News Column

RESTORGENEX CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

August 14, 2014

You should read the following discussion of our financial condition and results of operations together with the unaudited consolidated financial statements and the notes thereto included elsewhere in this report and other financial information included in this report. The following discussion may contain predictions, estimates and other forward looking statements that involve a number of risks and uncertainties, including those discussed under "Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations-Special Note Regarding Forward Looking Statements" in this report and under "Part I- Item 1A. Risk Factors" in our annual report on Form10-K/A for the fiscal year ended December 31, 2013. These risks could cause our actual results to differ materially from any future performance suggested below.

Business Overview



We are a specialty biopharmaceutical company initially focused on developing products for dermatology, ophthalmology and women's health. We are and will continue to review our products and technologies.

Dermatology



Our prescription dermatology business is based primarily upon three compounds. The first is RES-102, a "soft" estrogen, which is under development for the treatment of aging skin fragility/thinning. The second is RES-440, a "soft" anti-androgen, which is under development for the treatment of androgen excess, e.g. acne and hirsutism (unwanted excess hair). The third prescription dermatology compound is P529, which is under development for the treatment of keloid scarring and potentially other indications including psoriasis, atopic dermatitis, rosacea, actinic keratosis, Dupuytren's disease and the bullous blistering diseases.

Our first product for aging skin is CL-214, which is planned to be marketed and sold by Ferndale Pharma Group through physician offices and medi-spas worldwide. We believe that this product will be ready for launch in the fourth quarter of 2015 or early 2016.

Ophthalmology



Our prescription ophthalmology business is based upon developing a non-steroidal, synthetic, small molecule drug library through computational design, and synthetic and medicinal chemistry, resulting in a family of agents, called "palomids." Our palomids have shown significant activity in in vitro ("test tube") and in vivo ("animal") models of disease. The specific focus is on pathologies showing an aberrant up-regulation of the PI3K/Akt/mTOR pathway in the area of ophthalmology. We have completed two human Phase I clinical studies with one of our palomids ("P529") for age-related macular degeneration, both studies of which showed preliminary evidence of activity and no toxicity. We currently are planning Phase I/Phase II studies for age-related macular degeneration.

Women's Health



We also are engaged in the prescription women's health business. We have a "soft" estrogen compound, RES-102, which in addition to being in development for the treatment of aging skin fragility/thinning, is also in development for vulvar and vaginal atrophy ("VVA"), a condition affecting peri- and post-menopausal women due to declining levels of estrogen. RES-102 targets hormonal aging in women which affects the mucous membranes, skin and hair of women in menopause due to loss of estrogen.

Other Potential Indications/Products

In addition to the potential products and indications described above, we also have other potential products in our portfolio for a host of other indications that could be developed either internally or through license to other biopharmaceutical companies which may have greater resources than us. These other indications include and may not be limited to the use of our palomids in CNS disorders, cardiovascular medicine and biodefense. We also may pursue the development of orally available small molecular inhibitors. In order to create novel, patentable inhibitors of zinc-finger transcription factors, we initially have targeted the zinc finger transcription factor vascular endothelial

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zinc finger ("VEZF1"). VEZF1 is essential for embryonic blood vessel formation and regulates the synthesis of important growth factors such as IL3, endothelin-1 and neuropilin-1. Notably, VEZF1 is thought to control at least in part the creation of lymphatic vessels, called lymphangiogenesis. Lymphatic vessels support cancer metastasis. Thus far, we have undertaken a novel approach to design inhibitors of VEZF1/DNA binding using homology structural modeling and computer modeling ("in silico") targeting of small molecules to the VEZF1/DNA interface.

Corporate History



Prior to our repositioning as a specialty biopharmaceutical company, we operated various entertainment and sports events, which we acquired in a series of acquisitions beginning March 2008.

On March 14, 2008, pursuant to an agreement and plan of merger dated August 20, 2007 between Feris International, Inc. ("Feris") and Pro Sports & Entertainment, Inc. ("PSEI"), Feris issued 495,000 shares of its common stock for all issued and outstanding shares of PSEI, resulting in PSEI becoming a wholly owned subsidiary of Feris and the surviving entity for accounting purposes. In July 2008, Feris's corporate name was changed to Stratus Media Group, Inc. PSEI specialized in various entertainment and sports events that it owned and operated. PSEI also owned Stratus Rewards LLC that planned to operate a credit card rewards program. In June 2011, we acquired shares of series A convertible preferred stock of ProElite, Inc. ("ProElite"), that organized and promoted mixed martial arts ("MMA") matches. These holdings of series A convertible preferred stock provided us voting rights on an as-converted basis equivalent to a 95% ownership in ProElite. During the first quarter of 2013, we decided to focus on the MMA business and temporarily suspended development of our other businesses. Because of lack of working capital, we suspended operations of ProElite effective June 30, 2013. Following the repositioning of our company as a specialty biopharmaceutical company, our Board of Directors voted to discontinue the operations of ProElite effective March 31, 2014.

