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Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2014

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 001-32157

Mast Therapeutics, Inc.

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		84-1318182 (I.R.S. Employer Identification No.)
12390 El Camino Real, Suite 150, San Diego, CA		92130
(Address of principal executive offices)		(Zip Code)

(858) 552-0866

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

The number of shares outstanding of the registrant’s common stock, $0.001 par value per share, as of April 30, 2014 was 114,136,502.

TABLE OF CONTENTS


		Page

PART I	FINANCIAL INFORMATION		1

Item 1.	Financial Statements (Unaudited)		1

	a. Condensed Consolidated Balance Sheets as of March 31, 2014 and December 31, 2013		1

	b. Condensed Consolidated Statements of Operations and Comprehensive Income/(Loss) for the three months ended March 31, 2014 and 2013 and for the period from inception (June 12, 1996) through March 31, 2014		2

	c. Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2014 and 2013 and for the period from inception (June 12, 1996) through March 31, 2014		3

	d. Notes to Condensed Consolidated Financial Statements		5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		12

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		21

Item 4.	Controls and Procedures		21

PART II	OTHER INFORMATION		21

Item 1.	Legal Proceedings		21

Item 1A.	Risk Factors		21

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		22

Item 3.	Defaults Upon Senior Securities		22

Item 4.	Mine Safety Disclosures		22

Item 5.	Other Information		22

Item 6.	Exhibits		22

SIGNATURES			23

(i)

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

Mast Therapeutics, Inc. and Subsidiaries

(A Development Stage Enterprise)

Condensed Consolidated Balance Sheets

(Unaudited)


	March 31, 2014			December 31, 2013
Assets
Current assets:
Cash and cash equivalents	$	29,848,152		$	25,681,092
Investment securities		19,772,011			18,711,448
Prepaid expenses and other current assets		992,474			1,135,490

Total current assets		50,612,637			45,528,030
Property and equipment, net		106,495			105,747
In-process research and development		8,549,000			6,549,000
Goodwill		3,006,883			3,006,883
Other assets		83,542			60,312

Total assets	$	62,358,557		$	55,249,972

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	1,449,667		$	963,947
Accrued liabilities		3,942,895			2,495,088
Accrued compensation and payroll taxes		772,765			1,374,343

Total current liabilities		6,165,327			4,833,378
Deferred income tax liability		3,403,675			2,608,755

Total liabilities		9,569,002			7,442,133

Stockholders’ equity:
Common stock, $0.001 par value; 500,000,000 shares authorized; 113,721,647 and 102,710,286 shares issued and outstanding at March 31, 2014 and December 31, 2013, respectively		113,722			102,710
Additional paid-in capital		265,501,425			254,154,693
Accumulated other comprehensive loss		(26,185	)		(20,738	)
Deficit accumulated during the development stage		(212,799,407	)		(206,428,826	)

Total stockholders’ equity		52,789,555			47,807,839

Total liabilities and stockholders’ equity	$	62,358,557		$	55,249,972

See accompanying notes to unaudited condensed consolidated financial statements.

(1)

Mast Therapeutics, Inc. and Subsidiaries

(A Development Stage Enterprise)

Condensed Consolidated Statements of Operations and Comprehensive Income/(Loss)

(Unaudited)


	Three months ended March 31,						Inception (June 12, 1996) Through
	2014			2013			March 31, 2014
Revenues:
Net sales	$	—		$	—		$	174,830
Licensing revenue		—			—			1,300,000
Grant revenue		—			—			618,692

Total net revenues		—			—			2,093,522
Cost of goods sold		—			—			51,094

Gross margin		—			—			2,042,428

Operating expenses:
Research and development		4,280,817			3,442,912			103,240,536
Selling, general and administrative		2,266,233			2,112,706			78,450,726
Transaction-related expenses		280,352			27,500			1,031,644
Depreciation and amortization		11,450			9,795			11,076,202
Write-off of in-process research and development		—			—			10,422,130
Goodwill impairment		—			—			5,702,130
Equity in loss of investee		—			—			178,936

Total operating expenses		6,838,852			5,592,913			210,102,304

Loss from operations		(6,838,852	)		(5,592,913	)		(208,059,876	)
Reduction of fair value of warrants		—			—			(12,239,688	)
Interest income		15,346			14,416			4,907,822
Interest expense		—			—			(191,729	)
Other income/(expense), net		452,925			(2,370	)		581,278

Loss before cumulative effect of change in accounting principle		(6,370,581	)		(5,580,867	)		(215,002,193	)
Cumulative effect of change in accounting principle		—			—			(25,821	)

Net loss		(6,370,581	)		(5,580,867	)		(215,028,014	)
Preferred stock dividends		—			—			(621,240	)
Deemed dividends on preferred stock		—			—			(10,506,683	)

Net loss applicable to common stock	$	(6,370,581	)	$	(5,580,867	)	$	(226,155,937	)

Net loss per common share – basic and diluted	$	(0.06	)	$	(0.12	)

Weighted average shares outstanding – basic and diluted		105,053,762			46,265,286

Comprehensive Income/(Loss):
Net loss	$	(6,370,581	)	$	(5,580,867	)	$	(215,028,014	)
Other comprehensive gains/(losses)		(5,447	)		(8,448	)		(24,029	)

Comprehensive net loss	$	(6,376,028	)	$	(5,589,315	)	$	(215,052,043	)

See accompanying notes to unaudited condensed consolidated financial statements.

(2)

Mast Therapeutics, Inc. and Subsidiaries

(A Development Stage Enterprise)

Condensed Consolidated Statements of Cash Flows

(Unaudited)


	Three months ended March 31,						Inception (June 12, 1996) through
	2014			2013			March 31, 2014
Cash flows from operating activities:
Net loss	$	(6,370,581	)	$	(5,580,867	)	$	(215,028,014	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		11,450			9,795			10,626,204
Loss on disposals of equipment		—			—			61,315
Loss on fair value of warrants		—			—			12,239,688
Loss/(gain) on change in fair value of contingent consideration		—			27,500			(1,493,907	)
Gain on bargain purchase		(452,944	)		—			(452,944	)
Amortization of debt discount		—			—			450,000
Forgiveness of employee receivable		—			—			30,036
Impairment loss – write-off of goodwill		—			—			5,702,130
Share-based compensation expense related to employee stock options and restricted stock issued		399,454			351,556			13,548,600
Expenses related to options issued to non-employees		—			—			204,664
Expenses paid by issuance of common stock		—			—			1,341,372
Expenses paid by issuance of warrants		—			—			573,357
Expenses paid by issuance of preferred stock		—			—			142,501
Expenses related to stock warrants issued		—			—			612,000
Equity in loss of investee		—			—			178,936
In-process research and development		—			—			10,422,130
Write-off of license agreement		—			—			152,866
Impairment of equipment		—			—			510,739
Cumulative effect of change in accounting principle		—			—			25,821
Amortization of premium / (accretion of discount) on investments in securities		—			—			(1,571,502	)
Changes in assets and liabilities, net of effect of acquisitions:
Decrease/(increase) in prepaid expenses and other assets		202,314			140,213			(1,243,170	)
(Decrease)/increase in accounts payable and accrued liabilities		(61,996	)		563,439			4,739,790

Net cash used in operating activities		(6,272,303	)		(4,488,364	)		(158,227,388	)

Cash flows from investing activities:
Purchases of certificates of deposit		(6,745,020	)		(2,988,000	)		(52,695,234	)
Proceeds from maturities of certificates of deposit		5,679,000			6,393,000			32,618,330
Proceeds from sale of certificate of deposit		—			—			248,000
Purchases of other investment securities		—			—			(111,183,884	)
Proceeds from maturities and sales of other investment securities		—			—			112,788,378
Purchases of property and equipment		(6,620	)		(4,725	)		(1,790,205	)
Proceeds from sale of property and equipment		—			—			66,920
Cash obtained through acquisitions, net of cash paid		3,534,480			—			3,566,875
Payment on obligation under license agreement		—			—			(106,250	)
Issuance of note receivable – related party		—			—			(35,000	)
Payments on note receivable		—			—			405,993
Advance to investee		—			—			(90,475	)
Cash transferred in rescission of acquisition		—			—			(19,475	)
Cash received in rescission of acquisition		—			—			230,000

Net cash provided by/(used in) investing activities		2,461,840			3,400,275			(15,996,027	)

(3)


	Three months ended March 31,						Inception (June 12, 1996) through
	2014			2013			March 31, 2014
Cash flows from financing activities:
Proceeds from sale of common stock		8,293,398			—			160,049,769
Proceeds from exercise of stock options		—			—			714,561
Proceeds from sale or exercise of warrants		—			—			14,714,258
Proceeds from sale of preferred stock		—			—			44,474,720
Repurchase of Subject to Vesting Shares		—			—			(1,454	)
Repurchase of warrants		—			—			(55,279	)
Payments for financing and offering costs		(315,875	)		—			(16,573,789	)
Payments on notes payable and long-term debt		—			—			(605,909	)
Proceeds from issuance of notes payable and detachable warrants		—			—			1,344,718
Cash paid in lieu of fractional shares for reverse stock split		—			—			(146	)

Net cash provided by financing activities		7,977,523			—			204,061,449

Effect of exchange rate changes on cash		—			(2,428	)		10,118
Net increase/(decrease) in cash and cash equivalents		4,167,060			(1,090,517	)		29,848,152
Cash and cash equivalents at beginning of period		25,681,092			22,500,440			—

Cash and cash equivalents at end of period	$	29,848,152		$	21,409,923		$	29,848,152

See accompanying notes to unaudited condensed consolidated financial statements.

(4)

Mast Therapeutics, Inc. and Subsidiaries

(A Development Stage Enterprise)

Notes to Condensed Consolidated Financial Statements (Unaudited)

1. Basis of Presentation

Mast Therapeutics, Inc., a Delaware corporation (“Mast Therapeutics,” “we” or “our company”), prepared the unaudited interim condensed consolidated financial statements included in this report in accordance with United States generally accepted accounting principles (“U.S. GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (“SEC”) related to quarterly reports on Form 10-Q. Accordingly, they do not include all of the information and disclosures required by U.S. GAAP for annual audited financial statements and should be read in conjunction with our audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the SEC on March 26, 2014 (“2013 Annual Report”). The condensed consolidated balance sheet as of December 31, 2013 included in this report has been derived from the audited consolidated financial statements included in the 2013 Annual Report. In the opinion of management, these condensed consolidated financial statements include all adjustments (consisting of normal recurring adjustments) necessary for a fair statement of the financial position, results of operations and cash flows for the periods presented. The results of operations for the interim periods shown in this report are not necessarily indicative of the results that may be expected for any future period, including the full year.

We are a biopharmaceutical company focused on developing therapies for serious or life-threatening diseases. We have devoted substantially all of our resources to research and development (“R&D”) and acquisition of our product candidates. We have not yet marketed or sold any products or generated any significant revenue. Through our acquisition of SynthRx, Inc., a development-stage, privately-held Delaware corporation (“SynthRx”), in 2011, we acquired our Membrane Adhesion & Sealant Technology (MAST) platform, which includes proprietary poloxamer-related data and know-how derived from over two decades of clinical, nonclinical and manufacturing experience, and we are leveraging the MAST platform to develop MST-188, our lead product candidate, for serious or life-threatening diseases and conditions typically characterized by impaired microvascular blood flow and damaged cell membranes.

In February 2014, we completed the acquisition of Aires Pharmaceuticals, Inc., a development-stage, privately-held Delaware corporation (“Aires”), which is developing AIR001, an intermittently nebulized form of sodium nitrite, to treat pulmonary vascular disorders.

2. Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. On an ongoing basis, we evaluate our estimates, including estimates related to R&D expenses, in-process research and development (“IPR&D”), goodwill and share-based compensation expenses. We base our estimates on historical experience and various other relevant assumptions we believe to be reasonable under the circumstances. Actual results may differ from these estimates.

3. Acquisition of Aires

In February 2014, we completed the acquisition of Aires in an all-stock transaction pursuant to the terms of an agreement and plan of merger, dated February 7, 2014, by and among us, AP Acquisition Sub, Inc., a wholly-owned subsidiary of ours, Aires, and a stockholders’ representative (the “Merger Agreement”). Aires survived the merger transaction as a wholly-owned subsidiary of ours. Aires’ lead product candidate is AIR001 (sodium nitrite) inhalation solution and, prior to the acquisition, Aires had been focused on developing AIR001 in pulmonary arterial hypertension.

Upon completion of the merger, we issued an aggregate of 1,049,706 unregistered shares of our common stock to former Aires stockholders and, following a six-month holdback period, we will issue up to 4,198,830 additional unregistered shares of our common stock, in the aggregate, to former Aires stockholders, subject to adjustment to satisfy indemnification obligations of the former Aires stockholders to us, if any, in accordance with the merger agreement. There are no milestone or earn-out payments under the merger agreement; therefore, the total merger consideration will not exceed 5,248,536 shares.

We accounted for the acquisition of Aires in accordance with Accounting Standards Codification (“ASC”) Topic 805, Business Combinations (“ASC Topic 805”). The total purchase price of the acquisition is approximately $3.2 million. We calculated the purchase price by first multiplying the estimated total number of shares of our common stock to be issued by $0.80, which was the closing price per share of our common stock on February 27, 2014, the acquisition date. Then, we applied a discount factor to account for lack of market liquidity due to the restrictions on transfer of the securities for a period of six months following the acquisition in accordance with stockholder agreements we entered into with the former Aires stockholders and the fact that the shares are unregistered and we have no obligation to register them for resale.

(5)

Under the acquisition method of accounting, the total purchase price is allocated to Aires’ net tangible and intangible assets and liabilities based on their estimated fair values as of the acquisition date. The table below summarizes the preliminary estimated fair values of Aires’ net tangible and intangible assets and liabilities on the acquisition date. The purchase price allocations are preliminary and subject to change as more detailed analyses are completed and additional information with respect to the fair values of the assets and liabilities acquired becomes available.


Cash and cash equivalents	$	3,534,480
Prepaid expenses and other assets		85,681
In-process research and development		2,000,000

Total assets:		5,620,161
Accounts payable and accrued liabilities		1,212,297
Deferred tax liability		794,920

Total liabilities:		2,007,217

Net assets acquired	$	3,612,944

The preliminary estimated fair value of the net assets acquired exceeds the purchase price by approximately $0.5 million. Accordingly, we recognized the $0.5 million excess as a bargain purchase gain in other income/(expense), net in our condensed consolidated statements of operations and comprehensive income/(loss). We were able to realize a gain because Aires was in a distressed sale situation. Aires lacked sufficient capital to continue operations and was unable to secure additional capital in the timeframe it required.

Acquired In-Process Research and Development

Acquired IPR&D is the estimated fair value of the AIR001 program as of the acquisition date. We determined that the estimated fair value of the AIR001 program was $2.0 million as of the acquisition date using the Multi-Period Excess Earnings Method, or MPEEM, which is a form of the income approach. Under the MPEEM, the fair value of an intangible asset is equal to the present value of the asset’s incremental after-tax cash flows (excess earnings) remaining after deducting the market rates of return on the estimated value of contributory assets (contributory charge) over its remaining useful life.

To calculate fair value of the AIR001 program under the MPEEM, we used probability-weighted, projected cash flows discounted at a rate considered appropriate given the significant inherent risks associated with drug development by development-stage companies. Cash flows were calculated based on estimated projections of revenues and expenses related to AIR001 and then reduced by a contributory charge on requisite assets employed. Contributory assets included debt-free working capital, net fixed assets and assembled workforce. Rates of return on the contributory assets were based on rates used for comparable market participants. Cash flows were assumed to extend through a seven-year market exclusivity period. The resultant cash flows were then discounted to present value using a weighted-average cost of equity capital for companies with profiles substantially similar to that of Aires, which we believe represents the rate that market participants would use to value the assets. We compensated for the phase of development of the program by applying a probability factor to our estimation of the expected future cash flows. The projected cash flows were based on significant assumptions, including the indication in which we will pursue development of AIR001, the time and resources needed to complete the development and regulatory approval of AIR001, estimates of revenue and operating profit related to the program considering its stage of development, the life of the potential commercialized product, market penetration and competition, and risks associated with achieving commercialization, including delay or failure to obtain regulatory approvals to conduct clinical studies, failure of clinical studies, delay or failure to obtain required market clearances, and intellectual property litigation.

Deferred Income Tax Liability

The $0.8 million recorded for deferred income tax liability resulting from the acquisition reflects the tax impact of the difference between the book basis and tax basis of acquired IPR&D. Such deferred income tax liability cannot be used to offset deferred tax assets when analyzing our end of year valuation allowance as the acquired IPR&D is considered to have an indefinite life until we complete or abandon development of AIR001.

(6)

Pro Forma Information

The following unaudited pro forma information presents our condensed consolidated results of operations as if the acquisition of Aires had occurred on January 1, 2013:


	Three months ended March 31,
	2014			2013
Revenues	$	—		$	397,857
Loss from operations		(7,532,447	)		(9,085,094	)
Net loss applicable to common stock		(7,516,795	)		(9,072,377	)

The $0.4 million of revenues consists of amounts recognized by Aires during the three months ended March 31, 2013 as a result of a payment by a third-party partner pursuant to a collaboration agreement. The agreement was terminated in the fourth quarter of 2013. Aires recognized no revenues in 2014.

The above unaudited pro forma financial information includes the following nonrecuring adjustments directly attributable to the acquisition:


	Three months ended March 31,
	2014		2013
Transaction-related expenses	$	1,315,522	$	(1,315,522	)

Transaction-related expenses include $0.9 million of severance payments to former executive officers of Aires pursuant to employment agreements between them and Aires.

The above unaudited pro forma condensed consolidated financial information is presented for illustrative purposes only. It is not necessarily indicative of what the results of operations actually would have been had the acquisition been completed on the date indicated. In addition, it does not purport to project the future operating results of the combined entity.

The operations of Aires were consolidated with our operations as of the closing of the acquisition on February 27, 2014. Accordingly, Aires’ total operating expenses of $0.3 million for the three months ended March 31, 2014 were included in our condensed consolidated statements of operations and comprehensive income/(loss).

4. Goodwill and IPR&D

At March 31, 2014 and December 31, 2013, our goodwill and IPR&D consisted of the following:


	March 31,		December 31,
	2014		2013
Goodwill	$	3,006,883	$	3,006,883
IPR&D
Acquired IPR&D related to SynthRx acquisition		6,549,000		6,549,000
Acquired IPR&D related to Aires acquisition		2,000,000		—

Total goodwill and IPR&D	$	11,555,883	$	9,555,883

Our goodwill represents the difference between the total purchase price for SynthRx and the aggregate fair values of tangible and intangible assets acquired, less liabilities assumed. We test our goodwill for impairment annually as of September 30 and between annual tests if we become aware of an event or a change in circumstances that would indicate the carrying amount may be impaired.

Our IPR&D consists of the estimated fair values of the MST-188 and AIR001 programs as of their respective acquisition dates. We test our acquired IPR&D for impairment annually as of September 30 and between annual tests if we become aware of an event or a change in circumstances that would indicate the carrying amount may be impaired.

