ITEM 1. BUSINESS.
Overview
Redpoint Bio is a development stage company following a strategy focused on preserving the value of the License and Commercialization Agreement it entered into with International Flavors and Fragrances Inc., or IFF, a global leader in the food and beverage industry. As part of this strategy, the Company continues its efforts to reduce its liabilities and sell its remaining assets. Given its lack of resources, the Company is not currently performing any research and development activities.
In June 2009, we announced that we had identified an all-natural sweetness enhancer, RP44. RP44 is Reb-C (rebaudioside C) a component of the stevia plant. Extracts of the leaves of the stevia plant have been extensively used as sweeteners for decades. Although certain components of the stevia leaf can be used as sweeteners, RP44 is not sweet and contributes no taste or calories of its own when used in small quantities in combination with caloric sweeteners like sucrose (table sugar) fructose and high-fructose corn syrup. Instead, it works as a sweetness enhancer amplifying the existing sugary sweetness in a food or beverage so that less sweetener is required, while retaining the “clean sweet taste” that is associated with sugar. Taste tests demonstrate that RP44 enables the reduction of up to 25% of the caloric sweetener content in various product prototypes, while still maintaining the taste quality of the fully sweetened product. These results have been demonstrated by using RP44 in combination with several common sweeteners including sucrose (sugar), fructose, glucose and high-fructose corn syrup (HFCS).
In June 2010, we entered into a License and Commercialization Agreement with IFF for the development, manufacture, use and commercialization of RP44. IFF has exclusive rights, through June 2015, to develop, manufacture and commercialize RP44 in virtually all food and beverage product categories. In return, we received an upfront payment of $0.5 million and we became eligible to receive two milestone payments of $0.5 million each based upon certain criteria regarding regulatory approval and supply. In addition to these milestone payments, we are eligible to receive royalties based on the amount of RP44 purchased by IFF for use in products. Regardless of the amount of RP44 purchased by IFF for use in products, in order to maintain their exclusive rights, IFF shall be required to pay us minimum royalties in the low six figure range for each twelve month period following the first commercial purchase of RP44 by IFF for use in products. IFF will continue to be responsible for the regulatory process and for costs associated with prosecuting and maintaining our intellectual property covering the sweetness enhancer. Unless terminated earlier pursuant to the agreement, the agreement continues in effect until the end of the Royalty Term. The Royalty Term commences on the first commercial purchase by IFF (or any of its affiliates) of RP44 from a supplier under a supply agreement and ends on the fifth (5th) anniversary of the first purchase under the supply agreement, or, if a patent covering RP44 or Products (as defined in the agreement) has issued, such later date on which RP44 or such Product is no longer covered by a Valid Claim (as defined in the agreement) in any country in the Territory (as defined in the agreement). In addition to standard termination rights provided to each party, after the third (3rd) anniversary of this agreement, IFF may terminate the agreement at any time upon ninety (90) days prior written notice to the Company.
In October 2010, IFF received notification by the Flavor and Extract Manufacturers Association (FEMA) that RP44 had been determined to be Generally Recognized As Safe (GRAS), triggering the $0.5 million regulatory approval milestone payment which was received in 2010. This GRAS determination allows RP44 to be incorporated into specified products in the United States and potentially aids regulatory acceptance in numerous other countries.
In March 2011, IFF entered into an agreement with GLG Life Tech Corporation, or GLG, a global leader in the supply of high purity stevia extracts, to develop the extraction capability for high grade Reb C extract for use by IFF as a sweetness enhancer. If the development proved successful, IFF and GLG also negotiated preliminary terms for a supply agreement, including exclusive supply to IFF for high-purity Reb C for use as a sweetness enhancer. In December 2011, IFF notified us that the supply milestone was achieved, triggering the remaining $0.5 million payment which was received in December 2011. Although Reb C is currently derived from material found in the side stream of the Reb A production process there can be no assurance that it can be produced in large scale on an economically viable basis.
The worldwide sweetener market is estimated to be in excess of $50 billion with sugar (including sucrose, HFCS, and fructose) being the second most common ingredient used in food and beverages after water. Numerous scientific studies suggest a compelling link between the high levels of refined sugar found in common food and beverage products and the worsening epidemic of obesity and diabetes worldwide. Health and wellness trends continue to be major market drivers for the food and beverage industry, creating consumer demand for natural solutions that can preserve the clean sweet taste of sugar while reducing calories. We believe RP44 can provide an all-natural solution to reducing the amount of calories in sweetened foods and beverages while retaining the taste that consumers desire.
Since its inception in 1995, the Company has incurred losses and negative cash flows from operations, and such losses have continued subsequent to December 31, 2011. As of December 31, 2011, the Company had an accumulated deficit of $57.2 million and anticipates incurring additional losses for the foreseeable future. Through December 31, 2011, substantially all of the Company’s cash-flow has been derived from corporate collaborations, license agreements, government grants and equity financings. The Company expects that substantially all of its cash-flow for the foreseeable future will come from its license and commercialization agreement with IFF. However, there can be no assurance that the Company will receive any cash-flow from IFF or enter into any future corporate collaborations, equity financings or license agreements. Redpoint had approximately $127,000 of cash at December 31, 2011.
In connection with its strategy of reducing liabilities and selling its remaining assets, in April 2011, the Company sold a portion of its property and equipment through an auction process and received net cash proceeds of approximately $0.3 million. Certain of the property and equipment that was sold were used for collateral for the Company’s Loan and Security Agreement with a finance company. Of the total net proceeds received from the auction sale, approximately $85,000 was remitted directly to the finance company to reduce the outstanding indebtedness plus accrued interest under the Loan and Security Agreement to approximately $635,000 as of May 10, 2011. On May 11, 2011, the Company entered into a Discounted Payoff Agreement with the finance company, whereby the finance company agreed to accept approximately $43,000 in full satisfaction of the total outstanding indebtedness plus accrued interest. This amount was paid by the Company in May 2011.
On November 28, 2005, the Company entered into a Lease (the “Lease”) with BMR-7 Graphics Drive LLC (the “Landlord”), which was amended by the First Amendment to the Lease, dated as of October 25, 2006, and that certain Acknowledgement of Term Commencement Date and Term Expiration Date, dated as of May 7, 2007. On April 30, 2011, the Company moved out of its leased facility in New Jersey and no longer occupied the facility as of that date. The Company ceased to make rent payments under the Lease as of April 30, 2011. As a result, the Company was in default on the Lease. Additionally, on May 10, 2011, the Company received notice from the Landlord that the Company was in violation of the Lease for failure to pay rent as required under the Lease. On September 13, 2011, the Company entered into a Forbearance and Settlement Agreement with the Landlord (the “Settlement Agreement”), whereby the Landlord agreed to forbear temporarily from enforcing its rights to collect all payments currently due under the Lease and future payments due for the remainder of the Term (as defined in the Lease) (approximately $5,156,000 in the aggregate) during the period commencing on the Execution Date (as defined in the Settlement Agreement) and continuing through February 15, 2012 (the “Forbearance Period”) in consideration of the commitment to pay an aggregate of $425,000 (the “Payoff Amount”) prior to February 15, 2012. In September 2011, the Company paid $25,000 of the Payoff Amount in connection with the terms of the Settlement Agreement. Further, as discussed below, in October 2011 the Company paid an additional $27,500 of the Payoff Amount which was received in connection with an Asset Purchase Agreement entered into with Opertech Bio, Inc. In December 2011, we paid the remaining $372,500 of the Payoff Amount which was received in connection with the achievement of the supply milestone in accordance with the License and Commercialization Agreement entered into with IFF. As a result, we have no further obligations to the Landlord under the Lease or the Settlement Agreement.
On September 30, 2011, the Company entered into an Asset Purchase Agreement (the “Agreement”) with Opertech Bio, Inc. (the “Purchaser”). Pursuant to the Agreement, and subject to the terms and conditions contained therein, the Company sold certain operating assets and transferred certain liabilities and obligations to the Purchaser which relate to the Company’s taste modulator technology, including its Microtiter Operant Gustometer (“MOG”) technology. As consideration for the sale of the assets under the Agreement, the Company received at closing a cash payment in the amount of $27,500 (the “Closing Payment”). Pursuant to the Company’s obligations under the Settlement Agreement, in October 2011, the Company paid the entirety of the Closing Payment to the Landlord. In addition, if, during the one year period following the effective date of the Agreement, the Purchaser is sold or the Purchaser sells all or substantially all of the Technology (as defined in the Agreement) to an independent third party for proceeds greater than the sum of (i) the Closing Payment, and (ii) all capital invested in the Purchaser by its stockholders as of the date of such sale, then the Purchaser shall pay the Company an amount equal to 10% of the net proceeds from such sale transaction. In connection with the Agreement, the Company terminated each of its employees that remained on the Company’s scientific staff and certain of such employees have become employees of the Purchaser, including the Company’s current interim President and Chief Executive Officer and Chief Financial Officer, Scott Horvitz. Scott Horvitz also serves, on a part-time basis, as the President and Chief Executive Officer of Opertech Bio, Inc. As of the date of this filing, Mr. Horvitz is the only remaining employee of the Company.
As of the date of this filing, the Company had approximately $55,000 of cash. The Company believes that its current capital resources are only sufficient to meet its operating and capital requirements through May 2012, which raises substantial doubt about its ability to continue as a going concern. The Company is continuing its efforts to reduce its liabilities and sell its remaining assets and is seeking debt or equity financings to enhance the Company’s liquidity position. The Company’s remaining assets are primarily comprised of intellectual property, compounds and other research tools associated with the TRPm5 discovery program for pharmaceutical products which the Company terminated in March of 2011 due to scientific reasons and financial constraints. The Company had previously terminated its program for TRPm5 taste modulators.
For the Company to fund its operations, we must receive significant royalties from our license and commercialization agreement with IFF or additional equity and/or debt financing will be required before May 2012. There is no assurance that significant royalties will be received or such financing will be available to the Company as needed, and as a result, it will need to pursue other strategic alternatives. Failure to successfully address ongoing liquidity requirements will have a material adverse effect on the Company’s business. If the Company is unable to obtain additional capital on acceptable terms when needed, it will be unable to satisfy its existing obligations and may be required to take actions that harm its business and its ability to achieve positive operating cash flow in the future, including the surrender of its rights to the IFF license and commercialization agreement.
Effective March 1, 2011 through June 30, 2011, each of the Company’s executive officers agreed to indefinitely defer one-third of the cash portions of their salaries, at least until the Company has raised additional capital or the compensation committee of the board of directors determines otherwise. Effective July 1, 2011 through August 31, 2011, this salary deferral was increased to 90% of the salaries of those executive officers. On September 27, 2011, the Company reduced the outstanding amounts owed to the Company’s executive officers in connection with the deferral of their salaries to 10% of the balance owed to them as of August 31, 2011, or $15,730. As a result, the Company reduced the amounts that would have otherwise been owed to each executive officer by $141,000. In addition, on September 27, 2011, the Company mutually agreed with F. Raymond Salemme, PhD. (“Dr. Salemme”), the Company’s President and Chief Executive Officer, that Dr. Salemme shall resign as the Company’s President and Chief Executive Officer effective as of that date. Beginning on September 1, 2011, the Company is paying its Chief Financial Officer, working 50% of the time for the Company, at a revised annual salary of $125,903. As of December 31, 2011, we had one remaining employee, our Interim President and Chief Executive Officer and Chief Financial Officer, now employed on a part-time basis.
Competition and Competing Technologies
We believe RP44 is applicable to a wide range of food and beverage products representing many and diverse competitive companies and approaches. We face substantial competition from companies pursuing the commercialization of products relevant to sweet taste including leading flavor companies, such as International Flavors & Fragrances Inc. (“IFF”), Givaudan SA (“Givaudan”), Symrise and Firmenich. Senomyx and Chromocell are principally focused in the area of taste enhancement for food products and use a high throughput screening technology and synthetic chemistry to discover novel flavor enhancers, which they license to end users in the food industry. Nutrinova, a German ingredients company, is also developing a biotechnology approach to finding novel taste enhancers in collaboration with the German Biotechnology Research and Information Network. In certain instances we may also compete with companies who are commercializing Reb A. These companies include PureCircle Ltd and GLG Life Tech Corporation.
All of the above mentioned companies have substantially greater capital resources, research and development resources and experience, manufacturing capabilities, regulatory expertise, sales and marketing resources, established relationships with consumer products companies and production facilities than us.
We may in the future face competition from life sciences and other technology companies and other commercial enterprises. These entities engage in biotechnology, biology or chemistry and could apply this technology to the discovery and development of sweet taste modulators. We cannot guarantee that products developed as a result of our competitors’ existing or future collaborations will not compete with RP44.
Universities and public and private research institutions are also potential competitors. While these organizations primarily have educational objectives, they may develop proprietary technologies related to sweet taste enhancement or secure patent protection that we may need for the development of our technologies and products. We may attempt to license these proprietary technologies, but these licenses may not be available to us on acceptable terms, if at all, or we may not have the cash to pay for them.
Our competitors, either alone or with their collaborative partners, may succeed in developing technologies or discovering sweet taste enhancers that are more effective, safer, more affordable or more easily commercialized than ours, and our competitors may obtain intellectual property protection or commercialize products sooner than we do. Developments by others may render RP44 obsolete.
Regulatory Process
Regulatory Approval for New Food Flavors and Flavor Modifiers
In the United States, novel flavoring compounds, flavor enhancers and taste modulators intended for use in foods are regulated under provisions of the Federal Food, Drug, and Cosmetic Act administered by the FDA. In situations where compounds to be introduced as flavorings into food products are to be administered at low levels and in defined quantities, safety review can first be obtained through the GRAS (Generally Recognized As Safe) process, which can involve FEMA, other independent panels of experts, and/or FDA.
The GRAS process was established by the 1958 Food Additive Amendments to the Federal Food, Drug, and Cosmetic Act. GRAS ingredients are those which have been found to be generally recognized as safe by “experts qualified by scientific training and experience to evaluate the safety of substances directly or indirectly added to food” (21 CFR 570.30). These experts can be convened by any source, including FDA, industry (individual or corporation), or a trade association such as FEMA. The FEMA GRAS Panel, which has existed since 1960, has recognized many ingredients as GRAS. This process is the predominant process used to determine the GRAS status of synthetic and natural compounds that modify taste and/or flavor in the United States.
In the FEMA GRAS review program, an expert panel evaluates published literature, together with experimental toxicology, metabolism, and safety data and determines whether a compound is generally recognized as safe under the conditions and amounts of its intended use. The safety studies required for GRAS approval of a new chemical compound are extensive. GRAS safety studies typically involve the following: pharmacological activity profiling, genotoxicity studies, in vivo reproductive toxicology, ADME (absorption, distribution, metabolism, excretion), acute toxicology, and 90-day chronic dosing, including metabolism and histopathology.
A FEMA GRAS determination process for new flavoring agents and taste modifiers confers some key advantages:
•Rapid commercialization: A novel compound approved through the FEMA GRAS process can reach the U.S. marketplace in two to three years after initiation of safety studies.
•Relatively low development costs: Studies required to obtain FEMA GRAS approval typically cost about $1 to $2 million per new compound.
•Facilitation of the European Union, or EU, and other major market approval: Although new flavoring agents are approved in Europe and the rest of the world on a country by country basis, FEMA is coordinating with the International Organization of the Flavor Industry, or IOFI, and the EU Regulatory body JECFA (Joint FAO/WHO Expert Committee on Food Additives) to facilitate the approval of FEMA GRAS compounds for sale in the EU and worldwide.
In October 2010, IFF received notification by the Flavor and Extract Manufacturers Association (FEMA) that RP44 had been determined to be Generally Recognized As Safe (GRAS).
While there is ample historic precedent, there can be no assurance that regulatory requirements will remain stable and that the GRAS pathway will be available in its current or modified form.
Marketing and Sales
As a development stage company, we currently have no sales, marketing or distribution capabilities. With respect to RP44, pursuant to our license agreement, IFF will be responsible for establishing a supply chain and commercializing the product.
Intellectual Property
We currently own or have licenses to ten issued U.S. patents and two issued foreign patents, none of which, given the changes in our business focus, remain material to our core business. Also, we own over 53 U.S. and foreign patent applications pending. Due to recent scientific developments and financial constraints, we are no longer pursuing certain of our core scientific programs that we have historically been focusing on developing. Going forward we remain eligible to receive royalty payments under the License and Commercialization Agreement with IFF for RP44. Although we do not have any patents covering RP44, we have 25 applications pending.
Collaborative and Licensing Arrangements
International Flavor & Fragrances Inc.
In June 2010, we entered into a License and Commercialization Agreement with IFF for the development, manufacture, use and commercialization of RP44. IFF has exclusive rights, through June 2015, to develop, manufacture and commercialize RP44 in virtually all food and beverage product categories. In return, we received an upfront payment of $0.5 million and we became eligible to receive two milestone payments of $0.5 million each based upon certain criteria regarding regulatory approval and supply. In addition to these milestone payments, we are eligible to receive royalties based on the amount of RP44 purchased by IFF for use in products. Regardless of the amount of RP44 purchased by IFF for use in products, in order to maintain their exclusive rights, IFF shall be required to pay us minimum royalties in the low six figure range for each twelve month period following the first commercial purchase of RP44 by IFF for use in products. IFF will continue to be responsible for the regulatory process and for costs associated with prosecuting and maintaining our intellectual property covering the sweetness enhancer. Unless terminated earlier pursuant to the agreement, the agreement continues in effect until the end of the Royalty Term. The Royalty Term commences on the first commercial purchase by IFF (or any of its affiliates) of RP44 from a supplier under a supply agreement and ends on the fifth (5th) anniversary of the first purchase under the supply agreement, or, if a patent covering RP44 or Products (as defined in the agreement) has issued, such later date on which RP44 or such Product is no longer covered by a Valid Claim (as defined in the agreement) in any country in the Territory (as defined in the agreement). In addition to standard termination rights provided to each party, after the third (3rd) anniversary of this agreement, IFF may terminate the agreement at any time upon ninety (90) days prior written notice to the Company.
In October 2010, IFF received notification by the Flavor and Extract Manufacturers Association (FEMA) that RP44 had been determined to be Generally Recognized As Safe (GRAS), triggering the $0.5 million regulatory approval milestone payment which was received in 2010. This GRAS determination allows RP44 to be incorporated into specified products in the United States and potentially aids regulatory acceptance in numerous other countries.
In March 2011, IFF entered into an agreement with GLG Life Tech Corporation, or GLG, a global leader in the supply of high purity stevia extracts, to develop the extraction capability for high grade Reb C extract for use by IFF as a sweetness enhancer. If the development proved successful, IFF and GLG also negotiated preliminary terms for a supply agreement, including exclusive supply to IFF for high-purity Reb C for use as a sweetness enhancer. In December 2011, IFF notified us that the supply milestone was achieved, triggering the remaining $0.5 million payment which was received in December 2011. Although Reb C is currently derived from material found in the side stream of the Reb A production process there can be no assurance that it can be produced in large scale on an economically viable basis.
Strategy
We are following a strategy focused on preserving the value of the License and Commercialization Agreement we entered into with IFF. As part of this strategy, we are continuing our efforts to reduce our liabilities and sell our remaining assets. These remaining assets are primarily comprised of intellectual property, compounds and other research tools associated with the TRPm5 discovery program for pharmaceutical products which we terminated in March of 2011 due to scientific reasons and financial constraints. We had previously terminated our program for TRPm5 taste modulators.
IFF has exclusive rights for the development, manufacture, use and commercialization of RP44 through June 2015. After the expiration of the exclusivity term, our strategy may include licensing RP44 to other major ingredient suppliers, or food and beverage companies. Any failure to maintain or establish licensing or collaboration arrangements on favorable terms could adversely affect our business prospects, financial condition or ability to develop and commercialize RP44.
Employees
As of December 31, 2011, we had one remaining employee, our Interim President and Chief Executive Officer and Chief Financial Officer, now employed on a part-time basis. We also retain outside consultants.
Our Executive Officers and Directors
The following table identifies our current executive officers and directors:
(1)Scott M. Horvitz became Robcor’s Chief Financial Officer, Treasurer and Secretary on March 12, 2007 and became its Interim President and Chief Executive Officer on November 18, 2011. Mr. Horvitz has been the Original Redpoint’s Chief Financial Officer, Corporate Secretary and Treasurer since July 2004. Mr. Horvitz has approximately 25 years of experience in accounting and financial management of biotechnology companies, including the management of initial public offerings with his two previous companies. Mr. Horvitz also currently serves, on a part time basis, as the President and Chief Executive Officer of Opertech Bio, Inc. Prior to becoming Chief Financial Officer of Original Redpoint, Mr. Horvitz was a consultant to Original Redpoint from August 2003 to June 2004. Previously, Mr. Horvitz co-founded 3-Dimensional Pharmaceuticals, Inc. where he worked from September 1993 until its acquisition by Johnson & Johnson in July 2003, most recently serving as its Chief Financial Officer and Corporate Secretary and Treasurer. Prior to 3DP, Mr. Horvitz was the Executive Director of Finance and Human Resources with Magainin Pharmaceuticals. Mr. Horvitz holds a B.S. in Accounting from the University at Albany and is a Certified Public Accountant. Mr. Horvitz served on the Board of Directors of Protez Pharmaceuticals, Inc. and was the Chairman of its Audit Committee from 2004 until its acquisition by Novartis in 2008.
(2)Richard P. Shanley, CPA was appointed as a director on September 12, 2007, and as Chairman of the Board on February 23, 2010. Mr. Shanley, a Certified Public Accountant in New York, retired from public accounting at the end of 2006, having completed a 31 year career at Deloitte & Touche LLP and Eisner LLP, with a combined total of 25 years as a Partner at the two firms. During his career, Mr. Shanley served as lead audit partner on numerous engagements for both public and private companies, including those requiring application of Sarbanes-Oxley Section 404, as well as public stock offerings, primarily for biotechnology, pharmaceutical and high-tech companies. Mr. Shanley is a recognized authority on financing for emerging growth companies and is a published author of Financing Technology’s Frontier. He has spoken at industry meetings and is actively involved in organizations including the Biotech Council of New Jersey, the New York Biotechnology Association, the Connecticut Venture Group, the Biotechnology Industry Organization, and others. Mr. Shanley is currently serving as the chair of the New York State Society of CPA’s Professional Ethics Committee. Mr. Shanley currently serves on the Board of Harris & Harris Group, Inc. He earned his B.S. degree from Fordham University and his M.B.A. in Accounting from Long Island University.
(3)Robert Chefitz has been a General Partner of NJTC Venture Fund, SBIC, L.P., a private venture capital firm based in New Jersey that is a lead investor in seed and early stage companies in the region since April 2002. Prior to joining the NJTC Venture Fund, from February 1987 to October 2001, Mr. Chefitz was a partner at Apax Partners based in New York. Prior to Apax Partners, Mr. Chefitz was employed as an investment professional with Golder Thoma Cressey in Chicago. Mr. Chefitz is a past president of the New York Venture Association. Mr. Chefitz holds a B.A. in History from Northwestern University and a M.B.A. from Columbia University. In addition to Redpoint, Mr. Chefitz serves as a director on the boards at Hycrete Technologies, LLC, Achieve 3000, Point Blank Solutions, Inc., Westec Intelligent Surveillance, Alarm.com, The Ladders.com, and RightAnswers, Inc. Mr. Chefitz has been a director of Original Redpoint since 2003.
(4)Allen Bloom, Ph.D. was appointed as a director on September 12, 2007. From 1994 until 2003, Dr. Bloom, a patent attorney, was a partner at the law firm of Dechert LLP, where he served as Co-Chair of the Intellectual Property Group and headed a patent practice group focusing on biotechnology, pharmaceuticals and medical devices. From 1985 until mid-1994, Dr. Bloom was Vice President, General Counsel and Secretary of The Liposome Company, Inc., where he managed patent, regulatory and licensing activities. Before that, Dr. Bloom served as Patent Attorney and Patent Counsel for Pfizer, Inc. and RCA Corporation, respectively. Dr. Bloom currently serves on the Board of the biopharmaceutical company Unigene Laboratories, Inc., where he is lead director. He earned his Ph.D. in organic chemistry from Iowa State University, a J.D. degree from New York Law School and a B.S. in Chemistry from Brooklyn College.
None of our executive officers is related to any other executive officer or to any of our Directors. Our executive officers are elected annually by the Board of Directors and serve until their successors are duly elected and qualified.
Corporate History
Redpoint was incorporated in August 1995 under the name of Linguagen Corp., based on the pioneering work of its scientific founder Robert Margolskee, M.D., Ph.D. Dr. Margolskee’s laboratory has made major discoveries in the molecular biology of taste signaling pathways. We have obtained exclusive licenses to certain technology patents, covering discoveries in his laboratory, from the Mount Sinai School of Medicine. We terminated this license agreement in April 2011 as we were no longer pursuing certain scientific programs associated with this technology.
In March 2007, we entered into the Agreement and Plan of Merger, dated as of March 12, 2007, by and among Redpoint, on the one hand, and Robcor, Merger Sub, Robcor, LLC, and Halter Financial Investments, L.P. and Michael Heitz, as stockholders of Robcor, on the other hand. The transactions contemplated by the Reverse Merger Agreement were consummated on March 12, 2007.
Pursuant to the Reverse Merger Agreement, on the Closing Date, Merger Sub merged with and into Redpoint, with Redpoint being the surviving corporation and becoming a wholly-owned subsidiary of Robcor, and the outstanding shares of capital stock, convertible notes and certain warrants to purchase capital stock of Redpoint were converted into shares of common stock of Robcor in accordance with the Delaware General Corporation Law on the terms and conditions as set forth in the Reverse Merger Agreement. On May 3, 2007, Redpoint and Robcor entered into an Agreement and Plan of Merger in which Robcor, the former parent company of Redpoint after consummation of the Reverse Merger, merged with and into Redpoint. Such merger, referred to herein as the Reincorporation Merger, was deemed effective on June 15, 2007.
Redpoint was deemed to have been the accounting acquirer in the Reverse Merger. Accordingly, the financial statements of the Company presented reflect the historical results of Redpoint prior to the Reverse Merger, and of the combined entities following the Reverse Merger, and do not include the historical financial results of Robcor prior to the consummation of the Reverse Merger. For analysis of the accounting treatment of the Reverse Merger and the Reincorporation Merger as well as our business, please see the accompanying financial statements.
Our principal executive offices are located at 5501 Old York Road, Philadelphia, Pennsylvania 19141. Our telephone number is (215) 456-2312. Our website address is www.redpointbio.com. The information contained on our website is not incorporated by reference into, and does not form any part of, this annual report.