Effective September 30, 2013, we entered into an agreement and plan of merger with Canterbury Acquisition LLC, Hygeia Acquisition, Inc., Canterbury Laboratories, LLC ("Canterbury"), Hygeia Therapeutics, Inc. ("Hygeia") and Yael Schwartz, Ph.D., as holder representative, pursuant to which we acquired all of the capital stock of Canterbury and Hygeia, with Canterbury and Hygeia becoming our wholly owned subsidiaries. The consideration for the mergers was the issuance by us of an aggregate of 1,150,116 shares of our common stock issued to the stakeholders of Canterbury and Hygeia. Closing of the mergers occurred on November 18, 2013. For the three and six months ended June 30, 2014, there were no revenues associated with Canterbury and Hygeia.

Canterbury and Hygeia (the "Canterbury Group") are related companies engaged in the development of pharmaceuticals and cosmeceuticals (cosmetic products with "drug-like" benefits) which, depending on the specific product involved, may treat acne, hirsutism (unwanted hair) and alopecia (thinning hair) and may revitalize hormonally-aged skin and hair in women over the age of 45. We have an exclusive license with Yale University to develop and market 23 synthetic estrogenic ingredients for the treatment of aging skin and four classes of anti-androgenic ingredients for hair loss, excess facial hair, seborrhea and acne. The license from Yale University covers 24 patent-protected compounds under certain patents (together, the "Yale Patents").

The acquisition of the Canterbury Group was the first step in the implementation of our plan to reposition our company as a specialty biopharmaceutical company. The total consideration for the Canterbury Group was $12,421,249 based on the issuance of 1,150,116 shares of common stock at the market value of $10.80 per share as of the execution of the merger agreements on September 30, 2013.

As we continued to reposition our company as a specialty biopharmaceutical company, in early March 2014, we hired Stephen M. Simes as our Chief Executive Officer, an executive with over forty years of experience in the pharmaceutical and biotechnology industry. Shortly after adding Mr. Simes, in late March 2014, we acquired to two related companies. On March 3, 2014, we entered into an agreement and plan of merger with Paloma Acquisition, Inc., Paloma Pharmaceuticals, Inc. ("Paloma") and David Sherris, Ph.D., as founding stockholder and holder representative, pursuant to which we agreed to acquire all of the capital stock of Paloma, with Paloma becoming our wholly owned subsidiary. On March 28, 2014, the merger with Paloma was closed and we issued an aggregate of 2,500,000 shares of common stock to all the holders of Paloma common stock and its derivative securities and assumed promissory notes of Paloma in the aggregate amount (principal and interest at that time) of $1,151,315 to be paid on the first anniversary of the closing of the Paloma merger. The 2,500,000 shares were valued at $2.50 per share, which was the closing market price of our common stock on March 3, 2014, resulting in

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$6,250,000 of stock consideration, resulting in total consideration of $7,401,315. Paloma has developed a non-steroidal, synthetic, small molecule drug library that may have potential applications in dermatology (psoriasis, atopic dermatitis, rosacea, actinic keratosis, keloid and hypertrophic scarring, Dupuytren's disease, bullous blistering diseases), ocular disease, cancer, pulmonary fibrosis, CNS (Huntington's disease and infantile spasm, a form of childhood epilepsy), biodefense and anti-viral application. The lead product, P529, targets and inhibits the PI3K/Akt/mTOR signal transduction pathway, specifically as a first-in-class allosteric, dual TORC1/TORC2 dissociative inhibitor.

Also on March 3, 2014, we entered into an agreement and plan of merger with VasculoMedics Acquisition, Inc., VasculoMedics, Inc. ("VasculoMedics") and Dr. Sherris, pursuant to which we agreed to acquire all of the capital stock of VasculoMedics, with VasculoMedics becoming our wholly owned subsidiary. The VasculoMedics merger was concurrently closed with and was a condition to the closing of the Paloma merger on March 28, 2013. In the VasculoMedics merger, we issued an aggregate of 220,000 shares of common stock to the VasculoMedics stockholders. These shares were valued at $2.50 per share, which was the closing price of our common stock on March 3, 2014, resulting in $550,000 of consideration, all of which was allocated to goodwill. VasculoMedics was founded as a platform epigenetic company to develop orally available small molecular inhibitors of zinc finger transcription factors. Zinc finger transcription factors are a subset of transcription factors utilizing zinc at its core for activity. Transcription factors are proteins that bind to specific parts of DNA that control the transfer of genetic information from DNA to RNA. RNA in turn directs the protein making machinery to manufacture one or more proteins controlled by the transcription factor. Hence, by inhibition of a transcription factor, one can specifically inhibit the synthesis of one or more proteins controlled by the particular transcription factor. Many diseases can be linked to the activation of particular proteins whose synthesis is controlled by transcription factors. Inhibition of such transcription factors could then be able to control disease pathology.

