issued or transferred under the 2007Plan.  The 2007 Plan is now the Company’s only plan in effect.

 

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

 

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

 
| ** **                            | ** ** | ** **         | ** ** | ** **              | ** ** | **Weighted-**   | ** ** | ** **    | ** ** |
|---------------------------------------|------------|--------------------|------------|-------------------------|------------|-----------------|------------|---------------|------------|
| ** **                            | ** ** | ** **         | ** ** | **Weighted-**           | ** ** | **average**     | ** ** | ** **    | ** ** |
| ** **                            | ** ** | **Number of** | ** ** | **average**             | ** ** | **contractual** | ** ** | **Intrinsic** | ** ** |
| ** **                            | ** ** | **shares**         | ** ** | **exercise price** | ** ** | **term**        | ** ** | **Value**     | ** ** |
| Outstanding at December 31, 2007 |       | 9,603,961          |       | $                       | 0.49       |            |       |          |       |   |
| Granted                               |       | 1,629,938          |       | 0.65                    |       |            |       |          |       |
| Exercised                             |       | (271,883           | )          | 0.15                    |       |            |       |          |       |
| Forfeited                             |       | —             |       | —                  |       |            |       |          |       |
| Outstanding at June 30, 2008     |       | 10,962,016         |       | $                       | 0.52       |            | 7.95       |          | $          | 2,151,779 |   |
|                                       |            |                    |            |                         |            |                 |            |               |            |  |  |

 

All options granted to date have exercise prices equal to the fairvalue of the underlying common stock on the date of grant. Prior to theeffectiveness of the registration statement on Form S-1, which occurred onJuly 20, 2007, all options were granted with an exercise price equal tothe estimated fair value of the underlying common stock as determined by theboard of directors. Subsequent to that date, all options have been granted withan exercise price equal to the most recent trading price of the Company’scommon stock. As of June 30, 2008, there were 5,958,262 shares of commonstock available for grant under the 2007 Plan.

 

The per-share weighted average fair value of options granted during thesix months ended June 30, 2008 and 2007 was estimated at $0.42 and $0**.**53, respectively, on the date of grant using theBlack-Scholes option-pricing model.

 

The Company recognized $231,492, $426,641, $155,715 and $264,724 ofcompensation expense pursuant to SFAS 123R for the three and six monthsended June 30, 2008 and 2007, respectively. As of June 30, 2008,there was $2.4 million of unrecognized compensation expense related tounvested stock options granted to employees and non-employee directors, whichis expected to be recognized over a weighted average period of 2.8 years.

 

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

 

On June 5, 2007, the Company filed a “resale” registrationstatement with the SEC covering all shares of common stock issued in thePrivate Placement and in connection with the Reverse Merger, including sharesof common stock into which certain warrants are exercisable.  Suchregistration statement was declared effective on July 20, 2007.  TheCompany will use its best efforts to maintain its effectiveness until such timeas all securities registered under the registration statement have been sold orare otherwise able to be sold under Rule 144 of the Securities Act withoutregard to volume limitations, whichever is earlier.

 

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

 

*Givaudan*.    In March 2007, the Company entered into a JointResearch and Development and License Agreement (the “Givaudan Agreement”) withGivaudan Schweiz AG, a Swiss company (“Givaudan”) for the development andcommercialization of compounds that enhance sweetness or savory sensation, aswell as compounds that block or desensitize bitter taste for use in the food 

 

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andbeverage industry. Under the terms of the Givaudan Agreement, Redpoint receivedan upfront payment of $1,300,000 and will receive research funding over theinitial 3.5 year term of the Givaudan Agreement, of up to$11,600,000.  If certain conditions havenot been achieved in certain timeframes as set forth in the Givaudan Agreement,then Givaudan may terminate the agreement with us prior to the expiration ofthe initial 3.5 year term**.**  Redpoint is also eligible to receivereimbursement for costs incurred in connection with obtaining certainregulatory approvals.  Redpoint will alsobe eligible to receive milestone payments of up to $2,500,000 upon theachievement of specified development and commercialization events as well asroyalty payments based on net sales of Givaudan products that contain flavorsystems incorporating compounds developed under the collaboration. The upfrontpayment of $1,300,000 million is being recognized as revenue on astraight-line basis over the initial term of the Givaudan Agreement.  During the three and six months ended June 30,2008 and 2007, the Company recognized $93,000, $186,000, $93,000 and $93,000,respectively of revenue attributable to the amortization of the upfront fee and$614,000, $1,228,000, $583,000 and $624,000 of revenue from research funding,respectively.

 

*Coca-Cola*.    In December 2007, the Company entered into aresearch agreement (the “Coca-Cola Agreement”) with The Coca-Cola Company (“Coca-Cola”)for the development of certain technology for use in non-alcoholic beverages.Under the terms of the Coca-Cola Agreement, Redpoint will receive up to$900,000 over the initial one year term for research funding. In February 2008,Coca-Cola made a non-refundable payment of $450,000 for the initial six monthsof the agreement. Coca-Cola will also reimburse the Company for certain relatedclinical research organization (CRO) costs that the Company incurs. Redpoint isalso eligible to receive a milestone payment of $200,000 upon the achievementof specified development events set forth in the Coca-Cola Agreement.  The initial term of the Coca-Cola Agreementis for 12 months, subject to extension upon mutual agreement of theparties.  The Coca-Cola Agreement may beterminated early by the parties upon their mutual agreement or by Coca-Cola inits individual discretion after the initial six month period.  For the initial six month period, the Companygranted Coca-Cola an exclusive right to negotiate to extend and expand thecollaboration into a broader, multi-year research, development andcommercialization program.  During thethree and six months ended June 30, 2008, the Company recognized $268,000and $470,000 of revenue from research funding.

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

 

**Cautionary Note RegardingForward-Looking Statements**

 

The Securities and Exchange Commission, referred to herein as the SEC,encourages companies to disclose forward-looking information so that investorscan better understand a company’s future prospects and make informed investmentdecisions.  Certain statements that we may make from time to time,including, without limitation, statements contained in this Quarterly Report onForm 10-Q, referred to herein as the Quarterly Report, constitute “forward-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 similar substance used in connectionwith any discussion of future operating or financial performance, identifyforward-looking statements.  All forward-looking statements are management’spresent expectations of future events and are subject to a number of risks anduncertainties that could cause actual results to differ materially from thosedescribed in the forward-looking statements.  These risks anduncertainties include, among other things:

 

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

 

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

 

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

 

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

 

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

 

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

 

·                  the levels and timing of payments under ourcollaborative agreement;

 

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

 

·                  the development of competing diagnostic andtherapeutic products;

 

·                  our ability to protect our proprietarytechnologies;

 

·                  patent-infringement claims;

 

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

 

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

 

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

 

**Overview**

 

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

 

Since its inception in 1995, Redpoint has incurred losses and negativecash flows from operations, and such losses have continued subsequent to June 30,2008. As of June 30, 2008, Redpoint had an accumulated deficit of$38.1 million and anticipates incurring additional losses for at least thenext several years. We expect to spend significant resources over the nextseveral years to enhance our technologies and to fund research and developmentof our pipeline of potential products.

 

Through June 30, 2008, our revenue has come solely from corporatecollaborations, license agreements, and government grants. In order to achieveprofitability, we must continue to develop products and technologies that canbe commercialized by us or through existing and future collaborations.

 

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

 

In March 2007, we entered into a Joint Research and Developmentand License Agreement with Givaudan Schweiz AG for the development andcommercialization of compounds that enhance sweetness or savory sensation, aswell as compounds that block or desensitize bitter taste for use in the foodand beverage industry. Under the terms of the agreement, Redpoint and Givaudanare collaborating exclusively with each other to discover and develop compoundsthat act primarily through the modulation of the TRPM5 channel. Inconsideration of our agreement to conduct research and develop compounds andgrant exclusive licenses and other rights, Givaudan paid us an upfronttechnology fee of $1.3 million and agreed to provide research funding tous over the initial 3.5 year term of the agreement of up to$11.6 million. If certain conditions have not been achieved in certaintimeframes as set forth in the Givaudan Agreement, then Givaudan may terminatethe agreement with us prior to the expiration of the initial 3.5 yearterm.  Givaudan will also reimburse usfor costs we incur in connection with obtaining certain regulatory approvals.Through June 30, 2008, including the upfront fee, we have received$5.0 million in research and development funding. We are also eligible toreceive milestone payments of up to $2.5 million upon the achievement ofspecified development and commercialization events as well as royalty paymentsbased on net sales of Givaudan products that contain flavor systemsincorporating compounds developed under the collaboration.