Available Information
We make available the following public filings with the Securities and Exchange Commission, or the SEC, free of charge through our Web site at www.redpointbio.com as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the SEC:
•our Annual Reports on Form 10-K and any amendments thereto;
•our Quarterly Reports on Form 10-Q and any amendments thereto; and
•our Current Reports on Form 8-K and any amendments thereto.
In addition, we make available our code of conduct free of charge through our web site. We intend to disclose any amendments to, or waivers from, our code of conduct that are required to be publicly disclosed pursuant to rules of the SEC and NASDAQ by filing such amendment or waiver with the SEC and posting it on our web site.
No information on our internet web site is incorporated by reference into this Annual Report on Form 10-K or any other public filing made by us with the SEC.
ITEM 1A.
ITEM 1A. RISK FACTORS.
You should carefully consider the following risks and all of the other information set forth in this Annual Report on Form 10-K before deciding to invest in shares of our common stock. The risks described below are not the only ones facing us. Additional risks not presently known to us or that we currently deem immaterial may also impair our business operations.
If any of the following risks actually occurs, our business, financial condition or results of operations would likely suffer. In such case, the market price of our common stock would likely decline due to the occurrence of any of these risks, and you may lose all or part of your investment.
Risks Related To Our Business and Our Industry
As of December 31, 2011, we had approximately $127,000 of cash. As of the date of filing this annual report on Form 10-K, we have approximately $55,000 of cash. Although we received the remaining $0.5 million milestone payment from our license and commercialization agreement with IFF on December 13, 2011, we do not have sufficient capital to fund our future operations beyond May 2012 or to satisfy our obligations and continue our business.
We cannot be certain that additional financing will be available on acceptable terms, or at all. In recent years, it has been difficult for companies to raise capital due to a variety of factors, which may or may not continue. To the extent we raise additional capital through the sale of equity securities, the ownership position of our existing stockholders could be substantially diluted. If additional funds are raised through the issuance of preferred stock or debt securities, these securities are likely to have rights, preferences and privileges senior to our common stock. Fluctuating interest rates could also increase the costs of any debt financing we may obtain. Failure to successfully address ongoing liquidity requirements will have a material adverse effect on our business. If we are unable to obtain additional capital on acceptable terms when needed, we may be required to take actions that harm our business and our ability to achieve cash flow in the future, including possibly the surrender of our rights to the IFF license and commercialization agreement or curtailing or ceasing operations.
We will need substantial additional funding for our future operations. If we are unable to obtain the funds necessary to do so in the near term, we may be unable to continue our business.
We believe that our current capital resources are only sufficient to meet our operating and capital requirements through May 2012. Our future requirements will depend on many factors, including:
•IFF’s ability and willingness, to formulate RP44 into food and beverage products;
•the cost of prosecuting, defending and enforcing patent claims and other intellectual property rights;
•the time and cost involved in obtaining regulatory approvals;
•the cost of manufacturing RP44;
•competing technological and market developments; and
•our ability to establish and maintain arrangements with third parties to assist in bringing RP44 to market and the cost of such arrangements.
There can be no assurance that we will not need additional capital sooner than currently anticipated.
Redpoint is a development-stage company. We have incurred losses since inception and may incur additional net losses for at least the next several years, even if we are able to raise additional funds necessary to continue our business.
Since our inception in 1995, we have incurred losses and negative cash flows from operations, and such losses have continued subsequent to December 31, 2011. As of December 31, 2011, we had an accumulated deficit of $57.2 million and anticipate incurring additional losses for the foreseeable future. Through December 31, 2011, substantially all of our cash-flow has been derived from corporate collaborations, license agreements, government grants and equity financings. We expect that substantially all of our cash-flow for the foreseeable future will come from our license and commercialization agreement with IFF. However, there can be no assurance that we will receive any cash-flow from IFF or enter into any equity financings or other license agreements or that we will ever become profitable. Even if we do achieve profitability, we cannot predict the level of such profitability. If we sustain losses over an extended period of time, we may be unable to continue our business.
We are an early stage company and currently have no products available for sale. RP44 may require additional research, development, testing, and/or regulatory approvals before marketing. IFF may be unable to develop, obtain or maintain regulatory approval or market RP44. If commercialization of RP44 is delayed or fails, our financial condition will be negatively affected, and we may have to curtail or cease our operations.
We currently do not sell any products to third parties and, except for RP44, do not expect to have any products commercially available. You must evaluate us in light of the uncertainties and complexities affecting an early stage biotechnology company. RP44 may require additional research and development, testing and regulatory review and/or approvals clearances before marketing. There are many reasons that RP44 may fail or not advance to commercialization, including the possibility that:
•RP44 may be ineffective, unsafe or associated with unacceptable side effects;
•RP44 may fail to maintain or receive the necessary regulatory approvals or otherwise fail to meet applicable regulatory standards;
•experts may not agree that RP44 is generally recognized as safe;
•RP44, may be too expensive to develop, manufacture or market;
•other parties may hold or acquire proprietary rights that could prevent us or our potential collaborators from developing or marketing RP44;
•our current and potential collaborators may withdraw support for or otherwise impair the development and commercialization of RP44; or
•others may develop equivalent or superior products.
In addition, we, or our collaborators, may not succeed in developing RP44 with the appropriate attributes required for use in successful commercial products. Successful taste modulators require, among other things, appropriate biological activity, including the correct properties for the product application, an acceptable safety profile, including lack of toxicity or allergenicity, and appropriate physical or chemical properties, including relative levels of stability, volatility and resistance to heat. Successful taste enhancers must also be cost-efficient. We may not be able to develop RP44 that meet these criteria.
If the commercialization of RP44 is delayed or we fail to successfully develop and commercialize it, our financial condition may be negatively affected, and we may have to curtail or cease our operations.
We may not successfully establish and maintain collaborative and licensing arrangements, which could adversely affect our ability to develop and commercialize RP44.
IFF has exclusive rights for the development, manufacture, use and commercialization of RP44 through June 2015. After the expiration of the exclusivity term, our strategy may include licensing RP44 to other major ingredient suppliers, or food and beverage companies. Any failure to maintain or establish licensing or collaboration arrangements on favorable terms could adversely affect our business prospects, financial condition or ability to develop and commercialize RP44.
We may not be able to maintain or expand these licenses and collaborations or establish additional licensing and collaboration arrangements necessary to develop and commercialize RP44. For example, we were unable to renew our one year research agreement with The Coca-Cola Company in 2008 and our agreement with Givaudan ended on May 1, 2009. Even if we are able to maintain or establish licensing or collaboration arrangements, these arrangements may not be on favorable terms and may contain provisions that will restrict our ability to develop, test and market RP44. Any failure to maintain or establish licensing or collaboration arrangements on favorable terms could adversely affect our business prospects, financial condition or ability to develop and commercialize RP44.
We expect to rely on IFF to perform a number of activities relating to the development and commercialization of RP44, including the manufacturing of product materials, and marketing and distribution of any successfully developed products. In addition, if IFF withdraws support for RP44 our business could be negatively affected. To the extent we undertake any of these activities internally, our expenses may increase.
If we or our collaborators are unable to obtain and/or maintain the GRAS determination or regulatory approval required before RP44 can be incorporated into products that are sold, we would be unable to commercialize RP44 and our business would be adversely affected.
In the United States, novel flavoring compounds, flavor enhancers and taste modulators intended for use in foods are regulated under provisions of the Federal Food, Drug, and Cosmetic Act administered by the FDA. In situations where compounds to be introduced as flavorings into food products are to be administered at low levels and in defined quantities, safety review can first be obtained through the GRAS (Generally Recognized As Safe) process, which can involve FEMA, other independent panels of experts, and/or FDA.
The GRAS process was established by the 1958 Food Additive Amendments to the Federal Food, Drug, and Cosmetic Act. GRAS ingredients are those which have been found to be generally recognized as safe by “experts qualified by scientific training and experience to evaluate the safety of substances directly or indirectly added to food” (21 CFR 570.30). These experts can be convened by any source, including FDA, industry (individual or corporation), or a trade association such as FEMA. The FEMA GRAS Panel, which has existed since 1960, has recognized many ingredients as GRAS. This process is the predominant process used to determine the GRAS status of synthetic and natural compounds that modify taste and/or flavor in the United States.
In the FEMA GRAS review program, an expert panel evaluates published literature, together with experimental toxicology, metabolism, and safety data and determines whether a compound is generally recognized as safe under the conditions and amounts of its intended use. The safety studies required for GRAS approval of a new chemical compound are extensive. GRAS safety studies typically involve the following: pharmacological activity profiling, genotoxicity studies, in vivo reproductive toxicology, ADME (absorption, distribution, metabolism, excretion), acute toxicology, and 90-day chronic dosing, including metabolism and histopathology.
In October 2010, IFF received notification by the Flavor and Extract Manufacturers Association (FEMA) that RP44 had been determined to be Generally Recognized As Safe (GRAS). While there is ample historic precedent, there can be no assurance that regulatory requirements will remain stable and that the GRAS pathway will be available in its current or modified form.
Sales of RP44 outside of the United States will be subject to foreign regulatory requirements. In most cases, whether or not a GRAS determination or FDA approval has been obtained, approval of a product by the comparable regulatory authorities of foreign countries must still be obtained prior to manufacturing or marketing the product in those countries. A GRAS determination or FDA approval in the United States or in any other jurisdiction does not ensure approval in other jurisdictions because the requirements from jurisdiction to jurisdiction may vary widely. Obtaining foreign approvals could result in significant delays, difficulties and costs for us and require additional safety studies and additional expenses. If we fail to comply with these regulatory requirements or to obtain and maintain required approvals, our ability to generate revenue will be diminished.
We and our collaborators may not be successful in overcoming these regulatory hurdles, which could result in product launch delays, unanticipated expenses, termination of collaborations, and flavors and flavor enhancers not being approved for incorporation into consumer products. These consequences would have a material adverse effect on our business financial condition and results of operations.
Even though IFF received GRAS determination to incorporate RP44 into products, those products may never be commercially successful.
Our success depends to a significant degree upon the commercial success of packaged food and beverage products incorporating RP44. If these products fail to achieve or subsequently maintain market acceptance or commercial viability, our business would be significantly harmed because our royalty revenue is dependent upon consumer sales of these products. Many factors may affect the market acceptance and commercial success of any potential products incorporating RP44, including:
•health concerns, whether actual or perceived, or unfavorable publicity regarding RP44
•the timing of market entry of RP44 as compared to competitive products;
•the rate of adoption of products containing RP44; and
•any product labeling that may be required by the FDA or other United States or foreign regulatory agencies for products incorporating RP44.
We will rely on third parties to manufacture RP44. There can be no guarantee that IFF can obtain sufficient and acceptable quantities of RP44 on acceptable terms, which may delay or impair their ability to develop, test and market such products.
Our business strategy relies on third parties to manufacture and produce RP44 in accordance with good manufacturing practices established by the FDA, or similar regulations in other countries. RP44 may be in competition with other products for access to these facilities and may be subject to delays in manufacture if third parties give other products greater priority than our product candidates. These third parties also may not deliver sufficient quantities of RP44, manufacture RP44 in accordance with specifications, or comply with applicable government regulations. In March 2011, IFF entered into an agreement with GLG Life Tech Corporation, or GLG, a global leader in the supply of high purity stevia extracts, to develop the extraction capability for high grade Reb C extract for use by IFF as a sweetness enhancer. If the development proved successful, IFF and GLG also negotiated preliminary terms for a supply agreement, including exclusive supply to IFF for high-purity Reb C for use as a sweetness enhancer. In December 2011, IFF notified us that the supply agreement was signed. Although Reb C is currently derived from material found in the side stream of the Reb A production process there can be no assurance that it can be produced in large scale on an economically viable basis.
Many potential competitors, including those who have greater resources and experience than we do, may develop products or technologies that make ours obsolete or noncompetitive.
We believe RP44 is applicable to a wide range of food and beverage products representing many and diverse competitive companies and approaches. We face substantial competition from companies pursuing the commercialization of products relevant to sweet taste including leading flavor companies, such as International Flavors & Fragrances Inc. (“IFF”), Givaudan SA (“Givaudan”), Symrise and Firmenich. Senomyx and Chromocell are principally focused in the area of taste enhancement for food products and use a high throughput screening technology and synthetic chemistry to discover novel flavor enhancers, which they license to end users in the food industry. Nutrinova, a German ingredients company, is also developing a biotechnology approach to finding novel taste enhancers in collaboration with the German Biotechnology Research and Information Network. In certain instances we may also compete with companies who are commercializing Reb A. These companies include PureCircle Ltd and GLG Life Tech Corporation.
All of the above mentioned companies have substantially greater capital resources, research and development resources and experience, manufacturing capabilities, regulatory expertise, sales and marketing resources, established relationships with consumer products companies and production facilities than us.
We may in the future face competition from life sciences and other technology companies and other commercial enterprises. These entities engage in biotechnology, biology or chemistry and could apply this technology to the discovery and development of sweet taste modulators. We cannot guarantee that products developed as a result of our competitors’ existing or future collaborations will not compete with RP44.
Universities and public and private research institutions are also potential competitors. While these organizations primarily have educational objectives, they may develop proprietary technologies related to sweet taste enhancement or secure patent protection that we may need for the development of our technologies and products. We may attempt to license these proprietary technologies, but these licenses may not be available to us on acceptable terms, if at all, or we may not have the cash to pay for them.
Our competitors, either alone or with their collaborative partners, may succeed in developing technologies or discovering sweet taste enhancers that are more effective, safer, more affordable or more easily commercialized than ours, and our competitors may obtain intellectual property protection or commercialize products sooner than we do. Developments by others may render RP44 obsolete.
If we are unable to attract and retain key personnel and advisors, it may adversely affect our ability to obtain financing or pursue collaborations.
We are highly dependent on Scott Horvitz, our Interim President and Chief Executive Officer and Chief Financial Officer. To pursue our business strategy, we may need to hire or otherwise engage qualified personnel and managers, including personnel with expertise in development, government regulation, manufacturing, marketing and sales. Competition for qualified personnel is intense among companies, academic institutions and other organizations.
We may be sued for product liability, which could adversely affect our business.
Because our business strategy involves the development and sale by either us or our collaborators of RP44, we may be sued for product liability. We may be held liable if any product we develop and commercialize, or any product our collaborators commercialize that incorporates RP44, causes injury or is found otherwise unsuitable during product testing, manufacturing, marketing, sale or consumer use. In addition, the safety studies we performed and the FEMA GRAS determination IFF obtained for RP44 will not protect us from any such liability.
If we and our collaborators commence sale of commercial products we may need to obtain product liability insurance, and this insurance may be prohibitively expensive, or may not fully cover our potential liabilities. Inability to obtain sufficient insurance coverage at an acceptable cost or otherwise to protect against potential product liability claims could prevent or inhibit the commercialization of products developed by us or our collaborators. We may be obligated to indemnify our product discovery and development collaborators for product liability or other losses they incur as a result of our modulators. Any indemnification we receive from such collaborators for product liability that does not arise from our taste modulators or pharmaceutical products may not be sufficient to satisfy our liability to injured parties. If we are sued for any injury caused by RP44 or products incorporatingRP44, our liability could exceed our total assets.
Risks Related To Intellectual Property
If RP44 is not effectively protected by valid, issued patents or if we are not otherwise able to protect our proprietary information and technologies, it could harm our business.
The success of our operations will depend in part on our ability and that of our licensors to:
•obtain patent protection for RP44 both in the United States and in other countries with substantial markets;
•maintain patents once obtained;
•maintain trade secrets and operate without infringing upon the intellectual property rights of others; and
•obtain appropriate licenses upon reasonable terms to patents or proprietary rights held by others that are necessary or useful to us in commercializing our technology, both in the United States and in other countries with substantial markets.
In the event we are not adequately able to protect our intellectual property and proprietary information, our business will be materially harmed.
We may not have adequate protection for our unpatented proprietary information, which could adversely affect our competitive position.
In addition to patents, we will substantially rely on trade secrets, know-how and licensing opportunities to develop and maintain our competitive position. However, it is conceivable that others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets or disclose our technology. To protect our trade secrets, we may enter into confidentiality agreements with employees, consultants and potential collaborators. However, these agreements may not provide meaningful protection of our trade secrets or adequate remedies in the event of unauthorized use or disclosure of such information. Likewise, our trade secrets or know-how may become known through other means or be independently discovered by our competitors. Any of these events could hinder us from developing or commercializing our product candidates.
Our ability to compete in the ingredient, food and beverage market may decline if we do not adequately protect RP44.
Because of the substantial length of time and expense associated with the development of new products, we, along with the rest of the ingredient, food and beverage industry, place considerable importance on obtaining and maintaining patent protection for new technologies, products and processes. Our success depends in part on our ability to obtain and maintain intellectual property that protects RP44. Patent positions may be highly uncertain and may involve complex legal and factual questions, including the ability to establish patentability of sequences and or structures relating to taste receptors, proteins, chemical synthesis techniques, compounds and methods for using them to modulate taste for which we seek patent protection. No consistent pattern regarding the allowability or scope of claims in many of our pending patent applications has emerged to date. As a result, we cannot predict the breadth of claims that will ultimately be allowed in our patent applications, if any, or the extent to which we may enforce these claims against our competitors. The degree of future protection for our proprietary rights is therefore highly uncertain and we cannot assure you that:
•we, or our licensors, were the first to file patent applications or to invent the subject matter claimed in patent applications relating to the technologies upon which we rely;
•others will not independently develop similar or alternative technologies or duplicate any of our technologies;
•others did not publicly disclose our claimed technology before we conceived the subject matter included in any of our patent applications;
•any of our patent applications will result in issued patents;
•any of our patent applications will not result in interferences or disputes with third parties regarding priority of invention;
•any patents that may be issued to us, our collaborators or our licensors will provide a basis for commercially viable products or will provide us with any competitive advantages or will not be challenged by third parties;
•we will develop additional proprietary technologies that are patentable;
•the patents of others will not have an adverse effect on our ability to do business; or
In addition, the legal standards for patents outside the United States vary greatly and in many countries intellectual property laws are undergoing review and revision. The laws of some countries do not protect intellectual property rights to the same extent as domestic laws. It may be necessary or useful for us to participate in opposition proceedings to determine the validity of our competitors’ patents or to defend the validity of any of our or our licensor’s future patents, which could result in substantial costs and would divert our efforts and attention from other aspects of our business.
Many of the patent applications we and our licensors have filed have not yet been substantively examined and may not result in patents being issued.
Many of the patent applications with filed by us and IFF were filed recently with the United States Patent and Trademark Office and many have not been substantively examined and may not result in patents being issued. It is difficult to predict whether any of our or our licensors’ applications will ultimately be found to be patentable or, if so, to predict the scope of any allowed claims. In addition, the disclosure in our or our licensors’ patent applications, particularly in respect of the utility of our claimed inventions, may not be sufficient to meet the statutory requirements for patentability in all cases. As a result, it is difficult to predict whether any of our or our licensors’ applications will be allowed, or, if so, to predict the scope of any allowed claims or the enforceability of the patents. Even if enforceable, others may be able to design around any patents or develop similar technologies that are not within the scope of such patents. Our and our licensors’ patent applications may not issue as patents that will provide us with any protection or competitive advantage.
Disputes concerning the infringement or misappropriation of our proprietary rights or the proprietary rights of others could be time consuming and extremely costly.
Our commercial success, if any, will be significantly harmed if we infringe the patent rights of third parties or if we breach any license or other agreements that we have entered into with regard to our technology or business.
We are aware of other companies and academic institutions that have been performing research in the areas of taste modulation. In particular, other companies and academic institutions have announced that they have conducted taste-receptor research and have published data on taste receptor sequence information and taste receptors or filed patent applications or obtained patent protection on taste modulation or taste receptors and their uses. Additionally, we may be subject to disputes with our collaborative partners relating to the scope of our research, our related agreements and the resulting rights or ownership of any discoveries.
We are not currently a party to any litigation, interference, opposition, protest, reexamination or any other potentially adverse governmental, ex parte or inter-party proceeding with regard to our patent or trademark positions. However, the life sciences and other technology industries are characterized by extensive litigation regarding patents and other intellectual property rights. Many life sciences and other technology companies have employed intellectual property litigation as a way to gain a competitive advantage. If we become involved in litigation, interference proceedings, oppositions, reexaminations, protests or other potentially adverse intellectual property proceedings as a result, for example, of alleged infringement by us of the rights of others or as a result of priority of invention disputes with third parties, we might have to spend significant amounts of money, time and effort defending our position and we may not be successful. In addition, any claims relating to the infringement of third-party proprietary rights or proprietary determinations, even if not meritorious, could result in costly litigation, lengthy governmental proceedings, diversion of management’s attention and resources, or require us to enter into royalty or license agreements that are not advantageous to us.
Should any person have filed patent applications or obtained patents in the United States that claim inventions also claimed by us, we may have to participate in an interference proceeding declared by U.S. Patent and Trademark Office to determine priority of invention and, thus, the right to a patent for these inventions in the United States. Such a proceeding could result in substantial cost to us even if the outcome is favorable. Even if successful on priority grounds, an interference action may result in loss of claims based on patentability grounds raised in the interference action. Litigation, interference proceedings or other proceedings could divert management’s time and efforts. Even unsuccessful claims could result in significant legal fees and other expenses, diversion of management’s time and disruption in our business. Uncertainties resulting from initiation and continuation of any patent proceeding or related litigation could harm our ability to compete and could have a significant adverse effect on our business, financial condition and results of operations.
An adverse ruling arising out of any intellectual property dispute, including an adverse decision as to the priority of our inventions, could undercut or invalidate our intellectual property position. An adverse ruling could also subject us to significant liability for damages, including possible treble damages, prevent us from using technologies or developing products, or require us to negotiate licenses to disputed rights from third parties. Although patent and intellectual property disputes in the technology area are often settled through licensing or similar arrangements, costs associated with these arrangements may be substantial and could include license fees and ongoing royalties. Furthermore, necessary licenses may not be available to us on satisfactory terms, if at all. Failure to obtain a license in such a case could have a significant adverse effect on our business, financial condition and results of operations.
Risks Related to Our Fluctuating Operating Results, Possible Acquisitions and Management of Growth
We expect that our results of operations will fluctuate from period to period, and this fluctuation could cause our stock price to decline, causing investor losses.
Our operating results have fluctuated in the past and are likely to vary significantly in the future based upon a number of factors, many of which we have little or no control over. We operate in a highly dynamic industry and future results could be subject to significant fluctuations. These fluctuations could cause us to fail to meet or exceed financial expectations of securities analysts or investors, which could cause our stock price to decline rapidly and significantly. Revenue and expenses in future periods may be greater or less than revenue and expenses in the immediately preceding period or in the comparable period of the prior year. Therefore, period-to-period comparisons of our operating results are not necessarily a good indication of our future performance. Some of the factors that could cause our operating results to fluctuate include:
•our ability to discover and develop taste modulators;
•our ability or the ability of our product discovery and development collaborators, to incorporate RP44 into packaged food and beverage products;
•our receipt of commercialization payments in any particular period;
•the ability and willingness of collaborators to commercialize products incorporating RP44, on expected timelines, or at all;
•our ability to enter into product discovery and development collaborations and technology collaborations, or to extend the terms 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;
•the demand for our future products and our collaborators’ products containing RP44; and
•general and industry specific economic conditions, which may affect our collaborators’ research and development expenditures.
If we acquire products, technologies or other businesses, we will incur a variety of costs, may have integration difficulties and may experience numerous other risks that could adversely affect our business.
To remain competitive, we may decide to acquire additional businesses, products and technologies. We have limited experience in identifying acquisition targets, successfully acquiring them and integrating them into our current infrastructure. We may not be able to successfully integrate any businesses, products, technologies or personnel that we might acquire in the future without a significant expenditure of operating, financial and management resources, if at all. In addition, future acquisitions could require significant capital infusions and could involve many risks, including, but not limited to, the following:
•we may have to issue convertible debt or equity securities to complete an acquisition, which would dilute our stockholders and could adversely affect the market price of our common stock;
•an acquisition may negatively impact our results of operations because it may require us to incur large one-time charges to earnings, amortize or write down amounts related to goodwill and
•other intangible assets, or incur or assume substantial debt or liabilities, or it may cause adverse tax consequences, substantial depreciation or deferred compensation charges;
•we may encounter difficulties in assimilating and integrating the business, technologies, products, personnel or operations of companies that we acquire;
•certain acquisitions may disrupt our relationship with existing collaborators who are competitive to the acquired business;
•acquisitions may require significant capital infusions and the acquired businesses, products or technologies may not generate sufficient revenue to offset acquisition costs;
•an acquisition may disrupt our ongoing business, divert resources, increase our expenses and distract our management;
•acquisitions may involve the entry into a geographic or business market in which we have little or no prior experience; and
•key personnel of an acquired company may decide not to work for us.
Any of the foregoing risks could have a significant adverse effect on our business, financial condition and results of operations.
To the extent we enter markets outside of the United States, our business will be subject to political, economic, legal and social risks in those markets, which could adversely affect our business.
There are significant regulatory and legal barriers in markets outside the United States that we must overcome to the extent we enter or attempt to enter markets in countries other than the United States. We will be subject to the burden of complying with a wide variety of national and local laws, including multiple and possibly overlapping and conflicting laws. We also may experience difficulties adapting to new cultures, business customs and legal systems. Any sales and operations outside the United States would be subject to political, economic and social uncertainties including, among others:
•changes and limits in import and export controls;
•increases in custom duties and tariffs;
•changes in currency exchange rates;
•economic and political instability;
•changes in government regulations and laws;
•absence in some jurisdictions of effective laws to protect our intellectual property rights; and
•currency transfer and other restrictions and regulations that may limit our ability to sell certain products or repatriate profits to the United States.
Any changes related to these and other factors could adversely affect our business to the extent we enter markets outside the United States.
An economic downturn and adverse economic conditions may harm our business.
The recent economic downturn and adverse conditions in the national and global markets may negatively affect our operations in the future. Our revenues are contingent upon the expenditures of the pharmaceutical, biotech, and food and beverage industries, and as these industries continue to cut costs in response to the economic downturn, our revenues may be similarly decreased. Furthermore, while our revenues may decrease, our costs may remain fixed, resulting in decreased earnings.
Risks Related to our Common Stock; Liquidity Risks
The sale of a significant number of our shares of common stock in the public market, as well as substantial future issuances of our common stock, could depress the market price of common stock.
The sale of a significant number of shares of our common stock in the public market could harm the market price of our common stock. The number of shares that may be sold into the marketplace pursuant to the registration statement is significant. We believe that such sales may severely depress the market price of our common stock. In addition, some or all of the shares of common stock may be offered from time to time in the open market pursuant to Rule 144 (or pursuant to an additional registration statement, if one is effective), and these sales may also have a depressive effect on the market for the shares of common stock. In general, a person who is deemed to be an affiliate who has held shares for a period of six months may, upon filing of a notification on Form 144 with the SEC, sell into the market common stock in an amount up to the greater of 1% of the outstanding shares or the average weekly number of shares sold in the last four weeks before such sale. Such sales may be repeated once each three months. A non-affiliate holding restricted shares may sell such shares without restrictions after they have been held six months, subject only to the current public information requirement. After an additional six months have lapsed, a non-affiliate may sell such shares without any restrictions.