On March 7, 2014, we effected a reverse stock split of one-for-100 of our common stock, and we changed our corporate name from Stratus Media Group, Inc. to RestorGenex Corporation. All share and per share amounts in this report have been adjusted to reflect the one-for-100 reverse split of outstanding common stock effective March 7, 2014.

Financial Summary



Our financial position at the end of our second quarter of 2014 improved significantly compared to December 31, 2013 and the end of our first quarter of 2014, as a result of our recently completed private placement. Our total working capital as of June 30, 2014 totaled $25,306,982, including $27,139,593 in cash and cash equivalents, compared to a negative working capital ($5,880,035), including $254,964 in cash and cash equivalents, as of December 31, 2013 and compared to a negative working capital ($8,016,821), including $222,071 in cash and cash equivalents, as of March 30, 2014.

During the second quarter of 2014 and ending on July 10, 2014, we completed a private placement pursuant to which we raised approximately $35.6 in gross proceeds and approximately $31.3 million in net proceeds, after paying placement agent fees, estimated offering expenses, and certain accounts payable. In the private placement, we issued an aggregate of 8,895,685 shares of our common stock and warrants to purchase an aggregate of 2,668,706 shares of common stock. The purchasers of common stock received warrants to purchase 0.3 shares of common stock for each share of common stock that such investors purchased in the private placement. The purchase price of each common stock/warrant unit was $4.00. Each warrant is exercisable into a share of common stock at an initial exercise price of $4.80 per share. We intend to use the net proceeds from the offering to fund our research and development and for working capital purposes.

We recognized no revenues during the three and six months ended June 30, 2014. Our operating expenses were $4,507,584 and $5,879,104 during the three and six months ended June 30, 2014, respectively. We recognized a net loss from continuing operations of $5,835,407 for the six months ended June 30, 2014, compared to net income from continuing operations of $126,778 for the six months ended June 30, 2013. We recognized a net loss of $5,835,407 for the six months ended June 30, 2014, compared to a net loss of $129,290 for the six months ended June 30, 2013.

We expect to continue to recognize net losses for the foreseeable future. We intend to use our existing cash and cash equivalents for working capital and to fund the research and development of our technologies and products.

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Results of Operations for Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013

Revenues



We recognized no revenues during the three months ended June 30, 2014 or 2013.

Operating Expenses



Operating expenses were $4,507,584 during the three months ended June 30, 2014, representing a decrease of 44%, compared to $8,097,090 during the three months ended June 30, 2013. This decrease was primarily due to our repositioning as a specialty biopharmaceutical company and ceasing to operate various entertainment and sports events, including but not limited to our ProElite MMA business.

General and administrative expenses were $261,632 during the three months ended June 30, 2014, representing a decrease of 49%, compared to $514,041 during the three months ended June 30, 2013. This decrease was primarily due to our repositioning as a specialty biopharmaceutical company and ceasing to operate various entertainment and sports events, including but not limited to our ProElite MMA. During the three months ended June 30, 2013, we recognized a charge of $1,935,621 as a result of our decision during that time to suspend the operations of our ProElite MMA business. We expect that our general and administrative expenses will increase in future periods compared to the second quarter of 2014 as a result of increased personnel to support our efforts to advance our technologies and products.

As a result of our repositioning as a specialty biopharmaceutical company, we recognized $403,413 in research and development expenses during the three months ended June 30, 2014 compared to no research and development expenses recognized during the three months ended June 30, 2013. We expect that our research and development expenses will increase in future periods compared to the second quarter of 2014 and prior year periods due to our anticipated efforts to advance the research and development of our technologies and products.

Stock-based compensation expense was $141,315 during the three months ended June 30, 2014, representing a decrease of 94%, over $2,279,552 during the three months ended June 30, 2013. This decrease was primarily due to a significant number of options and warrants granted to officers and financial advisors during the three months ended June 30, 2013 compared with the same period in 2014.

Fair value of common stock exchanged for warrants and notes payable was $2,706,105 during the three months ended June 30, 2014, compared to $3,069,792 during the three months ended June 30, 2013. During the second quarter of 2014, we issued 552,738 shares of common stock, along with warrants to purchase an aggregate of 355,699 shares of our common stock, for notes payable in the aggregate principal amount of $1,050,000. These shares were valued at $4.00 per share resulting in the charge of $2,706,105 during such period. During the second quarter of 2013, we issued 1,023,264 shares of common stock in exchange for series E warrants that had a full-ratchet down anti-dilution provision and were extinguished. These shares of common stock were valued at $3.00 per share, which was the price at which we sold shares during the three months ended June 30, 2013, resulting in the charge of $3,069,792 during the second quarter of 2013.

Legal and professional services were $384,604 during the three months ended June 30, 2014, representing an increase of $94,001 from $290,603 during the three months ended June 30, 2013. This increase was related primarily to an increase in consulting expenses.