(7)

5. Investment Securities

Investment securities are marketable equity or debt securities. All of our investment securities are “available-for-sale” securities and carried at fair value. Fair value for securities with short maturities and infrequent secondary market trades typically is determined by using a curve-based evaluation model that utilizes quoted prices for similar securities. The evaluation model takes into consideration the days to maturity, coupon rate and settlement date convention. Net unrealized gains or losses on these securities are included in accumulated other comprehensive loss, which is a separate component of stockholders’ equity. Realized gains and realized losses are included in other income/(expense), while amortization of premiums and accretion of discounts are included in interest income. Interest and dividends on available-for-sale securities are included in interest income. We periodically evaluate our investment securities for impairment. If we determine that a decline in fair value of any investment security is other than temporary, then the cost basis would be written down to fair value and the decline in value would be charged to earnings.

Our investment securities are under the custodianship of a major financial institution and consist of FDIC-insured certificates of deposit. We have classified all of our available-for-sale investment securities, including those with maturities beyond one year from the date of purchase, as current assets on our consolidated balance sheets because we consider them to be highly liquid and available for use, if needed, in current operations. As of March 31, 2014, $4.2 million of our investment securities had contractual maturity dates of more than one year and less than or equal to 18 months and none were greater than 18 months.

At March 31, 2014, the fair value of our investment securities was $19,772,011. The cost basis of such investments was $19,796,040 and our net unrealized losses were $24,029.

6. Fair Value of Financial Instruments

Our investment securities are carried at fair value. The fair value of financial assets and liabilities is measured under a framework that establishes “levels” which are defined as follows: (i) Level 1 fair value is determined from observable, quoted prices in active markets for identical assets or liabilities; (ii) Level 2 fair value is determined from inputs, other than Level 1 inputs, that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities, and (iii) Level 3 fair value is determined using the entity’s own assumptions about the inputs that market participants would use in pricing an asset or liability.

The fair values at March 31, 2014 and December 31, 2013 of our investment securities are summarized in the following table:


	Total Fair		Fair Value Determined Under:
	Value		(Level 1)		(Level 2)		(Level 3)
Investment securities at March 31, 2014	$	19,772,011	$	—	$	19,772,011	$	—
Investment securities at December 31, 2013	$	18,711,448	$	—	$	18,711,448	$	—

7. Property and Equipment

Property and equipment are stated at cost, less accumulated depreciation. Property and equipment are depreciated using the straight-line method over the estimated useful lives of the assets, which generally is three to five years. Leasehold improvements are amortized over the economic life of the asset or the lease term, whichever is shorter. Repairs and maintenance are expensed as incurred.

8. Accrued Liabilities

Accrued liabilities at March 31, 2014 and December 31, 2013 were as follows:


	March 31,		December 31,
	2014		2013
Accrued R&D agreements and study expenses	$	3,552,026	$	2,273,860
Accrued acquisition costs		295,325		44,640
Other accrued liabilities		95,544		176,588

Total accrued liabilities	$	3,942,895	$	2,495,088

(8)

Approximately $0.8 million of the accrued R&D agreements and study expenses are assumed liabilities recorded through the acquisition of Aires.

9. Share-Based Compensation Expense

Estimated share-based compensation expense related to equity awards granted to our employees and non-employee directors for the three months ended March 31, 2014 and 2013 was as follows:


	Three months ended March 31,
	2014		2013
Selling, general and administrative expense	$	340,498	$	314,428
Research and development expense		58,956		37,128

Share-based compensation expense	$	399,454	$	351,556

During the three months ended March 31, 2014, the only equity awards granted to our employees and non-employee directors were stock option awards. The following table summarizes such equity award activity:


	Shares Underlying Option Awards		Weighted- Average Exercise Price
Outstanding at December 31, 2013		7,304,828	$	1.38
Granted		2,186,900	$	0.49
Exercised		—	$	—
Cancelled/forfeited/expired		—	$	—

Outstanding at March 31, 2014		9,491,728	$	1.18

At March 31, 2014, total unrecognized estimated compensation cost related to non-vested employee and non-employee director share-based awards granted prior to that date was $3.1 million, which is expected to be recognized over a weighted-average period of 2.9 years.

10. Net Loss Per Common Share

Basic and diluted net loss per common share was calculated by dividing the net loss applicable to common stock for the three months ended March 31, 2014 and 2013 by the weighted-average number of common shares outstanding during those periods, respectively, without consideration for outstanding common stock equivalents because their effect would have been anti-dilutive. Common stock equivalents are included in the calculation of diluted earnings per common share only if their effect is dilutive. For the periods presented, our outstanding common stock equivalents consisted of options and warrants to purchase shares of our common stock. The weighted-average number of those common stock equivalents outstanding for each of the periods presented is set forth in the table below:


	Three months ended March 31,
	2014		2013
Options		9,412,845		4,058,751
Warrants		44,585,932		16,488,432

11. Recent Accounting Pronouncements

In July 2013, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”). This standard requires an unrecognized tax benefit related to a net operating loss carryforward, a similar tax loss or a tax credit carryforward to be presented as a reduction to a deferred tax asset, unless the tax benefit is not available at the reporting date to settle any additional income taxes under the tax law of the applicable tax jurisdiction. ASU 2013-11 is effective for fiscal years and interim periods beginning after December 15, 2013. We adopted this guidance effective January 1, 2014. Our adoption of this standard did not have a significant impact on our consolidated financial position, results of operations and other comprehensive income/loss or cash flows.

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12. Supplemental Cash Flow Information

Non-cash investing and financing transactions presented separately from the condensed consolidated statements of cash flows for the three months ended March 31, 2014 and 2013 and for the period from inception (June 12, 1996) through March 31, 2014 are as follows:


	Three months ended March 31,				Inception (June 12, 1996) through
	2014		2013		March 31, 2014
Supplemental disclosures of cash flow information:
Interest paid	$	—	$	—	$	180,719
Supplemental disclosures of non-cash investing and financing activities:
Issuance of warrants, common stock and preferred stock for:
Conversion of notes payable and accrued interest		—		—		1,213,988
Prepaid services to consultants		—		—		1,482,781
Conversion of preferred stock		—		—		13,674
Acquisitions		3,160,000		—		33,826,878
Issuance of common stock to pay dividends		—		—		213,000
Financial advisor services in conjunction with financings		—		—		3,477,571
Underwriter commissions in conjunction with financings		—		—		766,784
Acquisition of treasury stock in settlement of a claim		—		—		34,737
Cancellation of treasury stock		—		—		(34,737	)
Assumptions of liabilities in acquisitions		1,212,297		—		2,744,103
Fair value of contingent liabilities, net of contingent assets, recorded at acquisition date		—		—		784,419
Issuance of common stock for milestone achievement		—		—		250
Acquisition of license agreement for long-term debt		—		—		161,180
Unrealized loss on investment securities		5,447		8,448		24,029
Disposal of equipment in conjunction with settlement of a liability		—		—		99,875
Cashless exercise of warrants		—		—		4,312
Dividends accrued		—		—		621,040
Trade asset converted to available-for-sale asset		—		—		108,000
Dividends extinguished		—		—		408,240
Trade payable converted to note payable		—		—		83,948
Issuance of warrants for return of common stock		—		—		50,852
Detachable warrants issued with notes payable		—		—		450,000
Cumulative preferred stock dividends		—		—		13,502,403
Financing costs in accounts payable and accrued liabilities		179,232		—		179,232

13. Stockholders’ Equity

“At the Market” Equity Offering Program

In February 2014, we entered into a sales agreement with Cowen and Company, LLC (“Cowen”), to sell shares of our common stock, with aggregate gross sales proceeds of up to $30 million, from time to time, through an “at the market” equity offering program (the “ATM program”), under which Cowen acts as sales agent. As of March 31, 2014, we had sold and issued an aggregate of 9,961,655 shares at a weighted-average sales price of $0.83 per share under the ATM program for aggregate gross proceeds of $8.3 million and $7.8 million in net proceeds, after deducting sales agent commission and discounts and our other offering costs.

Underwritten Public Offering of Common Stock and Warrants

In June 2013, we completed an underwritten public offering of 56,195,000 shares of our common stock and warrants to purchase up to 28,097,500 additional shares of our common stock. These securities were offered and sold to the underwriters and the public in units with each unit consisting of one share of common stock and one warrant to purchase up to 0.5 of a share of common stock. The gross proceeds from this financing were $28.1 million and, after deducting underwriting discounts and commissions and our other offering expenses, our net proceeds were $25.7 million. We may receive up to $18.3 million of additional proceeds from the exercise of the warrants issued in the financing. The exercise price of the warrants is $0.65 per share. Subject to certain beneficial ownership limitations, the warrants are exercisable at any time on or before June 19, 2018.

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Shares Issuable to Former SynthRx Stockholders Upon Achievement of Milestones

In April 2011, we acquired SynthRx as a wholly-owned subsidiary through a merger transaction in exchange for shares of our common stock and rights to additional shares of our common stock upon achievement of specified milestones related to MST-188. We have issued an aggregate of 3,050,851 shares of our common stock to the former SynthRx stockholders, 1,454,079 of which we repurchased in December 2012 for $0.001 per share pursuant to our exercise of a repurchase right under the merger agreement. We could issue up to an aggregate of 12,478,050 additional shares of our common stock to the former SynthRx stockholders if and when the development of MST-188 achieves certain milestones as follows: (a) 3,839,400 shares upon acceptance for review by the U.S. Food and Drug Administration (“FDA”) of a new drug application (“NDA”) covering the use of purified poloxamer 188 for the treatment of sickle cell crisis in children and (b) 8,638,650 shares upon approval of such NDA by the FDA.

Outstanding Warrants

At March 31, 2014, outstanding warrants to purchase shares of common stock are as follows:


Shares Underlying Outstanding Warrants		Exercise Price		Expiration Date
	99,696	$	11.9125	June 2014
	36,071	$	3.7500	June 2014
	19,007	$	4.4750	July 2014
	14,183	$	4.0625	August 2014
	144,000	$	5.8750	October 2014
	216,000	$	3.6700	October 2014
	409,228	$	3.4400	April 2015
	1,062,500	$	1.0000	April 2015
	1,816,608	$	3.6500	May 2015
	2,046,139	$	2.7500	January 2016
	10,625,000	$	1.1000	November 2016
	28,097,500	$	0.6500	June 2018

	44,585,932

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and accompanying notes appearing elsewhere in this report. For additional context with which to understand our financial condition and results of operations, see the discussion and analysis included in Part II, Item 7 of our annual report on Form 10-K for the year ended December 31, 2013, filed with the U.S. Securities and Exchange Commission, or SEC, on March 26, 2014, as well as the consolidated financial statements and accompanying notes contained therein. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including but not limited to those identified under “Forward Looking Statements” below and those discussed in Item 1A (Risk Factors) of Part I of our annual report on Form 10-K for the year ended December 31, 2013. Mast Therapeutics™, our corporate logo and SynthRx^® are trademarks of our company. All trademarks, service marks or trade names appearing in this report are the property of their respective owners. Use or display by us of other parties’ trademarks, service marks or trade names is not intended to and does not imply a relationship with, or endorsements or sponsorship of, us by the trademark, service mark or trade name owners.

Overview

We are a biopharmaceutical company developing novel therapies for serious or life-threatening diseases with significant unmet needs. We are leveraging our Molecular Adhesion & Sealant Technology, or MAST, platform, derived from over two decades of clinical, nonclinical and manufacturing experience with purified and non-purified poloxamers, to develop MST-188, our lead product candidate. MST-188 has demonstrated multiple pharmacologic effects that may provide clinical benefit in a wide range of diseases and conditions typically characterized by impaired microvascular blood flow and damaged cell membranes. We recently acquired Aires Pharmaceuticals, which is developing AIR001 (sodium nitrite) inhalation solution, and we are in the process of determining the optimal development strategy for this new asset.

We have devoted substantially all of our resources to research and development, or R&D, and to acquisition of our product candidates. We have not yet marketed or sold any products or generated any significant revenue and we have incurred significant annual operating losses since inception. We incurred a loss from operations of $6.8 million for the three months ended March 31, 2014. Our cash, cash equivalents and investment securities were $49.6 million as of March 31, 2014.

We continue to focus our resources primarily on MST-188. We believe that its pharmacologic effects support its development in a wide range of serious or life-threatening diseases and conditions and we intend to develop MST-188 in multiple clinical indications, both independently and through collaborations. Enrolling subjects in EPIC, our ongoing pivotal phase 3 study of MST-188 in patients with sickle cell disease, is one of our top priorities. In March 2014, we initiated a phase 2, clinical proof-of-concept study of MST-188 in combination with recombinant tissue plasminogen activator (rt-PA) in patients with acute lower limb ischemia to evaluate whether MST-188 improves effectiveness of rt-PA therapy. In addition, our MST-188 pipeline includes development programs in heart failure and resuscitation following major trauma (i.e., restoration of circulating blood volume and pressure).

We anticipate that our cash, cash equivalents and investment securities will be sufficient to fund our operations for at least the next 12 months. However, we have based this estimate on significant assumptions and we could utilize our available financial resources sooner than we currently expect. For example, we may pursue development activities for our product candidates at levels or on timelines, or we may incur unexpected expenses, that shorten the period through which our current financial resources will sustain us. We expect to incur significant and increasing losses for the next several years as we advance our product candidates through clinical studies and other development activities and seek regulatory approval for commercialization. We will need additional capital to support our planned operating activities. In addition, we may seek to expand our product pipeline through acquisition of additional product candidates and/or technologies. Our capital requirements will likely increase in future periods if we determine to conduct studies of our product candidates in addition to those currently planned, if we determine to pursue clinical development of our product candidates in additional indications without a partner, or if we determine to expand our product pipeline through acquisition of new product candidates and/or technologies. For the foreseeable future, we plan to fund our operations through public or private equity and/or debt financings and through collaborations, including licensing arrangements. However, adequate additional capital may not be available to us on acceptable terms, on a timely basis, or at all. Our failure to raise capital as and when needed would have a material and adverse effect on our financial condition and ability to pursue our business strategy.

Acquisition of Aires Pharmaceuticals

On February 27, 2014, we completed the acquisition of Aires Pharmaceuticals, Inc., a privately-held Delaware corporation, in an all-stock transaction pursuant to an agreement and plan of merger, dated February 7, 2014, by and among us, AP Acquisition Sub, Inc., a wholly-owned subsidiary of ours, Aires Pharmaceuticals, and a stockholders’ representative, which resulted in Aires becoming our wholly-owned subsidiary. Aires’ lead product candidate is AIR001 (sodium nitrite) inhalation solution, and, prior to the acquisition, Aires had focused its development in pulmonary arterial hypertension, an indication for which it has orphan drug status in the U.S. and European Union.

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Merger Consideration. Upon completion of the merger, we issued an aggregate of 1,049,706 unregistered shares of our common stock to former Aires stockholders and, following a six-month holdback period, we will issue up to 4,198,830 additional unregistered shares of our common stock, in the aggregate, to former Aires stockholders, subject to adjustment to satisfy indemnification obligations of the former Aires stockholders to us, if any, in accordance with the merger agreement. There are no milestone or earn-out payments under the merger agreement; therefore, the total merger consideration will not exceed 5,248,536 shares, or 5% of our outstanding common stock as of the acquisition date.

Stockholder Agreement. On February 7, 2014, we also entered into a stockholder agreement with the holders of all outstanding shares of Aires preferred stock and approximately 90% of the outstanding shares of Aires common stock. The transfer restrictions aspect of this agreement, among other things, prohibits the stockholder parties from transferring any shares acquired from us pursuant to the merger agreement for a period of six months from the closing date of the merger, subject to certain exceptions.

In-License Agreement with The National Institutes of Health. Aires has exclusive, sublicensable, worldwide rights to issued and pending patents related to nitrite salts and their uses, under which it may develop and commercialize inhaled nitrite formulations to treat pulmonary arterial hypertension, ischemia reperfusion injury and reperfusion injury associated with organ transplantation pursuant to a Public Health Service Patent License Agreement – Exclusive, or the NIH License. Under the terms of the NIH License, Aires agreed to make a minimum annual payment of $15,000. Aires also agreed to make “benchmark” payments of up to $7.2 million, with (a) $0.3 million related to clinical development milestones in pulmonary arterial hypertension, (b) $0.1 million related to the issuance of the first U.S. patent in the licensed field of use, and (c) an aggregate of $6.8 million related to the filing of the first NDA, regulatory approval, and commercial sales of a covered product in pulmonary arterial hypertension. In addition to these benchmark payments, to the extent a covered product is approved for commercial sale, under the NIH License, Aires will pay annual royalties ranging from 4% to 5% of its annual net sales of covered products.

Critical Accounting Policies and Significant Judgments and Estimates

Our discussion and analysis of our financial condition and results of operations included in this report is based upon consolidated financial statements and condensed consolidated financial statements that we have prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP. The preparation of these financial statements requires us to make a number of estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses in these financial statements and accompanying notes. On an ongoing basis, we evaluate these estimates and assumptions, including those related to determination of the fair value of goodwill and acquired in-process research and development, or IPR&D, and recognition of expenses for clinical study accruals and share-based compensation. We base our estimates on historical information, when available, and assumptions believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions.

We believe the following accounting estimates are those that can have a material impact on our financial condition or operating performance and involve substantial subjectivity and judgment in the application of our accounting policies to account for highly uncertain matters or the susceptibility of such matters to change. The following is not intended to be a comprehensive discussion of all of our significant accounting policies. See the notes accompanying our consolidated financial statements appearing in our most recent annual report on Form 10-K for a summary of all of our significant accounting policies and other disclosures required by U.S. GAAP.

Accrued Research and Development Expenses. As part of the process of preparing our financial statements, we are required to estimate our accrued expenses. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. Many of our service providers invoice us monthly in arrears for services performed or when contractual milestones are met. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments, if necessary. The majority of our accrued expenses relate to R&D services and related expenses. Examples of estimated accrued R&D expenses include:

•

fees paid to contract research organizations, or CROs, in connection with clinical studies;

•

fees paid to investigative sites and investigators in connection with clinical studies;

•

fees paid to contract manufacturing organizations, or CMOs, in connection with process development activities and production of nonclinical and clinical trial material;

•

fees paid to vendors in connection with nonclinical development activities; and

•

fees paid to consultants for regulatory-related advisory services.

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We base our expenses related to CROs and CMOs on our estimates of the services received and efforts expended pursuant to purchase orders or contracts with multiple service providers that we engage to conduct and manage clinical studies and manufacture our clinical trial material on our behalf. The financial terms of our arrangements with our CROs and CMOs are subject to negotiation, vary from contract to contract and may result in uneven payment flows. Payments under some of these contracts depend on factors such as the successful completion of specified process development activities or the successful enrollment of patients and the completion of clinical study milestones. In accruing these service fees, we estimate, as applicable, the time period over which services will be performed (e.g., enrollment of patients, activation of clinical sites, etc.). If the actual timing varies from our estimate, we adjust the accrual accordingly. In addition, there may be instances in which payments made to service providers will exceed the level of services provided and result in a prepayment of R&D expense, which we report as an asset. The actual costs and timing of clinical studies and research-related manufacturing are uncertain and subject to change depending on a number of factors. Differences between actual costs of these services and the estimated costs that we have accrued in a prior period are recorded in the subsequent period in which the actual costs become known to us. Historically, these differences have not resulted in material adjustments, but such differences may occur in the future and have a material impact on our consolidated results of operations or financial position.