The market price for our common stock could also decline, perhaps significantly, as a result of issuances of a large number of shares of our common stock in the public market or even the perception that such issuances could occur. Under our Registration Rights Agreement, certain holders of our outstanding shares of our common stock and other securities have demand and Form S-3 registration rights. The existence of such registration rights could also make it more difficult for us to raise funds through future offerings of our equity securities.
The price of our common stock is expected to continue to be volatile.
The market price of our common stock, and the market prices for securities of biotechnology companies in general, have been, and are expected to be, highly volatile. The following factors, in addition to other risk factors described in this Annual Report on Form 10-K, and the potentially low volume of trades in our common stock, may have a significant impact on the market price of our common stock, some of which are beyond our control:
· announcements of technological innovations and discoveries by the Company or its competitors;
· developments concerning any research and development, manufacturing, and marketing collaborations;
· new products or services that the Company or its competitors offer;
· actual or anticipated variations in operating results;
· the initiation, conduct and/or outcome of intellectual property and/or litigation matters;
· changes in financial estimates by securities analysts;
· regulatory developments in the United States and other countries;
· changes in the economic performance and/or market valuations of other biotechnology and flavor companies;
· the Company’s announcement of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
· additions or departures of key personnel;
· global unrest, terrorist activities, and economic and other external factors; and
· sales or other transactions involving common stock.
The stock market in general has recently experienced relatively large price and volume fluctuations. In particular, market prices of securities of biotechnology companies have experienced fluctuations that often have been unrelated or disproportionate to the operating results of these companies. Continued market fluctuations could result in extreme volatility in the price of our common stock, which could cause a decline in the value of our common stock. Investors should also be aware that price volatility may be worse if the trading volume of our common stock is low.
We do not expect to pay cash dividends in the foreseeable future.
We currently intend to retain any future earnings to finance the growth and development of our business; therefore, we do not expect to pay any cash dividends in the foreseeable future. Any future dividends will depend on our earnings, if any, and our financial requirements.
Because Redpoint became a public company as a result of the Reverse Merger and Reincorporation Merger and not through a traditional underwritten initial public offering of securities, the Company may not attract the attention of major brokerage firms. Additionally, as a public company, we incur substantial expenses.
As a result of the Reverse Merger and Reincorporation Merger, Redpoint became a publicly-traded company and, accordingly, will be subject to the information and reporting requirements of the United States securities laws. The costs to public companies of preparing and filing annual and quarterly reports, proxy statements and other information with the SEC and furnishing audited reports to stockholders have caused the Company’s expenses to be higher than they would be if it were a privately-held company. In addition, the Company incurred substantial expenses in connection with the preparation of the registration statement and related documents with respect to the registration of the common stock issued in the Private Placement and the Reverse Merger. Security analysts of major brokerage firms may not provide coverage of the Company. No assurance can be given that brokerage firms will want to conduct any secondary offerings on behalf of the Company in the future.
We have discretion on how we use any proceeds we receive from the exercise of warrants and options.
Our management has broad discretion on how to use and spend any proceeds we receive as a result of our security holders exercising their warrants and options. Our stockholders may not agree with our decision on how to use such proceeds. If we fail to spend the proceeds effectively, our business and financial condition could be harmed and we may need to seek additional financing sooner than expected.
It is not anticipated that there will be an active public market for shares of our common stock in the near term and stockholders may have to hold their shares of common stock for an indefinite period of time. Stockholders may be unable to resell a large number of their shares of common stock within a short time frame or at or above their purchase price.
To have purchased shares of our common stock and warrants to purchase common stock in the Private Placement, an investor must have represented that it was acquiring such shares and warrants for investment and not with a view to distribution or resale, that the investor understood that neither the common stock nor the warrants are readily transferable and, in any event, that it must bear the economic risk of an investment in the common stock for an indefinite period of time.
If we do not comply with registration rights granted to certain holders of our restricted securities, we may be required to pay damages to such holders.
We filed a “resale” registration statement with the SEC covering all shares of common stock issued in connection with the Private Placement, including shares of common stock into which any warrants are exercisable, within 60 days after the final closing of the Private Placement. Such registration statement has been declared effective by the SEC. We will use our best efforts to have such “resale” registration statement maintain its effectiveness until such time as all securities registered under the registration statement have been sold or are otherwise able to be sold under Rule 144 of the Securities Act without regard to volume limitations, whichever is earlier. We cannot assure you that we will be able to obtain or maintain such effective registration statement.
Our common stock may be considered “a penny stock” and may be difficult to sell.
The SEC has adopted regulations that generally define “penny stock” to be an equity security that has a market or exercise price of less than $5 per share, subject to specific exemptions. The market price of our common stock has been and may continue to be less than $5 per share and therefore may be designated a “penny stock” under SEC rules. This designation requires any broker or dealer selling our common stock to disclose certain information about the transaction, obtain a written agreement from the investor and determine that the investment in our common stock by the investor is a reasonably suitable investment for such investor. These rules may restrict the ability of brokers or dealers to sell our common stock and, as a result, may affect the ability of investors to sell their shares. In addition, unless and until our common stock is listed for trading on the American Stock Exchange or NASDAQ Capital Market or similar market, investors may experience a lack of buyers to purchase such stock or a lack of market makers to support the stock price. Resale restrictions on transferring “penny stocks” are sometimes imposed by some states, which may make transactions in our stock more difficult and may reduce the value of your investment.
Our stockholders may experience additional dilution upon the exercise of warrants or options.
As of December 31, 2011, there were 16.5 million shares of common stock underlying options that have been or may be granted pursuant to the Redpoint Bio Corporation 2007 Omnibus Equity Compensation Plan. As of December 31, 2011, there were 3.9 million warrants outstanding to purchase shares of common stock. If the remaining 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 the Company have a high concentration of our common stock ownership.
Based on the aggregate number of shares of our common stock that are outstanding as of December 31, 2011, our officers and directors beneficially own approximately 12.96% of our outstanding common stock and our 5% stockholders beneficially own approximately 27.65% of our outstanding common stock. Such a high level of ownership by such persons may have a significant effect in delaying, deferring or preventing any potential change in control of the Company. Additionally, as a result of their high level of ownership, our officers and directors might be able to strongly influence the actions of the Company’s board of directors, and the outcome of actions brought to our stockholders for approval. Such a high level of ownership may adversely affect the voting and other rights of our stockholders.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2.
ITEM 2. PROPERTIES.
Lease Agreement for Office and Laboratory Space in Ewing, New Jersey
On November 28, 2005, we entered into a lease agreement with BMR-7 Graphics Drive LLC (the “Landlord”) to lease office and laboratory space at 7 Graphics Drive in Ewing, New Jersey. The leased premises included approximately 18,000 square feet of office and laboratory space, and the annual base rent was $818,032, subject to annual increases of approximately 1%. Under the lease agreement, we also had to pay certain operating expenses associated with the leased premises. The term of the lease was ten years and commenced on May 7, 2007. We began to occupy the space at 7 Graphics Drive on May 21, 2007.
On April 30, 2011, we moved out of our leased facility in New Jersey and no longer occupied the facility as of that date. We made rent payments through April 30, 2011 in connection with the lease agreement. As a result, we were in default on our facility lease agreement. Additionally, on May 10, 2011, we received notice from the Landlord that we were in violation of our facility lease for failure to pay rent as required under the lease. On June 30, 2011, the Landlord filed suit in the Superior Court of New Jersey, Special Civil Part, Landlord Tenant section against us, alleging breach of a lease and seeking damages pursuant to that alleged breach. The case was marked as settled with a Consent Order dismissing the case to be submitted as part of the settlement.
On September 13, 2011, we entered into a Forbearance and Settlement Agreement (the “Settlement Agreement”) with the Landlord, whereby the Landlord agreed to forbear temporarily from enforcing its rights to collect all payments currently due under the lease and future payments due for the remainder of the Term (as defined in the lease agreement) (approximately Five Million One Hundred Fifty Six Thousand Dollars ($5,156,000) in the aggregate) during the period commencing on the Execution Date (as defined in the Settlement Agreement) and continuing through February 15, 2012 (the “Forbearance Period”) in consideration of the commitment to pay an aggregate of Four Hundred Twenty-Five Thousand Dollars ($425,000) (the “Payoff Amount”) prior to February 15, 2012. On September 13, 2011, we paid Twenty-Five Thousand Dollars ($25,000) of the Payoff Amount in connection with the terms of the Settlement Agreement. In October 2011we paid an additional $27,500 of the Payoff Amount which was received in connection with an Asset Purchase Agreement entered into with Opertech Bio, Inc. In December 2011, we paid the remaining $372,500 of the Payoff Amount which was received in connection with the achievement of the supply milestone in accordance with the License and Commercialization Agreement entered into with IFF. As a result, we have no further obligations to the Landlord under the lease agreement or the Settlement Agreement.
Lease Agreement for Office and Laboratory Space in Philadelphia, Pennsylvania
On September 30, 2005, we entered into an agreement with Albert Einstein Healthcare Network, or AEHN, to use AEHN’s laboratory space located at 5501 Old York Road, Philadelphia, Pennsylvania. The term expired in September 2009. From the time the term expired through September 2011, we occupied approximately 1,000 square feet of office and laboratory space and paid rent on a month-to-month basis of approximately $1,500 per month. In connection with the Asset Purchase Agreement we entered into in September of 2011 with Opertech Bio, Inc., Opertech agreed to assume the monthly costs associated with this space and has further agreed to store our remaining assets at this location for a period of not more than one year.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, the Company may become involved in various investigations, claims and legal proceedings that arise in the ordinary course of the Company’s business. These matters may relate to intellectual property, employment, tax, regulation, contract or other matters. The resolution of these matters as they arise will be subject to various uncertainties. As of the date of this Annual Report on Form 10-K, Redpoint Bio is not a party to any material pending legal proceeding.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Our common stock currently trades on the OTCQB under the symbol “RPBC”. However, for the years ended December 31, 2010 and December 31, 2011, our common stock traded on the OTC Bulletin Board under the symbol “RPBC”.
The following table describes the per share range of high and low sale prices for shares of our common stock, as listed for quotation on the OTC Bulletin Board, for the periods indicated. Please note that this information reflects inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
As of December 31, 2011, the closing price for our common stock was $0.01 per share. As of April 1, 2012, there were approximately 229 holders of record of our common stock. Our independent stock transfer agent is American Stock Transfer & Trust Company, located at 6201 15th Avenue, Brooklyn, New York 11219. Their telephone number is (800) 937-5449.
Dividend Policy
We have not declared or paid any cash dividends on common stock since our inception, and our Board of Directors currently intends to retain all earnings for use in the business for the foreseeable future. Any future payment of dividends will depend upon our results of operations, financial condition, cash requirements, and other factors deemed relevant by our Board of Directors. We are under no contractual obligations or restrictions to declare or pay dividends to our stockholders.
Equity Compensation Plan Information
The following table provides information as of December 31, 2011 with respect to the shares of our common stock that may be issued under our existing equity compensation plan. Prior to the Reverse Merger, Original Redpoint maintained the Linguagen Corp. 2003 Stock Incentive Plan, which we refer to as the “2003 Stock Plan.” In connection with the adoption of the Redpoint Bio Corporation 2007 Omnibus Equity Compensation Plan, which we refer to as the “2007 Plan,” the 2003 Stock Plan merged with and into the 2007 Plan and no additional grants may be made under the 2003 Stock Plan. Outstanding grants under the 2003 Stock Plan continue in effect in accordance with their terms as in effect before March 12, 2007 (subject to such amendments as the Compensation Committee determines, consistent with the 2003 Stock Plan, as applicable).
(1)Consists of the 2007 Plan.
Recent Sales of Unregistered Securities
We did not sell any unregistered equity securities during the fiscal year ended December 31, 2011.
Issuer Purchases of Equity Securities
We did not repurchase any shares of our equity securities during the fiscal year ended December 31, 2011.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Forward Looking Statements
The statements contained in this Annual Report on Form 10-K that are not historical facts are forward-looking statements (within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended) that involve risks and uncertainties. Such forward-looking statements may be identified by, among other things, the use of forward-looking terminology such as “believes”, “expects”, “may”, “will”, “should” or “anticipates” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. From time to time, we or our representatives have made or may make forward-looking statements, orally or in writing. Such forward-looking statements may be included in various filings made by us with the SEC, or press releases or oral statements made by or with the approval of one of our authorized executive officers. These forward-looking statements, such as statements regarding anticipated future revenues or operating margins, contract percentage completions, capital expenditures, and other statements regarding matters that are not historical facts, involve predictions. Our actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements. There are a number of important factors that could cause our results to differ materially from those indicated by such forward-looking statements. These factors include those set forth in the section entitled “Item 1A. Risk Factors”.
Overview
Redpoint Bio is a development stage company following a strategy focused on preserving the value of the License and Commercialization Agreement it entered into with International Flavors and Fragrances, Inc. or IFF, a global leader in the food and beverage industry. As part of this strategy, the Company continues its efforts to reduce its liabilities and sell its remaining assets. These remaining assets are primarily comprised of intellectual property, compounds and other research tools associated with the TRPm5 discovery program for pharmaceutical products which the Company terminated in March of 2011 due to scientific reasons and financial constraints. The Company had previously terminated its program for TRPm5 taste modulators. Given its lack of resources, the Company is not currently performing any research and development activities.
In June 2009, we announced that we had identified an all-natural sweetness enhancer, RP44. RP44 is Reb-C (rebaudioside C) a component of the stevia plant. Extracts of the leaves of the stevia plant have been extensively used as sweeteners for decades. Although certain components of the stevia leaf can be used as sweeteners, RP44 is not sweet and contributes no taste or calories of its own when used in small quantities in combination with caloric sweeteners like sucrose (table sugar) fructose and high-fructose corn syrup. Instead, it works as a sweetness enhancer amplifying the existing sugary sweetness in a food or beverage so that less sweetener is required, while retaining the “clean sweet taste” that is associated with sugar. Taste tests demonstrate that RP44 enables the reduction of up to 25% of the caloric sweetener content in various product prototypes, while still maintaining the taste quality of the fully sweetened product. These results have been demonstrated by using RP44 in combination with several common sweeteners including sucrose (sugar), fructose, glucose and high-fructose corn syrup (HFCS).
In June 2010, we entered into a License and Commercialization Agreement with IFF for the development, manufacture, use and commercialization of RP44. IFF has exclusive rights, through June 2015, to develop, manufacture and commercialize RP44 in virtually all food and beverage product categories. In return, we received an upfront payment of $0.5 million and we became eligible to receive two milestone payments of $0.5 million each based upon certain criteria regarding regulatory approval and supply. In addition to these milestone payments, we are eligible to receive royalties based on the amount of RP44 purchased by IFF for use in products. Regardless of the amount of RP44 purchased by IFF for use in products, in order to maintain their exclusive rights, IFF shall be required to pay us minimum royalties in the low six figure range for each twelve month period following the first commercial purchase of RP44 by IFF for use in products. IFF will continue to be responsible for the regulatory process and for costs associated with prosecuting and maintaining our intellectual property covering the sweetness enhancer. Unless terminated earlier pursuant to the agreement, the agreement continues in effect until the end of the Royalty Term. The Royalty Term commences on the first commercial purchase by IFF (or any of its affiliates) of RP44 from a supplier under a supply agreement and ends on the fifth (5th) anniversary of the first purchase under the supply agreement, or, if a patent covering RP44 or Products (as defined in the agreement) has issued, such later date on which RP44 or such Product is no longer covered by a Valid Claim (as defined in the agreement) in any country in the Territory (as defined in the agreement). In addition to standard termination rights provided to each party, after the third (3rd) anniversary of this agreement, IFF may terminate the agreement at any time upon ninety (90) days prior written notice to the Company.
In October 2010, IFF received notification by the Flavor and Extract Manufacturers Association (FEMA) that RP44 had been determined to be Generally Recognized As Safe (GRAS), triggering the $0.5 million regulatory approval milestone payment which was received in 2010. This GRAS determination allows RP44 to be incorporated into specified products in the United States and potentially aids regulatory acceptance in numerous other countries.
In March 2011, IFF entered into an agreement with GLG Life Tech Corporation, or GLG, a global leader in the supply of high purity stevia extracts, to develop the extraction capability for high grade Reb C extract for use by IFF as a sweetness enhancer. If the development proved successful, IFF and GLG also negotiated preliminary terms for a supply agreement, including exclusive supply to IFF for high-purity Reb C for use as a sweetness enhancer. In December 2011, IFF notified us that the supply milestone was achieved, triggering the remaining $0.5 million payment which was received in December 2011. Although Reb C is currently derived from material found in the side stream of the Reb A production process there can be no assurance that it can be produced in large scale on an economically viable basis.
We believe there is an important potential role for RP44 in all-natural reduced-calorie products. Numerous scientific studies suggest a compelling link between the high levels of refined sugar found in common food and beverage products and the worsening epidemic of obesity and diabetes worldwide. Health and wellness trends continue to be major market drivers for the food and beverage industry, creating consumer demand for natural solutions that can preserve the clean sweet taste of sugar while reducing calories.
The worldwide sweetener market is estimated to be in excess of $50 billion with sugar (including sucrose, HFCS, and fructose) being the second most common ingredient used in food and beverages after water. Numerous scientific studies suggest a compelling link between the high levels of refined sugar found in common food and beverage products and the worsening epidemic of obesity and diabetes worldwide. Health and wellness trends continue to be major market drivers for the food and beverage industry, creating consumer demand for natural solutions that can preserve the clean sweet taste of sugar while reducing calories. We believe RP44 can provide an all-natural solution to reducing the amount of calories in sweetened foods and beverages while retaining the taste that consumers desire.
Since its inception in 1995, the Company has incurred losses and negative cash flows from operations, and such losses have continued subsequent to December 31, 2011. As of December 31, 2011, the Company had an accumulated deficit of $57.2 million and anticipates incurring additional losses for the foreseeable future. Through December 31, 2011, substantially all of the Company’s cash-flow has been derived from corporate collaborations, license agreements, government grants and equity financings. The Company expects that substantially all of its cash-flow for the foreseeable future will come from its license and commercialization agreement with IFF. However, there can be no assurance that the Company will receive any cash-flow from IFF or enter into any future corporate collaborations, equity financings or license agreements. Redpoint had approximately $127,000 of cash at December 31, 2011.
In connection with its strategy of reducing liabilities and selling its remaining assets, in April 2011, the Company sold a portion of its property and equipment through an auction process and received net cash proceeds of approximately $0.3 million. Certain of the property and equipment that was sold were used for collateral for the Company’s Loan and Security Agreement with a finance company. Of the total net proceeds received from the auction sale, approximately $85,000 was remitted directly to the finance company to reduce the outstanding indebtedness plus accrued interest under the Loan and Security Agreement to approximately $635,000 as of May 10, 2011. On May 11, 2011, the Company entered into a Discounted Payoff Agreement with the finance company, whereby the finance company agreed to accept approximately $43,000 in full satisfaction of the total outstanding indebtedness plus accrued interest. This amount was paid by the Company in May 2011.
On November 28, 2005, the Company entered into a Lease (the “Lease”) with BMR-7 Graphics Drive LLC (the “Landlord”), which was amended by the First Amendment to the Lease, dated as of October 25, 2006, and that certain Acknowledgement of Term Commencement Date and Term Expiration Date, dated as of May 7, 2007. On April 30, 2011, the Company moved out of its leased facility in New Jersey and no longer occupied the facility as of that date. The Company ceased to make rent payments under the Lease as of April 30, 2011. As a result, the Company was in default on the Lease. Additionally, on May 10, 2011, the Company received notice from the Landlord that the Company was in violation of the Lease for failure to pay rent as required under the Lease. On September 13, 2011, the Company entered into a Forbearance and Settlement Agreement with the Landlord (the “Settlement Agreement”), whereby the Landlord agreed to forbear temporarily from enforcing its rights to collect all payments currently due under the Lease and future payments due for the remainder of the Term (as defined in the Lease) (approximately $5,156,000 in the aggregate) during the period commencing on the Execution Date (as defined in the Settlement Agreement) and continuing through February 15, 2012 (the “Forbearance Period”) in consideration of the commitment to pay an aggregate of $425,000 (the “Payoff Amount”) prior to February 15, 2012. In September 2011, the Company paid $25,000 of the Payoff Amount in connection with the terms of the Settlement Agreement. Further, as discussed below, in October 2011 the Company paid an additional $27,500 of the Payoff Amount which was received in connection with an Asset Purchase Agreement entered into with Opertech Bio, Inc. In December 2011, we paid the remaining $372,500 of the Payoff Amount which was received in connection with the achievement of the supply milestone in accordance with the License and Commercialization Agreement entered into with IFF. As a result, we have no further obligations to the Landlord under the Lease of the Settlement Agreement.
On September 30, 2011, the Company entered into an Asset Purchase Agreement (the “Agreement”) with Opertech Bio, Inc. (the “Purchaser”). Pursuant to the Agreement, and subject to the terms and conditions contained therein, the Company sold certain operating assets and transferred certain liabilities and obligations to the Purchaser which relate to the Company’s taste modulator technology, including its Microtiter Operant Gustometer (“MOG”) technology. As consideration for the sale of the assets under the Agreement, the Company received at closing a cash payment in the amount of $27,500 (the “Closing Payment”). Pursuant to the Company’s obligations under the Settlement Agreement, in October 2011, the Company paid the entirety of the Closing Payment to the Landlord. In addition, if, during the one year period following the effective date of the Agreement, the Purchaser is sold or the Purchaser sells all or substantially all of the Technology (as defined in the Agreement) to an independent third party for proceeds greater than the sum of (i) the Closing Payment, and (ii) all capital invested in the Purchaser by its stockholders as of the date of such sale, then the Purchaser shall pay the Company an amount equal to 10% of the net proceeds from such sale transaction. In connection with the Agreement, the Company terminated each of its employees that remained on the Company’s scientific staff and certain of such employees have become employees of the Purchaser, including the Company’s current interim President and Chief Executive Officer and Chief Financial Officer, Scott Horvitz, who also serves, on a part-time basis, as the President and Chief Executive Officer of Opertech, Bio Inc. As of the date of this filing, Mr. Horvitz is the only remaining employee of the Company.
As of the date of this filing, the Company had approximately $55,000 of cash. The Company believes that its current capital resources are only sufficient to meet its operating and capital requirements through May 2012, which raises substantial doubt about its ability to continue as a going concern. The Company is continuing its efforts to reduce its liabilities and sell its remaining assets and is seeking debt or equity financings to enhance the Company’s liquidity position. The Company’s remaining assets are primarily comprised of intellectual property, compounds and other research tools associated with the TRPm5 discovery program for pharmaceutical products which the Company terminated in March of 2011 due to scientific reasons and financial constraints. The Company had previously terminated its program for TRPm5 taste modulators.
For the Company to fund its operations, we must receive significant royalties from our license and commercialization agreement with IFF or additional equity and/or debt financing will be required before May 2012. There is no assurance that significant royalties will be received or such financing will be available to the Company as needed, and as a result, it will need to pursue other strategic alternatives. Failure to successfully address ongoing liquidity requirements will have a material adverse effect on the Company’s business. If the Company is unable to obtain additional capital on acceptable terms when needed, it will be unable to satisfy its existing obligations and may be required to take actions that harm its business and its ability to achieve positive operating cash flow in the future, including the surrender of its rights to the IFF license and commercialization agreement.
Effective March 1, 2011 through June 30, 2011, each of the Company’s executive officers agreed to indefinitely defer one-third of the cash portions of their salaries, at least until the Company has raised additional capital or the compensation committee of the board of directors determines otherwise. Effective July 1, 2011 through August 31, 2011, this salary deferral was increased to 90% of the salaries of those executive officers. On September 27, 2011, the Company reduced the outstanding amounts owed to the Company’s executive officers in connection with the deferral of their salaries to 10% of the balance owed to them as of August 31, 2011, or $15,730. As a result, the Company reduced the amounts that would have otherwise been owed to each executive officer by $141,000. In addition, on September 27, 2011, the Company mutually agreed with F. Raymond Salemme, PhD. (“Dr. Salemme”), the Company’s President and Chief Executive Officer, that Dr. Salemme shall resign as the Company’s President and Chief Executive Officer effective as of that date. Beginning September 1, 2011, the Company is paying its Chief Financial Officer, working 50% of the time for the Company, at a revised annual salary of $125,903. As of December 31, 2011, the Comapny had one remaining employee, its Interim President and Chief Executive Officer and Chief Financial Officer, now employed on a part-time basis.
On March 12, 2007, we completed the first closing of our private placement of shares of common stock and warrants to purchase shares of common stock raising approximately $17.2 million of net proceeds. On April 6, 2007, we completed the final closing of the private placement raising an additional $11.4 million of net proceeds, bringing the total private placement net proceeds to $28.6 million.
In March 2007, we entered into a Joint Research and Development and License Agreement with Givaudan Schweiz AG, a Swiss company, or Givaudan, for the development and commercialization of compounds that act primarily through the modulation of the TRPm5 ion channel and that enhance sweetness or savory sensation, as well as compounds that block or desensitize bitter taste for use in the food and beverage industry. In consideration of the Company’s agreement to conduct research and develop compounds and grant exclusive licenses and other rights to Givaudan, Redpoint received an upfront payment of $1.3 million and Givaudan provided research funding to the Company over the term of the agreement. Givaudan terminated the agreement, effective as of May 1, 2009, and Givaudan reserved its rights under the agreement with respect to certain collaboration compounds. Givaudan cited the fact that certain collaboration objectives had not been achieved as its reasoning for terminating the agreement. Through the termination date of the agreement, including the upfront fee, we received $6.9 million in research and development funding in connection with the agreement.
Recognizing the difficult financing environment that has significantly impacted the biotechnology sector and seeking ways to conserve cash, during the year ended December 31, 2009, we announced two restructurings which reduced our workforce by approximately 60%. As of December 31, 2011, we had 1 part-time employee.
Revenue
To date, our revenue has come solely from corporate collaborations, licensing agreements and government grants. Since our inception, we have undertaken research projects for which we were the recipient of several Small Business Innovative Research, or SBIR, Awards. The SBIR Awards were sponsored by the National Institutes of Health. The last SBIR related research project was completed in 2004.