 

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

 

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exclusivelicenses and other rights to Coca-Cola pursuant to the terms and conditions ofthe agreement, Coca-Cola agreed to pay us $900,000 over the initial one yearterm.  In connection therewith, in February 2008,Coca-Cola made a non-refundable payment in the amount of $450,000, which shallbe applied to the aforementioned costs for the initial six months of theagreement.  Coca-Cola will also reimburseus for certain related CRO costs that we incur. In addition, Coca-Cola also agreed to pay us a milestone payment of$200,000 upon the achievement of specified development events set forth in theResearch Agreement.  The initial term ofthe agreement is for 12 months, subject to extension upon mutual agreementof the parties.  The agreement may beterminated early by the parties upon their mutual agreement or by Coca-Cola inits individual discretion after the initial six month period. For the initialsix month period, we granted Coca-Cola an exclusive right to negotiate toextend and expand the collaboration into a broader, multi-year research,development and commercialization program.

 

Our discovery programs capitalize on advances in taste science and ourknow-how to create new products. We believe these products may have thepotential to make processed foods and beverages healthier and enhance theacceptability, safety and efficacy of many types of pharmaceutical products. Wehave developed an integrated discovery platform and identified prototypecompounds for both enhancement of sweet and savory taste and blocking bittertaste. To leverage our technology in the food and beverage markets, we haveentered into research and development agreements with Givaudan, the world’sleading company in the flavors and fragrances industry, and Coca-Cola, theworld’s largest beverage company. In addition, we plan to use our technology todiscover aversive taste blockers, principally to develop a pipeline of proprietarytaste-modified pharmaceutical products. We may develop such products ourselvesor partner with pharmaceutical companies who are seeking to extend the patentlife or enhance the performance of their products. We have identified severalcategories of products where patient acceptability, or the potential for novelformulation options, are currently limited due to the intense bitter or otheraversive taste of the active pharmaceutical ingredient (API). We plan toincorporate the proprietary bitter taste or aversive taste blockers foundthrough our discovery programs with drugs of proven safety and efficacy tocreate novel, valued-added formulations. We have not yet developed any productsthat are commercially available.

 

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

 

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

 

**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 sponsoredby the National Institutes of Health. The last SBIR related research projectwas completed in 2004.

 

To leverage our technology in the food and beverage markets, in March 2007,we entered into the Givaudan Agreement where we are collaborating exclusivelywith each other to discover and develop Enhancer Compounds and Bitter BlockerCompounds that act primarily through the modulation of the TRPM5 channel. Also,in December 2007, we entered into a research agreement with Coca-Cola forthe development of certain technology for use in non-alcoholic beverages. Wemay also partner with other major 

 

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ingredientsuppliers, or food and beverage companies, to develop and commercialize tasteenhancers that act through a variety of other newly discovered mechanisms oftaste sensation in exchange for technology access fees, research funding,product development milestones, and product royalties.

 

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

 

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

 

**Research and Development**

 

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

 

**General and Administrative**

 

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

 

**Results of Operations**

 

***Three months ended June 30, 2008compared to June 30, 2007***

 

*Research and Grant Revenue*.  For the three months ended June 30,2008, we recorded revenue of $1.0 million, which included$0.7 million from our Givaudan Agreement, which began on March 27,2007, for the development and commercialization of compounds that enhancesweetness or savory sensation as well as compounds that block or desensitizebitter taste for use in the food and beverage industry. The revenues fromGivaudan include $0.1 million attributable to the upfront fee which isbeing recognized as revenue over the initial 3.5 year term of theagreement and $0.6 million of research funding. The remaining $0.3 millionof revenue was primarily from our Coca-Cola Agreement, which began on December 13,2007, for the development of certain technology for use in non-alcoholicbeverages. During the three months ended June 30, 2007, we recorded $0.7million from our Givaudan Agreement including $0.1 million attributable to theupfront fee and $0.6 million of research funding.

 

*Research and Development Expenses*.  Ourresearch and development expenses were $2.2 million for the three monthsended June 30, 2008 compared to $1.2 million for the three monthsended June 30, 2007.  During thethree months ended June 30, 2008, we experienced increased costsassociated with our bitter blocker and taste enhancer research programs as wellas amounts paid to third parties to conduct research on our behalf. Theincreased costs related to salaries and related benefits, R&D suppliescosts, depreciation of lab equipment and facilities related expenses.

 

*General and Administrative Expenses*.  Ourgeneral and administrative expenses were $1.6 million for the three monthsended June 30, 2008 compared to $1.2 million for the three monthsended June 30, 2007.  The increaseof $0.4 million was related to increases in business development andinvestor relations activities as well as expenses associated with patentfilings.

 

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*Interest Income*.  Interest income was $0.1 million for thethree months ended June 30, 2008 compared to $0.2 million during thethree months ended June 30, 2007.

 

***Six months ended June 30, 2008 comparedto June 30, 2007***

 

*Research and Grant Revenue*.  For the six months ended June 30,2008, we recorded revenue of $1.9 million, which included $1.4 millionfrom 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. The revenues from the Givaudan Agreementinclude $0.2 million attributable to the upfront fee which is beingrecognized as revenue over the initial 3.5 year term of the agreement and$1.2 million of research funding. The remaining $0.5 million of revenue was primarily from ourCoca-Cola Agreement, which began on December 13, 2007, for the developmentof certain technology for use in non-alcoholic beverages.  During the six months ended June 30,2007, we recorded revenue of $0.7 million from our Givaudan Agreement including$0.1 million attributable to the upfront fee and $0.6 million of researchfunding.

 

*Research and Development Expenses*.  Ourresearch and development expenses were $4.2 million for the six monthsended June 30, 2008 compared to $3.8 million for the six months endedJune 30, 2007.  During the sixmonths ended June 30, 2007, the Company recorded a $1.6 millionnon-cash charge in connection with the issuance of approximately2.0 million shares of our common stock related to anti-dilution protectionfor Dr. Margolskee, the Company’s founder. Dr. Margolskee’santi-dilution protection terminated upon completion of the final closing of thePrivate Placement on April 6, 2007**.** During thesix months ended June 30, 2008, we experienced increased costs associatedwith our bitter blocker and taste enhancer research programs as well as amountspaid to third parties to conduct research on our behalf. In particular, ourfacilities costs increased as a result of our move to our new location inEwing, New Jersey, effective in May 2007. Our new, state-of-the-artfacility in Ewing, New Jersey is enabling us to move ahead with the continuedexpansion of our research and development operations. In addition, salaries andrelated benefits and R&D supplies costs increased.

 

*General and Administrative Expenses*.  Ourgeneral and administrative expenses were $3.2 million for the six months ended June 30,2008 compared to $2.1 million for the six months ended June 30, 2007.The increase of $1.1 million was related to costs associated with Redpointbecoming a public company, such as increases in accounting, legal and investorrelations fees, as well as expenses associated with business development andpatent filings and our move to our new facility. In addition, during the sixmonths ended June 30, 2008, we recognized non-cash compensation expense ofapproximately $0.3 million pursuant to SFAS 123R and$0.1 million during the six months ended June 30, 2007.

 

*Interest Income*.  Interest income was $0.4 million for thesix months ended June 30, 2008 compared to $0.2 million during thesix months ended June 30, 2007. The increase was due to interest earned onour cash, cash equivalents and marketable securities that resulted fromproceeds from our private placement in March 2007.

 

*Interest Expense*.  Interest expense was $28,000 for the sixmonths ended June 30, 2008 compared to $1.7 million for the sixmonths ended June 30, 2007. In May, June and October 2006, weentered into a convertible debt financing agreement with certain of ourinvestors, which provided for $4.1 million in funding. In addition to theissuance of 5% secured promissory notes, our investors received warrants topurchase additional shares of our stock. We allocated the proceeds from thefinancing between the notes and the warrants based on their relative fairvalues. The fair value of the warrants was recorded against the carrying valueof the notes as an original issue discount (OID) which was being amortized asinterest expense over a one-year period from the original issuance date of thenotes. During the six months June 30, 2007, we recognized a non-cashcharge to interest expense of $0.3 million for the amortization of theOID, which was fully expensed upon the completion of the first closing of ourprivate placement when the promissory notes were converted to common stock.Furthermore, in accordance with EITF No. 00-27, *Applicationof Issue No. 98-5 to Certain Convertible Instruments*, and EITF No. 98-5,*Accounting for Convertible Securities withBeneficial Conversion Features or Contingently Adjustable Ratios*,after considering the allocation of the proceeds to the promissory notes, theCompany determined that the promissory notes contained a contingent beneficialconversion feature (Contingent BCF). The Contingent BCF existed at the date ofthe issuance of the promissory notes due to the fact that the original carryingvalue of promissory notes, after allocation of the proceeds, would be less thanthe purchase price of the new series of stock paid by investors in the newseries. In accordance with EITF No. 98-5, during the six months ended June 30,2007, the Contingent BCF of $1.2 million was recognized as additionalnon-cash interest expense when the promissory notes were converted into sharesof common stock.