Business Combinations. We account for business combinations, such as our acquisitions of SynthRx in April 2011 and Aires Pharmaceuticals in February 2014, in accordance with Accounting Standards Codification, or ASC, Topic 805, Business Combinations, which requires the purchase price to be measured at fair value. When the purchase consideration consists entirely of shares of our common stock, we calculate the purchase price by determining the probability-weighted fair value as of the acquisition date of shares issued in connection with the closing of the acquisition and, if applicable, shares issuable upon the occurrence of future events or conditions pursuant to the terms of the agreement governing the business combination. If the transaction involves contingent consideration based on achievement of milestones or earn-out events, our calculation of the purchase price involves probability inputs that are highly judgmental due to the inherent unpredictability of drug development, particularly by development-stage companies such as ours. We recognize estimated fair values of the tangible assets and intangible assets acquired, including IPR&D, and liabilities assumed as of the acquisition date, and we record as goodwill any amount of the fair value of the tangible and intangible assets acquired and liabilities assumed in excess of the purchase price.

Goodwill and Acquired IPR&D. In accordance with ASC Topic 350, Intangibles – Goodwill and Other, or ASC Topic 350, our goodwill and acquired IPR&D are determined to have indefinite lives and, therefore, are not amortized. Instead, they are tested for impairment annually and between annual tests if we become aware of an event or a change in circumstances that would indicate the carrying value may be impaired. We perform our annual impairment testing on September 30 of each year. Pursuant to Accounting Standards Update, or ASU, No. 2011-08, Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment, and No. 2012-02, Intangibles – Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads us to determine that it is more likely than not (that is, a likelihood of more than 50%) that our goodwill or our acquired IPR&D is impaired. If we choose to first assess qualitative factors and we determine that it is not more likely than not goodwill or acquired IPR&D is impaired, we are not required to take further action to test for impairment. We also have the option to bypass the qualitative assessment and perform only the quantitative impairment test, which we may choose to do in some periods but not in others.

If we perform a quantitative assessment of goodwill, we utilize the two-step approach prescribed under ASC Topic 350. Step 1 requires a comparison of the carrying value of a reporting unit, including goodwill, to its estimated fair value. We test for impairment at the entity level because we operate on the basis of a single reporting unit. If our carrying value exceeds our fair value, we then perform Step 2 to measure the amount of impairment loss, if any. In Step 2, we estimate the fair value of our individual assets, including identifiable intangible assets, and liabilities to determine the implied fair value of goodwill. We then compare the carrying value of our goodwill to its implied fair value. The excess of the carrying value of goodwill over its implied fair value, if any, is recorded as an impairment charge.

If we perform a quantitative assessment of IPR&D, we calculate the estimated fair value of acquired IPR&D by using the Multi-Period Excess Earnings Method, or MPEEM, which is a form of the income approach. Under the MPEEM, the fair value of an intangible asset is equal to the present value of the asset’s projected incremental after-tax cash flows (excess earnings) remaining after deducting the market rates of return on the estimated value of contributory assets (contributory charge) over its remaining useful life.

Our determinations as to whether, and, if so, the extent to which, goodwill and acquired IPR&D become impaired are highly judgmental and based on significant assumptions regarding our projected future financial condition and operating results, changes in the manner of our use of the acquired assets, development of our acquired assets or our overall business strategy, and regulatory, market and economic environment and trends.

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Share-based Compensation Expenses. We account for share-based compensation awards granted to employees, including non-employee members of our board of directors, in accordance with ASC Topic 718, Compensation — Stock Compensation. Compensation expense for all share-based awards is based on the estimated fair value of the award on its date of grant and recognized on a straight-line basis over its vesting period. As share-based compensation expense is based on awards ultimately expected to vest, it is reduced for estimated forfeitures. We estimate forfeitures at the time of grant based on the expected forfeiture rate for our unvested stock options, which is based in large part on our historical forfeiture rates, but also on assumptions believed to be reasonable under the circumstances. We revise our estimates in subsequent periods if actual forfeitures differ from those estimates. Although share-based compensation expense can be significant to our consolidated financial statements, it is not related to the payment of any cash by us.

We estimate the grant date fair value of a stock option award using the Black-Scholes option-pricing model, or Black-Scholes model. In determining the grant date fair value of a stock option award under the Black-Scholes model, we must make a number of assumptions, including the term of the award, the volatility of the price of our common stock over the term of the award, and the risk-free interest rate. Changes in these or other assumptions could have a material impact on the compensation expense we recognize.

Results of Operations – Overview

We operate our business and evaluate our company on the basis of a single reportable segment, which is the business of developing therapies for serious or life-threatening diseases.

Revenue

We have not generated any revenue from product sales to date, and we do not expect to generate revenue from product sales until such time, if any, that we have obtained approval from a regulatory agency to sell one or more of our product candidates, which we cannot predict with certainty will occur.

Operating Expenses

Research and Development Expenses. We maintain and evaluate our R&D expenses by the type of cost incurred rather than by project. We do this primarily because we outsource a substantial portion of our work and our R&D personnel and consultants work across multiple programs rather than dedicating their time to one particular program. We began maintaining such expenses by type on January 1, 2005. We categorize our R&D expenses as external clinical study fees and expenses, external nonclinical study fees and expenses, personnel costs and share-based compensation expense. The major components of our external clinical study fees and expenses are fees and expenses related to CROs and clinical study investigative sites and investigators. The major components of our external nonclinical study fees and expenses are fees and expenses related to preclinical studies and other nonclinical testing, research-related manufacturing, including process development activities, and quality assurance and regulatory affairs services. Research-related manufacturing expenses include costs associated with producing or purchasing active pharmaceutical ingredient (API), conducting process development activities, producing clinical trial material, producing material for stability testing to support regulatory filings, related labeling, testing and release, packaging and storing services and related consulting fees. Impairment losses on R&D-related manufacturing equipment are also considered research-related manufacturing expenses. Personnel costs relate to employee salaries, benefits and related costs.

A general understanding of drug development is critical to understanding our results of operations and, particularly, our R&D expenses. Drug development in the U.S. and most countries throughout the world is a process that includes several steps defined by the U.S. Food and Drug Administration, or FDA, and similar regulatory authorities in foreign countries. The FDA approval processes relating to new drug products differ depending on the nature of the particular product candidate for which approval is sought. With respect to any product candidate with active ingredients not previously approved by the FDA, a prospective drug product manufacturer is required to submit a new drug application, or NDA, that includes complete reports of pre-clinical, clinical and laboratory studies and extensive manufacturing information to demonstrate the product candidate’s safety and effectiveness. Generally, an NDA must be supported by at least phase 1, 2 and 3 clinical studies, with each study typically more expensive and lengthy than the previous study.

Future expenditures on R&D programs are subject to many uncertainties, including the number of clinical studies required to be conducted for each development program and whether we will develop a product candidate with a partner or independently. At this time, due to such uncertainties and the risks inherent in drug product development and the associated regulatory process, we cannot estimate with any reasonable certainty the duration of or costs to complete our R&D programs, or whether or when or to what extent revenues will be generated from the commercialization and sale of any of our product candidates. The duration and costs of our R&D programs, in particular the duration and costs associated with clinical studies and research-related manufacturing, can vary significantly as a result of a variety of factors, including:

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•

the number of clinical and nonclinical studies necessary to demonstrate the safety and efficacy of a product candidate in a particular indication;

•

the number of patients who participate in each clinical study;

•

the number and location of sites included and the rate of site approval in each clinical study;

•

the rate of patient enrollment and ratio of randomized to evaluable patients in each clinical study;

•

the duration of patient treatment and follow-up;

•

the potential additional safety monitoring or other studies requested by regulatory agencies;

•

the time and cost to manufacture clinical trial material and commercial product, including process development and scale-up activities, and to conduct stability studies, which can last several years;

•

the availability and cost of comparative agents used in clinical studies;

•

the timing and terms of any collaborative or other strategic arrangements that we may establish; and

•

the cost, requirements, timing of and the ability to secure regulatory approvals.

We regularly evaluate the prospects of our R&D programs, including in response to available scientific, nonclinical and clinical data, our assessments of a product candidate’s market potential and our available resources, and make determinations as to which programs to pursue and how much funding to direct to each one.

Selling, General and Administrative Expenses. Selling, general and administrative, or SG&A, expenses consist primarily of salaries, benefits and related costs for personnel in executive, finance and accounting, legal and market research functions, and professional and consulting fees for accounting, legal, investor relations, business development, market research, human resources and information technology services. Other SG&A expenses include facility lease and insurance costs.

Transaction-Related Expenses. Transaction-related expenses consist of legal, accounting, financial and business development advisory fees associated with the evaluation of potential acquisition targets and execution of acquisition transactions, including our acquisitions of Aires and SynthRx. Transaction-related expenses also include the changes in the fair value of the contingent asset and contingent liability related to our acquisition of SynthRx, which we remeasured as of the end of each quarter until the contingent arrangement was settled.

Other Income/(Expense), Net. Other income/(expense), net includes the bargain purchase gain related to the acquisition of Aires, as well as unrealized and realized gains and losses from foreign currency transactions and other non-operating gains and losses.

Comparison of Three Months Ended March 31, 2014 and 2013

Revenue. We recognized no revenue for the three months ended March 31, 2014 and 2013.

R&D Expenses. Our R&D expenses for the three months ended March 31, 2014 consisted primarily of external costs associated with the EPIC study. These expenses consisted primarily of costs associated with CRO and CMO expenses, clinical study-related consulting and study site expenses, which include start-up costs as well as patient costs. The following table summarizes our consolidated R&D expenses by type for each of the periods listed and their respective percent of our total R&D expenses for such periods:


	Three months ended March 31,										January 1, 2005 through
	2014		%			2013		%			March 31, 2014
External clinical study fees and expenses	$	2,331,251		55	%	$	2,308,102		67	%	$	35,953,061
External nonclinical study fees and expenses		1,086,867		25	%		547,351		16	%		40,040,376
Personnel costs		803,743		19	%		550,331		16	%		16,567,284
Share-based compensation expense		58,956		1	%		37,128		1	%		3,205,562

Total	$	4,280,817		100	%	$	3,442,912		100	%	$	95,766,283

R&D expenses increased by $0.9 million, or approximately 24.3%, to $4.3 million for the three months ended March 31, 2014, compared to $3.4 million for the same period in 2013. This increase was due primarily to a $0.5 million increase in external nonclinical study fees and expenses related to manufacturing additional clinical trial material for the EPIC study and our phase 2 study of MST-188 in acute limb ischemia and a $0.3 million increase in personnel costs. The increase in personnel costs resulted primarily from additional clinical and research-related manufacturing staff hired after the first quarter of 2013.

Selling, General and Administrative Expenses. SG&A expenses increased by $0.2 million, or approximately 7.3%, to $2.3 million for the three months ended March 31, 2014, compared to $2.1 million for the same period in 2013. This increase resulted primarily from an increase in personnel costs.

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Transaction-Related Expenses. Transaction-related expenses were $0.3 million for the three months ended March 31, 2014 compared to $27,500 for the three months ended March 31, 2013. We recognized transaction-related expenses for the three months ended March 31, 2014 related to legal fees associated with the acquisition of Aires. We recognized transaction-related expenses for the three months ended March 31, 2013 due to changes in the fair value at March 31, 2013 relative to December 31, 2012, of the contingent liability related to the consideration for our acquisition of SynthRx. The increase in the fair value of the contingent liability was due to the increase in our stock price at March 28, 2013 ($0.68 per share), the last trading day of the three months ended March 31, 2013, relative to December 31, 2012 ($0.57 per share).

Other Income/(Expense), Net. Other income/(expense), net for the three months ended March 31, 2014 consisted primarily of a $0.5 million bargain purchase gain associated with the acquisition of Aires. Other income/(expense), net for the three months ended March 31, 2013 was negligible.

Net Loss. Net loss was $6.4 million, or $0.06 per share, for the three months ended March 31, 2014, compared to net loss of $5.6 million, or $0.12 per share, for the same period in 2013.

Liquidity and Capital Resources

We have a history of annual losses from operations and we anticipate that we will continue to incur losses for at least the next several years. For the three months ended March 31, 2014, we incurred a loss from operations of $6.8 million. Our cash, cash equivalents and investment securities were $49.6 million as of March 31, 2014. Our investment securities at March 31, 2014 consisted entirely of FDIC-insured certificates of deposit.

We historically have funded our operations principally through proceeds from sales of our equity securities. In June 2013, we completed an underwritten public offering involving the issuance of units consisting of 56,195,000 shares of our common stock and warrants to purchase 28,097,500 shares of our common stock. The warrants have an exercise price of $0.65 per share and, subject to certain beneficial ownership limitations, are exercisable at any time on or before June 19, 2018. This financing resulted in $28.1 million in gross proceeds and $25.7 million in net proceeds, after deducting underwriting discounts and commissions and our other offering expenses.

We may receive up to $0.8 million, $6.6 million, $5.6 million, $11.7 million and $18.3 million of additional net proceeds from the exercise of warrants issued in the registered direct equity financings we completed in October 2009, May 2010 and January 2011 and the underwritten public offerings we completed in November 2011 and June 2013, respectively. However, the timing of the exercise and extent to which any of these warrants are exercised before they expire are beyond our control and depend on a number of factors, including certain beneficial ownership limitations and the market price of our common stock. The exercise prices of these warrants are $3.67, $3.65, $2.75, $1.10 and $0.65 per share, respectively. In comparison, the closing sale price of our common stock on March 31, 2014 was $0.68 per share and we do not expect the holders of the warrants to exercise them unless and until our common stock trades at or above the exercise price of their warrants.

In February 2014, we entered into a sales agreement with Cowen and Company, LLC, or Cowen, to sell shares of our common stock, with aggregate gross sales proceeds of up to $30 million, from time to time, through an “at the market” equity offering program, or ATM program, under which Cowen acts as sales agent. As of March 31, 2014, we had sold and issued an aggregate of 9,961,655 shares at a weighted-average sales price of $0.83 per share under the ATM program for aggregate gross proceeds of $8.3 million and $7.8 million in net proceeds, after deducting sales agent commission and discounts and our other offering costs.

For a discussion of our liquidity and capital resources outlook, see “Management Outlook” below.

Operating activities. Net cash used in operating activities was $6.3 million for the three months ended March 31, 2014 and consisted primarily of a net loss of $6.4 million adjusted for non-cash items, including a gain on bargain purchase of $0.5 million, which was offset by share-based compensation expenses of $0.4 million and a net increase due to changes in assets and liabilities of $0.1 million. Net cash used in operating activities was $4.5 million for the three months ended March 31, 2013 and consisted primarily of a net loss of $5.6 million adjusted for non-cash items including share-based compensation expenses of $0.4 million and a net increase due to changes in assets and liabilities of $0.7 million. The primary reason for the $0.7 million change was an increase in accounts payable and accrued liabilities of $0.6 million, which was primarily due to additional accruals for our thorough QT/QTc clinical study of MST-188 and clinical research-related manufacturing.

Investing activities. Net cash provided by investing activities was $2.5 million for the three months ended March 31, 2014 compared to $3.4 million for the same period in 2013. The difference of $0.9 million was due primarily to an increase of $3.7 million in purchases of certificates of deposit and a decrease of $0.7 million in proceeds from maturities of certificates of deposits, offset by $3.5 million in cash obtained in our acquisition of Aires.

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Financing activities. Net cash provided by financing activities was $8.0 million for the three months ended March 31, 2014, representing the gross proceeds from sales of our shares of common stock through our ATM program, less the sales agent commission and offering expenses paid during the period. We expect to pay an additional $0.2 million in offering expenses during the second quarter. There was no cash used in or provided by financing activities during the three months ended March 31, 2013.

Management Outlook

We anticipate that our cash, cash equivalents and investment securities as of March 31, 2014 will be sufficient to fund our currently planned level of operations for at least the next 12 months. However, our estimate of the period of time through which our current financial resources will be adequate to support our operations is a forward-looking statement based on significant assumptions that involve a number of risks and uncertainties and actual results could differ materially. Factors that will affect our future capital requirements include, but are not limited to: the progress and results of our clinical and nonclinical studies of MST-188, particularly the EPIC study and the phase 2 study in acute limb ischemia; the number and nature of indications and jurisdictions in which we pursue development and regulatory approval of MST-188, and the extent to which we do so independently or through collaborations; our development strategy for AIR001; the rate of progress and costs of development and regulatory approval activities associated with our product candidates, including expenses related to initiating and conducting clinical studies and research-related manufacturing expenses; the extent to which we increase our workforce; the extent to which we seek to commercialize and sell our product candidates, if approved, independently or through collaborations; the extent of commercial success of any of our product candidates for which we receive regulatory approval; the costs and timing of establishing commercial manufacturing supply arrangements for our product candidates and establishing or acquiring sales and distribution capabilities for any approved products; and the extent to which we seek to expand our product pipeline through acquisitions and execute on transactions intended to do so.

MST-188

We are focusing our resources primarily on development of MST-188. In 2013, we initiated the EPIC study and enrolling subjects in that study is one of our top priorities. We expect to enroll 388 subjects in the study from approximately 70 medical centers – approximately 40 in the U.S. and 30 outside the U.S. At the end of 2013, we had opened 40 U.S. sites and, since then, we have opened clinical sites in multiple jurisdictions outside of the U.S. We expect to have approximately 25 sites open outside of the U.S. by the end of 2014. Although predicting the rate of enrollment for EPIC is subject to a number of significant assumptions and the actual rate may differ materially, we expect to complete enrollment by the end of 2015. We estimate that external clinical study fees and expenses from January 2014 through completion of the EPIC study will be approximately $16 million.

In addition to enrolling subjects in EPIC, we are conducting activities to evaluate the potential of MST-188 to reduce organ damage and improve survival in patients with sickle cell disease. First, we plan to conduct a sub-study at select EPIC sites to investigate and quantify the effect of MST-188 on microvascular blood flow, indirectly measured by tissue oxygenation using a non-invasive method, and we will evaluate the relationship between tissue oxygenation and clinical outcomes, such as the duration of vaso-occlusive crisis. Approximately 30 patients who are concurrently randomized in EPIC at U.S. study sites will be enrolled in the sub-study. We submitted the protocol for the sub-study to the FDA in 2013 and plan to initiate it during the second quarter of 2014. The estimated external clinical study fees and expenses to conduct the sub-study are included in the estimated cost of EPIC stated above.