In March 2007, we entered into an agreement with Givaudan where we were collaborating exclusively with each other to discover and develop Enhancer Compounds and Bitter Blocker Compounds that act primarily through the modulation of the TRPm5 channel. The agreement with Givaudan was terminated by Givaudan on May 1, 2009. Also, in December 2007, we entered into a one year research agreement with Coca-Cola for the development of certain technology for use in soft drinks and other non-alcoholic beverages. The agreement with Coca-Cola expired by its terms in December 2008.
In June 2010, we entered into a License and Commercialization Agreement with IFF, or the IFF Agreement, for the development, manufacture, use and commercialization of RP44. IFF has exclusive rights, through June 2015, to develop, manufacture and commercialize RP44 in virtually all food and beverage product categories.
Research and Development
Given its lack of resources, the Company is not currently performing any research and development activities. Previously, our research and development expenses consisted primarily of internal costs associated with our taste modulator and diabetes research programs as well as amounts paid to third parties to conduct research on our behalf. Our internal research and development costs were comprised of salaries and related benefits, facilities and depreciation on laboratory equipment, compound acquisition costs and research supplies. We charge research and development costs to operations as incurred.
General and Administrative
Our general and administrative expenses consist primarily of salaries and related benefit expenses for business development, financial, legal and other administrative functions. In addition, we incur external costs for professional fees for legal, patent, accounting and investor relations services.
Results of Operations
Year ended December 31, 2011 compared to December 31, 2010
Research, Grant Revenue and License Revenue. For the year ended December 31, 2011, we recorded revenue of $0.5 million which included $0.5 million in connection with the IFF Agreement, which we signed in June 2010 for the development, manufacture, use and commercialization of RP44. IFF has exclusive rights, through June 2015, to develop, manufacture and commercialize RP44 in virtually all food and beverage product categories. The Company has no future performance obligations under the IFF Agreement. The revenue from IFF relates to $0.5 million received in December 2011 from a milestone payment that was triggered when IFF achieved the supply milestone in connection with the IFF Agreement. In addition, we recorded $25,000 which was earned in connection with a research and development agreement relating to the Company’s taste modulator technology. The research and development agreement, related rights and work in progress was transferred to Opertech Bio, Inc. during 2011. As such, the Company has no future continuing involvement related to this program. For the year ended December 31, 2010, we recorded revenue of $1.2 million which included $1.0 million in connection with the IFF Agreement, which we signed in June 2010 for the development, manufacture, use and commercialization of RP44. The revenue from IFF includes $0.5 million from an upfront payment and $0.5 million from a milestone payment that was triggered when IFF received notification by the Flavor and Extract Manufacturers Association (FEMA) that RP44 had been determined to be Generally Recognized As Safe (GRAS). The remaining $0.2 million of revenue was related to the grant approval in connection with the Qualifying Therapeutic Discovery Project Program under section 48D of the Internal Revenue Code. As of December 31, 2011, the Company does not have any current sources of revenue other than the potential cash flow from the IFF Agreement.
Research and Development Expenses. Our research and development expenses were $1.0 million for the year ended December 31, 2011 compared to $3.0 million for the year ended December 31, 2010. The decrease in expenses was primarily attributable to reductions in payroll, laboratory supplies and services provided by contract research organizations. Our internal research and developments costs are comprised of salaries and related benefits, facilities and depreciation on laboratory equipment and research supplies. As of December 31, 2011, the Company is no longer performing research activities.
General and Administrative Expenses. Our general and administrative expenses were $1.9 million for the year ended December 31, 2011 compared to $3.6 million for the year ended December 31, 2010. The decrease in expenses was primarily attributable to reductions in professional fees and payroll expense, which was offset by $0.4 million of expense related to the liability to terminate the lease of the Company’s leased facility, as well as $0.2 million of expense for the write off of the security deposit related to this leased facility, both of which were recorded in 2011.
Interest Expense. Interest expense decreased for the year ended December 31, 2011 compared to the year ended December 31, 2010. On May 11, 2011 the Company entered into a Discounted Payoff Agreement with a finance company which terminated the Company’s Loan and Security Agreement. As such, there was lower interest expense during the year ended December 31, 2011 as compared to the year ended December 31, 2010.
Income Tax Benefit. During 2011, the Company sold $5.3 million of its New Jersey State net operating losses resulting in the recognition of an income tax benefit of $0.4 million recorded in the Company’s Statement of Operations. During 2010, we sold $0.1 million of our New Jersey State Research and Development Tax Credits resulting in the recognition of an income tax benefit of $0.1 million. Due to the Company’s history of losses, we have not recognized the benefit of any of our other net operating loss carryforwards.
Other Income . During the year ended December 31, 2011, the Company sold a portion of its property and equipment through an auction process and received net cash proceeds of $0.3 million. As a result of this transaction, the Company recorded a gain on sale of these assets of $0.2 million which is included in Other income in the Company’s Statements of Operations for the year ended December 31, 2011.
As noted above, during the year ended December 31, 2011, the Company sold a portion of its property and equipment through an auction process. Certain of the items sold were used for collateral for the Loan and Security Agreement entered into between Redpoint and a finance company. Accordingly, $0.1 million of the net proceeds from the auction was remitted directly to the finance company to reduce the outstanding indebtedness plus accrued interest under the Loan and Security Agreement to $0.6 million as of May 10, 2011. On May 11, 2011, the Company entered into a Discounted Payoff Agreement with the finance company, whereby the finance company agreed to accept approximately $43,000 in full satisfaction of the total outstanding indebtedness plus accrued interest under the Loan and Security Agreement. Upon receipt of such amount by the finance company, the Loan and Security Agreement automatically terminated, and all liabilities, obligations and indebtedness of the Company to the finance company were deemed satisfied in full and all liens and security interests of the finance company in any of the Company’s property and equipment were deemed released and terminated. In addition, there was a nominal balance of deferred financing costs related to the Loan and Security Agreement at May 11, 2011, which was written off in connection with the Discounted Payoff Agreement. As a result of the above transaction, the Company recorded a gain on debt extinguishment of $0.6 million which is included in Other income in the Company’s Statements of Operations for the year ended December 31, 2011.
During the year ended December 31, 2011, the Company entered into a series of agreements with several of the Company’s largest creditors. The creditors agreed to accept an aggregate amount of $0.1 million in full and complete satisfaction of $0.8 million of outstanding balances owed to such creditors. As a result of these agreements, the Company recorded a gain of $0.7 million which is included in Other income in the Company’s Statements of Operations for the year ended December 31, 2011.
Year ended December 31, 2010 compared to December 31, 2009
Research and Grant Revenue. For the year ended December 31, 2010, we recorded revenue of $1.2 million which included $1.0 million in connection with the IFF Agreement, which we signed in June 2010 for the development, manufacture, use and commercialization of RP44. The revenue from IFF includes $0.5 million from an upfront payment and $0.5 million from a milestone payment that was triggered when IFF received notification by the Flavor and Extract Manufacturers Association (FEMA) that RP44 had been determined to be Generally Recognized As Safe (GRAS). The remaining $0.2 million of revenue was related to the grant approval in connection with the Qualifying Therapeutic Discovery Project Program under section 48D of the Internal Revenue Code. For the year ended December 31, 2009, we recorded revenue of $1.9 million, which included $1.7 million from the agreement with Givaudan, which began in March 2007, for the development and commercialization of compounds that enhance sweetness or savory sensation as well as compounds that block or desensitize bitter taste for use in the food and beverage industry. In consideration of the Company’s agreement to conduct research and develop compounds and grant exclusive licenses and other rights to Givaudan, Redpoint received an upfront payment of $1.3 million and Givaudan provided research funding to the Company over the term of the agreement. The revenue from Givaudan during 2009 includes $0.7 million attributable to the upfront payment which was being recognized as revenue on a straight-line basis over the initial 3.5 year term of the agreement and $1.0 million of research funding. Givaudan terminated the agreement, effective as of May 1, 2009. As of May 1, 2009, the remaining unamortized portion of the upfront payment was approximately $0.5 million and was recognized as revenue upon the termination of the agreement. The remaining $0.2 million of revenue in 2009 was from other agreements including a feasibility research program we conducted with Schering-Plough Corporation in the area of taste science research of pharmaceutical applications.
Research and Development Expenses. Our research and development expenses were $3.0 million for the year ended December 31, 2010 compared to $5.6 million for the year ended December 31, 2009. The decrease in expenses was primarily attributable to a decrease in internal costs due to reductions in workforce as a result of corporate restructurings the Company undertook in 2009, as well as a reduction in the amounts paid to third parties to conduct research on our behalf.
General and Administrative Expenses. Our general and administrative expenses were $3.6 million for the year ended December 31, 2010 compared to $5.0 million for the year ended December 31, 2009. The decrease in expenses was primarily attributable to reduced expenditures associated with patent and other professional fees, as well as a reduction in payroll expense due to reductions in workforce as a result of the corporate restructurings the Company undertook in 2009.
Interest Income. Interest income was a nominal amount for the year ended December 31, 2010 compared to $0.1 million for the year ended December 31, 2009. The decrease was primarily the result of decreasing cash and investment balances.
Interest Expense. Interest expense was $0.1 million for the year ended December 31, 2010 compared to $0.2 million for the year ended December 31, 2009.
Income Tax Benefit. During 2010, we sold $0.1 million of our New Jersey State Research and Development Tax Credits resulting in the recognition of an income tax benefit of $0.1 million. Due to the Company’s history of losses, we have not recognized the benefit of any of our other net operating loss carryforwards.
Liquidity and Capital Resources
Since inception in 1995, we have incurred losses and negative cash flows from operations, and such losses have continued subsequent to December 31, 2011. As of December 31, 2011, we had an accumulated deficit of $57.2 million and we anticipate incurring additional losses for the foreseeable future. Through December 31, 2011, substantially all of our cash-flow has been derived from corporate collaborations, license agreements, government grants and equity financings. We expect that substantially all of our cash-flow for the foreseeable future will come from our license and commercialization agreement with IFF. However, there can be no assurance that we will receive any cash-flow from IFF or enter into any future corporate collaborations, equity financings or license agreements. We had approximately $127,000 of cash at December 31, 2011.
Since inception, we have used $43.5 million of cash to fund our operating activities and $3.4 million for capital expenditures. Through December 31, 2011, we have funded substantially all of our operations and capital expenditures through private placements of equity and convertible debt securities totaling $45.8 million, cash received from corporate collaborations totaling $11.4 million, government grants totaling $2.0 million, and capital equipment and working capital financing totaling $3.6 million.
We believe that our current capital resources are only sufficient to meet our operating and capital requirements through May 2012, which raises substantial doubt about our ability to continue as a going concern. We are continuing our efforts to reduce our liabilities and sell our remaining assets and are seeking debt or equity financings to enhance our liquidity position. For the Company to fund its operations, significant royalties from our license and commercialization agreement with IFF or additional equity and/or debt financing will be required before May 2012. There is no assurance that significant royalties will be received or such financing will be available to the Company as needed, and as a result, we will need to pursue other strategic alternatives. Failure to successfully address ongoing liquidity requirements will have a material adverse effect on our business. If we are unable to obtain additional capital on acceptable terms when needed, we will be unable to satisfy our existing obligations and may be required to take actions that harm our business including possibly the surrender of our rights to the IFF license and commercialization agreement.
In connection with our strategy of reducing liabilities and selling our remaining assets, in April 2011, we sold a portion of our property and equipment through an auction process and received cash proceeds of approximately $0.3 million. In order to conserve cash, effective March 1, 2011 through June 30, 2011, each of the Company’s executive officers agreed to indefinitely defer one-third of the cash portions of their salaries, at least until the Company has raised additional capital or the compensation committee of the board of directors determines otherwise. Effective July 1, 2011 through August 31, 2011, this salary deferral was increased to 90% of the salaries of those executive officers. On September 27, 2011, the Company reduced the outstanding amounts owed to the Company’s executive officers in connection with the deferral of their salaries to 10% of the balance owed to them as of August 31, 2011, or $15,730. As a result, the Company reduced the amounts that would have otherwise been owed to each executive officer by $141,000. In addition, on September 27, 2011, the Company mutually agreed with its President and Chief Executive Officer that this individual shall resign as the Company’s President and Chief Executive Officer effective as of that date. Beginning September 1, 2011, the Company is paying its Chief Financial Officer, working 50% of the time for the Company, at a revised annual salary of $125,903. As of December 31, 2011, we had one remaining employee, our Interim President and Chief Executive Officer and Chief Financial Officer, now employed on a part-time basis.
In September 2008, we entered into a Loan and Security Agreement with CIT Healthcare LLC that provided for borrowings of up to $2.0 million for the purchase of certain equipment, a portion of the proceeds which could have been used for general corporate working capital purposes. During 2008, we borrowed approximately $1.6 million pursuant to the Loan and Security Agreement, of which approximately $1.0 million was for equipment previously purchased and approximately $0.6 million was for general working capital. During the year ended December 31, 2011, certain scheduled repayments of amounts outstanding under the Loan and Security Agreement were not made. Based on the terms of the Loan and Security Agreement, this was considered an Event of Default (as defined in the Loan and Security Agreement) and the finance company had the option to declare all amounts outstanding immediately due and payable. In April 2011, the Company sold a portion of its property and equipment through an auction process. Certain of the items sold were used for collateral for the Loan and Security Agreement. Accordingly, approximately $85,000 of the net proceeds from the auction was remitted directly to the finance company to reduce the outstanding indebtedness plus accrued interest under the Loan and Security Agreement to approximately $635,000 as of May 10, 2011. Further, on May 11, 2011, the Company entered into a Discounted Payoff Agreement with the finance company, whereby the finance company agreed to accept approximately $43,000 in full satisfaction of the total outstanding indebtedness plus accrued interest under the Loan and Security Agreement. Upon receipt of such amount by the finance company, the Loan and Security Agreement automatically terminated, and all liabilities, obligations and indebtedness of the Company to the finance company were deemed satisfied in full and all liens and security interests of the finance company in any of the Company’s property and equipment were deemed released and terminated. In addition, there was a balance of $14,000 of deferred financing costs related to the Loan and Security Agreement at May 11, 2011, which was written off in connection with the Discounted Payoff Agreement. As a result of the above transaction, the Company recorded a gain on debt extinguishment of $578,000 which is included in Other income in the Company’s Statements of Operations for year ended December 31, 2011.
On April 30, 2011, the Company moved out of its leased facility in New Jersey and no longer occupied the facility as of that date. The Company ceased to make rent payments under the lease agreement as of April 30, 2011. As a result, the Company was in default on its facility lease agreement. Additionally, on May 10, 2011, the Company received notice from BMR-7 Graphics Drive LLC (the “Landlord”) that the Company was in violation of its facility lease for failure to pay rent as required under the lease. On June 30, 2011, the Landlord filed suit in the Superior Court of New Jersey, Special Civil Part, Landlord Tenant section against the Company, alleging breach of a lease and seeking damages pursuant to that alleged breach. The case has been marked as settled with a Consent Order dismissing the case to be submitted as part of the settlement. On September 13, 2011, the Company entered into a Forbearance and Settlement Agreement with the Landlord (the “Settlement Agreement”), whereby the Landlord agreed to forbear temporarily from enforcing its rights to collect all payments currently due under the lease agreement and future payments due for the remainder of the Term (as defined in the lease agreement) (approximately $5,156,000 in the aggregate) during the period commencing on the Execution Date (as defined in the Settlement Agreement) and continuing through February 15, 2012 (the “Forbearance Period”) in consideration of the commitment to pay an aggregate of $425,000 (the “Payoff Amount”) prior to February 15, 2012. As a result, the Company has recorded an expense of $425,000 during the year ended December 31, 2011, which is included in general and administrative expenses on the Company’s Statements of Operations. Additionally, the Company had recorded a security deposit of $250,000 and a deferred rent liability of $76,000 that was recorded in other assets and accrued expenses, respectively, at the time that the Company no longer occupied the leased facility. Due to management’s estimate of the recoverability of those amounts, the amounts were written off during the year ended December 31, 2011, and the difference of $174,000 was included in general and administrative expenses on the Company’s Statements of Operations during the year December 31, 2011. In September 2011, the Company paid $25,000 of the Payoff Amount in connection with the terms of the Settlement Agreement. Further, in October 2011, the Company paid an additional $27,500 of the Payoff Amount which was received in connection with an Asset Purchase Agreement entered into with Opertech Bio, Inc. In December 2011, the Company paid the remaining $372,500 of the Payoff Amount which was received in connection with the achievement of the supply milestone in accordance with the License and Commercialization Agreement entered into with IFF. As a result, the Company has no further obligations to the Landlord under the lease agreement or the Settlement Agreement.
Summary of Contractual Obligations
The Company is not obligated to make any future payments under any contractual obligations as of December 31, 2011.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and reported amount of revenue and expenses during the reporting period. On an ongoing basis, we evaluate our judgments and estimates, including those related to revenue recognition, long-lived assets, accrued liabilities, share-based payments and income taxes. We base our judgment and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. During 2011, there have been no material changes in our critical accounting policies.
While our significant accounting policies are described in more detail in Note 3 to our financial statements, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our financial statements:
Revenue Recognition
Revenue from corporate collaborations and licensing agreements consist of up-front fees, research and development funding, and milestone payments. Nonrefundable up-front fees are deferred and recognized as revenue over the related performance period. We estimate the performance period based on the specific terms of each collaborative agreement, but the actual performance may vary. We adjust the performance periods based on available facts and circumstances. Revenue from research and development agreements and government grants is recognized pursuant to the related agreements as work is performed and related costs are incurred. Revenue resulting from the achievement of substantive milestone events as defined in the agreements is recognized when the milestone is achieved.
Stock-Based Compensation
The Company recognizes compensation for stock-based awards to employees and non-employee board members based on the grant-date fair value of stock- based awards over the period during which an award holder is required to provide service in exchange for the award. No compensation expense is recognized for awards for which the award holder does not tender the requisite service.
Prior to 2006, we applied the intrinsic-value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, to account for fixed-plan stock options granted to employees and directors. Under APB Opinion No. 25, we did not record compensation expense for stock options since the current fair value of the underlying stock equaled the exercise price of the options.
In estimating the fair value of stock options, we use the Black-Scholes option-pricing model which requires us to make estimates about certain inputs regarding the volatility of our common stock and the expected term of our options. Until there is significant public trading activity in our common stock, we will use the average historical volatility of a group of pubic company peers. In addition, we have used the “simplified” method as described in SEC Staff Accounting Bulletin No. 107 to determine the expected life of our options.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our carrying values of cash and cash equivalents, marketable securities, accounts receivable, accounts payable, accrued expenses and debt are a reasonable approximation of their fair value. The estimated fair values of financial instruments have been determined by us using available market information and appropriate valuation methodologies.
We have not entered into and do not expect to enter into, financial instruments for trading or hedging purposes. We do not currently anticipate entering into interest rate swaps and/or similar instruments. We have no material currency exchange risk exposure as of December 31, 2011. Our primary market risk exposure with regard to financial instruments is to changes in interest rates, which would impact interest income earned on such instruments. A one percent change (100 basis points) in interest rates on our investments would have impacted interest income by a nominal amount for the year ended December 31, 2011.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements required to be filed pursuant to this Item 8 are appended to this Annual Report on Form 10-K. A list of the financial statements filed herewith is found at “Item 15. Exhibits, Financial Statements and Financial Statement Schedules”.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures and Changes in Internal Control over Financial Reporting
Our interim chief executive officer and chief financial officer evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) as of December 31, 2011. In designing and evaluating our disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applied its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our interim chief executive officer and chief financial officer concluded that, as of December 31, 2011, our disclosure controls and procedures were (1) effective in that they were designed to ensure that material information relating to us is made known and accumulated and communicated to management, including our interim chief executive officer and chief financial officer, by others within the Company, as appropriate to allow timely decisions regarding required disclosures, and (2) effective in that they provide that information required to be disclosed by us in our reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
No changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended December 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. As of the date of this filing, we had one remaining employee, our Interim Chief Executive Officer and Chief Financial Officer, now employed on a part-time basis. Our limited resources could potentially impact our disclosure controls and procedures in the future which could have a material effect on our internal control over financial reporting.
Management’s Responsibility for Financial Statements
Our management is responsible for the integrity and objectivity of all information presented in this annual report. The financial statements were prepared in conformity with accounting principles generally accepted in the United States of America and include amounts based on management’s best estimates and judgments. Management believes the financial statements fairly reflect the form and substance of transactions and that the financial statements fairly represent the Company’s financial position and results of operations.
The Audit Committee of the Board of Directors meets regularly with the Company’s independent registered public accounting firm and representatives of management to review accounting, financial reporting, internal control and audit matters, as well as the nature and extent of the audit effort. The Audit Committee is responsible for the engagement of the independent registered public accounting firm. The independent registered public accounting firm has unrestricted access to the Audit Committee.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act and is a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
•Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
•Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of our management and directors; and
•Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to newly adopted rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
Our management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2011. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.
Based on its evaluation, our management has concluded that, as of December 31, 2011, our internal control over financial reporting was effective.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Our Executive Officers and Directors
The following table identifies our current executive officers and directors:
(1)
Scott M. Horvitz became Robcor's Chief Financial Officer, Treasurer and Secretary on March 12, 2007 and its Interim President and Chief Executive Officer on November 18, 2011. Mr. Horvitz has been Original Redpoint's Chief Financial Officer, Corporate Secretary and Treasurer since July 2004. Mr. Horvitz has approximately 25 years of experience in accounting and financial management of biotechnology companies, including the management of initial public offerings with his two previous companies. Mr. Horvitz also currently serves, on a part time basis, as the President and Chief Executive Officer of Opertech Bio, Inc. Prior to becoming Chief Financial Officer of Original Redpoint, Mr. Horvitz was a consultant to Original Redpoint from August 2003 to June 2004. Previously, Mr. Horvitz co-founded 3-Dimensional Pharmaceuticals, Inc. where he worked from September 1993 until its acquisition by Johnson & Johnson in July 2003, most recently serving as its Chief Financial Officer and Corporate Secretary and Treasurer. Prior to 3DP, Mr. Horvitz was the Executive Director of Finance and Human Resources with Magainin Pharmaceuticals. Mr. Horvitz holds a B.S. in Accounting from the University at Albany and is a Certified Public Accountant. Mr. Horvitz served on the Board of Directors of Protez Pharmaceuticals, Inc. and was the Chairman of its Audit Committee from 2004 until its acquisition by Novartis in 2008.
(2)
Richard P. Shanley, CPA was appointed as a director on September 12, 2007, and as Chairman of the Board on February 23, 2010. Mr. Shanley, a Certified Public Accountant in New York, retired from public accounting at the end of 2006, having completed a 31 year career at Deloitte & Touche LLP and Eisner LLP, with a combined total of 25 years as a Partner at the two firms. During his career, Mr. Shanley served as lead audit partner on numerous engagements for both public and private companies, including those requiring application of Sarbanes-Oxley Section 404, as well as public stock offerings, primarily for biotechnology, pharmaceutical and high-tech companies. Mr. Shanley is a recognized authority on financing for emerging growth companies and is a published author of Financing Technology's Frontier. He has spoken at industry meetings and is actively involved in organizations including the Biotech Council of New Jersey, the New York Biotechnology Association, the Connecticut Venture Group, the Biotechnology Industry Organization, and others. Mr. Shanley is currently serving as the chair of the New York State Society of CPA's Professional Ethics Committee. Mr. Shanley currently serves on the Board of Harris & Harris Group, Inc. He earned his B.S. degree from Fordham University and his M.B.A. in Accounting from Long Island University.
(3)
Robert Chefitz has been a General Partner of NJTC Venture Fund, SBIC, L.P., a private venture capital firm based in New Jersey that is a lead investor in seed and early stage companies in the region since April 2002. Prior to joining the NJTC Venture Fund, from February 1987 to October 2001, Mr. Chefitz was a partner at Apax Partners based in New York. Prior to Apax Partners, Mr. Chefitz was employed as an investment professional with Golder Thoma Cressey in Chicago. Mr. Chefitz is a past president of the New York Venture Association. Mr. Chefitz holds a B.A. in History from Northwestern University and a M.B.A. from Columbia University. In addition to Redpoint, Mr. Chefitz serves as a director on the boards at Hycrete Technologies, LLC, Achieve 3000, Point Blank Solutions, Inc., Westec Intelligent Surveillance, Alarm.com, The Ladders.com, and RightAnswers, Inc. Mr. Chefitz has been a director of Original Redpoint since 2003.
(4)
Allen Bloom, Ph.D. was appointed as a director on September 12, 2007. From 1994 until 2003, Dr. Bloom, a patent attorney, was a partner at the law firm of Dechert LLP, where he served as Co-Chair of the Intellectual Property Group and headed a patent practice group focusing on biotechnology, pharmaceuticals and medical devices. From 1985 until mid-1994, Dr. Bloom was Vice President, General Counsel and Secretary of The Liposome Company, Inc., where he managed patent, regulatory and licensing activities. Before that, Dr. Bloom served as Patent Attorney and Patent Counsel for Pfizer, Inc. and RCA Corporation, respectively. Dr. Bloom currently serves on the Board of the biopharmaceutical company Unigene Laboratories, Inc., where he is lead director. He earned his Ph.D. in organic chemistry from Iowa State University, a J.D. degree from New York Law School and a B.S. in Chemistry from Brooklyn College.
None of our executive officers is related to any other executive officer or to any of our Directors. Our executive officers are elected annually by the Board of Directors and serve until their successors are duly elected and qualified.
Committees of the Board of Directors and Director Independence
Our Board currently has four standing committees: an Audit Committee, a Compensation Committee, a Nominating and Governance Committee and an Intellectual Property Oversight Committee. These committees, their principal functions and their respective memberships are described below.
Audit Committee
The current members of the Audit Committee are Mr. Shanley, who serves as Chairman, Dr. Bloom and Mr. Chefitz. Each of the members of the Audit Committee is independent as defined by the applicable NASDAQ listing standards and Securities and Exchange Commission ("SEC") rules applicable to audit committee members. Our Board has determined that Mr. Shanley also qualifies as an audit committee financial expert as defined by the SEC.
The Audit Committee oversees our financial reporting process and system of internal control over financial reporting, and selects and oversees the performance of, and approves in advance the services provided by, our independent registered public accounting firm. The Audit Committee provides an open avenue of communication among our independent registered public accounting firm, financial and senior management and the Board. The Audit Committee meets regularly with our independent registered public accounting firm without management present, and from time to time with management in separate private sessions, to discuss any matters that the Committee or these individuals believe should be discussed privately with the Audit Committee, including any significant issues or disagreements that may arise concerning our accounting practices or financial statements. The Audit Committee also oversees our whistleblower policy for receiving and handling complaints or concerns regarding accounting, internal accounting controls or auditing matters. In addition, the Audit Committee assists the Board in its oversight role by receiving periodic reports regarding our risk and control environment.
The Audit Committee held 4 meetings during the year ended December 31, 2011. A copy of the Audit Committee’s charter is posted on our website at www.redpointbio.com.