 

**Liquidity and Capital Resources**

 

At June 30, 2008, we had cash, cash equivalents and marketablesecurities of $17.9 million and working capital of $15.7 million.Since inception, we have used $25.4 million of cash to fund our operatingactivities and $3.1 million for capital expenditures. Through June 30,2008, we have funded substantially all of our operations and capitalexpenditures through private 

 

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placementsof equity and convertible debt securities totaling $45.8****million,cash received from corporate collaborations totaling $7.9 million,government grants totaling $1.8 million, and capital equipment financingtotaling $2.1 million.

 

On March 12, 2007, we completed the first closing of our PrivatePlacement of shares of common stock and warrants to purchase shares of commonstock raising approximately $17.2 million of net proceeds. On April 6,2007 we completed the final closing of our Private Placement raising anadditional $11.4 million of net proceeds, bringing the total privateplacement net proceeds to $28.6 million. On March 27, 2007, weentered into the Givaudan Agreement for the development and commercializationof compounds that enhance sweetness or savory sensation as well as compoundsthat block or desensitize bitter taste for use in the food and beverageindustry. Pursuant to the Givaudan Agreement, Givaudan agreed to pay us anupfront technology fee of $1.3 million and provide research funding to usover the initial 3.5 year term of the Givaudan Agreement of up to$11.6 million. On December 13, 2007, we entered into a researchagreement with Coca-Cola for the development of certain technology for use innon-alcoholic beverages. Pursuant to the Coca-Cola Agreement, Coca-Cola agreedto provide research funding of $900,000 over the initial one year term. Webelieve that our current capital resources and the funding we are receivingfrom Givaudan and Coca-Cola, should be sufficient to meet our operating andcapital requirements at least through December 2009.

 

We expect that substantially all of our revenue for the foreseeablefuture will come from corporate collaborations, license agreements and interestearned on the proceeds from our sales of marketable securities. During 2008, weexpect to recognize $3.7 million as revenue from the Givaudan andCoca-Cola Agreements, which will include $0.4 million of the upfronttechnology fee that we received from Givaudan and which is being recognized asrevenue over the related performance period and $3.3 million pursuant toresearch funding. We are subject to those risks associated with anybiotechnology company that has substantial expenditures for research anddevelopment. There can be no assurance that our research and developmentprojects will be successful, that products developed will obtain necessaryregulatory approval, or that any approved product will be commercially viable.In addition, we operate in an environment of rapid technological change and weare largely dependent on the services of our employees and consultants. For usto fund our operations and to commercially develop our products, additionalequity and/or debt financing will be required. There is no assurance that suchfinancing will be available to us as needed.

 

**Summary of Contractual Obligations**

 

A summary of our obligations to make future payments under contractsexisting at December 31, 2007 is included in Item 7, Management’sDiscussion and Analysis of Financial Condition and Results of Operations, ofour Annual Report on Form 10-K for the year ended December 31,2007.  As of June 30, 2008, therewere no significant changes to this information.

 

**Critical Accounting Policies**

 

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

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

 

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

 

We have not entered into and do not expect to enter into, financialinstruments for trading or hedging purposes.  We do not currentlyanticipate entering into interest rate swaps and/or similar instruments. We have no material currency exchange risk exposure as of June 30,2008.  Our primary market risk exposurewith regard to financial instruments is to changes in interest rates, whichwould impact interest income earned on such instruments. A one percent change(100 basis points) in interest rates on our investments would have impactedinterest income by approximately $0.1 and $0.2 million for the three andsix months ended June 30, 2008, respectively.

 

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

 

Our management, with the participation of our chiefexecutive officer and chief financial officer, evaluated the effectiveness ofour disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Exchange Act) as of June 30, 2008. Based on thisevaluation, our chief executive officer and chief financial officer concludedthat, as of June 30, 2008, our disclosure controls and procedures were (1) effectivein that they 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.

 

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

 

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**PART II.  OTHER INFORMATION**

 

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

 

TheCompany’s management knows of no material existing or pending legal proceedingsor claims against the Company, nor is the Company involved as a plaintiff inany material proceeding or pending litigation.  To the Company’sknowledge, no director, officer or affiliate of the Company, and no owner ofrecord or beneficial owner of more than five percent (5%) of the Company’ssecurities, or any associate of any such director, officer or security holderis a party adverse to the Company or has a material interest adverse to theCompany in reference to pending litigation.

 

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

 

*You should carefully consider the following risks and all of the otherinformation set forth in this Quarterly Report before deciding to invest inshares of our common stock. The risks described below are not the only onesfacing us. Additional risks not presently known to us or that we currently deemimmaterial may also impair our business operations.*

 

*If any of the following risks actually occurs, our business, financialcondition or results of operations would likely suffer. In such case, themarket price of our common stock would likely decline due to the occurrence ofany of these risks, and you may lose all or part of your investment.*

 

**Risks Related To Our Business andOur Industry**

 

***Redpoint is a development-stagecompany. We have incurred losses since inception and expect to incur additionalnet losses for at least the next several years.***

 

Sinceour inception we have incurred significant losses and negative cash flows fromoperations. As of June 30, 2008, we had an accumulated deficit of$38.1 million, and anticipate incurring additional losses for at least thenext several years. We expect to spend significant resources over the nextseveral years to enhance our technologies and to fund research and developmentof our pipeline of potential products. 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 productcandidates, which may include conducting pre-clinical and clinical tests,obtaining necessary regulatory approvals, and manufacturing and marketing ourproduct candidates. There can be no assurance that any such events will occuror that we will ever become profitable. Even if we do achieve profitability, wecannot predict the level of such profitability. If we sustain losses over anextended period of time, we may be unable to continue our business.

 

***We will need substantial additionalfunding to develop our products and for our future operations. If we are unableto obtain the funds necessary to do so, we may be required to delay, scale backor eliminate our product development or may be unable to continue our business.***

 

Thedevelopment of our product candidates will require a commitment of substantialfunds to conduct the costly and time-consuming research, which may includepre-clinical and clinical testing, necessary to obtain regulatory approvals andbring our products to market. We believe our current capital resources willsatisfy our operating plan through December 2009. Our future requirementswill depend on many factors, including:

 

·                  the progress of our research and developmentprograms, including our ability to discover and develop taste enhancers andaversive taste blockers;

 

·                  our ability, or our partners’ ability andwillingness, to formulate these taste enhancers and aversive taste blockersinto food, beverage and pharmaceutical products;

 

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

 

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

 

·                  the time and cost involved in obtainingregulatory approvals;

 

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·                  the cost of manufacturing our productcandidates;

 

·                  competing technological and market developments;and

 

·                  our ability to establish and maintaincollaborative and other arrangements with third parties to assist in bringingour products to market and the cost of such arrangements.

 

Therecan be no assurance that we will not need additional capital sooner thancurrently anticipated.

 

Wewill need to raise substantial additional capital to fund our futureoperations. We cannot be certain that additional financing will be available onacceptable terms, or at all. In recent years, it has been difficult forcompanies to raise capital due to a variety of factors, which may or may notcontinue. To the extent we raise additional capital through the sale of equitysecurities, the ownership position of our existing stockholders could besubstantially diluted. If additional funds are raised through the issuance ofpreferred stock or debt securities, these securities are likely to have rights,preferences and privileges senior to our common stock. Fluctuating interestrates could also increase the costs of any debt financing we may obtain.

 

Failureto successfully 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 productopportunities, delaying our clinical trials or curtailing or ceasingoperations.

 

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

 

Weare in the early stage of product development and we are dependent on newdiscoveries. We currently do not sell or license any products to third partiesand do not expect to have any products commercially available for severalyears, if at all. You must evaluate us in light of the uncertainties andcomplexities affecting an early stage biotechnology company. Our productcandidates require additional research and development, pre-clinical testing,clinical testing (for our pharmaceutical products) and regulatory review and/orapprovals clearances before marketing. There are many reasons that our productcandidates may fail or not advance to commercialization, including thepossibility that:

 

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

 

·                  our product candidates may fail to receivethe necessary regulatory approvals or otherwise fail to meet applicableregulatory standards;

 

·                  experts may not agree that our food productcandidates are generally recognized as safe;

 

·                  our product candidates may be too expensiveto develop, manufacture or market;

 

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

 

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

 

·                  our potential collaborators may withdrawsupport for or otherwise impair the development and commercialization of ourproduct candidates; or

 

·                  others may develop equivalent or superiorproducts.