Depreciation and amortization was $610,515 during the three months ended June 30, 2014 compared to $7,481 during the three months ended June 30, 2013. Of this increase, $262,813 was related to amortization of $3,153,750 of total expense related to a July 2013 agreement with Maxim Group LLC to provide us general financial advisory and investment banking services for three years on a non-exclusive basis. In addition, $186,819 and $134,367 of this increase was related to amortizing the amount attributed to intangible assets of Canterbury and Paloma, respectively, over the lives of those intangible assets.

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With our decision to suspend operations of our ProElite MMA business during the three months ended June 30, 2013, the related goodwill was considered to be fully-impaired and a charge of $1,935,621 was taken during the three months ended June 30, 2013. No impairment charge was taken during the three months ended June 30, 2014.

Adjustments to Fair Value of Derivative Liability

In October 2012, we issued 1,000 shares of series E convertible preferred stock ("Series E"). In May 2011, we issued 8,700 shares of Series E. The warrants issued in conjunction with the Series E were determined to have an embedded derivative liability, which was revalued using Black-Scholes models upon the earlier of events that affect the value of this liability or the end of every quarter. The difference between the value of this derivative liability at December 31, 2012 and May 6, 2013 resulted in a gain of $9,216,927 during the three months ended June 30, 2013. These warrants were extinguished in May 2013; and thus, there were no adjustments during the three months ended June 30, 2014.

Gain on Extinguishment of Derivative Liability

In May 2013, the warrants issued in conjunction with the Series E that gave rise to the derivative liability were exchanged for common stock and extinguished. The value of the derivative liability was $1,409,530 for the three months ended June 30, 2013 and a gain of this amount resulted when the liability was extinguished. Since these warrants were extinguished in May 2013, there was no comparable gain or loss during the three months ended June 30, 2014.

Other (Income) Expense



Other income during the three months ended June 30, 2014 was income of $188,936, compared to other expense of $17,636 during the three months ended June 30, 2013. The other income during the three months ended June 30, 2014 related primarily to reduction of the deferred tax liability due to the amortization of the Canterbury and Paloma intangible assets.

Interest Expense



Interest expense was $136,584 during the three months ended June 30, 2014, an increase of $101,500 from $35,084 during the three months ended June 30, 2013.

Net Loss from Continuing Operations

We recognized a net loss from continuing operations of $4,455,232 for the three months ended June 30, 2014, compared to net income from continuing operations of $2,476,647 for the three months ended June 30, 2013. We expect to incur net losses from continuing operations in future periods for the foreseeable future as we plan to continue our efforts to advance our technologies and products.

Net Loss from Discontinued Operations

We recognized no net loss from discontinued operations during the three months ended June 30, 2014. We recognized a net loss from discontinued operations of $129,157 during the three months ended June 30, 2013. Operations of ProElite were suspended on June 30, 2013 and the Board of Directors determined to discontinue ProElite operations on March 31, 2014.

Results of Operations for Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013

Revenues



We recognized no revenues during the six months ended June 30, 2014 and 2013.

Operating Expenses



Operating expenses were $5,879,104 during the six months ended June 30, 2014, representing a decrease of 42%, over $10,189,702 during the six months ended June 30, 2013. This decrease was primarily due to our

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repositioning as a specialty biopharmaceutical company and ceasing to operate various entertainment and sports events, including but not limited to our ProElite MMA business.

General and administrative expenses were $873,477 during the six months ended June 30, 2014, representing a decrease of 23%, over $1,138,715 during the six months ended June 30, 2013. This decrease was primarily due to our repositioning as a specialty biopharmaceutical company and ceasing to operate various entertainment and sports events, including but not limited to our ProElite MMA business. During the six months ended June 30, 2013, we recognized a charge of $1,935,621 as a result of our decision during that time to suspend the operations of our ProElite MMA business. We expect that our general and administrative expenses will increase in future periods compared to the six months ended June 30, 2014 as a result of increased personnel to support our efforts to advance our technologies and products.

As a result of our repositioning as a specialty biopharmaceutical company, we recognized $403,413 in research and development expenses during the six months ended June 30, 2014 compared to no research and development expenses recognized during the six months ended June 30, 2013. We expect that our research and development expenses will increase in future periods compared to the first six months of 2014 and prior year periods due to our anticipated efforts to advance the research and development of our technologies and products.

Stock-based compensation expense was $291,200 during the six months ended June 30, 2014, representing a decrease of 92%, from $3,595,700 during the six months ended June 30, 2013. This decrease was primarily due to a significant number of options and warrants granted to officers and financial advisors during the six months ended June 30, 2013 compared with the same period in 2014. In May 2013, we issued 1,023,263 shares of common stock in exchange for series E warrants that had a full-ratchet down anti-dilution provision and were extinguished. These shares of common stock were valued at $3.00 per share, which was the price at which we sold 139,166 shares during the six months ended June 30, 2013, resulting in the charge of $3,069,792 during the six months ended June 30, 2013.