Nominating and Governance Committee
The current member of the Nominating and Governance Committee (the "Governance Committee") is Mr. Shanley. Mr. Shanley is independent as defined by the applicable NASDAQ listing standards.
The Governance Committee assists the Board in fulfilling its responsibilities regarding the oversight of the composition of the Board and other corporate governance matters. Among its other duties, the Governance Committee evaluates nominees and reviews the qualifications of individuals eligible to stand for election and reelection as directors and makes recommendations to the Board on this matter; oversees compliance with our Code of Business Conduct; reviews and approves related party transactions; recommends and advises the Board on certain other corporate governance matters; and oversees the Board's performance evaluation process. The Governance Committee does not have a specific policy with regard to the consideration of diversity in identifying director nominees. However, our Governance Committee values diversity on our Board and considers the diversity of the professional experience, education and skills, as well as diversity of origin, in identifying director nominees.
The Governance Committee did not hold any meetings during the year ended December 31, 2011. A copy of the Governance Committee's charter is posted on our website at www.redpointbio.com.
Intellectual Property Oversight Committee
The current member of the Intellectual Property Oversight Committee (the "IP Committee") is Dr. Bloom, who serves as Chairman. The member of the IP Committee is independent as defined by the applicable NASDAQ listing standards.
The IP Committee assists the Board in evaluating the Company's strategic business decisions and reviewing the Company's strategy and policy with respect to the development and protection of its intellectual property. Among its other duties, the IP Committee provides oversight of the Company's management of those activities.
The IP Committee did not hold any meetings during the year ended December 31, 2011. A copy of the IP Committee's charter is posted on our website at www.redpointbio.com.
Compensation Committee
The current members of the Compensation Committee are Dr. Bloom and Mr. Chefitz. Mr. Chefitz serves as Chairman of the Compensation Committee. Each of the current members of the Compensation Committee is independent as defined by the applicable NASDAQ listing standards.
Decisions regarding the compensation of our executive officers are made by the Compensation Committee. The Compensation Committee's principal responsibilities include reviewing Redpoint's overall compensation philosophy and the adequacy and market competitiveness of our compensation plans and programs, evaluating the performance of and reviewing and approving compensation for our executive officers, evaluating and recommending director compensation, and reviewing and discussing with management the Compensation Discussion and Analysis included in this annual report on Form 10-K. The Compensation Committee also administers our equity-based and other incentive plans, including assuming responsibility for granting, or delegating as appropriate the authority for granting, and making decisions with respect to, awards under our equity compensation and other incentive plans.
To assist the Compensation Committee in its efforts to meet the objectives and responsibilities outlined above, management has retained an executive compensation consulting firm. During 2011, the Company retained Strategic Outsourcing Solutions LLC, a compensation consulting firm that works with a number of local life science companies, to advise the Compensation Committee on various matters related to executive compensation and compensation programs. For additional information on the projects undertaken by these consultants, see the discussion under "Compensation Discussion and Analysis" included in this annual report on Form 10-K. The consultants were engaged to provide general executive compensation consulting services and to respond to questions as needed. In addition, the consultants perform special executive compensation projects and consulting services from time to time as directed by the Compensation Committee and may from time to time advise management, with the Compensation Committee's consent. The consultants were hired by management and report to the Compensation Committee. Pursuant to its charter, the Committee has the power to hire and fire such consultants and to engage other advisors. The human resources consultant retained by management also provides information and support to the Compensation Committee as requested.
The Compensation Committee held did not hold any meetings during the year ended December 31, 2011. A copy of the Compensation Committee's charter is posted on our website at www.redpointbio.com.
Under NASDAQ rules, a Director will only qualify as an "independent director" if, in the opinion of our Board of Directors, that person does not have a relationship which would interfere with the exercise of independent judgment in carrying out the responsibilities of a Director. Our Board of Directors has determined that none of our directors has a relationship which would interfere with the exercise of independent judgment in carrying out the responsibilities of a Director and that each of these Directors is an "independent director" as defined under Rule 5605(a)(2) of the NASDAQ Stock Market Marketplace Rules.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act") requires our directors and executive officers and persons who own more than 10% of our outstanding shares of common stock to file with the SEC initial reports of ownership and reports of changes in ownership in our common stock and other equity securities. Specific due dates for these records have been established, and we are required to report in this annual report on Form 10-K any failure in 2011 to file by these dates. To our knowledge, based solely on a review of the copies of such reports furnished to us and representations that no other reports were required, there were no reports required under Section 16(a) of the Exchange Act that were not timely filed during the fiscal year ended December 31, 2011.
Code of Ethics
We have adopted a written code of conduct that applies to all of our employees, including our principal executive officer, principal financial officer and principal accounting officer, or persons performing similar functions. We make available our code of conduct free of charge through our web site which is located at www.redpointbio.com. We intend to disclose any amendments to, or waivers from, our code of conduct that are required to be publicly disclosed pursuant to rules of the SEC and NASDAQ by filing such amendment or waiver with the SEC and by posting it on our web site.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
Compensation of Directors
Discussed in the following paragraphs and tables is the compensation paid to the non-employee directors who serve on our Board. Directors who are also our employees do not receive any additional compensation for their service as directors of the Company.
During our 2011 fiscal year, directors who were employees did not receive any cash remuneration for serving as directors. Until April 1, 2011, we reimbursed each non-employee member of our Board for out-of-pocket expenses incurred in connection with attending our Board and Committee meetings. We also paid each of our non-employee directors a fee for each Board and Committee meeting attended, of $1,500 for each Board meeting attended in person and $750 for Board meetings attended by telephone, and $1,000 for each Committee meeting attended in person and $500 for Committee meetings attended by telephone. Each of our non-employee directors received an annual retainer of $17,500 for service as a director and the Chairman of our Board received an annual retainer of $20,000, both paid quarterly and pro-rated for the period of time such person held the position during 2011. The Chairman of our Audit Committee received an additional annual retainer of $10,000; other committee chairmen received an additional annual retainer of $5,000.
In order to conserve cash, on April 1, 2011, each of our directors agreed to indefinitely defer all cash remuneration for serving as directors (including fees for attending board and committee meetings and annual retainer fees), at least until the Company has raised additional capital. On September 27, 2011, the Company reduced the amounts that would have otherwise been owed to each member of the Board to ten percent (10%) of the deferred cash remuneration owed to each member of the Board as of August 31, 2011. As such, during the 2011 fiscal year, we reduced Allen Bloom’s deferred cash remuneration by $10,687, reduced Leif Kjaegaard’s deferred cash remuneration by $8,437, reduced Irwin Scher’s deferred cash remuneration by $7,913 and reduced Richard Shanley’s deferred cash remuneration by $13,500. As of December 31, 2011, the following amounts had either been paid to each such director or deferred: $12,813 for Allen Bloom, $12,592 for Leif Kjaegaard, $6,754 for Irwin Scher and $17,000 for Richard Shanley. The cash remuneration due to the directors is being accrued for by the Company.
Additionally, under the non-employee director compensation program in place during 2011, if a non-employee Board member had joined our Board in 2011, such non-employee Board member would have received an annual option grant to purchase 25,000 shares of common stock for their service as a director, granted on or before the date of the initial Board meeting appointing such director to serve on our Board and fully vesting on the first anniversary of the grant date, subject to the director's continued service as a director.
The following table further summarizes the compensation paid by us to our non-employee directors during the 2011 fiscal year. Except as noted below, all of our directors are paid at the same rate. The differences among directors in the table below are a function of dates of service on the Board during the year, additional compensation for chairing a committee and varying numbers of meetings attended during 2011 and corresponding payments of meeting fees.
(1)Dr. Salemme resigned as a member of our Board effective January 31, 2012. The fees paid to Dr. Salemme for his service as a director of the Company from October 2011 through January 2012 is shown in the Summary Compensation Table included in this annual report on Form 10-K.
(2)Consists of amounts described under "Compensation of our Directors-2011 Compensation."
(3)For the fiscal year 2011, included in these columns are the dollar amounts representing fees earned by and either paid to our non-employee directors or deferred. On April 1, 2011, each of our directors agreed to indefinitely defer all cash remuneration for serving as directors. On September 27, 2011, the Company reduced the amounts that would have otherwise been owed to each non-employee director to ten percent (10%) of the deferred compensation owed to each non-employee director as of August 31, 2011. Allen Bloom’s compensation for 2011 totaled $23,500, $10,687 of which has been agreed to not be paid, and the remaining amount, $12,813, has been either paid or deferred by the Company. Richard Shanley’s compensation for 2011 totaled $30,500, $13,500 of which has been agreed to not be paid, and the remaining amount, $17,000, has been either paid or deferred by the Company. Leif Kjaergaard’s compensation for 2011 totaled $21,029, $8,437 of which has been agreed to not be paid, and the remaining amount, $12,592, has been either paid or deferred by the Company. Irwin Scher’s compensation for 2011 totaled $14,667, $7,913 of which has been agreed to not be paid, and the remaining amount, $6,754 has been either paid or deferred by the Company.
(4)There were no option awards granted to directors during 2011.
(5)Such director waived any and all fees associated with being a director.
(6)Included as part of the fees listed above is reimbursement to Dr. Kjaergaard for his travel expenses, totaling $4,529, incurred in attending meetings of the Board or its committees. Dr. Kjaergaard did not receive any other compensation or personal benefits. Dr. Kjaergaard resigned as a member of our Board on September 8, 2011.
(7)Dr. Scher resigned as a member of our Board on August 25, 2011.
Compensation Discussion and Analysis
Overview for 2010
This Compensation Discussion and Analysis discusses the principles underlying our compensation policies and decisions and the principal elements of compensation paid to our named executive officers during the 2011 fiscal year. Our named executive officers include our Chief Executive Officer, F. Raymond Salemme, Ph.D., or CEO, and Chief Financial Officer, Scott M. Horvitz, or CFO.
Our executive compensation program is designed to provide performance-oriented incentives that fairly compensate our executive officers and enable us to attract, motivate and retain highly qualified executives and scientific, development and commercial personnel. Our compensation program consists of both short-term and long-term components, including cash and equity-based compensation, and is intended to reward consistent performance that meets or exceeds formally established strategic business and scientific goals and objectives that enhance stockholder value. The Compensation Committee of the Board of Directors, referred to herein as the Committee, and senior management is focused on providing an appropriate mix of short-term and long-term incentives to ensure that our executives continue in employment with us and generate stockholder value. We are mindful not to rely on highly leveraged incentives that would result in risky short-term behavior.
Our continued research and development efforts have led us to certain advances within our taste technology platform, including the identification of RP44, an all-natural sweetness enhancer, which we licensed to IFF in June of 2010. However, we recognize the difficult financing environment that has hit the biotechnology sector particularly hard which has required the Company to seek ways to conserve cash.
On March 29, 2011, the Committee met to review the Company's performance for 2010. Taking all of the above factors into consideration, the Committee determined not to award a 2010 year end bonus or provide new option grants to its executive officers, and it did not provide any increase in salary to its executive officers. In addition, in order to conserve cash, on March 1, 2011, each of our executive officers agreed to indefinitely defer one-third of the cash portions of their salaries, at least until the Company has raised additional capital or the compensation committee of the board of directors determines otherwise. The cash amounts due to the executive officers are being accrued for by the Company.
Compensation Objectives and Philosophy
The Committee oversees and administers our executive compensation program, including the evaluation and approval of compensation plans, policies and programs offered to our named executive officers. As part of such process, the Committee seeks to accomplish the following objectives with respect to our executive compensation program:
• Motivate, recruit and retain executives capable of meeting our strategic objectives;
• Provide incentives to ensure superior executive performance and successful results for us; and
• Align the interests of our executives with the long-term interests of our stockholders.
The Committee seeks to achieve these objectives by:
• Establishing a compensation structure that is both market competitive and internally fair;
• Linking a substantial portion of compensation to our achievement of corporate objectives and the individual executive's contribution to the attainment of those objectives; and
• Providing long-term equity-based incentives.
Setting Executive Compensation
It is the Committee's objective to set the total annual compensation of each executive officer at levels that are competitive for comparable positions based on available industry data. However, in determining the compensation of each executive officer, the Committee also considers a number of other factors, including recent corporate and individual performance, the CEO's recommendations, cost of living and internal pay equity. There is no pre-established policy for allocation of compensation between cash and non-cash components or between short-term and long-term components. Instead, the Committee determines the mix of compensation for each executive officer based on its review of the competitive data and its subjective analysis of that individual executive's performance and contribution to the our overall performance. In addition, the CEO provides the Committee with a detailed review of the performance of the other named executive officers and makes recommendations to the Committee with respect to the compensation packages for those officers.
The relative difference between the annual compensation package provided to our CEO in the form of base salary, short-term incentive compensation and long-term equity awards and the comparable compensation packages provided to our other named executive officers has not increased significantly since his hiring in June 2004 and which we believe is a fair and equitable allocation among all our named executive officers.
For purposes of measuring the competitive levels of the cash elements of our officer compensation package for the 2010 fiscal year, the Committee relied on the 2010 Radford Global Life Sciences Survey Report, referred to herein as the Radford Survey, generally benchmarking companies with less than 50 employees, as its primary source of market data. The Committee is committed to the ongoing evaluation of our compensation program through surveys, analysis and best practices within the biotechnology industry.
Components of Compensation
We have structured our company-wide employee compensation program to attract, develop, motivate and retain top talent and to focus our employees, including our named executive officers, on key business goals that enhance stockholder value. We use compensation as a means to reinforce our desired culture and unique corporate environment. The following principal components of 2010 compensation that we provided to our named executive officers were designed to meet the objectives of our executive compensation program discussed above:
• Base salary;
• Annual short-term cash incentives;
• Long-term equity incentive awards;
• Retirement and health insurance benefits; and
• Change of control and other severance agreements.
It is important to note that we do not have any non-qualified deferred compensation programs, pension plans or supplemental executive retirement plans for our named executive officers; however, in order to conserve cash, on March 1, 2011, each of our executive officers agreed to indefinitely defer one-third of the cash portions of their salaries, at least until the Company has raised additional capital or the compensation committee of the board of directors determines otherwise. The cash amounts due to the executive officers are being accrued for by the Company. The only deferral program that allows our named executive officers to accumulate a retirement income source is our 401(k) savings plan, which is subject to dollar limitations imposed under the Internal Revenue Code and its corresponding regulations on the maximum amount an individual can contribute each year. As a result, the equity incentive awards provided to our named executive officers are intended to serve as the primary source of wealth-accumulation for our named executive officers while at the same time incentivizing them to contribute to our financial success as measured in terms of appreciation in the value of our common stock.
The Committee reviews our compensation program periodically, including each of the above elements, to determine whether they provide appropriate incentives and motivation to our named executive officers and whether they adequately compensate our named executive officers relative to comparable officers in other companies with which we compete for executives. Based upon the information and data presented to it, the Committee generally views the compensation paid to our named executive officers as fair, reasonable and competitive.
We believe our approach to goal setting assists in mitigating excessive risk-taking that could harm our value or reward poor judgment by our executives. Several features of our programs reflect sound risk management practices. We believe we have allocated our compensation among base salary and short and long-term compensation target opportunities in such a way as to not encourage excessive risk-taking. In addition, under our equity compensation plan we may provide a mix of equity award instruments that includes full value awards as well as the multi-year vesting of our equity awards, which will also mitigate risk and properly account for the time horizon of risk.
Base Salary
In General-It is the Committee's objective to set a competitive rate of annual base salary for each executive officer. The Committee believes competitive base salaries are necessary to attract and retain top quality executives, since it is common practice for companies to provide their executive officers with a guaranteed annual component of compensation that is not subject to performance risk. The Committee works with the Company's CFO to establish salary bands for the executive officers, with minimum to maximum opportunities that cover the normal range of market variability. The actual base salary for each executive officer is then derived from those salary bands based on his or her responsibility, tenure, past performance and market comparability.
Changes for Fiscal Year 2010-On March 29, 2010, the Committee met to review performance for 2009. During 2009, our continued research and development efforts had led us to certain advances within our taste technology platform, including our announcement concerning the identification of RP44, an all-natural sweetness enhancer. However, during 2009, we did not enter into any new funded corporate collaborations. We were also unable to renew our one year agreement with The Coca-Cola Company and the agreement our agreement with Givaudan was terminated by Givaudan on May 1, 2009. Furthermore, we recognized the difficult financing environment that has hit the biotechnology sector particularly hard which required the Company to seek ways to conserve cash. Consequently, the Committee determined not to provide an increase in salary to its named executive officers for 2010. The base salaries for our named executive officers during 2010 are set forth in the table below.
Annual Bonuses
In General-As part of their compensation package, our executive officers have the opportunity to earn annual cash incentive awards under our cash bonus program. The bonus program is designed to reward superior executive performance while reinforcing our short-term strategic operating goals. The target awards, based on percentage of base salary were determined at the time the executive was hired. Annual bonus targets as a percentage of salary generally increase with executive rank so that for the more senior executives, a greater proportion of their total cash compensation is contingent upon annual performance. All of our employees are eligible to participate in our cash bonus program.
Fiscal 2010 Performance Measures and Payouts-Target awards for 2010 ranged from 30% to 40% of base salary for the executive officers and are payable based on the Committee's subjective review of both corporate and individual performance and the achievement of corporate and individual goals. The target bonus for the CEO is allocated 90% for corporate goals and 10% for individual performance. For the other named executive officers, the target bonus is allocated 80% for corporate goals and 20% for individual performance.
When assessing corporate performance, the Committee reviews how we did overall in achieving our key objectives, varying from year to year, but including financial goals, corporate development and scientific progress. Each factor is given a weight in proportion to the relative level of importance as determined by the Board. As previously mentioned, our continued research and development efforts have led us to certain advances within our taste technology platform, including the identification of RP44, an all-natural sweetness enhancer, which we licensed to IFF in June of 2010. However, the Committee also recognized the difficult financing environment that has hit the biotechnology sector particularly hard which required the Company to seek ways to conserve cash. Consequently, the Committee determined not to provide a 2010 bonus to its named executive officers.
The table below details fiscal 2010 annual bonus targets and actual bonus amounts.
Long-Term Incentive Equity Awards
A significant portion of each named executive officer's compensation is provided in the form of long-term incentive equity awards. The Committee believes that properly structured equity awards are an effective method for aligning the long term interests of our named executive officers with those of our stockholders. All of our employees are eligible to receive long-term incentive awards.
We provide our named executive officers with long-term incentive equity awards through our Amended and Restated 2007 Omnibus Equity Compensation Plan (the "Equity Plan"), which was approved by our stockholders on March 12, 2007. The Equity Plan is intended to provide us with the means to attract and retain the services of individuals who are essential to our growth and profitability and align the economic interests of those individuals with those of our stockholders. The Equity Plan authorizes us to grant incentive stock options, nonqualified stock options, stock appreciation rights, stock awards, stock units and other stock-based awards. To date, we have only granted stock options under the Equity Plan.
All stock options granted to our employees and directors were granted with an exercise price that was no less than the fair market value of a share of our common stock on the date such options were granted. All option grants granted in 2009 typically vested over four years, with one quarter of the shares subject to the stock option vesting on the one year anniversary of the grant date and the remaining shares vesting at the rate of 1/48 of the original grant amount each month thereafter for three years. The Committee determined that this vesting schedule achieves our goal of encouraging the retention and dedication of participants to our growth and success over a long time horizon. All options have a ten year term. Additional information regarding accelerated vesting upon termination of employment or in connection with a change of control is discussed below under "Potential Payments on Termination Or Change of Control."
We generally make grants at the beginning of the fiscal year, based on Company and individual performance in the prior fiscal year and also upon hiring. As previously mentioned, our continued research and development efforts have led us to certain advances within our taste technology platform, including the identification of RP44, an all-natural sweetness enhancer, which we licensed to IFF in June of 2010. In recognition of this achievement, in 2010, the Committee granted stock options under the Equity Plan to our named executive officers as follows:
Retirement and Health Insurance Benefits
Retirement Benefits
Our named executive officers are eligible to participate in our tax-qualified 401(k) defined contribution plan. The plan is available to all eligible employees. Employee contributions are voluntary and are determined on an individual basis, limited by the maximum amounts allowable under the Internal Revenue Code and its corresponding regulations. The Company offers a matching contribution of 50% of employee contributions up to 6%. The Company, in its discretion, may also make certain other contributions.
Other Benefits and Perquisites-All employees, including our named executive officers, are eligible to receive standard health, disability and life insurance benefits.
Change of Control and Other Severance Agreements
The offer letters for each of our named executive officers provide for payments in the event that the executive is terminated by us without cause or by the executive for good reason.
If the executive's employment is terminated by us without cause or by the executive for good reason, all of the executive's outstanding stock options that would have vested in the 12 month period following the termination of his employment will immediately accelerate and become fully vested. In addition, all of the executive's outstanding stock options will accelerate and become fully vested upon a change of control, without regard to a termination of employment.
See "Potential Payments on Termination and Change of Control" appearing on page 47 of this annual report on Form 10-K for further information regarding the severance and change of control payments and benefits under the offer letters.
IRC Section 162(m) compliance
As a result of Section 162(m) of the Internal Revenue Code, publicly traded companies such as us are not allowed a federal income tax deduction for compensation, paid to its CEO and the next three most highly-compensated executive officers (except our CFO), to the extent that such compensation exceeds $1 million per officer in any one year and does not otherwise qualify as performance-based compensation. The Equity Plan is structured so that compensation deemed paid to an executive officer in connection with the exercise of a stock option should qualify as performance-based compensation that is not subject to the $1 million limitation. Other awards made under the Equity Plan may or may not so qualify. In establishing the cash and equity incentive compensation programs for the executive officers, it is the Committee's view that the potential deductibility of the compensation payable under those programs should be only one of a number of relevant factors taken into consideration, and not the sole governing factor. For that reason the Committee may deem it appropriate to continue to provide one or more executive officers with the opportunity to earn incentive compensation, including cash bonus programs tied to the Company's financial performance and restricted stock unit awards, which may be in excess of the amount deductible by reason of Section 162(m) or other provisions of the Internal Revenue Code. It is the Committee's belief that cash and equity incentive compensation must be maintained at the requisite level to attract and retain the executive officers essential to the Company's financial success, even if all or part of that compensation may not be deductible by reason of the Section 162(m) limitation. However, for the 2011 fiscal year, the total amount of compensation paid by the Company (whether in the form of cash payments or upon the exercise or vesting of equity awards) should be deductible and not affected by the Section 162(m) limitation.
Overview for 2011
Effective March 1, 2011 through June 30, 2011, each of our executive officers agreed to indefinitely defer one-third of the cash portions of their salaries, at least until we have raised additional capital or the compensation committee of the board of directors determines otherwise. Effective July 1, 2011 through August 31, 2011, this salary deferral was increased to 90% of the salaries of those executive officers. On September 27, 2011, we reduced the outstanding amounts owed to our executive officers in connection with the deferral of their salaries to 10% of the balance owed to them as of August 31, 2011, or $15,730. As a result, we reduced the amounts that would have otherwise been owed to each executive officer by $141,000. Beginning on September 1, 2011, we are paying Scott Horvitz, our Chief Financial Officer, working 50% of the time for us, at a revised annual salary of $125,903.
In addition, on September 27, 2011, we reduced by 90% the amounts that would otherwise be owed to each of our executive officers pursuant to any severance arrangements included in their employment agreements or as otherwise agreed to by such executive officer and us. See "Potential Payments on Termination and Change of Control" appearing on pages 47 and 48 of this annual report on Form 10-K for further information. As such, in connection with Dr. Salemme’s resignation as our President and Chief Executive Officer on September 27, 2011, we recorded accrued severance of $37,129 as of December 31, 2011. This amount was included in general and administrative expenses during the year ended December 31, 2011. On November 18, 2011, we appointed Mr. Horvitz to serve as our Interim President and Chief Executive Officer. Mr. Horvitz is our only employee.
Base Salary
Changes for Fiscal Year 2011- The 2011 base salaries for our named executive officers are set forth in the table below. In order to conserve cash, effective March 1, 2011 through June 30, 2011, each of the executive officers agreed to indefinitely defer one-third of the cash portions of their salaries, at least until the Company has raised additional capital or the compensation committee of the board of directors determines otherwise. Effective July 1, 2011 through August 31, 2011, this salary deferral was increased to 90% of the salaries of those executive officers. On September 27, 2011, the Company reduced the outstanding amounts owed to each executive officer in connection with the deferral of his salary to 10% owed to each executive officer as of August 31, 2011. As a result, the Company reduced the amounts that would have otherwise been owed to each executive officer by $141,000. In addition, on September 27, 2011, the Company mutually agreed with F. Raymond Salemme, PhD. (“Dr. Salemme”), the Company’s President and Chief Executive Officer, that Dr. Salemme shall resign as the Company’s President and Chief Executive Officer effective as of that date. Beginning September 1, 2011, the Company is paying its Chief Financial Officer, working 50% of the time for the Company, at a revised annual salary of $125,903. As of December 31, 2011, the Company had one remaining employee, its Interim President and Chief Executive Officer and Chief Financial Officer, now employed on a part-time basis.
(1) Effective March 1, 2011 through June 30, 2011, each executive officer agreed to indefinitely defer one-third of the cash portions of their salaries, which prior to March 2011, were $350,625 for Dr. Salemme and $251,805 for Mr. Horvitz. Effective July 1, 2011 through August 31, 2011, this salary deferral was increased to 90% of the salaries of such executive officers. On September 27, 2011, the Company reduced the outstanding amounts owed to each executive officer in connection with the deferral of his salary to 10% owed to each executive officer as of August 31, 2011. As such, the Company reduced the amounts that would have otherwise been owed to Dr. Salemme and Scott Horvitz by $82,397 and $59,175, respectively. As a result, as of December 31, 2011, the Company has deferred $9,155 for Dr. Salemme (not including accrued severance totaling $37,129) and $6,575 for Mr. Horvitz.
(2) On September 27, 2011, Dr. Salemme resigned as the Company’s President and Chief Executive Officer effective as of that date.
(3) Beginning on September 1, 2011, the Company agreed to compensate Mr. Horvitz, working 50% of the time for us, at a revised annual salary of $125,903.
Annual Bonuses
Fiscal 2011 Performance Measures and Payouts - We did not award any annual cash incentive awards under our cash bonus program for the 2011 fiscal year.
Long-Term Incentive Equity Awards
For the fiscal year 2011, we did not grant any stock options under the Equity Plan to any of our named executive officers.
Summary Compensation Table
The following 2011 Summary Compensation Table provides certain information concerning the compensation earned for services rendered in all capacities to us for the year ended December 31, 2011 for our named executive officers. No other executive officers who would have otherwise been includable in such table on the basis of total compensation for the 2011 fiscal year has been excluded by reason of their termination of employment or change in executive status during that year.