 

Inaddition, we may not succeed in developing taste enhancers and aversive tasteblockers with the appropriate attributes required for use in successfulcommercial products. Successful taste enhancers and aversive taste blockersrequire, among other things, appropriate biological activity, including thecorrect taste enhancer and aversive taste blocker properties for the productapplication, an acceptable safety profile, including lack of toxicity orallergenicity, and appropriate physical or chemical properties, 

 

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includingrelative levels of stability, volatility and resistance to heat. Successfultaste enhancers and aversive taste blockers must also be cost-efficient. We maynot be able to develop taste enhancers and aversive taste blockers that meetthese criteria.

 

Ifour product candidates are delayed or we fail to successfully develop andcommercialize our product candidates, our financial condition may be negativelyaffected, and we may have to curtail or cease our operations.

 

***We may not successfully establishand maintain collaborative and licensing arrangements, which could adverselyaffect our ability to develop and commercialize our product candidates.***

 

Akey element of our food and beverage strategy is to commercialize our tasteenhancers through product discovery and development collaborations with majoringredient suppliers and/or end users, such as the Givaudan Agreement and theCoca-Cola Agreement. Our pharmaceutical strategy includes developing our own taste-improveddrug formulations as well as establishing collaborations and licensingagreements with major pharmaceutical, over-the-counter and generic companies.We may not be able to maintain or expand these licenses and collaborations orestablish additional licensing and collaboration arrangements necessary todevelop and commercialize our product candidates. Each of our collaborationagreements, such as the Givaudan Agreement and the Coca-Cola Agreement, provideeach of our collaborators with the ability to terminate its agreement with usprior to the expiration of the term as set forth in the agreements. Even if weare able to maintain or establish licensing or collaboration arrangements,these arrangements may not be on favorable terms and may contain provisionsthat will restrict our ability to develop, test and market our productcandidates. 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.

 

Weexpect to rely at least in part on third party collaborators to perform anumber of activities relating to the development and commercialization of ourproduct candidates, including the manufacturing of product materials, thedesign and conduct of clinical trials for our pharmaceutical formulations, andpotentially the obtaining of regulatory approvals and marketing anddistribution of any successfully developed products. Our collaborative partnersmay also have or acquire rights to control aspects of our product developmentand clinical programs. As a result, we may not be able to conduct theseprograms in the manner or on the time schedule we currently contemplate. Inaddition, if any of these collaborative partners withdraw support for ourprograms or product candidates or otherwise impair their development, ourbusiness could be negatively affected. To the extent we undertake any of theseactivities internally, our expenses may increase.

 

Inaddition, our success 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, our ability tosustain or expand our business will be significantly diminished.

 

***If we or our collaborators areunable to obtain and maintain the GRAS determination or regulatory approvalrequired before any taste enhancers or aversive taste blockers can beincorporated into products that are sold, we would be unable to commercializeour taste enhancers and aversive taste blockers and our business would beadversely affected.***

 

Inthe United States, the development, sale and incorporation of our tasteenhancers and aversive taste blockers into products are subject to regulationby the FDA, and in some instances, other government bodies. Obtaining andmaintaining a GRAS determination or regulatory approval is typically costly andcan take many years.

 

Dependingon the amount or intended use of a particular taste enhancer or aversive tasteblocker added to a product and the number of product categories in which theflavor or flavor enhancer will be incorporated, specific testing, safetyassessment protocols, and regulatory processes must be satisfied before we orour collaborators can commercially market and sell products containing anytaste enhancers and aversive taste blockers that we may discover. A key elementof our strategy is to develop flavors and flavor enhancers that will beevaluated by the FEMA (Flavor and Extracts Manufacturers Association) GRASPanel, which we expect will take 18 to 24 months and which is lessexpensive than the alternative of filing a food additive petition with the FDA,which can take eight years or more. The FEMA GRAS review process may takelonger than 24 months and cost more than we currently anticipate ifadditional safety studies are requested by the FEMA GRAS Panel or are necessaryto explain unexpected safety study findings. There is a risk that one or moreof our product candidates may not qualify for a FEMA GRAS determination. Thismay occur 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 materially 

 

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adverselyaffect our ability to market products on schedule or at all. In the event thata particular taste enhancer or aversive taste blocker does not qualify for aFEMA GRAS determination, we may be required to pursue a lengthy FDA approvalprocess to reach the U.S. market, or dedicate our development efforts toalternative compounds, which would further delay commercialization. Inaddition, laws, regulations or FDA practice governing the regulatory approvalprocess, the availability of the GRAS determination process or the manufactureor labeling of such products, may change in a manner that could adverselyaffect our ability to commercialize products on schedule or at all.

 

Salesof our taste enhancers and aversive taste blockers outside of the United Stateswill be subject to foreign regulatory requirements. In most cases, whether ornot a GRAS determination or FDA approval has been obtained, approval of aproduct by the comparable regulatory authorities of foreign countries muststill be obtained prior to manufacturing or marketing the product in thosecountries. A GRAS determination or FDA approval in the United States or in anyother jurisdiction does not ensure approval in other jurisdictions because therequirements from jurisdiction to jurisdiction may vary widely. Obtainingforeign approvals could result in significant delays, difficulties and costsfor us and require additional safety studies and additional expenses. If wefail to comply with these regulatory requirements or to obtain and maintainrequired approvals, our ability to generate revenue will be diminished.

 

Weand our collaborators may not be successful in overcoming these regulatoryhurdles, 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 our collaboratorsreceive a GRAS determination or regulatory approval and incorporate our tasteenhancers or aversive taste blockers into products, those products may never becommercially successful.***

 

Evenif we discover and develop taste enhancers and aversive taste blockers thatobtain the necessary GRAS determination or regulatory approval, our successdepends to a significant degree upon the commercial success of packaged foodand beverage products and pharmaceutical products incorporating those tasteenhancers or aversive taste blockers. If these products fail to achieve orsubsequently maintain market acceptance or commercial viability, our businesswould be significantly harmed because our royalty revenue is dependent uponconsumer sales of these products. In addition we could be unable to maintainour existing collaborations or attract new product discovery and developmentcollaborators. Many factors may affect the market acceptance and commercialsuccess of any potential products incorporating taste enhancers or aversivetaste blockers that we may discover, including:

 

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

 

·                  the timing of market entry as compared tocompetitive products;

 

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

 

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

 

***We may experience delays in clinicaltrials and regulatory approval relating to our products that could adverselyaffect our financial results and our commercial prospects for ourpharmaceutical products.***

 

Ourpharmaceutical strategy is to incorporate our taste enhancers and aversivetaste blockers into proprietary formulations of medicines that potentiallyoffer improved acceptability and compliance, thus enhancing efficacy andpossibly providing broader indications or patient populations. In addition tothe regulatory or other requirements for our taste enhancers and aversive tasteblockers, we will also require regulatory approvals of our pharmaceuticalformulations. In such case, we may be required to conduct clinical trials todemonstrate safety and efficacy of the new formulation. For product candidatesthat advance to clinical testing, we cannot be certain that we or acollaborator will successfully complete the clinical trials necessary toreceive regulatory product approvals. This process is lengthy and expensive.

 

Weintend to seek approval for our pharmaceutical formulations through the FDA505(b)(2) approval process. If we are unable to approve our pharmaceuticalformulations through the 505(b)(2) process, we may be required to pursuethe more expensive and time consuming 505(b)(1) approval process. Section 505(b) ofthe Federal Food, Drug, and Cosmetic Act describes two types of NDAapplications that an applicant may submit for approval of innovator medicines.The first type of NDA, described under section 505(b)(1), consists of afull report of investigations of safety and effectiveness conducted by or forthe applicant or for which the applicant has the right of reference for theinformation. The second type of NDA, described under section 505(b)(2),consists of a full report of investigations of safety and effectiveness whereat least some portion of the information submitted for approval comes 

 

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fromsources other than studies performed or sponsored by the applicant. Drugs thatmay be approved via the 505(b)(2) process include drugs that have the sameactive ingredients as previously approved products, but now are formulated in adifferent delivery mechanism or other new dosage forms or with differentindications. The basis for the 505(b)(2) application is that there alreadyis a certain amount of information that is known about the active ingredient.As such, repeating all the clinical studies required for a 505(b)(1) applicationwould be significantly more expensive and time consuming than the 505(b)(2) process.

 

Toobtain regulatory approvals, we must, among other requirements, completeclinical trials showing that our products are safe and effective for aparticular indication. Under the 505(b)(2) approval process, although wemay not have performed some of the studies ourselves, we must submit clinicaland non-clinical data to demonstrate the medication is safe and effective. Wealso must be able to provide data and information, including bioavailability orcomparative bioavailability studies, to establish sufficiently theappropriateness of relying on material without the right of reference.