We are conducting the pilot phase of a nonclinical study in a transgenic mouse model of sickle cell disease. The objective of this study is to demonstrate that chronic intermittent administration of MST-188 reduces the accumulating burden of organ damage and prolongs survival. The transgenic mice express human sickle hemoglobin and have been shown to mirror the pathophysiology and disease progression of sickle cell disease typically seen in humans, including development of neuropathy, organ damage and premature death. The results of this study, coupled with the clinical pharmacodynamic data from the EPIC sub-study described above, may provide evidence of MST-188’s ability to improve long-term outcomes, where direct evaluation of those outcomes is impractical. We expect to complete this study, including the survival portion, in late 2015.

In March 2014, we initiated a phase 2, clinical proof-of-concept study of MST-188 in combination with rt-PA in acute limb ischemia, or ALI. The study will enroll approximately 60 patients with acute lower limb ischemia from approximately 15 sites within and outside the U.S. and compare a high dose and low dose of MST-188 in combination with rt-PA against rt-PA alone. We estimate that the study will take approximately 18 months to enroll and that external clinical study fees and expenses for the study will be approximately $4 million. If this phase 2 study in ALI demonstrates that MST-188 improves the “clot busting” activity of rt-PA, we believe it not only would progress development in that indication, but also generate interest in developing MST-188 in other manifestations of occlusive arterial disease, such as stroke. Therefore, in parallel to the phase 2 study in ALI, we plan to conduct a nonclinical study in an experimental model of thrombotic stroke to evaluate MST-188’s potential to expand the window in which rt-PA is effective and improve the therapeutic effect of rt-PA.

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We also are evaluating MST-188’s potential in heart failure, another area of significant unmet medical need. Although there have been modest improvements in treatment, acute decompensated heart failure remains associated with high mortality and high hospital admission and readmission rates in patients older than 65 years. In contrast with current treatments, such as vasodilators and beta blockers, which can indirectly improve heart function, MST-188’s membrane sealant and hemorheologic activity may directly improve heart contractility and function. Earlier this year, we announced positive results from a randomized, placebo-controlled, nonclinical study of MST-188 in a model of chronic heart failure. Encouraged by those results, we are evaluating options for clinical development of MST-188 in heart failure. We will discuss with the FDA this year our plans to conduct a phase 2, dose-finding, clinical study of MST-188 in patients with heart failure and, if FDA feedback is positive, we expect to initiate the study in the first half of 2015. We are still early in the planning process for the phase 2 clinical study and, as such, cannot forecast with any degree of certainty the study costs. However, in light of anticipated timing of initiation of the study, we do not expect 2014 external clinical study fees and expenses related to the MST-188 heart failure program to be material.

In addition, we are evaluating MST-188’s potential in resuscitation following major trauma (i.e., restoration of circulating blood volume and pressure). Based on feedback from U.S. Department of Defense personnel, during 2014, we plan to conduct a nonclinical study of MST-188 in an experimental model of trauma. The results of this study, if positive, may generate further interest from the Department of Defense in evaluating the utility of MST-188 as a resuscitation fluid following major trauma.

Finally, we are conducting or plan to conduct a number of other ex vivo, nonclinical in vivo and in vitro studies of MST-188 to further understand its pharmacologic effects and support our intellectual property positions.

AIR001

In February 2014, we acquired Aires Pharmaceuticals, Inc., which is developing AIR001, an intermittently nebulized form of sodium nitrite to treat pulmonary vascular disorders, such as pulmonary hypertension (PH). Over the next several months, we will continue to confer with clinical and regulatory experts in PH and heart disease to define the optimal development strategy for AIR001. In parallel, we will review data, which we expect in the third quarter of 2014, from the approximately 20 subjects who completed treatment in a phase 2 study of AIR001 in pulmonary arterial hypertension, which study Aires had been in the process of closing prior to the acquisition due to capital constraints, and we plan to support expansion of an ongoing, university-sponsored phase 2a study of AIR001 to patients with PH associated with heart failure (WHO Group 2 PH). We estimate that, during the 12-month period following the acquisition of Aires, costs of the AIR001 program, including costs to wind-down the phase 2 studies in PAH, support the expansion of the university-sponsored phase 2a study, Aires personnel costs and consulting fees, will be approximately $2 million. However, as we refine our development strategy for AIR001 over the next few months, we expect that our initial plans for the program, and, therefore, its estimated costs, will change. In particular, we are aware of other planned investigator-sponsored clinical studies of AIR001 in WHO Group 2 PH patients and we may determine to provide some level of support to those studies and we may also determine to conduct nonclinical studies to support the development of AIR001, which activities could increase our current estimate of program costs.

In parallel with our independent development of MST-188 and AIR001, from time to time, we evaluate opportunities for strategic collaborations, including with respect to country-specific development and regulatory or commercial expertise that would enhance the value of our programs.

Although we anticipate that our cash, cash equivalents and investment securities will be sufficient to fund our operations for at least the next 12 months, we do not anticipate that such capital alone will be sufficient to fund our operations through the successful development and commercialization of our product candidates. In addition, our capital requirements likely will increase in future periods as we progress development of MST-188 in currently planned indications and potentially pursue its development in additional indications and define our development strategy for AIR001. Further, our capital requirements would likely increase if we were to expand our product pipeline through acquisition of new product candidates and/or technologies. For the foreseeable future, we plan to fund our operations through public or private equity and/or debt financings and through collaborations, including licensing arrangements. Even though we were able to raise significant funds in the recent past through equity financings, adequate additional financing may not be available to us in the future on acceptable terms, on a timely basis, or at all. Our failure to raise capital as and when needed would have a material and adverse effect on our financial condition and ability to pursue our business strategy.

Recent Accounting Pronouncements

See Note 11, “Recent Accounting Pronouncements,” of the Notes to the Condensed Consolidated Financial Statements (Unaudited) in this report for a discussion of recent accounting pronouncements and their effect, if any, on us.

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Forward Looking Statements

This report, particularly in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including, but not limited to, statements we make regarding our business strategy, expectations and plans, our objectives for future operations and our future financial position. When used in this report, the words “believe,” “may,” “could,” “would,” “will,” “estimate,” “continue,” “anticipate,” “plan,” “intend,” “expect,” “indicate” and similar expressions are intended to identify forward-looking statements. Examples of forward-looking statements include, but are not limited to, statements we make regarding activities, timing and costs related to developing and seeking regulatory approval for our product candidates, including the nature, timing of initiation and completion, and costs of clinical studies and nonclinical testing, the indications in which we plan to pursue development of our product candidates, our plans regarding partnering or other collaborative arrangements and for raising additional capital to support our operations, and our belief that we have sufficient liquidity to fund our currently planned level of operations for at least the next 12 months. The foregoing is not an exclusive list of all forward-looking statements we make.

We have based the forward-looking statements we make on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. The forward-looking statements we make are subject to known and unknown risks and uncertainties that could cause our actual results, performance or achievements to be materially different from any result, performance or achievement expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to the following:

•

our ability, or that of a future partner, to successfully develop, obtain regulatory approval for, and then successfully commercialize our product candidates;

•

delays in the commencement or completion of clinical studies or manufacturing and regulatory activities necessary to obtain regulatory approval to commercialize our product candidates, including MST-188;

•

suspension or termination of a clinical study, including due to patient safety concerns or capital constraints;

•

our ability to successfully execute clinical studies, including timely enrollment, and the ability of our product candidates to demonstrate acceptable safety and efficacy in clinical studies;

•

our ability to maintain our relationships with the single-source third-party manufacturers and suppliers for clinical trial material, including the API and finished drug product, and the ability of such manufacturers and suppliers to successfully and consistently meet our manufacturing and supply requirements;

•

the satisfactory performance of third parties, including CROs, on whom we rely significantly to conduct or assist in the conduct of our nonclinical testing, clinical studies and other aspects of our development programs;

•

our ability to obtain additional capital as needed on acceptable terms, or at all;

•

the potential for us to delay, scale back, or discontinue development of a product candidate, partner it at inopportune times, or pursue less expensive but higher-risk and/or lower-return development paths if we are unable to raise sufficient additional capital as needed;

•

the potential for the FDA, or another regulatory agency, to require additional nonclinical or clinical studies of MST-188 in sickle cell disease prior to accepting a new drug application for review or granting regulatory approval, even if the EPIC study is successful;

•

the potential for the FDA, or another regulatory agency, to require additional nonclinical or clinical studies of MST-188 or AIR001 prior to our initiation of a phase 2 clinical study in any new indication;

•

the potential that, even if clinical studies of a product candidate in one indication are successful, clinical studies in another indication may not be successful;

•

the potential for unsuccessful nonclinical or clinical studies in one indication or jurisdiction, or by a future partner that may be outside of our control, to adversely affect opportunities for a product candidate in other indications or jurisdictions;

•

the potential that we may enter into one or more collaborative arrangements, including partnering or licensing arrangements, for a product candidate, and the terms of any such arrangements;

•

the extent to which we increase our workforce and our ability to attract and retain qualified personnel and manage growth;

•

the extent of market acceptance of our product candidates, if we receive regulatory approval, and available alternative treatments;

•

our ability to protect our intellectual property rights related to our product candidates;

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•

claims against us for infringing the proprietary rights of third parties;

•

healthcare reform measures and reimbursement policies that, if not favorable to our products, could hinder or prevent commercial success;

•

undesirable side effects that our product candidates or products may cause;

•

potential product liability exposure and, if successful claims are brought against us, liability for a product or product candidate;

•

the extent to which we acquire new technologies and/or product candidates and our ability to integrate them successfully into our operations;

•

our ability to maintain compliance with NYSE MKT continued listing standards and maintain the listing of our common stock on the NYSE MKT equities market or another national securities exchange; and

•

the other factors that are described in Item 1A (Risk Factors) of Part I of our annual report on Form 10-K for the year ended December 31, 2013, filed with the SEC on March 26, 2014.

Except as required by law, we do not intend to update the forward-looking statements discussed in this report publicly or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. In light of these risks and uncertainties and our assumptions, actual results may differ materially and adversely from expectations indicated or implied by the forward-looking statements contained in this report and in any documents incorporated in this report. Accordingly, you are cautioned not to place undue reliance on such forward-looking statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Under SEC rules and regulations, as a smaller reporting company we are not required to provide the information required by this item.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed by us in the reports 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, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2014. Based on that evaluation, our principal executive officer and principal financial officer have concluded that as of March 31, 2014 these disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) under the Exchange Act that occurred during the quarterly period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

In the normal course of business, we may become subject to lawsuits and other claims and proceedings. Such matters are subject to uncertainty and outcomes are often not predictable with assurance.

Item 1A. Risk Factors

Under SEC rules and regulations, as a smaller reporting company we are not required to provide the information required by this item.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

In February 2014, we acquired Aires Pharmaceuticals, Inc. through a merger transaction in exchange for shares of our common stock and, on February 28, 2014, pursuant to the terms of the merger agreement, we issued an aggregate of 1,049,706 shares of our common stock to former stockholders of Aires.

The securities described above were offered and sold by us in reliance upon exemptions from the registration requirements of the Securities Act of 1933, as amended, or the Securities Act. Such securities were issued pursuant to Section 4(2) of the Securities Act, and/or Regulation D promulgated thereunder as transactions by an issuer not involving a public offering. The recipients of the securities represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to share certificates issued in these transactions. All recipients had adequate access to information about our company.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

An Exhibit Index has been attached as part of this report and is incorporated herein by reference.

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Signatures

Pursuant to the requirements 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.


		Mast Therapeutics, Inc.

Date: May 5, 2014	By:	/s/ Brian M. Culley
		Brian M. Culley Chief Executive Officer (Principal Executive Officer)

	By:	/s/ Brandi L. Roberts
		Brandi L. Roberts Chief Financial Officer and Senior Vice President (Principal Financial and Accounting Officer)

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EXHIBIT INDEX


			Incorporated by Reference
Exhibit No.	Description	Filed Herewith	Form	File/Film No.	Date Filed

2.1 †	Agreement and Plan of Merger, dated February 7, 2014, by and among the registrant, AP Acquisition Sub, Inc., Aires Pharmaceuticals, Inc. and, solely with respect to Sections 2.8(b) and 6.3 and Article IX, the Stockholders’ Representative, as amended by the Waiver of Closing Conditions, dated February 26, 2014	X

10.1 †	Form of Stockholder Agreement, dated February 7, 2014, by and among the registrant and each of the principal stockholders of Aires Pharmaceuticals, Inc.	X

10.2	Sales Agreement, dated February 10, 2014, between the registrant and Cowen and Company, LLC		Form 8-K	001-32157-14586244	02/10/14

31.1	Certification of principal executive officer pursuant to Rule 13a-14(a)/15d-14(a)	X

31.2	Certification of principal financial officer pursuant to Rule 13a-14(a)/15d-14(a)	X

32.1±	Certification of principal executive officer and principal financial officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	X

101.INS	XBRL Instance Document	X

101.SCH	XBRL Taxonomy Extension Schema Document	X

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document	X

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document	X

101.LAB	XBRL Taxonomy Extension Label Linkbase Document	X

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document	X

†	Indicates that confidential treatment has been requested or granted to certain portions, which portions have been omitted and filed separately with the SEC

These certifications are being furnished solely to accompany this report pursuant to 18 U.S.C. 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934 and are not to be incorporated by reference into any filing of the registrant, whether made before or after the date hereof, regardless of any general incorporation by reference language in such filing.

EX-2.1

Exhibit 2.1

AGREEMENT AND PLAN OF MERGER

by and among

MAST THERAPEUTICS, INC.

AP ACQUISITION SUB, INC.

and

AIRES PHARMACEUTICALS, INC.

and

FORTIS ADVISORS LLC, in its capacity as Stockholders’ Representative

(solely with respect to Section 2.8(b), Section 6.3, and Article IX)

Dated as of February 7, 2014

Table of Contents


		PAGE

ARTICLE I	THE MERGER		1

1.1	The Merger		1

1.2	Closing; Effective Time		2

1.3	Effects of the Merger		2

1.4	Further Assurances		2

1.5	Tax Consequences		3

ARTICLE II	CONVERSION OF SECURITIES		3

2.1	Effect on Company Capital Stock		3

2.2	Effect on Company Stock Options and Company Stock Equivalents		3

2.3	Exchange of Certificates		4

2.4	Parent Common Stock		5

2.5	Distributions with Respect to Unexchanged Shares of Company Capital Stock		5

2.6	No Further Ownership Rights in Company Capital Stock		5

2.7	Lost Certificates		5

2.8	Dissenters’ Rights		6

2.9	Withholding		6

2.10	Exemption from Registration; Lock-Up and Voting		6

ARTICLE III	REPRESENTATIONS AND WARRANTIES OF THE COMPANY		7

3.1	Organization and Good Standing		7

3.2	Authority and Enforceability		8

3.3	No Subsidiaries		8

3.4	Capitalization		8

3.5	No Conflicts; Consents		10

3.6	Financial Statements; No Liabilities		10

3.7	Taxes		11

3.8	Compliance with Law; Permits		12

3.9	Grants		13

3.10	Personal Property		14

3.11	Real Property		14

3.12	Intellectual Property		14

3.13	Absence of Certain Changes or Events		18

3.14	Contracts		19

3.15	Litigation		21

3.16	Employee Benefits		21

3.17	Labor and Employment Matters		22

Table of Contents

(CONTINUED)


		PAGE

3.18	Environmental		23

3.19	Insurance		23

3.20	Affiliate Transactions		23

3.21	Regulatory Matters		23

3.22	Bank Accounts; Powers of Attorney		24

3.23	Brokers		24

3.24	Novartis		24

3.25	No Misstatements		24

ARTICLE IV	REPRESENTATIONS AND WARRANTIES OF THE PARENT AND MERGER SUB		24

4.1	Organization and Good Standing		25

4.2	Authority and Enforceability		25

4.3	No Conflicts; Consents		25

4.4	Public Filing		26

4.5	Financial Statements		26

4.6	Issuance of Parent Common Stock		26

4.7	Absence of Certain Changes		26

4.8	Capital Stock		26

4.9	Absence of Litigation		27

4.10	Capitalization of Merger Sub		27

4.11	Compliance With Law; Permits		27

ARTICLE V	COVENANTS OF THE COMPANY		27

5.1	Conduct of Business		27

5.2	Negative Covenants		28

5.3	Access to Information		29

5.4	Notification of Certain Matters		29

5.5	Information Statement; Notice to Company Stockholders		30

5.6	Distribution Schedule		30

5.7	Section 280G Approval		31

5.8	Exclusivity		31

5.9	D&O Insurance		32

ARTICLE VI	COVENANTS OF THE COMPANY AND PARENT		32

6.1	Public Announcements		32

6.2	Further Assurances		32

Table of Contents

(CONTINUED)


		PAGE

6.3	Tax Matters		32

ARTICLE VII	CONDITIONS TO MERGER		33

7.1	Conditions to Each Party’s Obligation to Effect the Merger		33

7.2	Conditions to Obligations of Parent and Merger Sub to Effect the Merger		34

7.3	Conditions to Obligation of the Company to Effect the Merger		36

ARTICLE VIII	TERMINATION		36

8.1	Termination		36

8.2	Effect of Termination		38

8.3	Remedies		38

ARTICLE IX	INDEMNIFICATION		38

9.1	Survival		38

9.2	Indemnification by the Stockholders		39

9.3	Indemnification by Parent		40

9.4	Indemnification Procedure for Third Party Claims		40

9.5	Indemnification Procedures for Non-Third Party Claims		42

9.6	Limitation on Losses		42

9.7	Effect of Investigation; Reliance		42

9.8	Tax Treatment of Indemnification Payments		43

9.9	Damages Scrape		43

9.10	Stockholders’ Representative; Power of Attorney		43

ARTICLE X	MISCELLANEOUS		45

10.1	Notices		45

10.2	Amendments and Waivers		46

10.3	Expenses		46

10.4	Assignment and Delegation		47

10.5	Governing Law		47

10.6	Consent to Jurisdiction		47

10.7	Counterparts		48

10.8	Third Party Beneficiaries		48

10.9	Entire Agreement		48

10.10	Captions		48

10.11	Disclosure Schedule		48

10.12	Severability		48

10.13	Specific Performance		48

iii

Table of Contents

(CONTINUED)


		PAGE

10.14	Interpretation		48

ARTICLE XI	DEFINITIONS		49

11.1	Definitions		49

11.2	Other Defined Terms		54

11.3	Interpretation		57

AGREEMENT AND PLAN OF MERGER

THIS AGREEMENT AND PLAN OF MERGER (“Agreement”), dated as of February 7, 2014, is by and among Mast Therapeutics, Inc. a Delaware corporation (“Parent”), AP Acquisition Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Parent (“Merger Sub”), and Aires Pharmaceuticals, Inc., a Delaware corporation (the “Company”), and, solely with respect to Section 2.8(b), Section 6.3, and Article IX hereof, Fortis Advisors LLC, a Delaware limited liability company, in its capacity as representative of the Company Stockholders (the “Stockholders’ Representative”). Capitalized terms used in this Agreement are defined in Section 11.1, or in the applicable Section of this Agreement to which reference is made in Section 11.2.