(1)For the fiscal year 2011, included in this column are the dollar amounts representing the cash portion of such executive officer’s salary that has either been paid or deferred by the Company. For Dr. Salemme, the amount in this column includes $4,000 in fees he was paid for his service as a director of the Company from October 2011 through January 2012. Effective March 1, 2011 through June 30, 2011, each executive officer agreed to indefinitely defer one-third of the cash portions of their salaries, which, prior to March 2011, was $350,625 for Dr. Salemme and $251,805 for Mr. Horvitz. Effective July 1, 2011 through August 31, 2011, this salary deferral was increased to 90% of the salaries of such executive officers. During 2011, Mr. Horvitz had deferred $65,750 of his salary. In addition, on September 27, 2011, the Company reduced the amount that would have otherwise been owed to Mr. Horvitz by $59,175. From January 1, 2011 through September 27, 2011, the last day of Dr. Salemme’s employment with the Company, Dr. Salemme had deferred $91,552 of his salary. In addition, on September 27, 2011, the Company reduced the amount that would have otherwise been owed to Dr. Salemmeby $82,397. As a result, the Company reduced the outstanding amounts owed to each executive officer to $15,730 as of December 31, 2011 ($9,155 owed to Dr. Salemme and $6,575 owed to Mr. Horvitz). The $9,155 of deferred compensation owed to Dr. Salemme does not include accrued severance of $37,129 in connection with Dr. Salemme’s resignation on September 27, 2011.
(2)The amounts included in this column are the dollar amounts representing the full grant date fair value of each option award calculated in accordance with the Financial Accounting Standards Board Accounting Standards Codification Topic 718, "Compensation-Stock compensation," or FASB ASC Topic 718, and do not represent the actual value that may be recognized by the named executive officer upon option exercise. For information on the valuation assumptions used in calculating this amount, see Note 11 to Redpoint's audited financial statements included in this Annual Report on Form 10-K.
(3)For the named executive officer, the amounts shown in this column represent an employer matching contribution to a 401(k) plan.
(4)Dr. Salemme resigned as our President and Chief Executive Officer on September 27, 2011. Dr. Salemme resigned as a member of our Board effective January 31, 2012.
(5)Mr. Horvitz was appointed to serve as our Interim President and Chief Executive Officer on November 18, 2011.
Grants of Plan-Based Awards in 2011 Fiscal Year
The table disclosing grants of awards made to our named executive officers during the year under any plan is omitted because no such grants have been made to our named executive officers.
Outstanding Equity Awards as of December 31, 2011
The following table summarizes the equity awards we have made to our named executive officers that have not been exercised and remained outstanding as of December 31, 2011.
(1)
Each stock option grant included in this table that is not fully vested, has a term of 10 years measured from the grant date and vests 25% on the first anniversary of the grant date and 1/48th on a monthly basis thereafter, until all such options are vested on the fourth anniversary of the grant date.
Option Exercises and Stock Vested in 2011 Fiscal Year
The table disclosing option exercises and the vesting of stock awards during the year is omitted because our named executive officer has not exercised any stock options or had any stock awards vest.
Pension Benefits for 2011 Fiscal Year
The table disclosing the value of accumulated benefits under and other information concerning defined benefit plans during the year is omitted because we do not have a defined benefit plan for our named executive officer or other employees. The only retirement plan available to our named executive officers in 2011 was our 401(k) plan which is available to all employees.
Nonqualified Deferred Compensation for 2011 Fiscal Year
The following table sets forth compensation deferred by each of the named executive officers during fiscal year 2011.
(1)For the fiscal year 2011, the amounts included in this column represent the cash portion of such executive officer’s salary that has been indefinitely deferred. Effective March 1, 2011 through June 30, 2011, each executive officer agreed to indefinitely defer one-third of the cash portions of their salaries. Effective July 1, 2011 through August 31, 2011, this salary deferral was increased to 90% of the salaries of such executive officers. On September 27, 2011, the Company reduced the outstanding amounts owed to each executive officer in connection with the deferral of their salaries to 10% of the balance owed to them as of August 31, 2011. As of December 31, 2011, Mr. Horvitz had deferred $6,575 of his salary. As of September 27, 2011, the last day of Dr. Salemme’s employment with the Company, Dr. Salemme had deferred $9,155 of his salary. The contributions made by the named executive officers are included as a component of “Salary” compensation in the Summary Compensation Table for 2011. As of April 1, 2012, no moneys have been set aside by the Company for payment of such deferred compensation.
(2) The amount listed in these columns does not include the accrued severance of $37,129 the Company recorded as of December 31, 2011, in connection with Dr. Salemme’s resignation on September 27, 2011.
Potential Payments on Termination and Change of Control
The offer letters for each of our named executive officers provide each officer with certain payments and benefits upon termination of employment in certain circumstances and in connection with a change of control. This section describes these payments and benefits, with amounts based on the assumption that Mr. Horvitz’s termination of employment with us occurred on December 31, 2011. Dr. Salemme’s termination of employment with us occurred on September 27, 2011, when he tendered his resignation as our President and Chief Executive Officer. The information in this section does not include information relating to payments and benefits provided on a nondiscriminatory basis to salaried employees generally upon termination of employment. On December 31, 2011, the last reported sale price of our common stock on the OTC Bulletin Board was $0.01 per share. Actual amounts payable would vary based on the date of the named executive officer's termination of employment and can only be finally determined at that time.
Unless specified otherwise, the information in this section is based upon the terms of the (i) Offer Letter between us and F. Raymond Salemme, dated as of May 25, 2004, and amended on December 19, 2008 (“Dr. Salemme’s Letter”); and (ii) Offer Letter between us and Scott M. Horvitz, dated as of June 28, 2004, and amended on December 19, 2008 (“Mr. Horvitz’s Letter”). Dr. Salemme’s Letter and Mr. Horvitz’s Letter are collectively referred to in this Section as the “Offer Letters.”
Payments Upon Termination By The Company Without Cause
The Offer Letters provide each of our named executive officers severance payments and benefits upon termination of their employment by us without cause. We will continue each of our named executive officers' respective base salaries (as in effect at the time of their termination of employment) for twelve months. We will also continue health and dental benefits for a period of twelve months for them and, where applicable, their spouses and dependents. Furthermore, each of the named executive officers will receive an additional twelve months of vesting following the date of their termination of employment with respect to their outstanding stock options. Furthermore, each of the named executive officers will receive an additional twelve months of vesting following the date of their termination of employment with respect to their then-outstanding stock options.
Payments Upon Resignation By The Executive For Good Reason
The Offer Letters for Dr. Salemme and Mr. Horvitz provide Dr. Salemme and Mr. Horvitz with severance payments and benefits upon their resignation for good reason. While Dr. Salemme may resign for good reason either before or after a change of control, Mr. Horvitz may resign for good reason only after a change of control. If Dr. Salemme and Mr. Horvitz resign for good reason, they will be entitled to the same payments and benefits that they would receive had their employment been terminated by us without cause. Dr. Salemme and Mr. Horvitz will have good reason to resign if there is: (i) a material diminution in their responsibilities, duties or authority as provided in their respective Offer Letters; (ii) a material diminution in their base compensation without their consent; (iii) a relocation of our executive offices or their principal place of employment by more than forty miles from its current location without their consent; or (iv) any other action or inaction that constitutes a material breach by us of any provision of their Offer Letters.
Payments Upon Termination For Cause or Without Good Reason
The Offer Letters do not provide our named executive officers with any payments or other benefits in the event of their termination of employment by us for cause, for Dr. Salemme and Mr. Horvitz only, their resignation without good reason. A termination for cause under the Offer Letters generally would result from an executive's: (i) engagement in intentional misconduct that materially harms us, (ii) conviction of a felony, (iii) act of fraud against us or willful material misappropriation of our property, (iv) material breach of the confidentiality, nondisclosure, noncompetition and invention assignment agreement between the executive and us, and (v) willful disregard of the executive's material duties despite adequate warnings from the Board.
Payments Upon A Change Of Control
Upon a change of control, the Offer Letters provide that all outstanding stock options held by our named executive officers will become fully vested, without regard to a termination of employment. A change of control includes (i) the acquisition of our company by merger, (ii) the sale of all or substantially all of our assets, (iii) the purchase of fifty percent or more of our voting securities, or (iv) any other reorganization resulting in a change of fifty percent or more in the ownership of our outstanding voting securities.
The following table summarizes (i) the amounts paid to Dr. Salemme upon his resignation as our President and Chief Executive Officer on September 27, 2011 and (ii) the amounts payable to Mr. Horvitz based on the items described above with respect to each of the events set forth in the table. On September 27, 2011, the Company reduced by 90% the amounts that would otherwise be owed to each of the Company’s executive officers pursuant to any severance arrangements included in their employment agreements or as otherwise agreed to by such executive officer and the Company. As such, in connection with Dr. Salemme’s resignation, the Company recorded accrued severance of $37,129 as of December 31, 2011. The amounts in the table below reflect such reduction in amounts otherwise owed to each executive officer.
Employment Agreements
During 2011, our named executive officers were employed pursuant to offer letters with us. Each offer letter specifies, among other things, the named executive officer's initial base salary, bonus opportunity, entitlement to participate in our benefits plans and post-termination benefits and obligations. The post-termination benefits are described in the section entitled "Potential Payments on Termination and Change of Control" appearing on page 47 of this annual report on Form 10-K.
Dr. F. Raymond Salemme resigned as our President and Chief Executive Officer on September 27, 2011.
Scott M. Horvitz was appointed to serve as our Interim President and Chief Executive Officer on November 18, 2011 and has been employed by us as our Chief Financial Officer pursuant to an offer letter, dated June 28, 2004. Mr. Horvitz's offer letter was subsequently amended on December 19, 2008 to comply with the requirements of section 409A of the Internal Revenue Code and to provide Mr. Horvitz with severance payments and benefits upon his resignation for good reason following a change of control. Mr. Horvitz's offer letter, provides for a monthly base salary. Pursuant to his offer letter, Mr. Horvitz is also eligible for certain other benefits paid for by us, including, among other things, annual bonuses of up to 30% of his base salary, long-term incentive compensation and health care insurance coverage. Mr. Horvitz's employment is "at will" and not for any specified period of time. Pursuant to the terms of his offer letter, if we terminate his employment without cause or if he terminates his employment for good reason after a change of control, Mr. Horvitz will be entitled to receive his monthly salary, medical and dental benefits and the vesting of his then-outstanding stock options for 12 months. If we terminate his employment for cause, Mr. Horvitz will not be entitled to any subsequent payments. Mr. Horvitz's offer letter required his execution of our standard confidentiality, nondisclosure, noncompetition and invention assignment agreement.
In order to conserve cash, effective March 1, 2011 through June 30, 2011, Mr. Horvitz agreed to indefinitely defer one-third of the cash portion of his salary. Effective July 1, 2011 through August 31, 2011, this salary deferral was increased to 90% of his salary. During 2011, Mr. Horvitz had deferred $65,750 of his salary. Beginning September 1, 2011, we agreed to compensate Mr. Horvitz, working 50% of the time for us, at a revised annual salary of $125,903 (or $10,492 per month). In addition, on September 27, 2011, the Company reduced the amount that would have otherwise been owed to Mr. Horvitz by $59,175. As a result, the Company reduced the outstanding amount owed to Mr. Horvitz to $6,575 as of December 31, 2011.
Compensation Committee Interlocks and Insider Participation
Mr. Horvitz does not serve as a member of the board of directors or compensation committee, or other committee serving an equivalent function, of any other entity that has one or more of its executive officers serving as a member of our Board or compensation committee. None of the members of our compensation committee has ever been our employee or one of our officers.
Compensation Committee Report
The information contained in this report shall not be deemed to be "soliciting material" or "filed" with the SEC or subject to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended, referred to herein as the Exchange Act, except to the extent that Redpoint Bio Corporation specifically incorporates it by reference into a document filed under the Securities Act of 1933, as amended, or the Exchange Act.
The Committee is responsible for evaluating and approving the compensation for the named executive officers. Management has primary responsibility for our financial statements and reporting process, including the disclosure of executive compensation. The Committee has reviewed and discussed with management the Compensation Discussion and Analysis set forth above. The Committee is satisfied that the Compensation Discussion and Analysis fairly represents the objectives and actions of the Committee. The Committee has recommended to the Board that the Compensation Discussion and Analysis be included in this annual report on Form 10-K for filing with the Securities and Exchange Commission.
Submitted by:
The Compensation Committee of the Board of Directors
Robert Chefitz, Chairman
Allen Bloom, Ph.D.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
Equity Compensation Plans
The following table provides information with respect to all of our compensation plans under which equity compensation is authorized as of December 31, 2011.
(1)
Consists of the Redpoint Bio Corporation Amended and Restated 2007 Omnibus Equity Compensation Plan.
PRINCIPAL STOCKHOLDERS
The following table and notes thereto set forth information with respect to the beneficial ownership of shares of our common stock as of April 1, 2012 (except as otherwise indicated below) by (i) each of our directors and director nominees, (ii) our executive officer, (iii) our directors and executive officer as a group, and (iv) each person known to be the beneficial owner of five percent (5%) or more of our common stock. This information is based upon information furnished to us by each such person and/or based upon public filings with the Securities and Exchange Commission.
The information regarding beneficial ownership of our common stock has been presented in accordance with the rules of the Securities and Exchange Commission. Under these rules, a person may be deemed to beneficially own any shares of capital stock as to which such person, directly or indirectly, has or shares voting power or investment power, and to beneficially own any shares of our capital stock as to which such person has the right to acquire voting or investment power within 60 days through the exercise of any stock option or other right. The percentage of beneficial ownership as to any person as of a particular date is calculated by dividing (a) (i) the number of shares beneficially owned by such person plus (ii) the number of shares as to which such person has the right to acquire voting or investment power within 60 days by (b) the total number of shares outstanding as of such date, plus any shares that such person has the right to acquire within 60 days. Including those shares in the tables does not, however, constitute an admission that the named stockholder is a direct or indirect beneficial owner of those shares. Unless otherwise indicated, each person or entity named in the table has sole voting power and investment power (or shares that power with that person's spouse) with respect to all shares of capital stock listed as owned by that person or entity.
Unless otherwise specified, the address of each of the persons set forth below is in care of Redpoint Bio Corporation, 5501 Old York Road, Philadelphia, Pennsylvania 19141.
*
Less than 1%
(1)Beneficial Ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Unless otherwise indicated, each person or entity named in the table has sole voting power and investment power (or shares that power with that person's spouse) with respect to all shares of capital stock listed as owned by that person or entity.
(2)Based on 79,914,789 shares of our common stock issued and outstanding as of April 1, 2012.
(3)Consists of 530,353 shares of our common stock and 4,759,548 shares underlying options that are exercisable as of April 1, 2012, which terminate on April 30, 2012.
(4)Consists of 90,000 shares of our common stock and 1,623,591 shares underlying options that are exercisable within 60 days of April 1, 2012.
(5)Consists of 3,997,118 shares of our common stock owned by NJTC Venture Fund SBIC, L.P. The reporting person is a General Partner of NJTC Venture Fund SBIC, L.P. and disclaims beneficial ownership of the reported securities except to the extent of his pecuniary interest therein.
(6)Consists of 5,000 shares of our common stock and 100,000 shares underlying options that are exercisable within 60 days of April 1, 2012.
(7)Consists of 10,000 shares of our common stock and 100,000 shares underlying options that are exercisable within 60 days of April 1, 2012.
(8)Total number of shares includes common stock held by entities affiliated with directors and executive officers.
(9)Consists of 5,643,143 shares of our common stock.
(10)Consists of 3,997,118 shares of our common stock owned by NJTC Venture Fund SBIC, L.P. NJTC Venture Fund SBIC, L.P. is a New Jersey limited partnership of which James Gunton, Robert Chefitz and Joseph Falkenstein are general partners. As a result, each of the foregoing persons may be deemed to be a beneficial holder of the shares of common stock and warrants held of record by NJTC.
(11)Consists of 7,455,689 shares of common stock.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
See "Executive Compensation" and "Director Compensation" above for a discussion of director compensation, executive compensation and our named executive officers' employment agreements.
Under NASDAQ rules, a Director will only qualify as an "independent director" if, in the opinion of our Board of Directors, that person does not have a relationship which would interfere with the exercise of independent judgment in carrying out the responsibilities of a Director. Our Board of Directors has determined that none of our directors has a relationship which would interfere with the exercise of independent judgment in carrying out the responsibilities of a Director and that each of these Directors is an "independent director" as defined under Rule 5605(a)(2) of the NASDAQ Stock Market Marketplace Rules.
Review and Approval of Related Party Transactions
Our Board has adopted written policies and procedures for the review, approval or ratification of transactions involving the Company and any executive officer, director, director nominee, 5% stockholder and certain of their immediate family members (each of whom we refer to as a "related person"). The policy and procedures cover any transaction involving more than $120,000 with a related person (a "related person transaction") in which the related person has a material interest and which does not fall under an explicitly stated exception set forth in the applicable disclosure rules of the SEC.
Any proposed related person transaction must be reported to the Company's Chief Financial Officer. The policy calls for the transaction to be reviewed and, if deemed appropriate, approved by the Audit Committee. The transaction should be approved in advance whenever practicable. If not practicable, the Audit Committee will review, and may, if deemed appropriate, ratify the related person transaction. The policy also permits the chairman of the Audit Committee to approve related person transactions that arise between committee meetings, subject to ratification by the Audit Committee at its next meeting. Any related person transaction that is ongoing in nature will be reviewed annually.
A related person transaction will be considered approved or ratified if it is authorized by the Audit Committee or chairman after full disclosure of the related person's interest in the transaction. The transaction may be approved or ratified only if the Audit Committee determines that the transaction is not inconsistent with the Company's best interests. In considering related person transactions, the Audit Committee will consider any information considered material to investors and the following factors:
•the related person's interest in the transaction;
•the approximate dollar value of the transaction;
•whether the transaction was undertaken in the ordinary course of our business;
•whether the terms of the transaction are no less favorable to us than terms that we could have reached with an unrelated third party; and
•the purpose and potential benefit to us of the transaction.
The policy provides that transactions involving the compensation of our executive officers will be reviewed and approved by the Audit Committee or our Board, in accordance with the Audit Committee's charter.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The following table summarizes the aggregate fees for professional services rendered to us by KPMG LLP, our independent registered public accounting firm, in fiscal years 2010 and 2011. A description of these fees and services follows the table.
Audit Fees
Fees for 2011 and 2010 audit services included fees associated with the annual audit of our financial statements and the interim reviews of Redpoint's quarterly reports on Form 10-Q, notwithstanding when the fees were billed or rendered.
Audit-Related Fees
There were no audit-related fees for either 2011 or 2010.
Tax Fees
For 2011 and 2010, the tax fees were related to tax consulting, tax compliance, tax return preparation and tax planning services.
All Other Fees
There were no fees for the category "All Other Services" in 2011 and 2010.
The Audit Committee has considered whether the provision of these services by KPMG LLP is compatible with maintaining the independence of KPMG LLP. Further, all of the services provided by KPMG LLP in 2011 were approved in advance in accordance with the Audit Committee's pre-approval policies and procedures described below. The Audit Committee did not rely on the waiver of pre-approval procedures permitted with respect to de minimus non-audit services under the applicable rules of the SEC for its approval of any of the services provided by KPMG LLP since their appointment as Redpoint's independent registered public accounting firm in May 2007.
Pre-Approval Policies and Procedures
The Audit Committee has adopted policies and procedures relating to the pre-approval of all audit and non-audit services to be provided by our independent registered public accounting firm. Under these policies and procedures, the Audit Committee approves in advance the provision of services and fees for such services that are specifically identified in the independent registered public accounting firm's annual engagement letter for the audits and reviews, in management's annual budget relating to services to be provided by the independent registered public accounting firm and any amendments to the annual budget reflecting additional services to be provided by or higher fees of the independent registered public accounting firm. All other services to be provided by the independent registered public accounting firm are pre-approved by the Audit Committee as they arise. The Chairman of the Audit Committee has been delegated authority to pre-approve services in accordance with these policies and procedures. The Chairman is to report any such approval of services to the Audit Committee at its next meeting. The Audit Committee considers, among other things, whether the provision of such audit or non-audit services is consistent with applicable regulations regarding maintaining auditor independence, whether the provision of such services would impair the independent registered public accounting firm' independence and whether the independent registered public accounting firm is best positioned to provide the most effective and efficient service.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) Financial Statements.
Reference is made to the Index to Financial Statements on Page.
(2) Financial Statement Schedule.
Not applicable.
(3) Exhibits.
Reference is made to the Index to Exhibits on Pages 57-59.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized this 16th day of April, 2012.
REDPOINT BIO CORPORATION
By: /s/ Scott Horvitz
SCOTT HORVITZ
Interim President and Chief Executive Officer, Chief Financial Officer, Treasurer and Secretary
(Principal Executive, Principal Financial and Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Scott Horvitz
Scott Horvitz Interim President and Chief Executive Officer, Chief Financial Officer, Treasurer and Secretary (Principal Executive, Financial and Accounting Officer) April 16, 2012
/s/ Allen Bloom
Allen Bloom Director April 16, 2012
/s/ Robert Chefitz
Robert Chefitz Director April 16, 2012
/s/ Richard Shanley
Richard Shanley Director April 16, 2012
EXHIBIT INDEX
2.1
Agreement and Plan of Merger, dated May 3, 2007, between Robcor Properties, Inc. and Redpoint Bio Corporation (Incorporated by reference to Exhibit A of the Registrant’s Schedule 14C filed with the Commission on May 23, 2007).
3.1
Third Amended and Restated Certificate of Incorporation of Redpoint Bio Corporation (Incorporated by reference to Exhibit 3.1 of the Registrant’s Amendment No. 1 to the Registration Statement on Form S-1 (Registration No. 333-143507) filed on July 2, 2007).
3.2
Amended and Restated Bylaws of Redpoint Bio Corporation (Incorporated by reference to Exhibit C of the Registrant’s Schedule 14C filed with the Commission on May 23, 2007).
4.1
Form of Warrant issued by the Company to investors in the private placement on March 12, 2007 and April 6, 2007 (Incorporated by reference to Exhibit 4.1 of the Registrant’s Current Report on Form 8-K filed with the Commission on March 16, 2007).
4.2
Placement Agent Warrant issued by the Company to each of National Securities Corporation and Brean Murray, Carret & Co., LLC (Incorporated by reference to Exhibit 4.2 of the Registrant’s Current Report on Form 8-K filed with the Commission on March 16, 2007).
4.3
Form of common stock Certificate (Incorporated by reference to Exhibit 4.3 of the Registrant’s Amendment No. 1 to the Registration Statement on Form S-1 (Registration No. 333-143507) filed on July 2, 2007).
10.1
Agreement and Plan of Merger, dated as of March 12, 2007, by and among Redpoint Bio Corporation, on the one hand, and Robcor Properties, Inc., Robcor Acquisition Corp., Robcor LLC, Halter Financial Investments, L.P. and Michael Heitz (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on March 13, 2007).
10.2
Form of Subscription Agreement, dated March 12, 2007 and April 6, 2007, by and between Redpoint Bio Corporation and the signatories thereto (Incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the Commission on April 9, 2007).
10.3
Lease Agreement, dated as of September 30, 2005, between Albert Einstein Healthcare Network and Linguagen Corp. (Incorporated by reference to Exhibit 10.5 of the Registrant’s Current Report on Form 8-K filed with the Commission on March 16, 2007).
10.4
Amendment to Lease Agreement between Albert Einstein Healthcare Network and Linguagen Corp., effective as of June 1, 2006, by and between Albert Einstein Healthcare Network and Linguagen Corp. (Incorporated by reference to Exhibit 10.6 of the Registrant’s Current Report on Form 8-K filed with the Commission on March 16, 2007).
10.5
Amendment No. 2 to Lease Agreement between Albert Einstein Healthcare Network and Linguagen Corp., dated as of August 4, 2006, by and between Albert Einstein Healthcare Network and Linguagen Corp. (Incorporated by reference to Exhibit 10.7 of the Registrant’s Current Report on Form 8-K filed with the Commission on March 16, 2007).
10.6
Amendment No. 3 to Lease Agreement between Albert Einstein Healthcare Network and Linguagen Corp., dated as of January 2, 2007, by and between Redpoint Bio Corporation and Albert Einstein Healthcare Network (Incorporated by reference to Exhibit 10.8 of the Registrant’s Current Report on Form 8-K filed with the Commission on March 16, 2007).
10.7
Lease Agreement, dated as of November 28, 2005, by and between BMR-7 Graphics Drive LLC and Linguagen Corp. (Incorporated by reference to Exhibit 10.9 of the Registrant’s Current Report on Form 8-K filed with the Commission on March 16, 2007).
10.8
First Amendment to Lease Agreement, dated as of October 25, 2005, by and between BMR-7 Graphics Drive LLC and Linguagen Corp. (Incorporated by reference to Exhibit 10.10 of the Registrant’s Current Report on Form 8-K filed with the Commission on March 16, 2007).
10.9
Acknowledgement of Term Commencement Date and Term Expiration Date, dated May 7, 2007, by and between Redpoint Bio Corporation and BMR-7 Graphics Drive LLC (Incorporated by reference to Exhibit 10.11 of the Registrant’s Amendment No. 1 to the Registration Statement on Form S-1 (Registration No. 333-143507) filed on July 2, 2007).
10.10
Employment Agreement, dated May 25, 2004, between Linguagen Corp. and Dr. Raymond F. Salemme (Incorporated by reference to Exhibit 10.11 of the Registrant’s Current Report on Form 8-K filed with the Commission on March 16, 2007).**
10.11
Employment Agreement, dated June 28, 2004, between Linguagen Corp. and Scott Horvitz (Incorporated by reference to Exhibit 10.13 of the Registrant’s Current Report on Form 8-K filed with the Commission on March 16, 2007).**
10.12
Master Security Agreement, dated as of February 16, 2005, by and between Oxford Finance Corporation and Linguagen Corp. (Incorporated by reference to Exhibit 10.3 of the Registrant’s Current Report on Form 8-K filed with the Commission on March 16, 2007).
10.13
Redpoint Bio Corporation 2007 Omnibus Equity Compensation Plan (Incorporated by reference to Exhibit D of the Registrant’s Schedule 14C filed with the Commission on May 23, 2007).**
10.14
Registration Rights Agreement, dated March 12, 2007, by and among Robcor, National Holdings Corporation, Brean Murray, Carret & Co., LLC and the parties set forth on the signature page and Exhibit A thereto (Incorporated by reference to Exhibit 10.16 of the Registrant’s Current Report on Form 8-K filed with the Commission on March 16, 2007).