 

Wedo not know when clinical trials for our products will commence or whether wewill complete any of our clinical trials on schedule or at all. There can be noassurance that clinical trials will in fact demonstrate that our products aresafe or effective.

 

Additionally, we may not be able to find acceptable patients or mayexperience delays in enrolling patients for our clinical trials. The FDA or wemay suspend our clinical trials at any time if either believes that we areexposing the subjects participating in the trials to unacceptable health risks.The FDA or institutional review boards and/or institutional biosafetycommittees at the medical institutions and healthcare facilities where we seekto sponsor clinical trials may not permit a trial to proceed or may suspend anytrial indefinitely if they find deficiencies in the conduct of the trials.

 

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

 

***If our pharmaceutical productcandidates do not successfully complete the clinical trial process, we will notbe able to market them. Even successful clinical trials may not result in amarketable product and may not be entirely indicative of a product’s safety orefficacy.***

 

Manyfactors, known and unknown, can adversely affect clinical trials and theability to evaluate a product’s efficacy. During the course of treatment,patients can die or suffer other adverse events for reasons that may or may notbe related to the proposed product being tested. Even if unrelated to ourproduct, certain events can nevertheless adversely impact our clinical trials.As a result, our ability to ultimately develop and market the products andobtain revenues would suffer.

 

Evenpromising results in pre-clinical studies and initial clinical trials do notensure successful results in later clinical trials, which test broader humanuse of our products. Many companies in our industry have suffered significantsetbacks in advanced clinical trials, despite promising results in earliertrials. Even successful clinical trials may not result in a marketable productor be indicative of the efficacy or safety of a product. Many factors orvariables could affect the results of clinical trials and cause them to appearmore promising than they may otherwise be. Product candidates that successfullycomplete clinical trials could ultimately be found to be unsafe or ineffective.

 

Inaddition, our ability to complete clinical trials depends on many factors,including obtaining adequate clinical supplies and having a sufficient rate ofpatient recruitment. For example, patient recruitment is a function of manyfactors, 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.

 

Evenif patients are successfully recruited, we cannot be sure that they willcomplete the treatment process. Delays in patient enrollment or treatment inclinical trials may result in increased costs, program delays or both.

 

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Withrespect to markets in other countries, we or a partner will also be subject toregulatory requirements governing clinical trials in those countries. Even ifwe complete clinical trials, we may not be able to submit a marketingapplication. If we submit an application, the regulatory authorities may notreview or approve it in a timely manner, if at all.

 

***Because we cannot predict whether orwhen we will obtain regulatory approval to commercialize our pharmaceuticalproduct candidates, we cannot predict the timing of any future revenue fromthese product candidates.***

 

Wecannot commercialize 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.

 

***We will rely on third parties tomanufacture taste enhancers, aversive taste blockers and pharmaceutical productcandidates. There can be no guarantee that we can obtain sufficient andacceptable quantities of our taste enhancers or aversive taste blockers orpharmaceutical product candidates on acceptable terms, which may delay orimpair our ability to develop, test and market such products.***

 

Ourbusiness strategy relies on third parties to manufacture and produce our tasteenhancers and aversive taste blockers and pharmaceutical product candidates inaccordance with 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.

 

Weexpect to enter into manufacturing agreements for the production of productmaterials. If any manufacturing agreement is terminated or any third partycollaborator experiences a significant problem that could result in a delay orinterruption in the supply of product materials to us, there are very fewcontract manufacturers who currently have the capability to produce our tasteenhancers and aversive taste blockers and pharmaceutical product candidates onacceptable terms, or on a timely and cost-effective basis. There can be noassurance that manufacturers on whom we will depend will be able tosuccessfully produce our taste enhancers and aversive taste blockers andpharmaceutical product candidates on acceptable terms, or on a timely orcost-effective basis. There can also be no assurance that manufacturers will beable to manufacture our products in accordance with our product specifications,or will meet FDA or other requirements. We must have sufficient and acceptablequantities of our product materials to conduct our clinical trials and tomarket our product candidates, if and when such products have been approved bythe FDA for marketing. If we are unable to obtain sufficient and acceptablequantities of our product material, we may be required to delay the clinicaltesting and marketing of our products.

 

***If we do not comply with applicable regulatoryrequirements in the manufacture and distribution of our product candidates, wemay incur penalties that may inhibit our ability to commercialize our productsand adversely affect our revenue.***

 

Ourfailure or the failure of our potential collaborators or third partymanufacturers to comply with applicable FDA or other regulatory requirementsincluding manufacturing, quality control, labeling, safety surveillance,promoting and reporting may result in criminal prosecution, civil penalties,recall or seizure of our products, total or partial suspension of production oran injunction, as well as other regulatory action against our productcandidates or us. Discovery of previously unknown problems with a product,supplier, manufacturer or facility may result in restrictions on the sale ofour products, including a withdrawal of such products from the market. Theoccurrence of any of these events would negatively impact our business andresults of operations.

 

***If we are unable to create andmaintain sales, marketing and distribution capabilities or enter intoagreements with third parties to perform those functions, we will not be ableto commercialize our product candidates.***

 

Wecurrently have no sales, marketing or distribution capabilities. Therefore, tocommercialize our product candidates, if and when such products have beenapproved and are ready for marketing, we expect to collaborate with thirdparties to perform these functions. We have no experience in developing,training or managing a sales force and will incur substantial additionalexpenses if 

 

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wedecide to market any of our future products directly. Developing a marketingand sales force is also time consuming and could delay launch of our futureproducts. In addition, we will compete with many companies that currently haveextensive and well-funded marketing and sales operations. Our marketing and salesefforts may be unable to compete successfully against these companies.

 

***Many potential competitors,including those who have greater resources and experience than we do, maydevelop products or technologies that make ours obsolete or noncompetitive.***

 

Webelieve our taste technology approach is applicable to a wide range of food,beverage and pharmaceutical products representing many and diverse competitivecompanies and approaches. The life sciences and other technology industries arecharacterized by rapid technological change, and the area of sensory or tasteresearch is a rapidly evolving field. Our future success will depend on ourability to maintain a competitive position with respect to technologicaladvances. Technological developments by others may result in our tasteenhancers or aversive taste blockers and technologies, as well as ourpharmaceutical formulations, becoming obsolete.

 

Weface substantial 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. Among foodmanufacturers, at least Nestlé has an active program cloning and expressingreceptors for in vitro screening assays. In addition, Senomyx, Inc. is apublic biotechnology company taking a biochemical approach to taste modulation,both in foods and pharmaceutical products. Senomyx is principally focused inthe area of taste enhancement for food products and uses high throughputscreening technology and synthetic and natural products chemistry to discovernovel flavor enhancers, which it licenses to end users in the food industry.Senomyx was initially focused on sweetness, savory and salty flavor enhancers,but is now also developing programs to discover bitter blockers for food andpharmaceutical products. Chemcom is another company that is developing abiotechnology approach to finding novel taste enhancers. We currently competeand will continue to compete in the future with these companies incollaborating with and selling flavor products and technologies tomanufacturers of packaged food and beverage products.

 

Wealso face substantial competition from a number of companies in thepharmaceutical formulations industry. Taste masking has a long history in thepharmaceutical industry. A traditional method of taste masking forpharmaceutical products is to mix the active pharmaceutical ingredient withflavorings and sugar syrup to mask unpleasant taste. This approach is mostcommonly used for pediatric liquid formulations as well as manyover-the-counter cough-cold remedies. FlavorRx supplies flavors at drug storepharmacies that can be compounded by the pharmacist to make certain liquidformulations more palatable. In the pharmaceutical sector there are a number ofdrug delivery companies that have developed proprietary taste maskingtechnologies that include both traditional and novel pharmaceutical approaches.These competing technologies and companies include but are not limited toOraSolv® and DuraSolv® from CIMA Labs (a Cephaloncompany), MicroCaps® and Liquitard® from Eurand,FlavorTechTM, LiquetteTM and MicroMaskTM from KV Pharmaceuticals, EnVel®from Catalent, CEFORM from Biovail and WOWTab® from Astellas.Virtually all of these approaches including OralSolv, DuraSolv, MicroCap,Liquitard, CEFORM, EnVel and the technology used in Zydis products utilize aphysical approach to sequester the active drug substance away from the tastereceptors on the tongue. These include coating the drug, micro encapsulation,immobilization, use of cyclodextran carriers, or stabilization of the drug in amicellar or insoluble phase, as the principle means of taste masking.

 

Manyof these companies 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.