RECITALS:

WHEREAS, the respective Boards of Directors of Parent, Merger Sub and the Company have declared it advisable and deemed it to be in the best interests of their respective stockholders to consummate the business combination provided for herein;

WHEREAS, the Board of Directors of the Company has determined to recommend to the stockholders of the Company the adoption of this Agreement;

WHEREAS, Parent, as the sole stockholder of Merger Sub, has adopted this Agreement;

WHEREAS, prior to delivery of this Agreement, and as a condition and inducement for Parent’s willingness to have entered into this Agreement, each employee of the Company listed on Schedule 1.1(a) attached hereto (a “Key Employee”) has executed and delivered to Parent an offer letter or contract for employment (as determined by Parent in its sole discretion) and a proprietary rights and inventions agreement with Parent, in each case, to become effective upon the Closing (the “Key Employee Agreements”); and

WHEREAS, promptly following the execution of this Agreement, but in any event within three (3) hours thereafter, in order to induce Parent and Merger Sub to enter into this Agreement, the stockholders of Target listed on Schedule 1.1(b) (the “Required Stockholders”) shall deliver to Parent (i) an executed Action by Written Consent of the Stockholders in the form attached hereto as Exhibit A (the “Executed Written Consent”) adopting, among other things, this Agreement, and (ii) a stockholder agreement in the form attached hereto as Exhibit B (each, a “Company Stockholder Agreement”).

NOW, THEREFORE, in consideration of the foregoing premises and the respective representations, warranties, covenants and agreements contained herein, and intending to be legally bound hereby, Parent, Merger Sub and the Company agree as follows:

ARTICLE I

THE MERGER

1.1 The Merger. Subject to the terms and conditions of this Agreement and the Certificate of Merger in substantially the form attached hereto as Exhibit C (the “Certificate of Merger”) in such form as is required by the relevant provisions of the Delaware General Corporation Law (the “DGCL”), at the Effective Time, Merger Sub shall be merged with and into the Company and the separate corporate existence of Merger Sub shall thereupon cease (the “Merger”) and the Company shall be the surviving corporation following the Merger. As a result of the Merger, the outstanding shares of capital stock of Merger Sub and the Company shall be converted or canceled in the manner provided in Article II of this Agreement. Merger Sub and the Company are sometimes referred to herein as the “Constituent Corporations” and the Company as the surviving corporation following the Merger is sometimes referred to herein as the “Surviving Corporation”.

1.2 Closing; Effective Time. The closing of the Merger (the “Closing”) shall take place at the offices of DLA Piper LLP (US), 4365 Executive Drive, San Diego, California 92121 at 11:00 a.m. on a date to be specified by the parties which shall be no later than two (2) Business Days after satisfaction (or waiver as provided herein) of the conditions set forth in Article VIII (other than those conditions that by their nature will be satisfied at the Closing), unless another time, date and/or place is agreed to in writing by the parties. The date upon which the Closing occurs is herein referred to as the “Closing Date.” Simultaneously with, or as soon as practicable following, the Closing, the Company as the surviving corporation shall file the Certificate of Merger with the Secretary of State of the State of Delaware as provided in Section 252(c) of the DGCL. The Merger shall become effective at such time as the Certificate of Merger is so filed or at such later time as is set forth in the Certificate of Merger, if different, which time is hereinafter referred to as the “Effective Time.”

1.3 Effects of the Merger.

(a) At and after the Effective Time, the Merger shall have the effects specified in the DGCL.

(b) At the Effective Time, the Certificate of Incorporation of the Company shall be amended and restated in its entirety to be identical to the Certificate of Incorporation of Merger Sub as in effect immediately prior to the Effective Time, except that Article I of the Certificate of Incorporation shall read: “The name of this corporation is Aires Pharmaceuticals, Inc.” As so amended and restated, the Certificate of Incorporation of the Company shall be the Certificate of Incorporation of the Surviving Corporation, until amended thereafter in accordance with applicable Law.

(c) At the Effective Time, the Bylaws of Merger Sub as in effect immediately prior to the Effective Time shall be the Bylaws of the Surviving Corporation (except that all references to Merger Sub in the Bylaws of the Surviving Corporation shall be changed to reflect the name change of Merger Sub to “Aires Pharmaceuticals, Inc.”), until amended thereafter in accordance with applicable Law.

(d) At the Effective Time, each of the directors and officers of Merger Sub immediately prior to the Effective Time shall be the directors and officers of the Surviving Corporation, each to hold office until their respective death, permanent disability, resignation or removal or until his or her respective successor is duly elected and qualified, all in accordance with the Certificate of Incorporation and Bylaws of the Surviving Corporation and applicable Law.

1.4 Further Assurances. If, at any time after the Effective Time, the Surviving Corporation shall consider or be advised that any deeds, bills of sale, assignments or assurances or any other acts or things are necessary, desirable or proper (a) to vest, perfect or confirm, of record or otherwise, in the Surviving Corporation its right, title and interest in, to or under any of the rights, privileges, powers, franchises, properties or assets of either of the Constituent Corporations, or (b) otherwise to carry out the purposes of this Agreement, the Surviving Corporation and its proper officers and directors or their designees shall be authorized to execute and deliver, in the name and on behalf of either Constituent Corporation, all such deeds, bills of sale, assignments and assurances and to do, in the name and on behalf of either Constituent Corporation, all such other acts and things as may be necessary, desirable or proper to vest, perfect or confirm the Surviving Corporation’s right, title and interest in, to and under any of the rights, privileges,

powers, franchises, properties or assets of such Constituent Corporation and otherwise to carry out the purposes of this Agreement.

1.5 Tax Consequences. It is intended that the Merger be treated as a “reorganization” within the meaning of Sections 368(a)(1)(A) and 368(a)(2)(E) of the Code. Parent, Merger Sub and the Company hereby adopt this Agreement as a plan of reorganization within the meaning of Sections 1.368-2(g) and 1.368-3(a) of the Treasury Regulations. The Stockholders, the Company and Parent shall each use its commercially reasonable efforts to cause the Merger to qualify, and will use its commercially reasonable efforts not to, and not to permit or cause any of its Subsidiaries to, take any action which could reasonably be expected to prevent or impede the Merger from qualifying as a reorganization within the meaning of Sections 368(a)(1)(A) and 368(a)(2)(E) of the Code. The Stockholders, the Company, Parent and Merger Sub shall report the Merger as a reorganization within the meaning of Sections 368(a)(1)(A) and 368(a)(2)(E) of the Code unless otherwise required by applicable Law.

ARTICLE II

CONVERSION OF SECURITIES

2.1 Effect on Company Capital Stock.

(a) On the terms and subject to the terms set forth in this Agreement, by virtue of the Merger and without any further action on the part of Parent, Merger Sub, the Company or any stockholder of the Company (each such stockholder, a “Company Stockholder” or “Stockholder”, and collectively the “Stockholders”):

(i) At the Effective Time, each share of Company Capital Stock issued and outstanding immediately prior to the Effective Time, other than (A) Dissenting Shares as provided in Section 2.9 and (B) Treasury Shares as provided in Section 2.1(a)(ii) shall be converted into the right to receive a portion of the Merger Consideration, subject to adjustment as provided herein and if and when payable in accordance with the terms of this Agreement, each in accordance with the Distribution Schedule and in each case subject to Sections 2.3(a) and (b) and Article IX; and

(ii) At the Effective Time, each share of Company Capital Stock held in the Company’s treasury (“Treasury Shares”) immediately prior to the Effective Time shall not represent the right to receive any Merger Consideration, and each such share shall be canceled and retired and shall cease to exist, and no cash, securities or other property shall be payable in respect thereof.

(b) Each share of common stock of Merger Sub, par value $0.001 per share, issued and outstanding immediately prior to the Effective Time shall be converted into and become one fully paid and nonassessable share of common stock, par value $0.001 per share, of the Surviving Corporation.

(c) In the event of any stock split, combination, reclassification, stock dividend or similar capitalization change with respect to Parent Common Stock prior to the Effective Time, or if a record date with respect to any of the foregoing is fixed, appropriate and proportionate adjustments shall be made to the Merger Consideration and the Distribution Schedule.

2.2 Effect on Company Stock Options and Company Stock Equivalents.

(a) Prior to the Closing, the board of directors of the Company shall have adopted appropriate resolutions and taken all other actions necessary and appropriate to provide that the vesting of each unexpired and unexercised Company Stock Option shall be accelerated in full such number of days prior to the Effective Time as is determined by the board of directors of the Company and each unexpired and unexercised Company Stock Option shall be cancelled and retired and cease to exist effective as of the Effective Time. Following the Effective Time, no Company Stock Options shall be outstanding and any Company Stock Options outstanding immediately before the Effective Time shall be null and void and not be exercisable by any optionee or benefitting Stockholder, the Company, the Surviving Corporation or the Parent. The holders of the Company Stock Options shall cease to have any further right or entitlement to acquire shares of Company Common Stock.

(b) Immediately prior to the Effective Time, any Company Stock Equivalents then outstanding shall terminate and cease to be outstanding. Following the Effective Time, no Company Stock Equivalents shall be outstanding and any Company Stock Equivalents outstanding immediately before the Effective Time shall be null and void and not be exercisable, convertible or exchangeable by any Stockholder, the Company, the Surviving Corporation or the Parent. The holders of the Company Stock Equivalents shall cease to have any further right or entitlement to acquire shares of Company Capital Stock.

2.3 Exchange of Certificates.

(a) Company shall mail to each holder of record of Company Capital Stock a letter of transmittal in the form attached as Exhibit D (the “Transmittal Letter”) prior to the Closing Date, but, in any event, within two (2) Business Days following the Closing Date. Upon surrender to Parent of a certificate or certificates representing all of such Company Stockholder’s outstanding shares of Company Capital Stock (collectively, “Certificates”), together with a duly executed Transmittal Letter, (i) such Company Stockholder shall be entitled to receive a right to the Merger Consideration, subject to adjustment as provided herein and if and when payable in accordance with the terms of this Agreement, in accordance with the Distribution Schedule less the Holdback Amount allocable to such Company Stockholder and (ii) Parent shall reasonably promptly deliver (and in any event within ten (10) Business Days) certificates representing the shares of Parent Common Stock representing the Closing Consideration with respect to such Company Stockholder, issuable pursuant to Section 2.1, as of the Effective Time in respect of the Company Capital Stock (other than Dissenting Shares) and as set forth in the Distribution Schedule.

(b) The Holdback Amount shall be available to the Parent to satisfy any amounts owed to the Parent pursuant to the Stockholders’ indemnification obligations pursuant to Article IX). On the fifth Business Day following the Ending Date (the “Release Date”), Parent shall release the amount of shares of Parent Common Stock then comprising the Holdback Amount, less the number of shares of Parent Common Stock comprising the Holdback Amount then subject to any indemnification claims pursuant to Article IX.

(c) In the event of any stock split, combination, reclassification, stock dividend or similar capitalization change with respect to Parent Common Stock prior to the Release Date, or if a record date with respect to any of the foregoing is fixed, appropriate and proportionate adjustments shall be made to the Parent Common Stock comprising the Holdback Amount.

(d) None of Parent, Merger Sub or the Company shall be liable to any Person in respect of any cash or other property delivered to a public official pursuant to any applicable abandoned property, escheat or similar Law. If any Certificates shall not have been surrendered prior to seven (7) years after the Effective Time (or immediately prior to such earlier date on which any payment pursuant to this Article II would otherwise escheat to or become the property of any Governmental Entity), the shares of Parent Common Stock issuable, or cash payment determined in accordance with Section 2.1(a), in respect of such Certificate shall, to the extent permitted by applicable Law, become the property of Parent free and clear of all claims or interests of any Person previously entitled thereto.

2.4 Parent Common Stock.

(a) If any certificate representing shares of Parent Common Stock is to be issued in a name other than that in which the Certificate surrendered in exchange therefor is registered, it shall be a condition of such exchange that the Certificate(s) so surrendered shall be properly endorsed for transfer (or accompanied by an appropriate instrument of transfer) and shall otherwise be in proper form for transfer, and that the Person requesting such exchange shall pay any transfer or other taxes required by reason of the issuance of certificates for such shares of Parent Common Stock in a name other than that of the registered holder of the Certificate surrendered, or shall establish to the satisfaction of Parent that any such taxes have been paid or are not applicable.

(b) Notwithstanding any other provision of this Article II, no fractional shares of Parent Common Stock will be issued and any fraction of a share shall be rounded down to the nearest whole number.

2.5 Distributions with Respect to Unexchanged Shares of Company Capital Stock. Notwithstanding any other provisions of this Agreement, no dividends or other distributions on shares of Parent Common Stock shall be paid with respect to any share of Company Capital Stock or other securities represented by a Certificate until such Certificate is surrendered for exchange as provided herein. Subject to the effect of applicable Laws, following surrender of any such Certificate there shall be paid to the holder of certificates representing shares of Parent Common Stock issued in exchange therefor, without interest, (a) at the time of such surrender, the amount of dividends or other distributions with a record date after the Effective Time theretofore payable with respect to such shares of Parent Common Stock and not paid, less the amount of any withholding taxes which may be required thereon, and (b) at the appropriate payment date, the amount of dividends or other distributions with a record date after the Effective Time but prior to surrender thereof and a payment date subsequent to surrender thereof payable with respect to such shares of Parent Common Stock, less the amount of any withholding taxes which may be required thereon. No holder of unsurrendered Certificates shall be entitled, until the surrender of such Certificate, and subject to the other restrictions contemplated by this Agreement, to vote the shares of Parent Common Stock which such holder shall have the right to receive pursuant to this Article II.

2.6. No Further Ownership Rights in Company Capital Stock. The payment of the Merger Consideration, subject to adjustment as provided herein and if and when payable in accordance with the terms of this Agreement, in respect of each share of Company Capital Stock owned by the Company Stockholders shall be deemed to have been paid in full satisfaction of all rights pertaining to each such share of Company Capital Stock, and there shall be no further registration of transfers on the stock transfer books of the Surviving Corporation of the shares of Company Capital Stock which were outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates are presented for transfer to the Surviving Corporation, they shall be canceled and exchanged as provided in this Article II.

2.7 Lost Certificates. In the event any Certificate shall have been lost, stolen or destroyed, Parent may, in its discretion and as a condition precedent to the disbursement of the Merger Consideration, subject to adjustment as provided herein and if and when payable in accordance with the terms of this Agreement, in respect of shares of Company Capital Stock represented by such Certificate, require the owner of such lost, stolen or destroyed Certificate to make an affidavit of that fact containing such indemnification provisions as Parent may reasonably deem appropriate, including the posting of a standard bond required by Parent’s transfer agent as indemnity against any claim that may be made against it or the Surviving Corporation with respect to such Certificate.

2.8 Dissenters’ Rights.

(a) Notwithstanding anything in this Agreement to the contrary, any shares of Company Capital Stock held by any Company Stockholder who shall have demanded and not lost or withdrawn, or who shall be eligible to demand, appraisal rights with respect to such shares of Company Capital Stock in the manner provided in Section 262 of the DGCL or, if applicable, Chapter 13 of the California Corporations Code (“Dissenting Shares”) shall not represent the right to receive the Merger Consideration, subject to adjustment as provided herein and if and when payable in accordance with the terms of this Agreement. If any Company Stockholder shall fail to perfect or shall effectively withdraw or lose such Stockholder’s right to appraisal and payment under the DGCL or California Corporations Code, as the case may be, each share of Company Capital Stock held by such Company Stockholder shall thereupon, in accordance with and subject to the provisions set forth in this Article II, represent the right to receive the Merger Consideration, subject to adjustment as provided herein and if and when payable in accordance with the terms of this Agreement.

(b) The Company shall give Parent prompt notice of any demands for appraisal received by the Company, withdrawals of such demands, and any other communications received by the Company in connection with any demands for appraisal. The Company shall not, except with the written consent of Parent, voluntarily make any payment with respect to any such demands. Parent shall have the right, subject to acting reasonably and in good faith, to control all negotiations and proceedings with respect to demands for appraisal, including the right to settle any such demands subject to the approval of the Stockholders’ Representative, such approval not to be unreasonably withheld. To the extent that Parent or the Company makes any payment in respect of any Dissenting Shares, Parent shall be entitled to recover under Article IX hereof (i) the aggregate amount by which such payment exceeds the Merger Consideration, subject to adjustment as provided herein and if and when payable in accordance with the terms of this Agreement, to which the holders of such Dissenting Shares were entitled and (ii) any other reasonable costs and expenses, including reasonable attorney fees and expenses, incurred in connection with investigating, defending and settling such demands for appraisal (the amounts in clauses (i) and (ii) collectively, “Dissenting Share Payments”).

2.9 Withholding. Parent shall be entitled to deduct and withhold from the consideration payable pursuant to this Agreement to any holder of Dissenting Shares such amounts as it is required to deduct and withhold with respect to the making of such payment under the Code or any provision of applicable Tax Law. Parent shall timely remit to the appropriate Governmental Entity any and all amounts so deducted or withheld and timely file all Tax Returns and provide to such holder such information statements and other documents required to be filed or provided under applicable Tax Law. To the extent that amounts are so withheld by Parent, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the holder of Dissenting Shares in respect of which such deduction and withholding was made by Parent.

2.10 Exemption from Registration; Lock-Up and Voting.

(a) The shares of Parent Common Stock to be issued in connection with the Merger shall be issued in a transaction exempt from registration under the Securities Act, by reason of Regulation D promulgated under the Securities Act and may not be re-offered or resold other than in conformity with the registration requirements of the Securities Act and such other laws or pursuant to an exemption therefrom. The certificates issued by Parent with respect to the shares of Parent Common Stock issued hereunder shall be legended to the effect described above and shall include such additional legends as necessary to comply with applicable U.S. federal securities laws and Blue Sky laws. The Stockholder Agreement to be executed by each Stockholder set forth on Schedule 1.1(b) hereto shall contain appropriate representation with respect to their accredited status under Rule 506 of the Securities Act. It is acknowledged and understood that Parent is relying on the written representations made by each such Stockholder in the Stockholder Agreements.

(b) The shares of Parent Common Stock to be issued in connection with the Merger shall be subject to the transfer and voting restrictions and proxy as set forth in the Stockholder Agreements. The certificates issued by Parent with respect to the shares of Parent Common Stock issued hereunder shall be legended as follows:

THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT PURPOSES ONLY, AND THE RESALE OF SUCH SHARES HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. SUCH SHARES MAY NOT BE RESOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION WITHOUT AN EXEMPTION UNDER THE SECURITIES ACT.

THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN TRANSFER RESTRICTIONS, VOTING AGREEMENTS AND IRREVOCABLE PROXY PURSUANT TO A STOCKHOLDERS AGREEMENT DATED AS OF FEBRUARY 7, 2014, BY AND AMONG THE COMPANY AND CERTAIN OF THE COMPANY’S STOCKHOLDERS. A COPY OF SUCH STOCKHOLDERS AGREEMENT WILL BE FURNISHED WITHOUT CHARGE BY THE COMPANY TO THE HOLDER HEREOF UPON WRITTEN REQUEST.

THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE ARE RESTRICTED AND THE COMPANY HAS NO OBLIGATION TO REGISTER THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE WITH THE SECURITIES EXCHANGE COMMISSION OR ANY STATE OR LIST THE SHARES WITH ANY SECURITIES EXCHANGE.

ARTICLE III

REPRESENTATIONS AND WARRANTIES OF THE COMPANY

The Company hereby represents and warrants to the Parent that each statement contained in this Article III is true and correct as of the date hereof, except where another date is used or except as set forth in the written disclosure schedule prepared by the Company which is dated as of the date of this Agreement and arranged in sections corresponding to the numbered and lettered sections contained in this Article III (the “Company Disclosure Schedule”).

3.1 Organization and Good Standing. The Company is duly organized, validly existing and in good standing under the Laws of the jurisdiction of its incorporation, has all requisite power and authority to own, lease and operate its properties and assets and to carry on its business as now being conducted. The Company is duly licensed or qualified to do business as a foreign corporation and is in good standing in each jurisdiction in which it owns or leases property or assets or the nature of its activities require such licensing or qualification, except in those jurisdictions where the failure to be so qualified or in good standing, when taken together with all other failures by the Company to be so qualified or in good standing, would not have a Material Adverse Effect on the Company. The operations now being conducted by the Company are not now and have never been conducted by the Company under any other name. The Company is not in default under or in violation of any provision of its Organizational Documents. The minutes and consents of the board of directors of the Company the Stockholders that have been delivered to Parent are true, correct and complete copies and constitute copies of all such minutes and consents of the Company since the inception thereof.

3.2 Authority and Enforceability.

(a) The Company has the requisite power and authority to enter into this Agreement and each of the Ancillary Agreements to which it is a party, to perform its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. The execution, delivery and performance by the Company of this Agreement, each of the Ancillary Agreements to which it is a party and the consummation by the Company of the transactions contemplated hereby and thereby have been duly authorized by all necessary action on the part of the Company and no other action is necessary on the part of the Company to authorize this Agreement, any Ancillary Agreement to which it is a party or to consummate the transactions contemplated hereby and thereby, subject to the receipt of the Required Company Stockholder Vote. This Agreement and each of the Ancillary Agreements to which it is a party have been duly executed and delivered by the Company. Assuming due authorization, execution and delivery by the Parent and the other parties thereto, this Agreement and each of the Ancillary Agreements constitutes the valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as limited by (a) bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar Laws relating to creditors’ rights generally and (b) general principles of equity, whether such enforceability is considered in a proceeding in equity or at Law.

(b) The board of directors of the Company, has determined by unanimous approval of all directors that (i) the Merger is fair, from a financial point of view, to the Stockholders and is in the best interests of the Company, and (ii) to unanimously recommend that the Stockholders vote in favor of the Merger, this Agreement and the transactions contemplated thereby and hereby.

(c) The Merger requires the affirmative vote of (i) a majority of Common Stock and Preferred Stock voting together as a single class, and (ii) eighty-five percent (85%) of the outstanding Preferred Stock, voting together as a single separate class (the “Required Company Stockholder Vote”). Other than the Required Company Stockholder Vote, no other vote of any holders of common stock, options, warrants, bonds, debentures, notes, other indebtedness or other securities of the Company is required under Law, the Company’s Organizational Documents or otherwise in order to consummate the Merger. The Company is not subject to Section 2115 of the California Corporations Code.

3.3 No Subsidiaries. The Company has no Subsidiaries. The Company does not own, directly or indirectly, any capital stock of, or other equity or voting interests in, any Person. The Company does not otherwise control directly or indirectly, any corporation, partnership, association, joint venture or other business entity.

3.4 Capitalization.

(a) The authorized capital stock of the Company consists of (i) 80,000,000 shares of Company common stock (the “Company Common Stock”), of which 2,094,000 shares are issued and outstanding as of the date hereof, and (ii) 55,154,400 shares of Preferred Stock (the “Company Preferred Stock”), (1) 6,000,000 of which are designated Series A Preferred Stock, 6,000,000 of which are issued and outstanding as of the date hereof, (2) 28,888,889 of which are designated Series B-1 Preferred Stock, 28,888,889 of which are issued and outstanding as of the date hereof, (3) 9,090,909 of which are designated Series B-2 Preferred Stock, 9,090,909 of which are issued and outstanding as of the date hereof, (4) 8,888,888 of which are designated Series C-1 Preferred Stock, 8,888,888 of which are issued and outstanding as of the date hereof and (5) 2,285,714 of which are designated Series C-2 Preferred Stock, 2,285,714 of which are issued and outstanding as of the date hereof. All issued and outstanding shares of Company Common Stock and Company Preferred Stock (collectively, the “Company Capital Stock”) have been duly authorized and validly issued, are fully paid and nonassessable, and were issued in compliance with all applicable federal and state securities Laws.

(b) All outstanding shares of Company Capital Stock (the “Shares”) are held as of the Closing Date by the Stockholders with the domicile addresses and in the amounts set forth on the Distribution Schedule, which is a true, correct and complete list of all holders of Shares. Such Stockholders own of record and, to the Knowledge of the Company, beneficially all the outstanding Shares, each of them so owning the number of Shares set forth opposite such Stockholder’s name on the Distribution Schedule.

(c) The Company has outstanding warrants to purchase 13,067,820 shares of the Company’s Common Stock (collectively, the “Company Warrants”).

(d) The Company has duly reserved 5,750,000 shares of Company Common Stock for future issuance pursuant to the Company Stock Option Plan, of which Company Stock Options to purchase 4,024,500 shares of Company Common Stock are outstanding as of the date hereof. The Company has provided to Parent a report dated as of the date hereof that sets forth with respect to each Company Stock Option that is outstanding as of such date: (i) the name of the holder of such Company Stock Option; (ii) the date on which such Company Stock Option was granted; (iii) the term of such Company Stock Option; (iv) the total number of shares of Company Common Stock that were originally subject to such Company Stock Option and the total number of shares of Company Common Stock that remain subject to such Company Stock Option; (v) the exercise price per share of Company Common Stock purchasable under such Company Stock Option; and (vi) whether such Company Stock Option has been designated an “incentive stock option” as defined in section 422 of the Code. The Company has delivered to Parent accurate and complete copies of (A) its standard form of option agreement, (B) any option agreement which deviates in any material respect from the standard form of option agreement and (C) the Company Stock Option Plan. No other stock option plan or other equity based compensation plan is currently in effect, and there are no shares of Company Capital Stock reserved for issuance under any other equity based compensation plan. Other than as set forth in this Section 3.4(d) or Section 3.4(d) of the Company Disclosure Schedule, there are no outstanding rights, options, warrants, conversion rights, stock appreciation rights, redemption rights, repurchase rights, calls, commitments, preemptive or other rights or agreements of any kind that obligate the Company to issue or sell any shares of capital stock or other securities of the Company or any securities or obligations convertible or exchangeable into or exercisable for, or that give any Person a right to subscribe for or acquire, any securities of the Company, and no securities or obligations evidencing such rights are authorized, issued or outstanding.

(e) None of the Company Capital Stock, Company Warrants, Company Stock Options, Company Stock Equivalents were issued or have been transferred in violation of, or are subject to, any preemptive rights, rights of first offer or subscription agreements. The Company is not a party to any stockholder agreements, voting agreements, voting trusts or any such other similar arrangements with respect to the transfer, voting or other rights associated with its securities, and there are no such agreements to which the Company is not a party.

(f) Except for Company Warrants and Company Stock Options, there are no other options, warrants, restricted stock awards, calls, rights, commitments or agreements of any character to which the Company is a party or by which it is bound, obligating the Company to issue, deliver, sell, repurchase or redeem or cause to be issued, delivered, sold, repurchased or redeemed, any shares of Company Capital Stock or other securities of the Company or obligating the Company to grant, extend, accelerate the vesting of, change the price of, or otherwise amend or enter into any such option, warrant, call, right, commitment or agreement.

(g) There are no agreements or other commitments which relate to the registration, sale or transfer of any securities of the Company (including agreements relating to rights of first refusal, co-sale rights or “drag along” rights). Other than the Stockholders’ Agreements, there are no voting trusts, proxies, or other agreements or understandings with any equity securities of the Company.

(h) There are no, and at the Closing there will not be, accrued or unpaid dividends on shares of Company Capital Stock.

3.5 No Conflicts; Consents.

(a) The execution and delivery of this Agreement and the Ancillary Agreements to which the Company is a party does not, the performance by the Company of any of its obligations hereunder and thereunder and the consummation of the transactions contemplated hereby and thereby (in each case, with or without the giving of notice or lapse of time, or both) will not, directly or indirectly, (i) violate or conflict with or result in the breach of the provisions of any of the Organizational Documents of the Company, (ii) violate, breach, conflict with or constitute a default, an event of default, or an event creating any additional rights (including rights of amendment, impairment, modification, suspension, revocation, acceleration, termination or cancellation), impose additional obligations (including without limitation, payment obligations) or result in a loss of any rights, or require a consent or the delivery of notice, under any Company Contract, Law or Permit applicable to the Company or to which the Company is a party or a beneficiary or otherwise subject, or in respect of any Company Intellectual Property, or (iii) result in the creation of any Liens upon any asset owned or used by the Company.

(b) No Permit or Order of, with, or to any Person is required by the Company in connection with the execution, delivery and performance of this Agreement and the Ancillary Agreements and the consummation of the transactions contemplated hereby and thereby.

3.6 Financial Statements; No Liabilities.

(a) Complete and accurate copies of the (i) audited consolidated financial statements consisting of the consolidated balance sheet of the Company as of December 31, 2012 and the related statements of income and retained earnings, stockholders’ equity and cash flow, for the year then ended (the “Audited Financial Statements”) and (ii) unaudited consolidated financial statements consisting of the consolidated balance sheet of the Company as of November 30, 2013 and the related statements of income and retained earnings, stockholders’ equity and cash flow for the eleven-month period then ended (the “Interim Financial Statements” and together with the Audited Financial Statements, the “Financial Statements”) are set forth in Section 3.6(a) of the Company Disclosure Schedule. The Financial Statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) applied on a consistent basis throughout the periods involved, subject, in the case of the Interim Financial Statements, to normal and recurring year-end adjustments (the effect of which will not be material in amount) and the absence of notes (that, if presented, would not differ materially from those presented in the Audited Financial Statements). The Financial Statements were prepared from the Books and Records (which are complete and accurate in all material respects) of the Company, and fairly present, in all material respects, the financial condition of the Company as of the respective dates they were prepared and the results of the operations of the Company for the periods indicated. No financial statements of any Person other than the Company are (A) required by GAAP to be included in the Financial Statements or (B) included in the Financial Statements.

(b) The Company has no Liabilities except (i) those which are adequately reflected or reserved against in the Financial Statements, and (ii) those which have been incurred in the ordinary course of business consistent with past practice since December 31, 2012 and which are not, individually or in the aggregate, material in amount. There are no Liens on any capital stock (or other equity interests), assets or properties of the Company. The Company has no liabilities that would be considered “off-balance-sheet” for GAAP purposes, including operating leases or guarantees of debt.

(c) The Company is not aware of any claims that would require the Company to incur costs under its various indemnification agreements.

3.7 Taxes.

(a) All income Tax Returns and other material Tax Returns required to be filed by or with respect to the Company have been duly and timely filed, and each such Tax Return correctly and completely reflects Liabilities for Taxes and all other information required to be reported thereon in all material respects. All Taxes owed by the Company have been timely paid. The Company has adequately provided for, in their books of account and related records, Liabilities for all unpaid Taxes (that are current Taxes not yet due and payable) with respect to all periods through the date thereof in accordance with GAAP.

(b) There is no action or audit currently proposed in writing, or, to the Knowledge of the Company, threatened or pending against the Company. The Company is not the beneficiary of any extension of time within which to file any Tax Return. To the Knowledge of the Company, no claim has ever been made by an authority in a jurisdiction where the Company does not file Tax Returns that it is or may be subject to taxation by that jurisdiction or that the Company must file Tax Returns in such jurisdiction. There are no Liens (other than Permitted Liens) on any of the assets or properties of the Company with respect to Taxes.

(c) The Company has withheld and timely paid all Taxes required to have been withheld or paid and has complied with all information reporting and backup withholding requirements in all material respects, including maintenance of required records with respect thereto.

(d) There is no dispute or claim concerning any Liabilities for Taxes with respect to the Company, for which written notice has been provided, or, to the Knowledge of the Company, which is asserted or threatened, or which is otherwise known to the Company. Section 3.7(d) of the Company Disclosure Schedule (i) lists all federal, state, local, and foreign income Tax Returns filed with respect to the Company for taxable periods ended on or after January 1, 2010, (ii) indicates those Tax Returns that have been audited and (iii) indicates those Tax Returns that currently are the subject of audit. The Company has delivered or otherwise made available to the Parent correct and complete copies of all federal, state, local and foreign income Tax Returns, examination reports, and statements of deficiencies assessed against or agreed to by the Company. The Company has not waived any statute of limitations in respect of Taxes or has agreed to (or is subject to) any extension of time with respect to a Tax assessment or deficiency. No power of attorney (other than powers of attorney authorizing employees of the Company to act on behalf of the Company) with respect to Taxes has been granted with respect to the Company that is still in effect.

(e) The Company is not nor has it ever been a United States real property holding corporation within the meaning of Section 897(c)(2) of the Code. The Company has not participated in nor cooperated with an international boycott as defined in Section 999 of the Code. The Company has never been a party to a “listed transaction” as such term is defined in Treasury Regulation Section 1.6011-4(b)(2).

(f) Parachute Payments. There is no agreement, plan, arrangement or other contract covering any employee or other service provider of Company or any Affiliate of the Company (or any other entity treated as a member of Company’s affiliated group for purposes of Section 280G(d)(5) of the Code), including arrangements contemplated by this Agreement, that, considered individually or in the aggregate with any other such agreements, plans, arrangements or other contracts in existence as of the date of this Agreement, will, or could reasonably be expected to, give rise directly or indirectly to the payment of any amount that would be characterized as a “parachute payment” within the meaning of Section 280G(b)(1) of the Code or similar provisions of applicable law. There is no agreement, plan, arrangement or other contract by which the Company or any of its Affiliates is bound to compensate any Person for excise taxes paid pursuant to Section 4999 of the Code. Section 3.7(f) of the Company Disclosure Schedule lists all Persons who are “disqualified individuals” (within the meaning of Section 280G of the Code and the regulations promulgated thereunder) as determined as of the date of this Agreement.

(g) Deferred Compensation. No stock options, stock appreciation rights or other equity-based awards issued or granted by the Company or any of its Affiliates are deferred compensation arrangements subject to the requirements of Section 409A of the Code. Each “nonqualified deferred compensation plan” (as such term is defined under Section 409A(d)(1) of the Code and the guidance thereunder) under which the Company or any of its Affiliates makes, is obligated to make or promises to make, payments (each, a “409A Plan”) complies in both form and operation, with the requirements of Section 409A of the Code and the guidance thereunder. Section 3.7(g) of the Company Disclosure Schedule lists each 409A Plan under which the Company or any of its Affiliates makes, is obligated to make or promises to make, payments. No compensation shall be includable in the gross income of any current or former employee, director, or consultant of the Company or any of its Affiliates as a result of the operation of Section 409A of the Code and no payment to be made under any 409A Plan is or will be subject to the penalties of Section 409A(a)(1) of the Code.

(h) Except for customary Tax indemnification provisions in commercial Contracts not primarily relating to Taxes, the Company is not a party to, a beneficiary of or subject to, any Tax allocation or sharing agreement or otherwise has any Liabilities for the Taxes of any Person. The Company is not a party to, a beneficiary of or is subject to, any joint venture, partnership or other arrangement that is treated as a partnership for federal income tax purposes.

(i) Notwithstanding any other provision of this Agreement, the Company makes no representations or warranties in respect of the existence, amount or usability of any net operating loss carryforward and carryback, capital loss carryforward and carryback or research credit carryforward and carryback.

3.8 Compliance with Law; Permits.

(a) Section 3.8(a) of the Company Disclosure Schedule sets forth each Order entered, issued or rendered by any Governmental Entity to which the Company, its business or its properties or assets is subject.

(b) The Company has conducted, and is conducting, its business in compliance in all material respects with all applicable Laws.

(c) The Company has obtained, owns, holds or lawfully uses all Permits which are necessary for it to conduct its business as currently conducted, or by which any of the properties or assets owned or used by the Company is subject, free and clear of all Liens (other than Permitted Liens). Each such Permit is valid and in full force and effect and is listed on Section 3.8(c) of the Company Disclosure Schedule.

(d) The Company has not received written notice regarding any (x) violation of, conflict with, or failure to conduct its business in compliance with, any applicable Law or Permit or (y) any termination, revocation, cancellation, suspension or other impairment or modification of, any Permit. The Company is not in default (or received notice of any claim of default) with respect to any Permit.

(e) To the Knowledge of the Company, the Company has adhered to all requirements necessary to retain title to all subject inventions conceived of or first reduced to practice by Company under Government Contracts, Government Grants, sub grants under Government Grants, and procurement contracts under either Government Grants or sub grants under Government Grants and avoid the exercise of march-in rights by a Governmental Entity, in each case where the relevant Governmental Entity is the United States federal government, or an agency or department thereof. The Company has not received written notice from a Governmental Entity asserting that the Company has acted or failed to act in a manner that would entitle a Governmental Entity to revoke a Patent license, result in the exercise of march-in rights by a Governmental Entity or require the Company to assign title in such a subject invention to the Governmental Entity.

(f) The Company has not received any written notices or other written correspondence or, to the Knowledge of the Company, oral correspondence or oral notices from any Governmental Entity, institutional review board, independent ethics committee, data safety monitoring committee, or other oversight body with respect to any ongoing clinical or pre-clinical studies or tests requiring the termination or suspension or material modification of such studies or tests and, to the Knowledge of the Company, there are no facts that would reasonably give rise to such an action.

(g) The Company has notified all Subcontractors of their duties and responsibilities under the applicable Government Contracts, and has incorporated all provisions required by the applicable Government Contracts to be flowed down to any subcontracts, (ii) to the Knowledge of the Company, all Subcontractors have complied in all material respects with the requirements in the applicable Government Contracts and Government Bids pertaining to submission of information in the System for Award Management, the Federal Awardee Performance and Integrity Information System, the Central Contractor Registration, the Online Representations and Certifications Application, and any other government repository for procurement contractor information and all such submissions are accurate and complete in all material respects, (iii) to the Knowledge of the Company, no Subcontractor has been excluded from participation in federal contracts or awards, and (iv) to the Knowledge of the Company, no Subcontractor has breached or violated in any material respect, or has been in default in any material respect under, the terms of any Government Contract, Government Bid, or any applicable Law pertaining to any Government Contract or Government Bid.