10.15
Registration Rights Agreement, dated March 12, 2007, by and among Robcor and certain existing stockholders of Redpoint (Incorporated by reference to Exhibit 10.17 of the Registrant’s Current Report on Form 8-K filed with the Commission on March 16, 2007).
10.16
Placement Agency Agreement, dated December 4, 2006, by and among Redpoint, National Securities Corporation and Brean Murray, Carret & Co., LLC (Incorporated by reference to Exhibit 10.18 of the Registrant’s Current Report on Form 8-K filed with the Commission on March 16, 2007).
10.17
Amendment No. 1 to the Placement Agency Agreement, dated March 6, 2007, by and among Redpoint, National Securities Corporation and Brean Murray, Carret & Co., LLC (Incorporated by reference to Exhibit 10.19 of the Registrant’s Current Report on Form 8-K filed with the Commission on March 16, 2007).
10.18
Advisory Agreement, dated March 8, 2007, by and between Halter Financial Group, L.P., and Redpoint Bio Corporation (Incorporated by reference to Exhibit 10.20 of the Registrant’s Current Report on Form 8-K filed with the Commission on March 16, 2007).
10.19
Separation Agreement and General Release, dated as of April 25, 2007, by and between Redpoint Bio Corporation and Susan Welsh (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on April 26, 2007).**
10.20
Joint Research and Development and License Agreement, dated March 27, 2007, by and between Givaudan Schweiz AG and Redpoint Bio Corporation (Incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed with the Commission on May 15, 2007).†
10.21
Amended and Restated License Agreement, effective as of April 2, 2003, between Mount Sinai School of Medicine of New York University and Linguagen Corp. (Incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the Commission on March 16, 2007).
10.22
First Amendment to Amended and Restated License Agreement, dated as of November 10, 2003, between Mount Sinai School of Medicine of New York University and Linguagen Corp. (Incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed with the Commission on March 16, 2007).
10.23
Side Letter, dated July 11, 2007, to Placement Agency Agreement, dated December 4, 2006, as amended, by and between National Securities Corporation and Brean Murray, Carret & Co., LLC (Incorporated by reference to Exhibit 10.26 of the Registrant’s Amendment No. 3 to the Registration Statement on Form S-1 (Registration No. 333-143507) filed on July 18, 2007).
10.24
Research Agreement, dated December 13, 2007, by and between the Coca-Cola Company and Redpoint Bio Corporation (Incorporated by reference to Exhibit 10.28 of the Company’s Annual Report on Form 10-K filed on March 14, 2008).†
10.25
Loan and Security Agreement, dated September 25, 2008, by and between Redpoint Bio Corporation and CIT Healthcare LLC (Incorporated by reference to Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q filed with the Commission on November 7, 2008).
10.26
Separation of Employment Agreement and General Release, by and between the Company and Robert W. Bryant, Ph.D., dated January 9, 2009 (Incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the Commission on January 15, 2009).**
10.27
Confidential Separation Agreement and General Release, by and between the Company and Scott Siegel, Ph.D., dated February 26, 2009 (Incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the Commission on March 4, 2009).**
10.28
Amendment to Employment Agreement by, and between the Company and Dr. F. Raymond Salemme, dated December 22, 2008 (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on December 23, 2008).**
10.29
Amendment to Employment Agreement by, and between the Company and Scott M. Horvitz, dated December 22, 2008 (Incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed on December 23, 2008).**
10.30
License and Commercialization Agreement, by and between the Company and International Flavors & Fragrances Inc., dated June 29, 2010 (Incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q filed on August 13, 2010).†
10.31
10.31
Forbearance and Settlement Agreement, by and between the Company and BMR-7 Graphics Drive LLC, dated September 13, 2011 (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on September 13, 2011).
10.32
Asset Purchase Agreement, by and between the Company and Opertech Bio, Inc. dated September 30, 2011.*
21.1
List of Subsidiaries.*
23.1
Consent of KPMG LLP.*
31.1
Certification Pursuant to Rule 13a-14(a) and 15d-14(a) of Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer and Chief Financial Officer).*
32.1
Certification Pursuant to 18 U.S.C. Section 1350 (Chief Executive Officer and Chief Financial Officer).*
*Filed herewith.
**A management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 15(a)(3) of Form 10-K.
†Confidential treatment has been granted as to certain portions, which portions have been filed separately with the Securities and Exchange Commission.
REDPOINT BIO CORPORATION
(A Development-Stage Enterprise)
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Redpoint Bio Corporation:
We have audited the accompanying balance sheets of Redpoint Bio Corporation (a development-stage enterprise) (the “Company”) as of December 31, 2010 and 2011, and the related statements of operations, redeemable convertible preferred stock and stockholders’ equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 2011 and for the period from August 16, 1995 (inception) to December 31, 2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Redpoint Bio Corporation as of December 31, 2010 and 2011, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2011 and for the period from August 16, 1995 (inception) to December 31, 2011, in conformity with U.S. generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in note 1 to the financial statements, the Company has incurred losses and negative cash flows from operations since inception, has an accumulated deficit and limited cash resources that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ KPMG LLP
Philadelphia, Pennsylvania
April 16, 2012
REDPOINT BIO CORPORATION
(A Development-Stage Enterprise)
Balance Sheets
See accompanying notes to financial statements.
REDPOINT BIO CORPORATION
(A Development-Stage Enterprise)
Statements of Operations
See accompanying notes to financial statements.
REDPOINT BIO CORPORATION
(A Development-Stage Enterprise)
Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)
Period from August 16, 1995 (inception) to December 31, 2011
See accompanying notes to financial statements.
REDPOINT BIO CORPORATION
(A Development-Stage Enterprise)
Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit) (Continued)
Period from August 16, 1995 (inception) to December 31, 2011
See accompanying notes to financial statements.
REDPOINT BIO CORPORATION
(A Development-Stage Enterprise)
Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit) (Continued)
Period from August 16, 1995 (inception) to December 31, 2011
See accompanying notes to financial statements.
REDPOINT BIO CORPORATION
(A Development-Stage Enterprise)
Statements of Cash Flows
See accompanying notes to financial statements.
REDPOINT BIO CORPORATION
(A Development-Stage Enterprise)
Notes to Financial Statements
(1) Description of the Business and Liquidity
Redpoint Bio is a development stage company following a strategy focused on preserving the value of the License and Commercialization Agreement it entered into with International Flavors and Fragrances, Inc., or IFF, a global leader in the food and beverage industry. As part of this strategy, the Company continues its efforts to reduce its liabilities and sell its remaining assets. Given its lack of resources, the Company is not currently performing any research and development activities.
In June 2009, the Company announced that it had identified an all-natural sweetness enhancer, RP44. RP44 is Reb-C (rebaudioside C) a component of the stevia plant. Extracts of the leaves of the stevia plant have been extensively used as sweeteners for decades. Although certain components of the stevia leaf can be used as sweeteners, RP44 is not sweet and contributes no taste or calories of its own when used in small quantities in combination with caloric sweeteners like sucrose (table sugar) fructose and high-fructose corn syrup. Instead, it works as a sweetness enhancer amplifying the existing sugary sweetness in a food or beverage so that less sweetener is required, while retaining the “clean sweet taste” that is associated with sugar. Taste tests demonstrate that RP44 enables the reduction of up to 25% of the caloric sweetener content in various product prototypes, while still maintaining the taste quality of the fully sweetened product. These results have been demonstrated by using RP44 in combination with several common sweeteners including sucrose (sugar), fructose, glucose and high-fructose corn syrup (HFCS).
In June 2010, the Company entered into a License and Commercialization Agreement with IFF for the development, manufacture, use and commercialization of RP44. IFF has exclusive rights, through June 2015, to develop, manufacture and commercialize RP44 in virtually all food and beverage product categories. In return, we received an upfront payment of $0.5 million and we became eligible to receive two milestone payments of $0.5 million each based upon certain criteria regarding regulatory approval and supply. In addition to these milestone payments, the Company is eligible to receive royalties based on the amount of RP44 purchased by IFF for use in products. Regardless of the amount of RP44 purchased by IFF for use in products, in order to maintain their exclusive rights, IFF shall be required to pay the Company minimum royalties in the low six figure range for each twelve month period following the first commercial purchase of RP44 by IFF for use in products. IFF will continue to be responsible for the regulatory process and for costs associated with prosecuting and maintaining the Company’s intellectual property covering the sweetness enhancer. Unless terminated earlier pursuant to the agreement, the agreement continues in effect until the end of the Royalty Term. The Royalty Term commences on the first commercial purchase by IFF (or any of its affiliates) of RP44 from a supplier under a supply agreement and ends on the fifth (5th) anniversary of the first purchase under the supply agreement, or, if a patent covering RP44 or Products (as defined in the agreement) has issued, such later date on which RP44 or such Product is no longer covered by a Valid Claim (as defined in the agreement) in any country in the Territory (as defined in the agreement). In addition to standard termination rights provided to each party, after the third (3rd) anniversary of this agreement, IFF may terminate the agreement at any time upon ninety (90) days prior written notice to the Company.
In October 2010, IFF received notification by the Flavor and Extract Manufacturers Association (FEMA) that RP44 had been determined to be Generally Recognized As Safe (GRAS), triggering the $0.5 million regulatory approval milestone payment which was received in 2010. This GRAS determination allows RP44 to be incorporated into specified products in the United States and potentially aids regulatory acceptance in numerous other countries.
In March 2011, IFF entered into an agreement with GLG Life Tech Corporation, or GLG, a global leader in the supply of high purity stevia extracts, to develop the extraction capability for high grade Reb C extract for use by IFF as a sweetness enhancer. If the development proved successful, IFF and GLG also negotiated preliminary terms for a supply agreement, including exclusive supply to IFF for high-purity Reb C for use as a sweetness enhancer. In December 2011, IFF notified the Company that the supply milestone was achieved, triggering the remaining $0.5 million payment which was received in December 2011. Although Reb C is currently derived from material found in the side stream of the Reb A production process there can be no assurance that it can be produced in large scale on an economically viable basis.
Since its inception in 1995, the Company has incurred losses and negative cash flows from operations, and such losses have continued subsequent to December 31, 2011. As of December 31, 2011, the Company had an accumulated deficit of $57.2 million and anticipates incurring additional losses for the foreseeable future. Through December 31, 2011, substantially all of the Company’s cash-flow has been derived from corporate collaborations, license agreements, government grants and equity financings. The Company expects that substantially all of its cash-flow for the foreseeable future will come from its license and commercialization agreement with IFF. However, there can be no assurance that the Company will receive any cash-flow from IFF or enter into any future corporate collaborations, equity financings or license agreements. Redpoint had approximately $127,000 of cash at December 31, 2011.
In connection with its strategy of reducing liabilities and selling its remaining assets, in April 2011, the Company sold a portion of its property and equipment through an auction process and received net cash proceeds of approximately $0.3 million. Certain of the property and equipment that was sold were used for collateral for the Company’s Loan and Security Agreement with a finance company. Of the total net proceeds received from the auction sale, approximately $85,000 was remitted directly to the finance company to reduce the outstanding indebtedness plus accrued interest under the Loan and Security Agreement to approximately $635,000 as of May 10, 2011. On May 11, 2011, the Company entered into a Discounted Payoff Agreement with the finance company, whereby the finance company agreed to accept approximately $43,000 in full satisfaction of the total outstanding indebtedness plus accrued interest. This amount was paid by the Company in May 2011.
On November 28, 2005, the Company entered into a Lease (the “Lease”) with BMR-7 Graphics Drive LLC (the “Landlord”), which was amended by the First Amendment to the Lease, dated as of October 25, 2006, and that certain Acknowledgement of Term Commencement Date and Term Expiration Date, dated as of May 7, 2007. On April 30, 2011, the Company moved out of its leased facility in New Jersey and no longer occupied the facility as of that date. The Company ceased to make rent payments under the Lease as of April 30, 2011. As a result, the Company was in default on the Lease. Additionally, on May 10, 2011, the Company received notice from the Landlord that the Company was in violation of the Lease for failure to pay rent as required under the Lease. On September 13, 2011, the Company entered into a Forbearance and Settlement Agreement with the Landlord (the “Settlement Agreement”), whereby the Landlord agreed to forbear temporarily from enforcing its rights to collect all payments currently due under the Lease and future payments due for the remainder of the Term (as defined in the Lease) (approximately $5,156,000 in the aggregate) during the period commencing on the Execution Date (as defined in the Settlement Agreement) and continuing through February 15, 2012 (the “Forbearance Period”) in consideration of the commitment to pay an aggregate of $425,000 (the “Payoff Amount”) prior to February 15, 2012. In September 2011, the Company paid $25,000 of the Payoff Amount in connection with the terms of the Settlement Agreement. Further, as discussed below, in October 2011 the Company paid an additional $27,500 of the Payoff Amount which was received in connection with an Asset Purchase Agreement entered into with Opertech Bio, Inc. In December 2011, the Company paid the remaining $372,500 of the Payoff Amount which was received in connection with the achievement of the supply milestone in accordance with the License and Commercialization Agreement entered into with IFF. As a result, the Company has no further obligations to the Landlord under the Lease or the Settlement Agreement.
On September 30, 2011, the Company entered into an Asset Purchase Agreement (the “Agreement”) with Opertech Bio, Inc. (the “Purchaser”). Pursuant to the Agreement, and subject to the terms and conditions contained therein, the Company sold certain operating assets and transferred certain liabilities and obligations to the Purchaser which relate to the Company’s taste modulator technology, including its Microtiter Operant Gustometer (“MOG”) technology. As consideration for the sale of the assets under the Agreement, the Company received at closing a cash payment in the amount of $27,500 (the “Closing Payment”). Pursuant to the Company’s obligations under the Settlement Agreement, in October 2011, the Company paid the entirety of the Closing Payment to the Landlord. In addition, if, during the one year period following the effective date of the Agreement, the Purchaser is sold or the Purchaser sells all or substantially all of the Technology (as defined in the Agreement) to an independent third party for proceeds greater than the sum of (i) the Closing Payment, and (ii) all capital invested in the Purchaser by its stockholders as of the date of such sale, then the Purchaser shall pay the Company an amount equal to 10% of the net proceeds from such sale transaction. In connection with the Agreement, the Company terminated each of its employees that remained on the Company’s scientific staff and certain of such employees have become employees of the Purchaser, including the Company’s current interim President and Chief Executive Officer and Chief Financial Officer, Scott Horvitz, who also serves, on a part-time basis, as the President and Chief Executive Officer of Opertech Bio Inc. As of the date of this filing, Mr. Horvitz is the only remaining employee of the Company.
As of the date of this filing, the Company had approximately $55,000 of cash. The Company believes that its current capital resources are only sufficient to meet its operating and capital requirements through May 2012, which raises substantial doubt about its ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Company is continuing its efforts to reduce its liabilities and sell its remaining assets and is seeking debt or equity financings to enhance the Company’s liquidity position. The Company’s remaining assets are primarily comprised of intellectual property, compounds and other research tools associated with the TRPm5 discovery program for pharmaceutical products which the Company terminated in March of 2011 due to scientific reasons and financial constraints. The Company had previously terminated its program for TRPm5 taste modulators.
For the Company to fund its operations, the Company must receive significant royalties from its license and commercialization agreement with IFF or additional equity and/or debt financing will be required before May 2012. There is no assurance that significant royalties will be received or such financing will be available to the Company as needed, and as a result, it will need to pursue other strategic alternatives. Failure to successfully address ongoing liquidity requirements will have a material adverse effect on the Company’s business. If the Company is unable to obtain additional capital on acceptable terms when needed, it will be unable to satisfy its existing obligations and may be required to take actions that harm its business and its ability to achieve positive operating cash flow in the future, including the surrender of its rights to the IFF license and commercialization agreement.
Effective March 1, 2011 through June 30, 2011, each of the Company’s executive officers agreed to indefinitely defer one-third of the cash portions of their salaries, at least until the Company has raised additional capital or the compensation committee of the board of directors determines otherwise. Effective July 1, 2011 through August 31, 2011, this salary deferral was increased to 90% of the salaries of those executive officers. On September 27, 2011, the Company reduced the outstanding amounts owed to the Company’s executive officers in connection with the deferral of their salaries to 10% of the balance owed to them as of August 31, 2011, or $15,730. As a result, the Company reduced the amounts that would have otherwise been owed to each executive officer by $141,000. In addition, on September 27, 2011, the Company mutually agreed with F. Raymond Salemme, PhD. (“Dr. Salemme”), the Company’s President and Chief Executive Officer, that Dr. Salemme shall resign as the Company’s President and Chief Executive Officer effective as of that date. Beginning on September 1, 2011, the Company is paying its Chief Financial Officer, working 50% of the time for the Company, at a revised annual salary of $125,903. As of December 31, 2011, the Company had one remaining employee, its Interim President and Chief Executive Officer and Chief Financial Officer, now employed on a part-time basis.
(2) Reverse Triangular Merger, Financing, Reincorporation Merger
Completion of Merger
Robcor Properties, Inc., a Florida corporation (“Robcor”), and its newly- formed subsidiary, Robcor Acquisition Corp., a Delaware corporation (“Merger Sub”) entered into an Agreement and Plan of Merger (the “Merger Agreement”), dated March 12, 2007, by and among, Redpoint, formerly a privately-held Delaware corporation, on the one hand, and Robcor, Merger Sub, Robcor LLC, a Kentucky limited liability company and wholly-owned subsidiary of Robcor (“Robcor LLC”) and Halter Financial Investments, L.P., a Texas limited partnership (“Halter”), and Michael Heitz (“Heitz”), as stockholders of Robcor, on the other hand. Pursuant to the Merger Agreement, Merger Sub, which Robcor had incorporated in the state of Delaware for the purpose of completing the transaction, merged into Redpoint (the “Reverse Merger”) on March 12, 2007 (the “Closing” or the “Closing Date”) with Redpoint continuing as the surviving entity in the Reverse Merger. As a result of the Reverse Merger, Redpoint became a wholly-owned subsidiary of Robcor. In connection with the Reverse Merger, each share of capital stock of Redpoint was converted into 2.7820 shares of common stock of Robcor and all of Redpoint’s convertible promissory notes were converted into shares of common stock of Robcor.
Redpoint was deemed to have been the accounting acquirer in the Reverse Merger. Accordingly, the financial statements of the Company presented reflect the historical results of Redpoint prior to the Reverse Merger, and of the combined entities following the Reverse Merger, and do not include the historical financial results of Robcor prior to the consummation of the Reverse Merger. In connection with the Reverse Merger, Redpoint issued 1,391,000 shares of common stock to Robcor shareholders which have been treated as issuance costs in connection with the Private Placement.
Private Placement
Concurrently with the completion of the Reverse Merger, Robcor received $17.2 million in net proceeds from the initial closing of a private placement of approximately 24.7 million shares of common stock at a price of $0.81 per share, and warrants to purchase approximately 6.2 million shares of Robcor common stock at an exercise price of $1.35 per share (the “Private Placement”). The initial 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 two placement agents which were issued five-year warrants to buy approximately 2.0 million shares of Robcor common stock equal to 10% of the number of shares of common stock sold in the Private Placement at an exercise price of $0.97 per share; provided, however, no warrants were issued to the placement agents with respect to shares and warrants sold to existing Redpoint stockholders.
On April 6, 2007, Robcor sold an additional 16.1 million shares of common stock and warrants to purchase 4.0 million shares of common stock which resulted in net proceeds of approximately $11.3 million. In connection with the April closing, warrants to purchase an additional 1.6 million shares of common stock were issued to the placement agents.
Reincorporation Merger
On June 15, 2007, Robcor was merged with and into Redpoint, its wholly-owned subsidiary, with Redpoint being the surviving corporation pursuant to the Agreement and Plan of Merger dated May 3, 2007. As a result of the merger, the Company’s state of incorporation changed from Florida to Delaware.
In connection with the reincorporation merger, the authorized number of shares 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 par value per share, and the authorized number of shares of preferred stock was decreased from 20,000,000 shares of preferred stock, no par value per share, to 10,000,000 shares of preferred stock, $0.0001 par value per share. The Company’s share data and capital stock have been retrospectively adjusted for all periods presented to reflect the reincorporation merger.
In addition, the maximum number of shares of common stock reserved for issuance under the Company’s 2007 Omnibus Equity Compensation Plan was increased from 13,511,562 to 17,644,267 shares.
(3) Summary of Significant Accounting Policies
(a) Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Illiquid credit markets, volatile equity, and declines in consumer spending have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effect cannot be determined with precision, actual results could differ significantly from these estimates. Changes in those estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in those future periods.
(b) Cash and Cash Equivalents
The Company considers all highly liquid investments that have original maturities of three months or less when acquired to be cash equivalents. As of December 31, 2010, cash and cash equivalents included amounts invested in money market accounts. The Company did not have any cash equivalents at December 31, 2011.
(c) Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash equivalents. The Company has established guidelines relating to diversification and maturities that allows the Company to manage risk.
(d) Revenue Recognition
Revenue from corporate collaborations and licensing agreements consists of 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 Redpoint has a contractual right to receive such payment, the contract price is fixed or determinable, the collection of the resulting receivable is reasonably assured, and Redpoint has no further performance obligations under the license agreement.
Multiple element arrangements are analyzed to determine whether the deliverables, which often include a license and performance obligations, such as research and development services, can be separated or whether they must be accounted for as a single unit of accounting. If the fair value of the undelivered performance obligations can be determined, such obligations would then be accounted for separately as performed. However, if the elements are considered to either (i) not have stand-alone value or (ii) have standalone value but the fair value of any of the undelivered performance obligations cannot be determined, the arrangement would then be accounted for as a single unit of accounting and all of the payments are recognized as revenue over the estimated period of when the performance obligations are performed. Whenever Redpoint determines that an arrangement should be accounted for as a single unit of accounting, it must determine the period over which the performance obligations will be performed and revenue will be recognized. Significant management judgment is required in determining the period over which the Company is expected to complete its performance obligations under an arrangement.
Substantive Milestone Payments
Redpoint’s collaboration agreements may also contain substantive milestone payments that are recognized upon achievement of the milestone only if all of the following conditions are met:
•the milestone payments are non-refundable;
•achievement of the milestone involves a degree of risk and was not reasonably assured at the inception of the arrangement;
•substantive effort is involved in achieving the milestone;
•a reasonable amount of time passes between the up-front license payment and the first milestone payment as well as between each subsequent milestone payment; and
•the amount of the milestone payment is reasonable in relation to the effort expended or the risk associated with achievement of the milestone.
Determination as to whether a payment meets the aforementioned conditions involves management’s judgment. If any of these conditions are not met, the resulting payment would not be considered a substantive milestone, and therefore the resulting payment would be considered part of the consideration for the single unit of accounting and be recognized as revenue as such performance obligations are performed.
Reimbursement of Research and Development Costs
Reimbursement of research and development costs is recognized as revenue, provided the amounts are fixed and determinable, and collection of the related receivable is reasonably assured.
(e) Property and Equipment
Property and equipment are recorded at cost and depreciated on a straight-line basis over their estimated useful lives. The Company uses a life of four to five years for laboratory equipment, three to seven years for office equipment and furniture, and the lesser of the useful life or the remaining life of the underlying facility lease for leasehold improvements. Expenditures for repairs and maintenance are charged to expense as incurred, while major renewals and betterments are capitalized. Upon disposition of assets, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the Statements of Operations. During the year ended December 31, 2011, the Company sold its remaining property and equipment in connection with the Asset Purchase Agreement entered into with Opertech Bio, Inc. As a result, the Company did not have any property and equipment on its Balance Sheets at December 31, 2011.
(f) Research and Development
Research and development costs, including those incurred in relation to the Company’s collaborative arrangements, are charged to expense as incurred. These expenses include internal research and development as well as research conducted on behalf of the Company by third parties, including sponsored university-based research agreements and clinical study vendors. Costs incurred in obtaining technology licenses are charged immediately to research and development expense if the licensed technology has not reached technological feasibility and has no alternative future uses.
(g) Impairment of Long-Lived Assets
The Company reviews long-lived assets, such as property and equipment, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, then an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. The Company has not recorded any impairment charges pursuant to its review of long-lived assets.
(h) Income Taxes
Income taxes are accounted for under the asset-and-liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
(i) Stock-Based Compensation
The Company recognizes compensation cost for awards to employees and nonemployee board members based on the grant-date fair value of stock-based awards over the period during which an award holder is required to provide service in exchange for the award. No compensation cost is recognized for awards for which the award holder does not render the requisite service.
Prior to 2006, the Company applied the intrinsic-value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, to account for its fixed-plan stock options granted to employees and directors. Under APB Opinion No. 25, the Company did not record compensation expense for its stock options since the current fair value of the underlying stock equaled the exercise price of the options.
The fair value of stock options is determined using the Black Scholes option- pricing model and is recognized as expense over the requisite service period using the straight-line method.
To satisfy the exercise of options, the Company plans to issue new shares rather than purchase shares on the open market.
(j) Net Loss per Common Share
Basic net loss per common share is computed by dividing the net loss allocable to common stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted net loss per common share is computed by dividing net loss allocable to common stockholders by the sum of the weighted- average number of common shares outstanding for the period and the number of additional shares that would have been outstanding if dilutive potential common shares had been issued. Stock options and warrants to purchase an aggregate of 22,857,110, 13,497,205 and 10,897,476 common shares were excluded from the computation of diluted net loss per common share for the years ended December 31, 2009, 2010 and 2011, respectively. In all periods presented, Redpoint’s diluted net loss per common share is equal to basic net loss per common share because giving effect in the computation of diluted net loss per common share to the exercise of outstanding options and warrants would have been antidilutive.
(k) Fair Value of Financial Instruments
The fair value of the Company’s financial instruments is the amount for which the instrument could be exchanged in a current transaction between willing parties. As of December 31, 2010 and 2011, the carrying values of cash and cash equivalents, prepaid expenses and other current assets, accounts payable, accrued expenses, and accrued compensation equaled or approximated their respective fair values because of the short duration of these instruments. In addition, the Company believes the carrying value of its debt instrument at December 31, 2010, which does not have a readily ascertainable market value, approximates its fair value, given that the interest rate approximates market rates.
(l) Comprehensive Loss
The Company classifies items of other comprehensive income (loss) by their nature and disclosure of the accumulated balance of other comprehensive income (loss) separately from accumulated deficit and additional paid-in capital, in the stockholders’ equity section of its balance sheet. Other comprehensive income (loss) consisted of unrealized gains and losses on marketable securities for the year ended December 31, 2009 and is presented in the Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit). There was no other comprehensive income (loss) recorded during the years ended December 31, 2010 and 2011.
(m) Recent Accounting Pronouncements
In October 2009, the FASB issued accounting guidance related to revenue recognition for transactions with multiple deliverables, which impacts the determination of when the individual deliverables included in a multiple-element arrangement may be treated as separate units of accounting. This guidance became effective for us beginning on January 1, 2011 and did not have a significant impact on the Company’s financial statements.