 

Wemay in the future face competition from life sciences and other technologycompanies and other commercial enterprises. These entities engage as we do inbiotechnology, biology or chemistry and could apply this technology to thediscovery and development of taste enhancers and aversive taste blockers andnew formulations of pharmaceutical products. We cannot guarantee that productsdeveloped as a result of our competitors’ existing or future collaborationswill not compete with our taste enhancers and aversive taste blockers and newpharmaceutical formulations.

 

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

 

Ourcompetitors, either alone or with their collaborative partners, may succeed indeveloping technologies or discovering taste enhancers and aversive tasteblockers that are more effective, safer, more affordable or more easilycommercialized than ours, and our competitors may obtain intellectual propertyprotection or commercialize products sooner than we do. Developments by othersmay render our product candidates or our technologies obsolete. In addition,our current product discovery and development 

 

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collaboratorsare not prohibited from entering into research and development collaborationagreements with third parties in any product field. Our failure to competeeffectively would have a significant adverse effect on our business, financialcondition and results of operations.

 

***If we are unable to attract andretain key personnel and advisors, it may adversely affect our ability toobtain financing, pursue collaborations or develop our product candidates.***

 

Weare highly dependent on F. Raymond Salemme, Ph.D., our Chief Executive Officerand President, as well as other executive and scientific officers, includingScott Horvitz, Chief Financial Officer, Scott Siegel, Ph.D., Vice President,Corporate Development and Robert Bryant, Ph.D., Vice President, DiscoveryResearch.

 

Ourfuture success depends on our ability to attract, retain and motivate highlyqualified management and scientific, development and commercial personnel andadvisors. To pursue our business strategy, we will need to hire or otherwiseengage qualified personnel and managers, including personnel with expertise indiscovery, development, clinical trials, government regulation, manufacturing,marketing and sales. Competition for qualified personnel is intense among companies,academic institutions and other organizations. If we are unable to attract andretain key personnel and advisors, it may negatively affect our ability tosuccessfully develop, test and commercialize our product candidates.

 

***We use hazardous and biologicalmaterials in our business. Any claims relating to improper handling, storage ordisposal of these materials could be time consuming and costly.***

 

Ourproducts and processes will involve the controlled storage, use and disposal ofcertain hazardous and biological materials and waste products. We and oursuppliers and other collaborators are subject to federal, state and localregulations governing the use, manufacture, storage, handling and disposal ofmaterials and waste products. Even if we and these suppliers and collaboratorscomply with the standards prescribed by law and regulation, the risk ofaccidental contamination or injury from hazardous materials cannot becompletely eliminated. In the event of an accident, we could be held liable forany damages that result, and any liability could exceed the limits or falloutside the coverage of any insurance we may obtain and exceed our financialresources. We may not be able to maintain insurance on acceptable terms, or atall. We may incur significant costs to comply with current or futureenvironmental laws and regulations.

 

***We may be sued for productliability, which could adversely affect our business.***

 

Becauseour business 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.

 

Ifwe and our collaborators commence sale of commercial products we will need toobtain product liability insurance, and this insurance may be prohibitivelyexpensive, or may not fully cover our potential liabilities. Inability toobtain sufficient insurance coverage at an acceptable cost or otherwise toprotect against 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 product candidates are noteffectively protected by valid, issued patents or if we are not otherwise able toprotect our proprietary information and technologies, it could harm ourbusiness.***

 

Thesuccess of our operations will depend in part on our ability and that of ourlicensors to:

 

·                  obtain patent protection for our tastescreening technology and our taste enhancers and aversive taste blockers bothin the United States and in other countries with substantial markets;

 

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·                  obtain patent protection for ourpharmaceutical formulations including those created using our taste enhancers;

 

·                  defend patents once obtained;

 

·                  maintain trade secrets and operate withoutinfringing upon the patents and proprietary rights of others; and

 

·                  obtain appropriate licenses upon reasonableterms to patents or proprietary rights held by others that are necessary oruseful to us in commercializing our technology, both in the United States andin other countries with substantial markets.

 

Inthe event we are not able to protect our intellectual property and proprietaryinformation, our business will be materially harmed.

 

***We may not have adequate protectionfor our unpatented proprietary information, which could adversely affect ourcompetitive position.***

 

Inaddition to patents, we will substantially rely on trade secrets, know-how,continuing technological innovations and licensing opportunities to develop andmaintain our competitive position. However, others may independently developsubstantially equivalent proprietary information and techniques or otherwisegain access to our trade secrets or disclose our technology. To protect ourtrade secrets, we may enter into confidentiality agreements with employees,consultants and potential collaborators. However, these agreements may notprovide meaningful protection of our trade secrets or adequate remedies in theevent of unauthorized use or disclosure of such information. Likewise, ourtrade secrets or know-how may become known through other means or beindependently discovered by our competitors. Any of these events could hinderus from developing or commercializing our product candidates.

 

***Our ability to compete in theingredient, food and beverage market and the pharmaceutical market may declineif we do not adequately protect our proprietary technologies.***

 

Becauseof the substantial length of time and expense associated with the developmentof new products, we, along with the rest of the ingredient, food and beverageindustry and pharmaceutical industry, place considerable importance onobtaining and maintaining patent protection for new technologies, products andprocesses. Our success depends in part on our ability to obtain and maintainintellectual property that protects our technologies, taste enhancers oraversive taste blockers and our pharmaceutical products. Patent positions maybe highly uncertain and may involve complex legal and factual questions,including the ability to establish patentability of sequences relating to tastereceptors, proteins, chemical synthesis techniques, compounds and methods forusing them to modulate taste for which we seek patent protection. No consistentstandard regarding the allowance or enforceability of claims in many of ourpending patent applications has emerged to date. As a result, we cannot predictthe breadth of claims that will ultimately be allowed in our patentapplications, if any, including those we have in-licensed or the extent towhich we may enforce these claims against our competitors. The degree of futureprotection for our proprietary rights is therefore highly uncertain and wecannot assure you that:

 

·                  we, or our Licensors, were the first to filepatent applications or to invent the subject matter claimed in patentapplications relating to the technologies upon which we rely;

 

·                  others will not independently develop similaror alternative 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 inissued patents;

 

·                  any of our patent applications will notresult in interferences or disputes with third parties regarding priority ofinvention;

 

·                  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 proprietarytechnologies that are patentable;

 

·                  the patents of others will not have anadverse effect on our ability to do business; or

 

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

 

Inaddition, patent law outside the United States is uncertain 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.

 

Technologieslicensed to us by others, or in-licensed technologies, are important to ourbusiness. In particular, we depend on certain technologies relating to tastebiology licensed from the Mount Sinai School of Medicine. In addition, we mayin the future acquire rights to additional technologies by licensing suchrights from existing licensors or from third parties. Such in-licenses may becostly. Also, we generally do not control the patent prosecution, maintenanceor enforcement of in-licensed technologies. Accordingly, we are unable toexercise the same degree of control over this intellectual property as we doover our internally developed technologies. Moreover, some of our academicinstitution licensors, collaborators and scientific advisors have rights topublish data and information to which we have rights. If we cannot maintain theconfidentiality of our technologies and other confidential information inconnection with our collaborations, our ability to protect our proprietaryinformation or obtain patent protection in the future may be impaired, whichcould have a significant adverse effect on our business, financial conditionand results of operations.

 

***Many of the patent applications weand our licensors have filed have not yet been substantively examined and maynot result in patents being issued.***

 

Manyof the patent applications filed by us and our licensors were filed recentlywith the United States Patent and Trademark Office and most have not beensubstantively examined and may not result in patents being issued. It isdifficult to predict whether any of our or our licensors’ applications willultimately be found to be patentable or, if so, to predict the scope of anyallowed claims. In addition, the disclosure in our or our licensors’ patentapplications, particularly in respect of the utility of our claimed inventions,may not be sufficient to meet the statutory requirements for patentability inall cases. As a result, it is difficult to predict whether any of our or ourlicensors’ applications will be allowed, or, if so, to predict the scope of anyallowed claims or the enforceability of the patents. Even if enforceable,others may be able to design around any patents or develop similar technologiesthat are not within the scope of such patents. Our and our licensors’ patentapplications may not issue as patents that will provide us with any protectionor competitive advantage.

 

***Disputes concerning the infringementor misappropriation of our proprietary rights or the proprietary rights ofothers could be time consuming and extremely costly and could delay ourresearch and development efforts.***

 

Ourcommercial success, if any, will be significantly harmed if we infringe thepatent rights of third parties or if we breach any license or other agreementsthat we have entered into with regard to our technology or business.