3.9 Grants. The Company is, and has been, in compliance in all material respects with the terms and conditions of all grants, subsidies, incentives, exemptions or other financial assistance (collectively “Grants”) and all cost reports submitted for the Grants were current, accurate and complete in all material respects as of their respective submission dates. The Company has not taken any action or made any omission (including execution and delivery of this Agreement by the Company and the consummation by the Company of the transactions contemplated by this Agreement) that would reasonably be expected to lead to the revocation or material modification of any Grant.

3.10 Personal Property.

(a) Section 3.10(a) of the Company Disclosure Schedule sets forth a complete and accurate list of all personal properties and assets, in each case with a fair market value in excess of $30,000, that are owned, leased or used by the Company as of the date hereof, specifying whether and by whom such properties and assets are owned or leased and the location of such properties and assets. The Company has good and marketable title to such properties and assets free and clear of all Liens, other than Permitted Liens. With respect to personal properties and assets that are leased by the Company, the Company has a valid leasehold interest in such properties and assets free and clear of all Liens, other than Permitted Liens.

(b) The personal properties and assets that are owned, leased or used by the Company (i) are in good operating condition, working order and repair, subject to ordinary wear and tear, free from defects, are usable in the ordinary course of the business and are suitable for the purposes for which they are currently being used or are proposed to be used and (ii) constitute all the personal properties and assets necessary for the conduct of its business as presently conducted.

3.11 Real Property. All Leases for real property to which the Company is a party are in full force and effect and are valid, binding and enforceable in accordance with their respective terms, except as such enforceability may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting or relating to creditors’ rights generally; and general principles of equity, regardless of whether asserted in a proceeding in equity or at law. True and correct copies of all such Leases have been provided to Parent. The Company has paid all rents and service charges to the extent such rents and charges are due and payable under the Leases. The Company does not own any real property.

3.12 Intellectual Property.

(a) Section 3.12(a) of the Company Disclosure Schedule contains a complete and accurate list of all Registered Intellectual Property (including the owner(s); inventor(s) (if applicable); application, registration, Patent or other identifying number under which such Registered Intellectual Property is identified; application or registration/issue date; and jurisdiction). Except for those Patents identified in Section 3.12(a) of the Company Disclosure Schedule as being jointly owned by the Company and another Person, the Company exclusively owns all right, title, and interest in and to the Owned Intellectual Property, free and clear of all Liens, other than (i) Permitted Liens and (ii) the licenses granted by the Company under the agreements listed in Section 3.12(d) of the Company Disclosure Schedule.

(b) With respect to any of the Registered Intellectual Property owned or purported to be owned by the Company which the Company has not determined to abandon in its reasonable business judgment as such abandonment is identified in Section 3.12(a) of the Company Disclosure Schedule, the Company (i) has timely satisfied all final deadlines for prosecuting any applications or maintaining any registrations or Patents (including timely payment of any maintenance, renewal or related fees) with the relevant Governmental Entity; and (ii) has taken all other actions with any Governmental Entity required to maintain its validity and effectiveness. Section 3.12(b) of the Company Disclosure Schedule contains a complete and accurate list of all actions that must be taken by the Company within one hundred twenty (120) days of the Closing Date with respect to any of the Registered Intellectual Property, including the payment of any filing, examination, registration, maintenance, renewal and other fees and taxes or the filing of any documents, applications or certificates for the purposes of maintaining, perfecting, preserving or renewing such Registered Intellectual Property, in each case in accordance with applicable Law. The Company is listed as one of the record title owners in the records of the relevant Governmental Entity for Registered Intellectual Property owned by the Company as set forth in Section 3.12(a) of the Company Disclosure Schedule that has not been abandoned by the Company. To the Knowledge of the Company, all such Registered Intellectual Property will be valid and enforceable upon issuance by the relevant Governmental Entity. To the Knowledge of the Company, the Company has not taken any action or failed to take any action that could reasonably be expected to result in the abandonment, cancellation, forfeiture, relinquishment, invalidation, waiver or unenforceability of any such Registered Intellectual Property (other than Registered Intellectual Property which the Company has determined to abandon in its reasonable business judgment as such abandonment is identified in Section 3.12(a) of the Company Disclosure Schedule).

(c) Section 3.12(c) of the Company Disclosure Schedule identifies all Licensed Intellectual Property and the relevant Contract pursuant to which Company obtained a license to the Licensed Intellectual Property (except for “shrink-wrap,” “click-wrap” and/or similar commercially available end-user licenses, each of which has incurred license fees of less than $10,000 annually). The Company has a valid, legally enforceable right to use, license, practice and otherwise exploit all Licensed Intellectual Property in accordance with the Contracts under which the same has been licensed to the Company.

(d) Section 3.12(d) of the Company Disclosure Schedule: (i) lists all licenses, sublicenses, and other agreements pursuant to which the Company authorizes a third party to use, practice any rights under, co-exist with, or grant sublicenses with respect to any Company Intellectual Property (including on such list, whether such license is exclusive or non-exclusive) but excluding any standard customer or client agreements entered into by the Company in the ordinary course of business on Company’s standard forms of agreements; and (ii) identifies any material alterations to standard customer or client agreements of the Company and circumstances surrounding such alteration. Neither the Company nor, to the Knowledge of the Company, the other party to any such licenses, sublicenses or other Contracts is in breach thereof.

(e) To the Knowledge of the Company, the Company Intellectual Property constitutes all of the Intellectual Property used in or necessary for the operation of the Company’s businesses as they are currently conducted and, in connection with the Company’s products as currently being developed (including without limitation, AIR001), as proposed to be conducted. Except as set forth in Section 3.12(e) of the Company Disclosure Schedule, the Company’s right to use the Licensed Intellectual Property (excluding “shrink-wrap,” “click-wrap” and/or similar commercially available end-user licenses, each of which has incurred license fees of less than $10,000 annually) will not be lost, altered, impaired, reduced or limited, in each case by virtue of the execution, delivery or performance of this Agreement and the consummation of the transactions contemplated hereby.

(f) No aspect of the Owned Intellectual Property, the Company’s products or services, or the operation of the Company’s business as currently conducted or, in connection with the Company’s products as currently being developed (including without limitation, AIR001), as proposed to be conducted, infringes, misappropriates, dilutes or otherwise violates the Intellectual Property (other than Patents) of any Person or, to the Knowledge of the Company, any Patents of any Person. The Company has not received any written notice from any Person that any of the Owned Intellectual Property, any Company product or service, or the operation of the Company’s business as currently conducted infringes, misappropriates, dilutes or otherwise violates any Intellectual Property of any Person.

(g) To the Knowledge of the Company, no Person has infringed, misappropriated, diluted or otherwise violated, or is infringing, misappropriating, diluting or otherwise violating, any Owned Intellectual Property or Licensed Intellectual Property that is exclusively licensed to the Company and no infringement, misappropriation, dilution or similar claims are pending or threatened in writing against any Person by the Company.

(h) None of the Owned Intellectual Property, and to the Knowledge of the Company, none of Licensed Intellectual Property that is exclusively licensed to the Company, is subject to any outstanding Order, including any Order restricting Company’s rights under such Intellectual Property.

(i) Except as set forth in Section 3.12(i) of the Company Disclosure Schedule, the Company has not entered into any agreement to indemnify any other Person against any charge of infringement, misappropriation or violation of any Intellectual Property, other than such indemnification obligations to the Company’s customers contained in customer agreements entered into by the Company in the ordinary course of business.

(j) None of the Owned Intellectual Property or, to the Knowledge of the Company, Licensed Intellectual Property exclusively licensed to the Company has been or is now involved in any interference, reissue, reexamination, cancellation or opposition proceeding in the United States Patent and Trademark Office or any other Governmental Entity and no such Action has been threatened in writing.

(k) Except as set forth on Section 3.12(k) of the Company Disclosure Schedule, (i) all current and former employees, consultants and contractors of the Company who have or had access to Company confidential and proprietary information or have been involved in the creation, development or conception of any Owned Intellectual Property or Company products have executed and delivered and, to the Knowledge of the Company, are in compliance with, enforceable written agreements under which they have (A) agreed to maintain the confidentiality of the Company Know-How and (B) assigned to the Company all Intellectual Property conceived or developed by such employees, consultants, or contractors and, where applicable, acknowledged that works to which they contributed were “works made for hire” and (ii) no Affiliate or current or former partner, director, stockholder, member, officer, employee, consultant or contractor of the Company will, after giving effect to the transactions contemplated hereby, own or retain any rights to use any of the Company Intellectual Property in the conduct of their business. To the Knowledge of the Company, no current or former employee, consultant, or contractors of the Company or any other person has any right, claim or interest to any of the Owned Intellectual Property.

(l) To the Knowledge of the Company, the Company has at all times complied in all material respects with (i) all applicable Laws relating to privacy, data protection, and the collection, use, storage, disclosure, processing, and disposal of personal information collected, used, or held for use by or on behalf of the Company in the conduct of its business; and (ii) all Contracts (or portions thereof) between the Company and vendors, marketing affiliates, and all other customers and business partners, that are applicable to the collection, use, disclosure and security of personal data, including data that can reasonably identify an individual (“Privacy Agreements”). Without limiting the foregoing, the Company is in compliance in all material respects with the Health Insurance Portability and Accountability Act of 1996, Title II, Subtitle F, Sections 261-264, Public Law 104-191 and the Health Information Technology for Economic and Clinical Health Act, as amended, as well as the implementing regulations thereunder (collectively, “HIPAA”). References to “Laws” shall include but not be limited to HIPAA. The Company has delivered to Parent accurate and complete copies of all of the Privacy Agreements.

(m) The Company currently does not nor has it in the past collected personal data through any publicly posted website. No Action has been asserted or, to the Knowledge of the Company, threatened against the Company alleging (A) a violation of any Person’s privacy or personal information or data rights; (B) a violation of any applicable privacy Laws; or (C) otherwise constitutes an unfair, deceptive, or misleading trade practice. The consummation of the transactions contemplated in this Agreement will not breach or otherwise cause any violation of any Law or rule, policy, or procedure related to privacy, data protection, information security, or the collection, use, storage or disposal of personal information collected, used, or held for use by the Company in the conduct of their business.

(n) At all times, the Company has taken commercially reasonable steps to ensure that all personal data in its possession or control is protected against damage, loss, and against unauthorized access, use, modification, disclosure or other misuse, including, without limitation, unauthorized access by third persons, including the Company’s employees and contractors. There has been no unauthorized access, use, or disclosure of personal data in the possession or control of the Company, and, to the Company’s Knowledge, any of its contractors with regard to any personal data obtained from or on behalf of the Company.

(o) The Company contractually requires all third parties, including vendors, affiliates, and other persons providing services to the Company who have access to or receive personal data from the Company to comply with all applicable privacy Laws, and to use commercially reasonable efforts consistent with best industry practices, applicable law, self-regulatory guidelines, industry standards, and privacy policies to store and secure all personal data to protect against unauthorized access to or use of the personal data.

(p) The Company has taken reasonable measures and precautions to protect and maintain the confidentiality and value of all Company Know-How which is not generally known or reasonably ascertainable and by which the Company can obtain an economic advantage over its competitors (“Trade Secrets”) and the Company has not disclosed any such Trade Secrets to any Person without having such Person execute a written agreement regarding the non-disclosure and non-use thereof. All use, disclosure or appropriation by the Company of any Trade Secrets not owned by the Company has been pursuant to the terms of a written agreement between the Company and the owner of such Know-How, or is otherwise lawful. The Company has not received any notice from any Person that there has been an unauthorized use or disclosure of any Know-How.

(q) The Company is not now nor has ever been, a member or promoter of, or a contributor to or made any commitments or agreements regarding any patent pool, industry standards body, standard setting organization, industry or other trade association or similar organization, in each case that would reasonably be expected to or does require or obligate the Company to grant or offer to any other Person any license or other right to the Owned Intellectual Property.

(r) Except as set forth in Section 3.12(r) of the Company Disclosure Schedule, no funding, facilities, resources or personnel of any Governmental Entity or any university, college, other educational institution, multi-national, bi-national or international organization or research center was used in connection with the development or creation, in whole or in part, any Owned Intellectual Property or, to the Knowledge of the Company, any Licensed Intellectual Property exclusively licensed to the Company. With respect to the disclosures in Section 3.12(r) of the Company Disclosure Schedule, Company has with respect to the relevant Company Owned Intellectual Property, and, to the Knowledge of the Company, the owner of relevant Licensed Intellectual Property exclusively licensed to the Company has, (i) timely made all required disclosures regarding any “subject inventions” as defined under 37 CFR 401.14(a) resulting from or conceived during the development of any portion of any Company Owned Intellectual Property or Licensed Intellectual Property exclusively licensed to the Company, respectively, developed under a Contract with any Governmental Entity such that the Governmental Entity does not have the right to take or claim title to such “subject inventions” and (ii) timely made all required disclosures (on the appropriate Governmental Entity schedule) of all technical data and technical information resulting from the development of any portion of any Company Intellectual Property or Licensed Intellectual Property exclusively licensed to the Company, as applicable, developed under any Contract with any Governmental Entity in which the Governmental Entity has unlimited, limited, restricted, government purpose or specifically negotiated rights. The Company has marked the technical data, and other proprietary information that it has provided to any Governmental Entity in compliance with all applicable legal requirements, and for each Government Contract or government subcontract containing a patents rights clause, the Company has reported and elected to retain the title to all patentable inventions that were conceived or reduced to practice under any such Government Contract or government subcontract in accordance with the requirements of the applicable patent rights clause. No contractual right exists for any U.S. Government customer to take title to any Company Intellectual Property, or, to the Knowledge of the Company, any Licensed Intellectual Property exclusively licensed to the Company, nor has any U.S. Government customer communicated to the Company the customer’s intent to take title to or actual transfer of title to any Company Intellectual Property.

3.13 Absence of Certain Changes or Events.

(a) Since November 30, 2013, no event, change, condition or state of facts or circumstances exists or has occurred that has had or could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect on the Company.

(b) Without limiting the generality of this Section 3.13, since December 31, 2012 the Company has conducted its business in the ordinary course, consistent with past practice, and the Company has not:

(i) declared, set aside or paid any dividend or other distribution (whether in cash, stock or other property) with respect to any securities;

(ii) delayed or postponed the payment of accounts payable or other Liabilities, in each case, outside the ordinary course of business, consistent with past practice, made any change in its accounting principles or practices or the methods by which such principles or practices are applied for financial reporting purposes (except as required by GAAP), changed, or made, any material Tax election, changed any Tax accounting method or settled any material claim for Taxes or written down or written up (or failed to write down or write up in accordance with GAAP consistent with past practice) the value of any inventories or revalued any of their respective assets other than in the ordinary course of business consistent with past practice and in accordance with GAAP; or

(iii) made any capital expenditure or commitment for any capital expenditure in excess of $30,000.

(c) Without limiting the generality of this Section 3.13, since November 30, 2013 the Company has conducted its business in the ordinary course, consistent with past practice, and the Company has not:

(i) adopted any amendment to the Organizational Documents of the Company;

(ii) (A) except in the ordinary course of business consistent with past practice, cancelled, materially modified, terminated or granted a material waiver or release of any Permit, Company Contract or given any consent or exercised any material right thereunder or (B) entered into any Contract which would be a Company Contract in effect on the date hereof;

(iii) suffered any material damage, destruction or Loss with respect to any of its properties or assets, whether or not covered by insurance;

(iv) entered into any severance or termination arrangement with any employee;

(v) acquired, sold, transferred, conveyed, leased, subleased or otherwise disposed of any businesses or any properties or assets that have a fair market value in excess of $30,000 (whether by merger, consolidation or otherwise);

(vi) (A) mortgaged, pledged or permitted to become subject to Liens any properties or assets of the Company, (B) paid any principal of or interest on any Indebtedness before the required date of such payment, cancelled any Indebtedness or waived of any claims or rights with respect to any Indebtedness, or (C) failed to pay any creditor any amount owed to such creditor when due;

(vii) taken any action that would constitute a “mass lay-off,” a “mass termination,” or a “plant closing,” or which would otherwise trigger notice requirements under any applicable Law concerning reductions in force, such as the WARN Act, or any similar federal, state, local or foreign Law in any applicable jurisdiction;

(viii) waived, released, assigned, settled or compromised any material claims, settle any proceeding or initiated proceeding; or

(ix) authorized, or entered into any Contract to do, any of the foregoing.

3.14 Contracts.

(a) Section 3.14(a) of the Company Disclosure Schedule sets forth a complete and accurate list of all of the following Contracts to which the Company is a party or a beneficiary or by which the Company or its assets are subject:

(i) Contracts for the purchase or lease of materials, supplies, goods, services, equipment or other assets and that involves or would reasonably be expected to involve (A) aggregate annual payments by the Company in excess of $30,000 or (B) aggregate payments by the Company in excess of $30,000, other than clinical site agreements (provided that such clinical site agreements are, other than immaterial changes, in the form provided to Parent);

(ii) Contracts (A) for the sale by the Company of materials, supplies, goods, services, equipment or other assets, and that involve a specified annual minimum dollar sales amount in excess of $30,000 or (B) pursuant to which the Company received payments or reasonably expects to receive payments in excess of $30,000 for the year ended December 31, 2013, or (C) pursuant to which the Company reasonably expects to receive payments in excess of $30,000 in the year ended December 31, 2014;

(iii) Contracts requiring the Company to purchase its total requirements of any product or service from a third party or that contain “take or pay” or other minimum purchase requirements provisions;

(iv) partnership, joint venture or similar Contracts;

(v) employment, severance, stay, bonus, termination, change in control, currently active consulting Contracts or similar Contracts;

(vi) Contracts containing covenants not to compete or other covenants restricting or purporting to restrict the right of the Company or their Affiliates to engage in any line of business, acquire any property, develop or distribute any product, provide any service (including geographic restrictions) or to compete with any Person, or granting any exclusive distribution rights, in any market, field or territory;

(vii) Contracts with any Stockholder or any Affiliate or family member of any Stockholder or the Company;

(viii) notes, debentures, bonds, equipment trusts, letters of credit, loans or other Contracts for or evidencing Indebtedness or the lending of money;

(ix) Contracts (including keepwell agreements) under which (A) any Person has directly or indirectly guaranteed Indebtedness or Liabilities of the Company or (B) the Company has directly or indirectly guaranteed Indebtedness or Liabilities of any Person (in each case other than endorsements for the purpose of collection in the ordinary course of business consistent with past practice);

(x) Contracts under which the Company has, directly or indirectly, made any advance, loan, extension of credit or capital contribution to, or other investment in, any Person;

(xi) Contracts providing for indemnification of any Person with respect to Liabilities relating to any current or former business, or other asset or property of the Company or any predecessor Person (other than Contracts entered into in the ordinary course of business);

(xii) Contracts under which there is a continuing obligation to pay any “earn out” payment or deferred or contingent purchase price or any similar payment respecting the purchase of any business or assets;

(xiii) powers of attorney or similar instruments;

(xiv) Contracts with any Governmental Entity (“Government Contracts”);

(xv) swap, option, forward, future or other commodities, hedging or derivatives Contracts;

(xvi) all licenses related to Licensed Intellectual Property (except for “shrink-wrap,” “click-wrap” and/or similar commercially available end-user licenses, each of which has incurred license fees of less than $10,000 annually);

(xvii) all licenses, sublicenses, and other agreements pursuant to which the Company authorizes a third party to use, practice any rights under, co-exist with, or grant sublicenses with respect to any Company Intellectual Property (including on such list, whether such license is exclusive or non-exclusive); and

(xviii) Contracts that are otherwise material to the Company or were entered into outside the ordinary course of business and not previously disclosed pursuant to this Section 3.14(a).