Fair value of common stock exchanged for warrants and notes payable was $2,706,105 during the six months ended June 30, 2014, compared to $3,069,792 during the six months ended June 30, 2013. During the second quarter of 2014, we issued 552,738 shares of common stock, along with warrants to purchase an aggregate of 355,699 shares of our common stock, in exchange for notes payable in the aggregate principal amount of $1,050,000. These shares were valued at $4.00 per share, resulting in the charge of $2,706,105 during the six months ended June 30, 2014. During the second quarter of 2013, we issued 1,023,264 shares of common stock in exchange for series E warrants that had a full-ratchet down anti-dilution provision and were extinguished. These shares of common stock were valued at $3.00 per share, which was the price at which we sold shares during the six months ended June 30, 2013, resulting in the charge of $3,069,792 during the six months ended June 30, 2013.

Legal and professional services were $516,290 during the six months ended June 30, 2014, representing an increase of $82,584 from $433,706 during the six months ended June 30, 2013. This increase was primarily due to an increase in consulting expenses.

Depreciation and amortization was $1,088,619 during the six months ended June 30, 2014 compared with $16,168 during the six months ended June 30, 2013. Of this increase, $525,625 is related to amortization of $3,153,750 of total expense related to a July 2013 agreement with Maxim Group LLC to provide us general financial advisory and investment banking services for three years on a non-exclusive basis. In addition, $373,638 and $134,367 of this increase was related to amortizing the amount attributed to intangible assets of Canterbury and Paloma, respectively, over the lives of those intangible assets.

With our decision to suspend the operations of our ProElite MMA business during the six months ended June 30, 2013, the related goodwill was considered to be fully-impaired and a charge of $1,935,621 was taken during the six months ended June 30, 2013. No impairment charge was taken during the six months ended June 30, 2014.

Adjustments to Fair Value of Derivative Liability

In October 2012, we issued 1,000 shares of Series E and in May 2011, we issued 8,700 shares of Series E. The warrants issued in conjunction with the Series E were determined to have an embedded derivative liability,

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which was revalued using Black-Scholes models upon the earlier of events that affect the value of this liability or the end of every quarter. The difference between the value of this derivative liability at December 31, 2012 and May 6, 2013 resulted in a gain of $8,980,077 during the six months ended June 30, 2013. These warrants were extinguished in May 2013; and thus, there were no adjustments during the six months ended June 30, 2014.

Gain on Extinguishment of Derivative Liability

In May 2013, the warrants issued in conjunction with the Series E that gave rise to the derivative liability were exchanged for common stock and extinguished. The value of the derivative liability was $1,409,530 for the six months ended June 30, 2013 and a gain of this amount resulted when the liability was extinguished. Since these warrants were extinguished in May 2013, there was no comparable gain or loss during the six months ended June 30, 2014.

Other (Income) Expense



Other income during the six months ended June 30, 2014 was $238,575, compared to other expense of $15,072 during the six months ended June 30, 2013. The other income (expense) for both periods relates primarily to the reduction of the deferred tax liability due to the amortization of the Canterbury and Paloma intangible assets.

Interest Expense



Interest expense was $194,878 during the six months ended June 30, 2014, an increase of $136,823 from $58,055 during the six months ended June 30, 2013.

Net Loss from Continuing Operations

We recognized a net loss from continuing operations of $5,835,407 for the six months ended June 30, 2014, compared to net income from continuing operations of $126,778 for the six months ended June 30, 2013. We expect to incur net losses from continuing operations in future periods for the foreseeable future as we plan to continue our efforts to advance our technologies and products.

Net Loss from Discontinued Operations

We recognized no net loss from discontinued operations during the six months ended June 30, 2014. We recognized a net loss from discontinued operations of $256,068 during the six months ended June 30, 2013. Operations of ProElite were suspended on June 30, 2013 and the Board of Directors determined to discontinue ProElite operations on March 31, 2014.

Dividends on Preferred Stock



Dividends on preferred stock were $171,625 during the six months ended June 30, 2013, which were related to dividends on series E preferred stock, which were extinguished during the six months ending June 30, 2013. As a result, there were no dividends on preferred stock during the six months ended June 30, 2014.

Liquidity and Capital Resources

Working Capital



Our financial position at the end of our second quarter of 2014 improved significantly compared to December 31, 2013 and the end of our first quarter of 2014, as a result of our recently completed private placement. Our working capital as of June 30, 2014 totaled $25,306,982 including $27,139,593 in cash and cash equivalents, compared to a negative working capital $(5,880,035), including $254,964 in cash and cash equivalents, as of December 31, 2013 and compared to a negative working capital $(8,016,821), including $222,071 in cash and cash equivalents, as of March 30, 2014.

During second quarter of 2014 and ending on July 10, 2014, we completed a private placement pursuant to which we raised approximately $35.6 million in gross proceeds and approximately $31.3 million in net proceeds, after paying placement agent fees, estimated offering expenses, and certain accounts payable. In the private

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placement, we issued an aggregate of 8,895,685 shares of our common stock and warrants to purchase an aggregate of 2,668,706 shares of common stock. The purchasers of common stock received warrants to purchase 0.3 shares of common stock for each share of common stock that such investors purchased in the private placement. The purchase price of each common stock/warrant unit was $4.00. Each warrant is exercisable into a share of common stock at an initial exercise price of $4.80 per share. We intend to use the net proceeds from the offering to fund our research and development and for working capital purposes.