 

Weare aware of other companies and academic institutions that have beenperforming research in the areas of taste modulation and taste enhancers andaversive taste blockers. In particular, other companies and academicinstitutions have announced that they have conducted taste-receptor researchand have published data on taste receptor sequence information and tastereceptors or filed patent applications or obtained patent protection on tastemodulation or taste receptors and their uses. To the extent any of thesecompanies or academic institutions currently have, or obtain in the future,broad patent claims, such patents could block our ability to use variousaspects of our discovery and development process and might prevent us fromdeveloping or commercializing newly discovered taste enhancers and aversivetaste blockers or otherwise conducting our business. In addition, it ispossible that some of the taste enhancers or aversive taste blockers that arediscovered using our technology may not be patentable or may be covered byintellectual property of third parties.

 

Withrespect to third-party patent rights in the area of the TRPM5 receptorspecifically, we are aware of pending U.S. and foreign patent applications bycompetitors and others that have claims directed to the TRPM5 receptor and/ormethods of using the TRPM5 receptor to identify novel taste modulatingcompounds. Although these patent applications are currently undergoingexamination by the U.S. Patent and Trademark Office, and it is possible thatthey will not be granted or will not be granted with the current claims, it isalso possible that patents will be granted on these applications with claimsthat are relevant to our current or future commercialization plans. To theextent we determine that we need a license to these or other patents relatingto the TRPM5 receptor and are unable to obtain such licenses on commerciallyreasonable terms or at all, we may be restricted in our ability tocommercialize our own TRPM5 technologies.

 

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Weare not currently a party to any litigation, interference, opposition, protest,reexamination or 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 ofalleged infringement by us of the rights of others or as a result of priorityof invention disputes with third parties, we might have to spend significantamounts of money, time and effort defending our position and we may not besuccessful. In addition, any claims relating to the infringement of third-partyproprietary rights or proprietary determinations, even if not meritorious,could result in costly litigation, lengthy governmental proceedings, divertmanagement’s attention and resources, or require us to enter into royalty orlicense agreements that are not advantageous to us.

 

Shouldany person have filed patent applications or obtained patents in the UnitedStates that claim inventions also claimed by us, we may have to participate inan interference proceeding declared by the relevant patent regulatory agency 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 onpatentability grounds raised in the interference action. Litigation,interference proceedings or other proceedings could divert management’s timeand efforts. Even unsuccessful claims could result in significant legal feesand other expenses, diversion of management’s time and disruption in ourbusiness. Uncertainties resulting from initiation and continuation of any patentproceeding or related litigation could harm our ability to compete and couldhave a significant adverse effect on our business, financial condition andresults of operations.

 

Anadverse ruling arising out of any intellectual property dispute, including anadverse decision as to the priority of our inventions, could undercut orinvalidate our intellectual property position. An adverse ruling could alsosubject us to significant liability for damages, including possible trebledamages, prevent us from using technologies or developing products, or requireus to negotiate licenses to disputed rights from third parties. Although patentand intellectual property disputes in the technology area are often settledthrough licensing or similar arrangements, costs associated with thesearrangements may be substantial and could include license fees and ongoingroyalties. Furthermore, necessary licenses may not be available to us onsatisfactory terms, if at all. Failure to obtain a license in such a case couldhave a significant adverse effect on our business, financial condition andresults of operations.

 

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

 

***We expect that our results ofoperations will fluctuate from period to period, and this fluctuation couldcause our stock price to decline, causing investor losses.***

 

Ouroperating results have fluctuated in the past and are likely to varysignificantly in the future based upon a number of factors, many of which we havelittle or no control over. We operate in a highly dynamic industry and futureresults could be subject to significant fluctuations. These fluctuations couldcause us to fail to meet or exceed financial expectations of securitiesanalysts or investors, which could cause our stock price to decline rapidly andsignificantly. Revenue and expenses in future periods may be greater or lessthan revenue and expenses in the immediately preceding period or in thecomparable period of the prior year. Therefore, period-to-period comparisons ofour 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 and develop tasteenhancers and aversive taste blockers;

 

·                  our ability or the ability of our productdiscovery and development collaborators to incorporate our taste enhancers andaversive taste blockers into packaged food and beverage products andpharmaceutical products;

 

·                  our receipt of milestone payments in anyparticular period;

 

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

 

·                  our ability to enter into product discoveryand development 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,to successfully satisfy all pertinent regulatory requirements;

 

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

 

·                  general and industry specific economicconditions, which may affect our collaborators’ research and developmentexpenditures.

 

***If we acquire products, technologiesor other businesses, we will incur a variety of costs, may have integrationdifficulties and may experience numerous other risks that could adverselyaffect our business.***

 

Toremain competitive, we may decide to acquire additional businesses, productsand technologies. We currently have no commitments or agreements with respectto, and are not actively seeking, any material acquisitions. We have limitedexperience in identifying acquisition targets, successfully acquiring them andintegrating them into our current infrastructure. We may not be able tosuccessfully integrate any businesses, products, technologies or personnel thatwe might acquire in the future without a significant expenditure of operating,financial and management resources, if at all. In addition, future acquisitionscould require significant capital infusions and could involve many risks,including, but not limited to, the following:

 

·                  we may have to issue convertible debt orequity securities to complete an acquisition, which would dilute ourstockholders and could adversely affect the market price of our common stock;

 

·                  an acquisition may negatively impact ourresults of operations because it may require us to incur large one-time chargesto earnings, 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 assimilatingand integrating the business, technologies, products, personnel or operationsof companies that we acquire;

 

·                  certain acquisitions may disrupt ourrelationship with existing collaborators who are competitive to the acquiredbusiness;

 

·                  acquisitions may require significant capitalinfusions and the acquired businesses, products or technologies may notgenerate sufficient revenue to offset acquisition costs;

 

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

 

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

 

·                  key personnel of an acquired company maydecide not to work for us.

 

Anyof the foregoing risks could have a significant adverse effect on our business,financial condition and results of operations.

 

***To the extent we enter marketsoutside of the United States, our business will be subject to political,economic, legal and social risks in those markets, which could adversely affectour business.***

 

Thereare significant regulatory and legal barriers in markets outside the UnitedStates that we must overcome to the extent we enter or attempt to enter marketsin countries other than the United States. We will be subject to the burden ofcomplying with a wide variety of national and local laws, including multipleand possibly overlapping and conflicting laws. We also may experiencedifficulties adapting to new cultures, business customs and legal systems. Anysales and operations outside the United States would be subject to political,economic and social uncertainties including, among others:

 

·                  changes and limits in import and exportcontrols;

 

·                  increases in custom duties and tariffs;

 

·                  changes in currency exchange rates;

 

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·                  economic and political instability;

 

·                  changes in government regulations and laws;

 

·                  absence in some jurisdictions of effectivelaws to protect 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.

 

Anychanges related to these and other factors could adversely affect our businessto the extent we enter markets outside the United States.

 

***We may encounter difficultiesmanaging our growth, which could adversely affect our business.***

 

Ourstrategy includes entering into and working on simultaneous taste enhancer andaversive taste blocker discovery and development programs across multiplemarkets that include both the food and beverage industry and the pharmaceuticalindustry. We expect to continue to grow to meet our strategic objectives. Ifour growth continues, it will continue to place a strain on us, our managementand our resources. Our ability to effectively manage our operations, growth andvarious projects requires us to continue to improve our operational, financialand management controls, reporting systems and procedures and to attract andretain sufficient numbers of talented employees. We may not be able tosuccessfully implement these tasks on a larger scale and, accordingly, we maynot achieve our research, development and commercialization goals. If we failto improve our operational, financial and management information systems, or failto effectively monitor or manage our new and future employees or our growth,our business would suffer significantly. In addition, no assurance can be madethat we will be able to secure adequate facilities to house our staff, conductour research or achieve our business objectives.

 

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

 

***The sale of a significant number ofour shares of common stock in the public market could depress the market priceof common stock.***

 

Thesale of a significant number of shares of our common stock in the public marketcould harm the market price of our common stock. As additional shares of commonstock have become available for resale in the public market pursuant to theregistration statement and releases of lock-up agreements, the market supply ofshares of common stock has increased, which could decrease its market price.The number of shares that may be sold into the marketplace pursuant to theregistration statement is significant. We believe that such sales may severelydepress the market price of our common stock. In addition, some or all of theshares of common stock may be offered from time to time in the open marketpursuant to Rule 144 (or pursuant to an additional registration statement,if one is effective), and these sales may also have a depressive effect on themarket for the shares of common stock. In general, a person who is deemed to bean affiliate who has held shares for a period of six months may, upon filing ofa notification on Form 144 with the SEC, sell into the market common stockin an amount up to the greater of 1% of the outstanding shares or the averageweekly number of shares sold in the last four weeks before such sale. Suchsales may be repeated once each three months. A non-affiliate holding restrictedshares may sell such shares without restrictions after they have been held sixmonths, subject only to the current public information requirement. After anadditional six months have lapsed, a non-affiliate may sell such shares withoutany restrictions.