(4) Research and Collaboration Agreements
International Flavor & Fragrances. In June 2010, the Company entered into a License and Commercialization Agreement with IFF for the development, manufacture, use and commercialization of RP44, the Company’s all-natural sweetness enhancer. IFF has exclusive rights, through June 2015, to develop, manufacture and commercialize RP44 in virtually all food and beverage product categories. In return, the Company received an upfront payment of $0.5 million and became eligible to receive two milestone payments of $0.5 million each based upon certain criteria regarding regulatory approval and supply. In addition to these milestone payments, the Company is eligible to receive royalties based on the amount of RP44 purchased by IFF for use in products. Regardless of the amount of RP44 purchased by IFF for use in products, in order to maintain their exclusive rights, IFF shall be required to pay the Company minimum royalties in the low six figure range for each twelve month period following the first commercial purchase of RP44 by IFF for use in products. IFF will continue to be responsible for the regulatory process and for costs associated with prosecuting and maintaining the Company’s intellectual property covering the sweetness enhancer. Unless terminated earlier pursuant to the agreement, the agreement continues in effect until the end of the Royalty Term. The Royalty Term commences on the first commercial purchase by IFF (or any of its affiliates) of RP44 from a supplier under a supply agreement and ends on the fifth (5th) anniversary of the first purchase under the supply agreement, or, if a patent covering RP44 or Products (as defined in the agreement) has issued, such later date on which RP44 or such Product is no longer covered by a Valid Claim (as defined in the agreement) in any country in the Territory (as defined in the agreement). In addition to standard termination rights provided to each party, after the third (3rd) anniversary of this agreement, IFF may terminate the agreement at any time upon ninety (90) days prior written notice to the Company.
In October 2010, IFF received notification by the Flavor and Extract Manufacturers Association (FEMA) that RP44 had been determined to be Generally Recognized As Safe (GRAS), triggering the $0.5 million regulatory approval milestone payment which was received in 2010. This GRAS determination allows RP44 to be incorporated into specified products in the United States and potentially aids regulatory acceptance in numerous other countries.
In March 2011, IFF entered into an agreement with GLG Life Tech Corporation, or GLG, a global leader in the supply of high purity stevia extracts, to develop the extraction capability for high grade Reb C extract for use by IFF as a sweetness enhancer. If the development proved successful, IFF and GLG also negotiated preliminary terms for a supply agreement, including exclusive supply to IFF for high-purity Reb C for use as a sweetness enhancer. In December 2011, IFF notified the Company that the supply milestone was achieved, triggering the remaining $0.5 million payment which was received in December 2011.
(5) Grant Revenue
In November 2010, the Company received a grant in the amount of $244,479 in connection with the Qualifying Therapeutic Discovery Project Program under section 48D of the Internal Revenue Code.
REDPOINT BIO CORPORATION
(A Development-Stage Enterprise)
Notes to Financial Statements
(6) Property and Equipment
During the fiscal year ended December 31, 2011, the Company sold its remaining property and equipment in connection with the Asset Purchase Agreement entered into with Opertech Bio, Inc. As a result, the Company did not have any property and equipment on its Balance Sheets at December 31, 2011.
Property and equipment consisted of the following:
Depreciation and amortization expense was $519,636, $389,433, $135,271 and $3,178,176 for the years ended December 31, 2009, 2010, 2011 and the period from August 16, 1995 (inception) through December 31, 2011, respectively.
(7) Accrued Expenses
Accrued expenses consisted of the following:
Accrued Compensation
Effective March 1, 2011 through June 30, 2011, each of the Company’s executive officers agreed to indefinitely defer one-third of the cash portions of their salaries, at least until the Company has raised additional capital or the compensation committee of the board of directors determines otherwise. Effective July 1, 2011 through August 31, 2011, this salary deferral was increased to 90% of the salaries of those executive officers. On September 27, 2011, the Company reduced the outstanding amounts owed to the Company’s executive officers in connection with the deferral of their salaries to 10% of the balance owed to them as of August 31, 2011, or $15,730. As a result, the Company reduced the amounts that would have otherwise been owed to each executive officer by $141,000. Beginning on September 1, 2011, the Company is paying its Chief Financial Officer, working 50% of the time for the Company, at a revised annual salary of $125,903. In addition, on September 27, 2011, the Company reduced by 90% the amounts that would otherwise be owed to each of the Company’s executive officers pursuant to any severance arrangements included in their employment agreements or as otherwise agreed to by such executive officer and the Company. As such, in connection with the resignation of the Company’s President and CEO on September 27, 2011, based on the above, the Company recorded accrued severance of $37,129 as of December 31, 2011. This amount was included in general and administrative expenses during the year ended December 31, 2011. Accrued compensation of $52,859 is included in “Accrued Compensation” on the Company’s Balance Sheets at December 31, 2011 which consists of the cash amounts due to the Company’s executive officers as a result of the deferral of salaries and accrued severance.
(8) Debt
(a) Master Security Agreement and Loan and Security Agreement
In February 2005, the Company entered into a Master Security Agreement with a finance company that provided for borrowings up to $3,200,000, subject to certain conditions, through December 2005. During 2005, the Company borrowed $2,001,810 under the Master Security Agreement in order to finance the purchase of laboratory and office equipment. Amounts borrowed were evidenced with promissory notes and were repayable in equal monthly payments, over 36 to 48 months, and are collateralized by the purchased equipment. The notes bore interest at rates varying between 9.4% and 10.4%. As of December 31, 2008, $187,577 was outstanding under the Master Security Agreement. The notes were repaid in full during 2009.
In connection with the borrowings under the Master Security Agreement, the Company issued the finance company warrants to purchase 53,039 shares of the Company’s common stock at an exercise price of $0.75 per share. The estimated fair value of the warrants of $30,074, determined using the Black-Scholes option- pricing model, was accounted for as deferred financing costs and were amortized to interest expense through the date in which the notes were repaid in full, which occurred during the fourth quarter of 2009.
In September 2008, the Company entered into a Loan and Security Agreement with a finance company that provided for borrowings of up to $2,000,000 to be used for the purchase of certain equipment and for working capital purposes. During 2008, the Company borrowed $1,556,357 under the Loan and Security Agreement. As of December 31, 2010, $773,842 was outstanding under the Loan and Security Agreement. Amounts borrowed were evidenced with a promissory note, were repayable in equal monthly payments over 48 months, and were collateralized by the purchased equipment. The note bore interest of 12.1%. The Loan and Security Agreement contained certain provisions, including a material adverse change clause (as defined in the Loan and Security Agreement) which restricted the Company’s ability to borrow additional money and also enabled the finance company to request full repayment of the loan if such a change had occurred.
Interest expense on notes payable recorded during the years ended December 31, 2009, 2010 and 2011 and for the period from August 16, 1995 (inception) to December 31, 2010 was $167,616, $117,884, $31,394 and $728,403 respectively.
During the year ended December 31, 2011, certain scheduled repayments of amounts outstanding under the Loan and Security Agreement were not made. Based on the terms of the Loan and Security Agreement, this was considered an Event of Default (as defined in the Loan and Security Agreement) and the finance company had the option to declare all amounts outstanding immediately due and payable. During the year ended December 31, 2011, the Company sold a portion of its property and equipment through an auction process. Certain of the items sold were used for collateral for the Loan and Security Agreement. Accordingly, $84,583 of the net proceeds from the auction was remitted directly to the finance company to reduce the outstanding indebtedness plus accrued interest under the Loan and Security Agreement to $634,788 as of May 10, 2011. On May 11, 2011, the Company entered into a Discounted Payoff Agreement with the finance company, whereby the finance company agreed to accept $42,639 in full satisfaction of the total outstanding indebtedness plus accrued interest under the Loan and Security Agreement. Upon receipt of such amount by the finance company, the Loan and Security Agreement automatically terminated, and all liabilities, obligations and indebtedness of the Company to the finance company were deemed satisfied in full and all liens and security interests of the finance company in any of the Company’s property and equipment were deemed released and terminated. In addition, there was a balance of $14,409 of deferred financing costs related to the Loan and Security Agreement at May 11, 2011, which was written off in connection with the Discounted Payoff Agreement. As a result of the above transaction, the Company recorded a gain on debt extinguishment of $577,740 which is included in Other income in the Company’s Statements of Operations for the year ended December 31, 2011.
(b) Convertible Notes Payable
In May, June and October 2006, the Company entered into a convertible debt financing agreement with certain of its existing investors which provided for $4,116,774 in funding. The Company issued 5% secured promissory notes (the Promissory Notes) with principal amounts totaling $4,093,021 and warrants to purchase shares of a new series of preferred stock that may be designated in the future in a Qualified Financing, as defined in such Promissory Notes. The Promissory Notes were due on the earliest to occur of: (i) demand by holders of a majority of the outstanding principal at any time after the one year anniversary of the initial May closing; (ii) a Liquidation Event, as defined; and (iii) the two-year anniversary of the initial May closing. In conjunction with the Reverse Merger, the Promissory Notes and accrued interest were converted into 5,223,522 shares of common stock and warrants were exercised resulting in the issuance of 2,033,175 shares of common stock.
The Company allocated the proceeds from the financing between the Promissory Notes and warrants based on their relative estimated fair values of $4,093,021 and $1,228,565, respectively. The relative fair value of the warrants was recorded against the carrying value of the Promissory Notes as an original issue discount (OID) which was being amortized as interest expense over the one year anniversary of the initial May issuance date of the Promissory Notes until the closing of the Reverse Merger.
After considering the allocation of the proceeds to the Promissory Notes, the Company determined that the Promissory Notes contained a contingent beneficial conversion feature (Contingent BCF). The Contingent BCF existed at the date of the issuance of the Promissory Notes due to the fact that the original carrying value of Promissory Notes, after allocation of the proceeds, would be less than the purchase price of the new series of preferred stock paid by investors in the new series. During the year ended December 31, 2007, the Contingent BCF of $1,228,565 was recognized as additional interest expense when the Promissory Notes were converted into shares of common stock.
(9) Related-Party Transaction
The Company has licensed the rights to certain patents and pending patents in the area of taste receptors and taste inhibitors from a research institution that is a stockholder of the Company. The license agreement, as amended, required a payment of $130,000. In addition, the Company is required to pay royalties on future sales, if any, of certain products covered by the license agreement. Commencing in July 2004, the Company is obligated to pay a minimum annual fee, creditable against royalties, of $25,000 to the licensor through the expiration of the last-to-expire patent. The Company estimates the term of the license agreement to be through December 2019.
(10) Redeemable Convertible Preferred Stock
During 2003 and 2004, the Company sold an aggregate of 5,820,875 shares of convertible preferred stock (Series A) at $2.10 per share, for gross proceeds of $12,223,832.
In connection with the conversion of a previously outstanding convertible note, the Company issued 623,963 shares of Series A and also issued 236,987 shares of Junior Preferred in connection with the conversion of the accrued interest on the convertible notes in 2003.
Dividends on each outstanding share of Series A and Junior Preferred accrued and compounded annually, and were cumulative at the annual rate of 8%. Dividends were payable only when and if declared by the board of directors.
Each share of Preferred Stock was convertible at any time at the option of the holder into the number of shares of common stock obtained by dividing the original issue price (subject to certain adjustments), plus accrued and unpaid dividends, by the conversion price, as defined. The Preferred Stock was mandatorily convertible in the event of an initial public offering, as defined.
At any time on or after October 31, 2008, the holders of a majority of the Preferred Stock could have required the Company to redeem the Series A at the applicable redemption price. In the case of the Series A, the redemption price was equal to the greater of (i) the original issue price plus any accumulated unpaid dividends, or (ii) the fair value of the shares of common stock then issuable upon conversion of such shares of Series A. In the case of the Junior Preferred, the redemption price was equal to the original issue price of $2.10 per share.
In connection with the Reverse Merger, the Series A and Junior Preferred converted into 22,774,963 shares of common stock.
(11) Stockholders’ Equity (Deficit)
(a) Common Stock
The Company was party to a number of agreements that provided for dilution protection to certain investors. In connection with the Reverse Merger and closing of the Private Placement, the Company issued approximately 2.0 million shares of common stock to a founder and shareholder of the Company as a result of such anti-dilution protection. During 2007, the Company recorded a charge of $1.6 million to research and development expenses related to the issuance of such shares of common stock, which represents the fair value of these shares. As of December 31, 2011, none of the Company’s existing agreements contain dilution protection provisions.
(b) Warrants
As of December 31, 2011, the Company had the following warrants to purchase Common Stock outstanding:
During the year ended December 31, 2010, warrants to purchase 10,197,346 shares of Common Stock at an exercise price of $1.35 per share expired and were not exercised. As of December 31, 2011, 3,627,945 warrants were vested.
(c) Registration Rights
On June 5, 2007, the Company filed a “resale” registration statement with the SEC covering all shares of common stock issued in the Private Placement and in connection with the Reverse Merger, including shares of common stock into which certain warrants are exercisable. Such registration statement was declared effective on July 20, 2007. The Company will use its best efforts to maintain its effectiveness until such time as all securities registered under the registration statement have been sold or are otherwise able to be sold under Rule 144 of the Securities Act without regard to volume limitations, whichever is earlier.
If the Company fails to maintain the effectiveness of the “resale” registration statement, a 1% penalty will be assessed for each monthly period that the registration statement is not effective, capped at 12%. The penalty will be payable monthly in either cash or additional shares of common stock, as determined by the Company. The Company follows the relevant accounting literature, which specifies that registration payment arrangements should play no part in determining the initial classification of, and subsequent accounting for, securities to which the payments relate. Contingent obligations in a registration payment arrangement are separately analyzed. If we determine a penalty payment is probable and can be reasonably estimated, a liability will be recorded. As of December 31, 2011, we concluded the likelihood of having to make any payments under the arrangements was remote, and therefore did not record any related liability.
(d) Stock Option Plans
In November 2003, the Company adopted the 2003 Stock Incentive Plan, as amended (the “2003 Plan”), that authorized the Company to grant up to 6,523,790 shares of Common Stock to eligible employees, directors, and consultants 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. The term of the options could have been up to 10 years, and options were exercisable in cash or as otherwise determined by the board of directors. Generally, options vested 25% upon the first anniversary of the date of grant and ratably each month thereafter through the fourth anniversary of the date of grant.
On March 12, 2007, the Company adopted the Redpoint Bio Corporation 2007 Omnibus Equity Compensation Plan (“2007 Plan”), which provided for the issuance of up to 13,511,562 shares of common stock, subject to adjustment in certain circumstances. In connection with the adoption of the 2007 Plan, the 2003 Plan merged with and into the 2007 Plan and no additional grants were to be made thereafter under the 2003 Plan. Outstanding grants under the 2003 Plan continued in effect in accordance with their terms as in effect before March 12, 2007 and the shares with respect to outstanding grants under the 2003 Plan have been or will be issued or transferred under the 2007 Plan. The 2007 Plan is now the Company’s only plan in effect.
On April 20, 2007, the Company approved an amendment to the 2007 Plan, which increased the maximum number of shares of common stock reserved for issuance under the 2007 Plan by an additional 4,132,705 shares from 13,511,562 to 17,644,267 shares of common stock.
The following is a summary of stock option activity under the 2007 Plan through December 31, 2011.
All options granted to date have exercise prices equal to the fair value of the underlying common stock on the date of grant. Prior to the effectiveness of the registration statement on Form S-1, which occurred on July 20, 2007, all options were granted with an exercise price equal to the estimated fair value of the underlying common stock as determined by the board of directors. Subsequent to that date, all options have been granted with an exercise price equal to the most recent trading price of the Company’s common stock on the date of grant. The Company received proceeds of $51,424, $574 and $6,584 for option exercises in 2009, 2010 and 2011, respectively. As of December 31, 2011, there were 9,531,732 shares of common stock available for grant under the 2007 Plan.
The per-share weighted average fair value of the options granted during the years ended December 31, 2009 and 2010 was estimated at $0.07 and $0.07, respectively, on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
The expected term assumption is based on the use of the simplified method. The expected volatility of share options was calculated based on a historical volatility analysis of public company peers that were similar to the Company for a term equivalent to the expected term of the option. The risk-free rate of the option is based on the zero-coupon U.S. Treasury yield at the date of grant for a term equivalent to the expected term of the option.
The Company recognized $680,893, $583,536 and $208,797 of stock- based compensation expense related to stock options for the years ended December 31, 2009, 2010 and 2011, respectively. As of December 31, 2011, there was $31,833 of unrecognized compensation expense related to unvested stock options, which is expected to be recognized over a weighted average period of 1.0 year.
(12) Commitments
Employment-Related Agreements
The Company has entered into an employment agreement with its remaining key executive officer, providing for a base salary plus performance incentive bonuses. In January 2009, the Company entered into a separation agreement with a former officer that required the Company to make aggregate payments of $40,175, which was paid in bimonthly installments through March 31, 2009. In February 2009, the Company entered into a separation agreement with a former officer that required the Company to make aggregate payments of $222,888, which was paid in bimonthly installments through February 28, 2010.
See Notes 1 and 7.
(13) Lease Settlement Charge
On November 28, 2005, the Company entered into a lease agreement (the “Lease”) with BMR-7 Graphics Drive LLC (the “Landlord”), which was amended by the First Amendment to the Lease, dated as of October 25, 2006, and that certain Acknowledgement of Term Commencement Date and Term Expiration Date, dated as of May 7, 2007. On April 30, 2011, the Company moved out of its leased facility in New Jersey and no longer occupied the facility as of that date. The Company ceased to make rent payments under the Lease as of April 30, 2011. As a result, the Company was in default on the Lease. Additionally, on May 10, 2011, the Company received notice from the Landlord that the Company was in violation of the Lease for failure to pay rent as required under the Lease. On September 13, 2011, the Company entered into a Forbearance and Settlement Agreement with the Landlord (the “Settlement Agreement”), whereby the Landlord agreed to forbear temporarily from enforcing its rights to collect all payments currently due under the Lease and future payments due for the remainder of the Term (as defined in the Lease) (approximately $5,156,000 in the aggregate) during the period commencing on the Execution Date (as defined in the Settlement Agreement) and continuing through February 15, 2012 (the “Forbearance Period”) in consideration of the commitment to pay an aggregate of $425,000 (the “Payoff Amount”) prior to February 15, 2012. As a result, the Company has recorded an expense of $425,000 during the year ended December 31, 2011, which is included in general and administrative expenses on the Company’s Statements of Operations. Additionally, the Company had recorded a security deposit of $250,000 and a deferred rent liability of $76,000 that was recorded in other assets and accrued expenses, respectively, at the time that the Company no longer occupied the leased facility. Due to management’s estimate of the recoverability of those amounts, the amounts were written off during the year ended December 31, 2011, and the difference of $174,000 was included in general and administrative expenses on the Company’s Statements of Operations during the year ended December 31, 2011. In September 2011, the Company paid $25,000 of the Payoff Amount in connection with the terms of the Settlement Agreement. Further, as discussed below, in October 2011 the Company paid an additional $27,500 of the Payoff Amount which was received in connection with an Asset Purchase Agreement entered into with Opertech Bio, Inc. In December 2011, the Company paid the remaining $372,500 of the Payoff Amount which was received in connection with the achievement of the supply milestone in accordance with the License and Commercialization Agreement entered into with IFF. As a result, the Company has no further obligations to the Landlord under the Lease or the Settlement Agreement.
(14) Other Income
The following items are included in Other income on the Company’s Statements of Operations for the year ended December 31, 2011:
During the year ended December 31, 2011, the Company sold a portion of its property and equipment through an auction process and received net cash proceeds of $347,575. As a result of this transaction, the Company recorded a gain on sale of property and equipment of $174,581 which is included in Other income in the Company’s Statements of Operations for the year ended December 31, 2011. In addition, during the year ended December 31, 2011, the Company sold certain property and equipment to an unrelated third party and received cash proceeds of $1,638. As a result of this transaction, the Company recorded a loss on sale of property and equipment of $4,366, which is included in Other income in the Company’s Statements of Operations for the year ended December 31, 2011.
During 2011, the Company entered into an Asset Purchase Agreement (the “Agreement”) with Opertech Bio, Inc. (the “Purchaser”). Pursuant to the Agreement, and subject to the terms and conditions contained therein, the Company sold certain operating assets (including certain property and equipment) and transferred certain liabilities and obligations to the Purchaser which related to the Company’s taste modulator technology, including its Microtiter Operant Gustometer (“MOG”) technology. As consideration for the sale of the assets under the Agreement, the Company received cash proceeds of $27,500. As a result of this transaction, the Company recorded a gain on sale of property and equipment of $4,472 which is included in Other income in the Company’s Statements of Operations for the year ended December 31, 2011. In addition, during 2011, the Company received a payment of $50,000 in connection with a research and development agreement relating to the Company’s taste modulator technology. Based on the terms of the Agreement, the corresponding research and development agreement and all related rights and work in process associated with the research and development agreement was transferred to the Purchaser, with the exception of the $50,000 payment received by the Company. As the Company has no future continuing involvement with the research program and did not perform any research activities in connection with the research and development agreement, the $50,000 payment was included in Other income in the Company’s Statements of Operations for the year ended December 31, 2011.
As noted above, during 2011, the Company sold a portion of its property and equipment through an auction process. Certain of the items sold were used for collateral for the Loan and Security Agreement entered into between Redpoint and a finance company (see Note 8). Accordingly, $84,583 of the net proceeds from the auction was remitted directly to the finance company to reduce the outstanding indebtedness plus accrued interest under the Loan and Security Agreement to $634,788 as of May 10, 2011. On May 11, 2011, the Company entered into a Discounted Payoff Agreement with the finance company, whereby the finance company agreed to accept $42,639 in full satisfaction of the total outstanding indebtedness plus accrued interest under the Loan and Security Agreement. Upon receipt of such amount by the finance company, the Loan and Security Agreement automatically terminated, and all liabilities, obligations and indebtedness of the Company to the finance company were deemed satisfied in full and all liens and security interests of the finance company in any of the Company’s property and equipment were deemed released and terminated. In addition, there was a balance of $14,409 of deferred financing costs related to the Loan and Security Agreement at May 11, 2011, which was written off in connection with the Discounted Payoff Agreement. As a result of the above transaction, the Company recorded a gain on debt extinguishment of $577,740 which is included in Other income in the Company’s Statements of Operations for the year ended December 31, 2011.
During 2011, the Company entered into a series of agreements with several of the Company’s largest creditors. The creditors agreed to accept an aggregate amount of $94,242 in full and complete satisfaction of $889,875 of outstanding balances owed to such creditors. As a result of these agreements, the Company recorded a gain of $795,633 which is included in Other income in the Company’s Statements of Operations for the year ended December 31, 2011.
(15) Restructuring
During 2009, the Company announced two restructurings which reduced its workforce by approximately 60%. As of December 31, 2011, the Company has 1 part-time employee. In connection with the restructurings, the Company incurred severance costs of $526,553 which are included in general and administrative expenses on the accompanying Statements of Operations for the year ended December 31, 2009. As of December 31, 2011, all amounts related to these restructurings have been paid.
(16) Income Taxes
As of December 31, 2011, the Company had approximately $46,413,000 and $25,615,000 of federal and state net operating loss carryforwards, respectively, and approximately $580,000 and $239,000 of federal and state research and development credit carryforwards, respectively, available to offset future federal and state taxable income. The federal net operating loss carryforward will expire beginning in 2022, and the state net operating loss carryforwards began expiring in 2012. The federal research and development credit carryforward will expire beginning in 2022, and the state research and development carryforward will expire beginning in 2021.
The following table summarizes the components of the deferred tax assets and liabilities as of:
The Company's effective tax rate differs from the statutory rate primarily due to its valuation allowance associated with its net operating losses.
In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the temporary differences representing net future deductible amounts become deductible. Due to the Company's history of losses, the deferred tax assets are fully offset by a valuation allowance at December 31, 2010 and 2011. The valuation allowance in 2011 decreased by $387,000 over 2010 related primarily to the expiration and sale of certain net operating losses by the Company. The valuation allowance in 2010 increased by $284,000 over 2009 related primarily to additional net operating losses incurred by the Company.
Under the Tax Reform Act of 1986, the utilization of a corporation's net operating loss and tax credit carryforwards is limited following a greater than 50% change in ownership during a three-year period. Any unused annual limitation may be carried forward to future years for the balance of the net operating loss and tax credit carryforward period. Prior equity financings may significantly limit the Company’s ability to utilize net operating loss and tax credit carryforwards against future taxable income under Sections 382 and 383 of the Internal Revenue Code.
During the year ended December 31, 2011, the Company sold $5,268,454 of its New Jersey State net operating losses resulting in the recognition of an income tax benefit of $410,726 recorded in the Company’s Statement of Operations.
During the year ended December 31, 2010, and the Company sold $112,562 of its New Jersey State Research and Development Tax Credits resulting in the recognition of an income tax benefit of $101,306 recorded in the Company’s Statement of Operations.
The Company applies the provisions of FASB Accounting Standards Codification 740-10 “Accounting for Uncertainty in Income Taxes” (ASC 740-10), which clarifies the accounting and disclosure for uncertainties in income taxes recognized in an enterprise’s financial statements. ASC 740-10 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position reported or expected to be reported on a tax return. ASC 740-10 also provides guidance on the recognition and classification of interest and penalties in an entity’s financial statements. The Company’s policy is to recognize potential accrued interest and penalties related to income tax matters in income tax expense. As of December 31, 2011, the Company determined that it had no liability for uncertain income tax matters as prescribed by ASC 740-10. Net operating loss and credit carryforwards since inception remain open to examination by taxing authorities, and will continue to remain open for a period of time post utilization.
(17) 401(k) Plan
The Company maintained a defined contribution 401(k) plan available to eligible employees. The 401(k) plan was terminated during 2011. Prior to its termination, employee contributions are voluntary and are determined on an individual basis, limited by the maximum amounts allowable under federal tax regulations. During the year ended December 31, 2007, the Company began making matching contributions in the amount of 50% of employee contributions up to 6%. The Company, in its discretion, may also make certain contributions to the plan. The Company contributed $18,000, $21,000 and $17,000 as matching contributions for the years ended December 31, 2009, 2010 and 2011, respectively.
(18) Quarterly Results (unaudited)
The following tables summarize the quarterly results of operations for each of the quarters in 2010 and 2011. These quarterly results are unaudited, but in the opinion of management, have been prepared on the same basis as the Company’s audited financial information and include all adjustments (consisting only of normal recurring adjustments) necessary for fair presentation of the information set forth herein.
(1)Per common share amounts for the quarters and full years have been calculated separately.
(2)The net loss for the three months ended December 31, 2010 reflects the reversal of $187,983 of accrued bonuses previously recognized in the first three quarters of 2010, as a result of the Company’s decision not to pay 2010 bonuses.