The following table summarizes our liquidity and capital resources as of June 30, 2014 and December 31, 2013:

Liquidity and Capital Resources June 30, 2014 December 31, 2013 Cash and cash equivalents $ 27,139,593 $ 254,964 Prepaid expenses, deposits and other assets 2,298,629 2,743,319 Total current liabilities 4,131,240 8,878,318 Working capital $ 25,306,982$ (5,880,035 )



We expect to continue to incur net losses for the foreseeable future. We intend to use our existing cash and cash equivalents for working capital and to fund the research and development of our acquired technologies.

Cash Flows The following table sets forth our cash flows for the six months ended June 30, 2014 and 2013: Six Months Ended June 30, 2014 2013 Operating activities $ (5,121,098 )$ (850,994 ) Investing activities - - Financing activities 32,005,727 617,500



Net increase (decrease) in cash $ 26,884,629$ (233,494 )

Operating Activities



Negative operating cash flows for the six months ended June 30, 2014 reflect our net loss from continuing operations of $5,835,407, partially offset by non-cash items of $852,652 of depreciation and amortization and $291,201 of expense for warrants, options and stock compensation. Further, there was a net increase during the six months ended June 30, 2014 due to a loss on a related party note payable settlement and issuing shares for liabilities providing cash of $3,115,054. A decrease in accounts payable and accrued liabilities of $3,436,877 added to our negative operating cash flow for the six months ended June 30, 2014.

Negative operating cash flows during the six months ended June 30, 2013 reflect our net loss of $300,915, partially offset by non-cash items totaling $1,709,813, primarily related to a $8,980,077 gain on adjustment to fair value of derivative liabilities, a $1,409,530 gain on extinguishment of derivative liability offset by a $3,607,283 expense for warrant, stock and option compensation expenses, a $3,069,792 charge for fair value of common stock exchanged for warrants and a $1,935,621 expense for impairment of assets. Cash was further adjusted by a source of funds from working capital of $1,159,734, primarily related to $836,650 provided by other accrued expenses and liabilities and $242,547 in deferred salaries.

Investing Activities



Capital constraints resulted in no cash used in investing activities during the six months ended June 30, 2014 or 2013.

Financing Activities



Net cash provided by financing activities was $32,005,727 during the six months ended June 30, 2014 compared to $617,500 during the six months ended June 30, 2013. Net cash provided by financing activities during

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the current year was attributable primarily to proceeds from our recent private placement. Net cash provided by financing activities during the prior year period resulted from proceeds on notes payable and proceeds from the issuance of common stock.

Capital Requirements



We expect to incur substantial expenses and generate significant operating losses as we continue to execute our business strategy including:

synthesis and formulation of our products; conducting pre-clinical and clinical trials to pursue our



product development initiatives;

securing facilities to establish a principal corporate



and administrative headquarters and such other facilities as necessary to pursue our research and development capabilities;

hiring additional personnel for managerial, research and



development, operations and other functions; and

implementing improved operational, financial and management systems.



To date, we have used primarily equity and debt financings to fund our ongoing business operations and short-term liquidity needs, and we expect to continue this practice for the foreseeable future. During the second quarter of 2014 and ending on July 10, 2014, we completed a private placement pursuant to which we raised approximately $35.6 million in gross proceeds and $31.3 million in net proceeds, after paying placement agent fees, estimated offering expenses and certain accounts payable. In the private placement, we issued an aggregate of 8,895,685 shares of our common stock and warrants to purchase an aggregate of 2,668,706 shares of common stock. The purchasers of common stock received warrants to purchase 0.3 shares of common stock for each share of common stock that such investors purchased in the private placement. The purchase price of each common stock/warrant unit was $4.00. Each warrant is exercisable into a share of common stock at an initial exercise price of $4.80 per share. We filed a registration statement on Form S-1 with the SEC on July 14, 2014 registering the offering and resale of 11,633,885 shares of our common stock, including the outstanding shares of common stock and shares of common stock issuable upon exercise of the warrants issued in the private placement. This registration statement was declared effective by the SEC on July 31, 2014. We intend to use the net proceeds from the offering to fund our research and development and for working capital purposes.

We believe our cash and cash equivalents as of June 30, 2014 will be sufficient to fund our planned operations for at least the next 12 months. However, we may require significant additional funds earlier. Accordingly, there is no assurance that we will not need or seek additional funding prior to such time. We may elect to raise additional funds even before we need them if market conditions for raising additional capital are favorable.