 

***The price of our common stock isexpected to be volatile.***

 

Themarket price of our common stock, and the market prices for securities ofbiotechnology companies in general, are expected to be highly volatile. Thefollowing factors, in addition to other risk factors described in thisQuarterly Report on Form 10-Q, and the potentially low volume of trades inour common stock, may have a significant impact on the market price of ourcommon stock, some of which are beyond our control:

 

·                  announcements of technological innovationsand discoveries by the Company or its competitors;

 

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

 

·                  new products or services that the Company orits competitors offer;

 

·                  actual or anticipated variations in operatingresults;

 

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·                  the initiation, conduct and/or outcome ofintellectual property and/or litigation matters;

 

·                  changes in financial estimates by securitiesanalysts;

 

·                  conditions or trends in bio-pharmaceutical orother healthcare industries;

 

·                  regulatory developments in the United Statesand other countries;

 

·                  changes in the economic performance and/ormarket valuations 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, andeconomic and other external factors; and

 

·                  sales or other transactions involving commonstock.

 

Thestock market in general has recently experienced relatively large price andvolume fluctuations. In particular, market prices of securities ofbiotechnology companies have experienced fluctuations that often have beenunrelated or disproportionate to the operating results of these companies.Continued market fluctuations could result in extreme volatility in the priceof our common stock, which could cause a decline in the value of our commonstock. Investors should also be aware that price volatility may be worse if thetrading volume of our common stock is low.

 

***We do not expect to pay cashdividends in the foreseeable future.***

 

Wecurrently intend to retain any future earnings to finance the growth anddevelopment of our business; therefore, we do not expect to pay any cashdividends in the foreseeable future. Any future dividends will depend on ourearnings, if any, and our financial requirements.

 

***Because Redpoint became a publiccompany as a result of the Reverse Merger and Reincorporation Merger and notthrough a traditional underwritten initial public offering of securities, theCompany may not attract the attention of major brokerage firms. Additionally,as a public company, we incur substantial expenses.***

 

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

 

***We have discretion on how we use anyproceeds we receive from the exercise of warrants and options.***

 

Ourmanagement has broad discretion on how to use and spend any proceeds we receiveas a result of our security holders exercising their warrants and options. Ourstockholders may not agree with our decision on how to use such proceeds. If wefail to spend the proceeds effectively, our business and financial conditioncould be harmed and we may need to seek additional financing sooner thanexpected.

 

***It is not anticipated that therewill be an active public market for shares of our common stock in the near termand stockholders may have to hold their shares of common stock for an indefiniteperiod of time. Stockholders may be unable to resell a large number of theirshares of common stock within a short time frame or at or above their purchaseprice.***

 

Tohave purchased shares of our common stock and warrants to purchase common stockin the Private Placement, an investor must have represented that it wasacquiring such shares and warrants for investment and not with a view todistribution or resale, that 

 

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theinvestor understood that neither the common stock nor the warrants are readilytransferable and, in any event, that it must bear the economic risk of aninvestment in the common stock for an indefinite period of time.

 

***If we do not comply withregistration rights granted to certain holders of our restricted securities, wemay be required to pay damages to such holders.***

 

Wefiled a “resale” registration statement with the SEC covering all shares ofcommon stock issued in connection with the Private Placement, including sharesof common stock into which any warrants are exercisable, within 60 daysafter the final closing of the Private Placement. Such registration statementhas been declared effective by the SEC. We will use our best efforts to havesuch “resale” registration statement maintain its effectiveness until such timeas all securities registered under the registration statement have been sold orare otherwise able to be sold under Rule 144 of the Securities Act withoutregard to volume limitations, whichever is earlier. We cannot assure you thatwe will be able to obtain or maintain such effective registration statement.

 

***Our common stock may be considered “apenny stock” and may be difficult to sell.***

 

TheSEC has adopted 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 future issuances of ourcommon stock could depress our stock price.***

 

Themarket price for our common stock could decline, perhaps significantly, as aresult of issuances of a large number of shares of our common stock in thepublic market or even the perception that such issuances could occur. Under ourRegistration Rights Agreement, certain holders of our outstanding shares of ourcommon stock and other securities have demand and Form S-3 registrationrights. Sales of a substantial number of these shares of common stock, or theperception that holders of a large number of shares intend to sell theirshares, could depress the market price of our common stock. The existence ofsuch registration rights could also make it more difficult for us to raise fundsthrough future offerings of our equity securities.

 

***Our stockholders may experienceadditional dilution upon the exercise of warrants or options.***

 

Asof the final closing of the Private Placement, we issued warrants to investorsto acquire approximately 10.2 million shares of common stock and warrantsto the placement agents to acquire approximately 3.6 million shares ofcommon stock in the Private Placement. In addition, there are 17.2 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 and officers of theCompany have a high concentration of our common stock ownership.***

 

Basedon the aggregate number of shares of our common stock that are outstanding asof June 30, 2008, our officers and directors beneficially ownapproximately 17.1% of our outstanding common stock. Such a high level ofownership by such persons may have a significant effect in delaying, deferringor preventing any potential change in control of the Company. Additionally, asa result of their high level of ownership, our officers and directors might beable to strongly influence the actions of the Company’s board of directors, andthe outcome of actions brought to our stockholders for approval. Such a highlevel of ownership may adversely affect the voting and other rights of ourstockholders.

 

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

 

None.

 

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

 

Notapplicable.

 

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**Item 4. Submission of Mattersto a Vote of Security Holders**

 

Our annual meeting of stockholders, or the AnnualMeeting, was held on June 5, 2008. There were present at the AnnualMeeting in person or by proxy stockholders holding an aggregate of 50,648,240shares of our common stock out of a total number of 79,440,870 shares of commonstock issued and outstanding and entitled to vote at the meeting.

 

The matters that were voted on at the Annual Meetingwere:

 

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

 

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

 

(B)                       To ratify the appointment of KPMG LLP asRedpoint’s independent registered public accounting firm to audit Redpoint’sfinancial statements for the fiscal year ending December 31, 2008.

 

The results of the votes of the Annual Meeting wereas follows:

 
| ** **                                        | ** ** | **Number of Shares of  Common Stock** | ** ** |
|---------------------------------------------------|------------|-----------------------------------------------------------|------------|
| **Proposal**                                      | ** ** | **For**                                                   | ** ** | **Withheld** | ** ** |
| Election of the following nominees as  Directors: |       |                                                      |       |   |   |
| Dr. Raymond Salemme                          |       | 50,235,528                                                |       | 412,712 |   |
| Dr. Joseph Mollica                           |       | 50,316,106                                                |       | 332,134 |   |
| Dr. Allen Bloom                              |       | 50,314,206                                                |       | 334,034 |   |
| Mr. Robert Chefitz                           |       | 50,314,206                                                |       | 334,034 |   |
| Dr. Leif Kjaergaard                          |       | 50,314,206                                                |       | 334,034 |   |
| Dr. Irwin Scher                              |       | 50,316,206                                                |       | 332,034 |   |
| Mr. Richard P. Shanley                       |       | 50,316,206                                                |       | 332,034 |   |

 
| ** **                                                                                                                                                                                               | ** ** | **Number of Shares of  Common Stock** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| **Proposal**                                                                                                                                                                                             | ** ** | **For**                                                   | ** ** | **Against** | ** ** | **Abstain** | ** ** |
| 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, 2008 |       | 50,409,468                                                |       | 208,170 |   | 30,602 |   |

 

Accordingly, our stockholders elected Dr. RaymondSalemme, Dr. Joseph Mollica, Dr. Allen Bloom, Mr. RobertChefitz, Dr. Leif Kjaergaard, Dr. Irwin Scher and Mr. Richard P.Shanley to serve as Directors until our 2009 annual meeting of stockholders anduntil their respective successors have been duly elected and qualified.

 

Our stockholders also approved and ratified theselection by the audit committee of our board of directors of KPMG LLP as ourindependent registered public accounting firm for the year ending December 31,2008.

 

**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). |

 

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| 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**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 
|                | REDPOINT BIO CORPORATION                         |
|---------------------|--------------------------------------------------|
|                |                                             |   |
| August 8, 2008 | By:                                              | /s/ F. Raymond Salemme |
|                | F. Raymond Salemme                               |
|                | President and Chief Executive Officer            |
|                | (Principal Executive Officer)                    |
|                |                                             |   |
| August 8, 2008 | 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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