As of June 30, 2014, we did not have any existing credit facilities under which we could borrow funds. We may seek to raise additional funds through various sources, such as equity and debt financings, or through strategic collaborations and license agreements. We can give no assurances that we will be able to secure additional sources of funds to support our operations, or if such funds are available to us, that such additional financing will be sufficient to meet our needs or on terms acceptable to us. This risk may increase if economic and market conditions deteriorate. If we are unable to obtain additional financing when needed, we may need to terminate, significantly modify or delay the development of our product candidates and our operations, or we may need to obtain funds through collaborators that may require us to relinquish rights to our technologies or product candidates that we might otherwise seek to develop or commercialize independently. If we are unable to obtain additional financing when needed, we may be forced to explore strategic alternatives, such as selling or merging our company or winding down our operations and liquidating our company.

To the extent that we raise additional capital through the sale of common stock, the interests of our current stockholders may be diluted. If we issue preferred stock or convertible debt securities, it could affect the rights of our common stockholders or reduce the value of our common stock. In particular, specific rights granted to future holders of preferred stock or convertible debt securities may include voting rights, preferences as to dividends and

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liquidation, conversion and redemption rights, sinking fund provisions, and restrictions on our ability to merge with or sell our assets to a third party. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.

Contractual Obligations



Set forth below is information concerning our known contractual obligations as of June 30, 2014 that are fixed and determinable by year starting with the twelve months ending June 30, 2015.

Beyond Total 2015 2016 2017 2017 Notes payable $ 915,000$ 915,000 $ - $ - $ - Rent obligations 1,212,495 677,738 339,958 103,799 - Accrued board fees 210,625 210,625 - - - Consulting agreement 150,000 150,000 - - - Employee contracts 3,808,014 835,000 1,538,014 1,435,000 - Accrued interest 592,609 592,609 - - - Total $ 6,797,743$ 3,380,972$ 1,877,972$ 1,538,799 $ -



Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, as defined by the rules and regulations of the SEC that have or are reasonably likely to have a material effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources. As a result, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these arrangements.

Critical Accounting Policies



Certain of our critical accounting estimates require the application of significant judgment by management in selecting the appropriate assumptions in determining the estimate. By their nature, these judgments are subject to an inherent degree of uncertainty. We develop these judgments based on our historical experience, terms of existing contracts, our observance of trends in the industry, information provided by our customers and information available from other outside sources, as appropriate. Actual results may differ from these judgments under different assumptions or conditions. Different, reasonable estimates could have been used for the current period. Additionally, changes in accounting estimates are reasonably likely to occur from period to period. Both of these factors could have a material impact on the presentation of our financial condition, changes in financial condition or results of operations. The following are our critical accounting policies and estimates:

Goodwill and Intangible Assets

Goodwill is the excess of the cost of an acquired entity over the net amounts assigned to tangible and intangible assets acquired and liabilities assumed. We apply ASC 350 "Goodwill and Other Intangible Assets," which requires allocating goodwill to each reporting unit and testing for impairment using a two-step approach.

Goodwill and intangible assets as of June 30, 2014 and December 31, 2013 were as follows: June 30, 2014 (Unaudited) December 31, 2013 Intangible Intangible Assets Goodwill Assets Goodwill Canterbury Group $ 7,318,044$ 7,642,825$ 7,691,682$ 7,642,825 Paloma 6,315,261 3,144,857 - - VasculoMedics 159,492 454,305 - - $ 13,792,797$ 11,241,987$ 7,691,682$ 7,642,825 32



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We review the value of intangible assets and related goodwill as part of our annual reporting process, which generally occurs in February or March of each calendar year. In between valuations, we conduct additional tests if circumstances warrant such testing.

To review the value of intangible assets and related goodwill as December 31, 2013, we followed Accounting Standards Update ("ASU") 2011-08 and first examined the facts and circumstances for each event or business to determine if it was more likely than not that an impairment had occurred. If this examination suggested it was more likely that an impairment had occurred, we then compare discounted cash flow forecasts related to the asset with the stated value of the asset on the balance sheet. The objective is to determine the value of each asset to an industry participant who is a willing buyer not under compulsion to buy and we are a willing seller not under compulsion to sell. Revenues from these assets are forecasted based on the assumption they are standalone entities. These forecasts are discounted at a range of discount rates determined by taking the risk-free interest rate at the time of valuation, plus premiums for equity risk to small companies in general, for factors specific to us and the business. As of June 30, 2014, we determined that the fair value of our businesses for accounting purposes was equal to our market capitalization of approximately $74,900,000, and that the total for goodwill and intangible assets of $25,034,784 was 33% of this market capitalization on the consolidated balance sheet as of June 30, 2014 on a company-wide basis. However, it is possible that impairment may have occurred on a reporting-unit basis and we intend to test impairment annually on a reporting-unit basis beginning with the year ending December 31, 2014. As of December 31, 2013, we determined that the fair value of our businesses for accounting purposes was equal to our market capitalization of approximately $17,400,000, which was 113% of the $15,334,507 goodwill and intangible assets on our consolidated balance sheet as of December 31, 2013.

If we determine that the discount factor for cash flows should be substantially increased, or in the event that we will not be able to begin operations when planned, or that the facts and circumstances for each asset have changed, it is possible that the values for intangible assets currently on our consolidated balance sheets could be substantially reduced or eliminated, which could result in a maximum charge to operations equal to the current carrying value of our intangible assets and goodwill of $25,034,784 as of June 30, 2014.

Income Taxes



We utilize ASC Topic 740 "Accounting for Income Taxes," which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that were included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The provision for income taxes represents the tax payable for the period and the change during the period in deferred tax assets and liabilities.

As of December 31, 2013, we had a deferred tax asset of $26,274,933, that was fully reserved and a net operating loss carryforward of $47,728,300 for Federal tax purposes and $44,482,850 for state tax purposes. We will continue to monitor all available evidence and reassess the potential realization of our deferred tax assets. The net operating loss carryforwards for 2013 begin expiring in 2021. From December 31, 2012 to June 30, 2014, the outstanding shares of our common stock increased from 890,837 to 18,391,193. This increase in the number of shares outstanding constitutes a change of ownership, under the provisions of Internal Revenue Code Section 382 and similar state provisions, and is likely to significantly limit our ability to utilize these net operating loss carryforwards to offset future income. Accordingly, we recorded a 100% valuation allowance of the deferred tax assets at June 30, 2014 and December 31, 2013.

As of June 30, 2014 and December 31, 2013, we had a net operating loss carryforwards as follows: June 30, December 31, 2014 2013 (unaudited) Combined NOL Carryforwards: Federal $ 53,563,707$ 47,728,300 California $ 50,318,257$ 44,482,850 33



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We amortize stock-based awards under ASC Topic 718 "Share Based Payment" on a straight-line method over the related service period of the awards taking into account the fair value of the stock option as determined by the Black-Scholes option pricing model, the effects of the employees' expected exercise and post-vesting employment termination behavior.

We account for equity instruments issued to non-employees in accordance with ASC Topic 718 and Emerging Issues Task Force Issue No. 96-18. The fair value of each option granted is estimated as of the grant date using the Black-Scholes option pricing model.

Special Note Regarding Forward-Looking Statements

This report contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact included in this report that address activities, events or developments that we expect, believe or anticipate will or may occur in the future are forward-looking statements including, in particular, the statements about our plans, objectives, strategies and prospects regarding, among other things, our financial condition, operating results and business. We have identified some of these forward-looking statements with words like "believe," "may," "will," "should," "could," "expect," "intend," "plan," "predict," "anticipate," "estimate" or "continue," other words and terms of similar meaning and the use of future dates. These forward-looking statements are based on current expectations about future events affecting us and are subject to uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control and could cause our actual results to differ materially from those matters expressed or implied by our forward-looking statements. Forward-looking statements (including oral representations) are only predictions or statements of current plans and can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties, including, among other things, risks associated with:

our history of operating losses and negative cash flow; our ability to generate revenues and obtain profitability;



our ability to obtain additional capital when needed or on acceptable terms and the effect of any future equity or debt financings on our stockholders;

our ability to successfully choose which of our potential products should be developed and in which order;

the potential for changes in our focus on certain products to other products;



our success in developing new products and technologies, obtaining any required regulatory approvals for such products and technologies and obtaining market acceptance and commercial success with respect to such new products and technologies;

the timing of when, if ever, our products will be approved and introduced commercially;

the size of the market and the level of market acceptance of our products if and when they are commercialized;

our ability to acquire or invest in new businesses, products and technologies by way of a license, acquisition or merger transaction and the effect of such a transaction on our stockholders, business, operating results and financial condition;

our ability to protect our proprietary technology and to operate our business without infringing the proprietary rights of third parties;

our ability to compete in a competitive industry; our dependence upon key employees; 34



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our ability to maintain effective internal control over financial reporting;



changes in applicable laws or regulations and our failure to comply with applicable laws and regulations;

changes in generally accepted accounting principles and the effect of new accounting pronouncements;

conditions and changes in the biopharmaceutical industry or in general economic or business conditions; and

pending and future litigation, which could have an adverse effect on our business, financial condition or operating results.

For more information regarding these and other uncertainties and factors that could cause our actual results to differ materially from what we have anticipated in our forward-looking statements or otherwise could materially adversely affect our business, financial condition or operating results, see "Part I - Item 1A. Risk Factors" of our annual report on Form 10-K/A for the fiscal year ended December 31, 2013. The risks and uncertainties described above and in "Part I - Item 1A. Risk Factors" of our annual report on Form 10-K/A for the fiscal year ended December 31, 2013 are not exclusive and further information concerning us and our business, including factors that potentially could materially affect our financial results or condition, may emerge from time to time. We assume no obligation to update, amend or clarify forward-looking statements to reflect actual results or changes in factors or assumptions affecting such forward-looking statements. We advise you, however, to consult any further disclosures we make on related subjects in our future annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K we file with or furnish to the Securities and Exchange Commission.


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