The Contracts required to be listed on Section 3.14(a) of the Company Disclosure Schedule, together with the Real Property Leases, Intellectual Property Contracts and Policies, are collectively referred to herein as the “Company Contracts”. The Company has delivered complete and accurate copies of each Company Contract (including all amendments, modifications, extensions and renewals thereof and related notices and agreements thereto) to the Parent.

(b) (i) Each Company Contract is in full force and effect and valid and enforceable against the Company in accordance with its terms, subject to (A) bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar Laws relating to creditors’ rights generally and (B) general principles of equity, whether such enforceability is considered in a proceeding in equity or at Law, (ii) the Company has complied with and is in compliance with, and to the Knowledge of the Company, all other parties thereto have complied with and are in material compliance with, the provisions of each Company Contract, (iii) to the Knowledge of the Company, no other party thereto is, in default in the performance, observance or fulfillment of any obligation, covenant, condition or other term contained in any Company Contract, and the Company has not given or received written notice to or from any Person relating to any such alleged or potential default that has not been cured, and (iv) other than the transactions contemplated by this Agreement, to the Knowledge of the Company, no event has occurred which with or without the giving of notice or lapse of time, or both, could violate, breach, conflict with or constitute a default, an event of default, or an event creating any additional rights (including rights of amendment, impairment, modification, suspension, revocation, acceleration, termination, or cancellation), impose additional obligations or result in a loss of any rights, or require a consent or the delivery of notice, under any Company Contract.

3.15 Litigation. There is no action, suit or proceeding, claim, arbitration, litigation or investigation (each, an “Action”), (i) pending or, to the Knowledge of the Company, threatened against the Company, its business or its properties or assets or (ii) that challenges or seeks to prevent, enjoin or otherwise delay the transactions contemplated by this Agreement or the Ancillary Agreements. To the Knowledge of the Company, no event has occurred or circumstances exist that does or could result in or serve as a basis for any such Action. There is no unsatisfied judgment, penalty or award against the Company or affecting its assets or properties.

3.16 Employee Benefits.

(a)Section 3.16(a) of the Company Disclosure Schedule contains a complete and accurate list of each (x) “employee pension benefit plan” (as defined in Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”)), “employee welfare benefit plan” (as defined in Section 3(1) of ERISA), and any other employee benefit plan (within the meaning of Section 3(3) of ERISA) that is maintained or sponsored by the Company or to which the Company contributes or for which the Company has or may have any liability, contingent or otherwise, and (y) any other benefit arrangement, obligation or practice to provide benefits, other than salary, as compensation for services rendered, to one or more present or former employees, directors, agents or independent contractors, that is maintained or sponsored by the Company or to which the Company contributes or for which the Company has or may have any liability, contingent or otherwise, including, without limitation, bonus, nonqualified deferred compensation, incentive compensation, stock ownership, stock purchase, stock option, phantom stock, retirement, vacation, severance, change of control, disability, workers’ compensation, death benefit, hospitalization, medical, fringe benefit, excess benefit, executive compensation, stock appreciation, restricted stock, indemnification, collective bargaining agreement, vacation pay, sick leave, severance policies or arrangements, or tuition reimbursement (each a “Benefit Plan”, and collectively, “Benefit Plans”).

(b) The Company has delivered or made available complete and accurate copies of the following documents (in each case, as applicable) to the Parent with respect to each Benefit Plan (i) the current plan document and any amendments thereto, (ii) the trust agreement (and all amendments thereto and the latest financial statements thereof), (iii) a written description of any Benefit Plan that is not set forth in a written document, (iv) the most recent summary plan description together with any summary or summaries of material modifications thereto, (v) the most recent determination, advisory and/or opinion letter, as applicable, from the IRS covering such Benefit Plan, (vi) the annual reports (Form 5500 Series and all schedules and financial statements attached thereto) covering such Benefit Plan for each of the last three (3) years and (vii) all Contracts relating to such Benefit Plan, including service provider agreements, insurance contracts, investment management agreements, and recordkeeping agreements.

(c) Except as set forth on Section 3.16(c) of the Company Disclosure Schedule, the Company does not have any obligation to provide post-employment benefits or coverage in the nature of health, life or disability insurance to any Person, except as may be required under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“COBRA”) or similar state legal requirement at the sole expense of the participant.

(d) The Company does not maintain, sponsor, participate in, contributes or is required to contribute to, or has ever maintained, established, sponsored, participated in, or contributed or been required to contribute to, or has any liability with respect to (i) any “pension plan” (within the meaning of Section 3(2) of ERISA) that is subject to Part 3 of Subtitle B of Title I of ERISA, Title IV of ERISA or Section 412 of the Code, (ii) any “multiemployer plan” as such term is defined in Section 3(37) of ERISA, (iii) any “multiple employer welfare arrangement” as such term is defined in Section 3(40) of ERISA or (iv) any plan maintained by more than one employer as described in Section 413(c) of the Code. No event has occurred, and no circumstance exists that has given or would reasonably be expected to result in any liability to the Company under Title IV of ERISA or Section 412 of the Code.

(e) There has been no “prohibited transaction” (within the meaning of Section 406 and 407 of ERISA and Section 4975 of the Code and that would not be exempt under Section 408 of ERISA and the regulatory guidance thereunder) with respect to any Benefit Plan.

(f) Except as set forth on Section 3.16(f) of the Company Disclosure Schedule, (i) each Benefit Plan has been operated and administered, and as of the date hereof is being operated and administered, in accordance with its terms and with applicable law, including, but not limited to, ERISA, the Code, HIPAA, and COBRA, and in each case the regulations thereunder, (ii) to the Knowledge of the Company, no event has occurred and no condition exists that would subject the Company, to any tax, fine, lien, penalty or other liability imposed by ERISA, the Code or other applicable Laws, and (iii) for each Benefit Plan with respect to which a Form 5500 has been filed, no material change has occurred with respect to the matters covered by the most recent Form since the date thereof. To the knowledge of the Company, no Benefit Plan is presently under audit or examination (nor has notice been received of a potential audit or examination) by the IRS, the Department of Labor or any other governmental authority, and no matters are pending with respect to any Benefit Plan under any IRS program. All material reports, returns and similar documents required to be filed with any governmental authority or distributed to any Benefit Plan participant have been timely filed or distributed.

3.17 Labor and Employment Matters. The Company has 7 employees and 18 consultants. The Company has complied in all material respects with all Law, Contracts, and other sources of enforceable rights with respect all labor and employment practices, including employee benefits; immigration; non discrimination; collective bargaining; and occupational safety and health; the payment of compensation, minimum wages, hours, and/or overtime; the identification of particular employees and/or job classifications as “exempt” and/or “non-exempt” for purposes of such obligations; compensation for breaks, meal periods, periods before and after work, and other periods at or away from work; and any and all other matters involving compensation or benefits afforded or not afforded to employees, contractors and/or consultants. All persons who have performed services for the Company while classified as independent contractors have satisfied the requirements of Law to be so classified, and the Company has fully and accurately reported their compensation on IRS Forms 1099 or other applicable Tax forms for independent contractors when required to do so. The Company is not party to or bound by any collective bargaining agreement, no collective bargaining agreement is being negotiated by the Company and the Company does not have any duty to bargain with any labor organization.

3.18 Environmental. The Company is and has been in material compliance with, and has no material Liability under, any and all applicable: (i) Environmental Laws; and (ii) any provisions of any Permits required to be held by the Company pursuant to Environmental Laws.

3.19 Insurance. Section 3.19 of the Company Disclosure Schedule sets forth (a) a list of each insurance policy and fidelity bond which covers the Company, its properties and assets or any director, officer or employee of the Company (the “Policies”) and (b) a list of all pending claims and the claims history for the Company during the current year and the preceding three (3) years (including with respect to insurance obtained but not currently maintained). All premiums due under the Policies have been paid in full or, with respect to premiums not yet due, accrued. The Company has not received a written notice of cancellation or termination of any Policy or of any material changes that are required in the conduct of the Company’s business as a condition to the continuation of coverage under, or renewal of, any such Policy. The Company does not have any self-insurance arrangements.

3.20 Affiliate Transactions. Except as set forth in Section 3.20 of the Company Disclosure Schedule, no Affiliate or family member of any of the Stockholders, or Affiliate or family member of any director, current or former partner, stockholder, officer, employee, consultant, or contractor of the Company is a party to, a beneficiary of or is subject to, any Contract with the Company or has any material interest in any of the properties or assets of the Company, other than indirect interests in such by virtue of their ownership interests in the Company and rights to receive compensation for services performed as an officer, director or employee of the Company. There are no inter-company services provided to the Company by any Affiliate of any of the Stockholders or by any family member of any director, current or former partner, member, manager, stockholder, officer, employee, consultant or contractor or direct or indirect stockholder of the Company (other than services provided by any such Persons as directors, officers or employees of the Company).

3.21 Regulatory Matters.

(a) The Company’s activities in connection with the development of the Company’s products (including, but not limited to, all preclinical and clinical investigations sponsored by the Company and that have been or are intended to be submitted to support regulatory submissions) have been conducted in material compliance with all applicable regulatory requirements of the FDA, including good clinical practices, good manufacturing practices, good laboratory practices, laws governing study subject privacy and confidentiality, and all other applicable Laws. No governmental or regulatory authority has commenced or, to the Knowledge of the Company, threatened to initiate or otherwise alleged that such action may be justified: (i) any action or proceeding asserting any violations of any federal, state or local laws or regulations governing pharmaceutical products or the payment for such products (including, for example, actions under the Food, Drug and Cosmetic Act and similar laws regulating pharmaceutical products; any health care laws such as those regarding government or private payor reimbursement, pricing or rebate reporting, false claims, and other forms of fraud and abuse; and any consumer protection laws); or (ii) to seek exclusion, whether voluntary or otherwise, of the Company or any employee or agent of the Company from participation in any federally or state-funded health care program. In addition, neither the Company nor any of its affiliates or employees has been debarred and is not subject to debarment pursuant to Section 306 of the United States Federal Food, Drug and Cosmetic Act, as amended, nor is it the subject of a conviction described in such Section.

(b) The Company has not (i) made an untrue statement of a material fact or fraudulent statement to the FDA, or any other Governmental Entity, (ii) failed to disclose a material fact required to be disclosed to the FDA, or any other Governmental Entity or (iii) committed any other act, made any statement or failed to make any statement that (in any such case) establishes a reasonable basis for the FDA to have scientific integrity concerns that would cause it to defer substantive scientific review of any pending or future submission and/or invoke its Fraud, Untrue Statements of Material Facts, Bribery, and Illegal Gratuities Policy or any other Governmental Entity to take a comparable action. The Company nor is not the subject of any pending or, to the Knowledge of the Company, threatened investigation by the FDA pursuant to its Fraud, Untrue Statements of Material Facts, Bribery, and Illegal Gratuities Final Policy, or by any other Governmental Entity pursuant to a comparable policy and, to the Knowledge of the Company, there are no facts that would reasonably give rise to such an action.

(c) No claims for liability for death or injury to any Person as a result of any defect in any of the Company’s products, any warranty or recall for any of the Company’s products, or any statutory liability or any liability assessed with respect to any failure to warn arising out of any of the Company’s products, including any claims for liability for death or injury to any Person as a result of any clinical trial conducted with respect to any of the Company’s products have been asserted against the Company or, to the Knowledge of the Company, its licensors in respect of any of the Company’s products.

3.22 Bank Accounts; Powers of Attorney. Section 3.22 of the Company’s Disclosure Schedule sets forth (a) the name of each bank, safe deposit company or other financial institution in which the Company has an account, lock box or safe deposit box and the names of all Persons authorized to draw thereon or have access thereto and (b) each outstanding power of attorney with respect thereto executed by or on behalf of the Company in favor of any other Person.

3.23 Brokers. The Company does not have any Liability to pay any fees or commissions to any broker, finder or similar agent with respect to this Agreement, the Ancillary Agreements or the transactions contemplated by hereby or thereby.

3.24 Novartis. The Company has no material continuing obligations under that certain Option Agreement (including any merger agreement or other agreement appended thereto or entered into in connection therewith), dated October 29, 2010, as amended on May 9, 2012 and April 15, 2013, by and between Novartis International Pharmaceutical Limited and the Company, which was terminated on November 25, 2013.

3.25 No Misstatements. No representation or warranty made by the Company in this Agreement, the Disclosure Schedule or any certificate delivered or deliverable pursuant to the terms hereof contains or will contain any untrue statement of a material fact, or omits, or will omit, when taken as a whole, to state a material fact, necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF THE PARENT AND MERGER SUB

Parent and Merger Sub represent and warrant to the Company that each statement contained in this Article IV is true and correct as of the date hereof, except where another date is used or except as set forth (i) in the written disclosure schedule prepared by Parent which is dated as of the date of this Agreement and arranged in sections corresponding to the numbered and lettered sections contained in this Article IV (the “Parent Disclosure Schedule”) or (ii) in the Company’ s SEC reports filed pursuant to Sections 13(a), 14 and 15(d) of the 1934 Act since January 1, 2013.

4.1 Organization and Good Standing. Each of Parent and Merger Sub is a corporation duly organized, validly existing and in good standing under the Laws of the jurisdiction in which it is organized and has the requisite corporate or other power, as the case may be, and authority to own, lease and operate its properties and assets and to carry on its business as now being conducted. Each of Parent and Merger Sub is duly licensed or qualified to do business as a foreign corporation and is in good standing in each jurisdiction in which it owns or leases property or assets or the nature of its activities require such licensing or qualification, except in those jurisdictions where the failure to be so qualified or in good standing, when taken together with all other failures by Parent or Merger Sub, as applicable, to be so qualified or in good standing, would not have a Material Adverse Effect on Parent or Merger Sub. Each of Parent and Merger Sub is not in default under or in violation of any provision of its Organizational Documents.

4.2 Authority and Enforceability. Each of Parent and Merger Sub has the requisite power and authority to enter into this Agreement and each of the Ancillary Agreements to which it is a party, to perform its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. The execution, delivery and performance by Parent and Merger Sub of this Agreement and each of the Ancillary Agreements to which it is a party and the consummation by the Parent and Merger Sub of the transactions contemplated hereby and thereby have been duly authorized by all necessary action on the part of the Parent and Merger Sub and no other action is necessary on the part of the Parent and Merger Sub to authorize this Agreement or any Ancillary Agreement to which it is a party or, except for any Permits that may be required by the NYSE MKT, to consummate the transactions contemplated hereby and thereby. This Agreement and each of the Ancillary Agreements to which it is a party have been duly executed and delivered by the Parent and Merger Sub. Assuming due authorization, execution and delivery by the Stockholders and each other party thereto, this Agreement and each of the Ancillary Agreements constitutes, the valid and binding obligation of the Parent and Merger Sub, enforceable against the Parent and Merger Sub in accordance with its terms, except as limited by (a) bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar Laws relating to creditors’ rights generally and (b) general principles of equity, whether such enforceability is considered in a proceeding in equity or at Law.

4.3 No Conflicts; Consents.

(a) The execution and delivery by the Parent and Merger Sub of this Agreement and the Ancillary Agreements to which it is a party does not, and the performance by the Parent of its obligations hereunder and thereunder and the consummation of the transactions contemplated hereby and thereby (in each case, with or without the giving of notice or lapse of time, or both) will not, directly or indirectly, (i) violate or conflict with the provisions of any of the Organizational Documents of the Parent or Merger Sub or (ii) violate, breach, conflict with or constitute a default, an event of default, or an event creating any additional rights (including rights of amendment, impairment, suspension, revocation, acceleration, termination or cancellation), imposition of additional obligations or resulting in a loss of any rights or, except with respect applicable NYSE MKT rules and regulations, require a consent or the delivery of notice, under any Contract, Law or Permit applicable to the Parent or Merger Sub or to which the Parent or Merger Sub is a party or a beneficiary or by which the Parent or its assets are subject, except in the case of clause (ii), where such violation, conflict, breach, default, event or other item would not reasonably be expected to materially impair or delay the ability of Parent or Merger Sub to perform its obligations under this Agreement and the Ancillary Agreements.

(b) Except for any approval by the NYSE MKT, no Permit or Order of, with, or to any Person is required by the Parent or Merger Sub in connection with the execution and delivery of this Agreement and the Ancillary Agreements, the performance of the obligations hereunder and thereunder and the consummation of the transactions contemplated hereby and thereby, except where the failure to obtain such Permit or Order would not reasonably be expected to materially impair or delay the ability of the Parent or Merger Sub to perform its obligations under this Agreement and the Ancillary Agreements.

4.4 Public Filing. Parent has filed with the SEC all reports required to be filed by Parent pursuant to Sections 13(a), 14 and 15(d) of the 1934 Act, since January 1, 2013 (collectively, and in each case including all amendments thereto, the “Public Documents”). As of their respective dates, except to the extent revised or superseded by a subsequent filing with the SEC, the Public Documents complied in all material respects with the requirements of the 1934 Act, and none of the Public Documents (including any and all financial statements included therein) as of such dates and as of the date hereof contained or contains any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading.

4.5 Financial Statements. Except as set forth in any Public Documents, the financial statements of Parent, including the notes thereto, included in the most recent annual report on Form 10-K and each subsequent quarterly report on Form 10-Q, in each case as amended, if applicable, included in the Public Documents (the “Parent Financial Statements”) (i) complied as to form in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto as of their respective dates, (ii) have been prepared in accordance with GAAP applied on a consistent basis throughout the periods indicated and consistent with each other (except as may otherwise not included in the notes thereto or, in the case of unaudited statements included in Quarterly Reports on Form 10-Q as permitted by Form 10-Q under the 1934 Act), and (iii) present fairly in all material respects the financial condition and results of operations and cash flows of Parent as of the dates, and for the periods, indicated therein (subject, in the case of interim period financial statements, to normal recurring year-end audit adjustments). Except as set forth in the Parent Financial Statements and except as arising hereunder, the Parent has no material Liabilities or obligations of any nature (whether absolute, accrued, asserted or unasserted, contingent or otherwise) that would be required to be reflected on or reserved against in any Parent Financial Statements that are not disclosed, reflected or reserved against in such Parent Financial Statements, except for Liabilities and obligations (i) incurred since September 30, 2013 in the Ordinary Course of Business, or (ii) that would not reasonably be expected to have a Material Adverse Effect on Parent.

4.6 Issuance of Parent Common Stock. The issuance and delivery of Parent Common Stock in accordance with this Agreement has been duly authorized by all necessary corporate action on the part of Parent and, when issued as contemplated hereby, such Parent Common Stock shall be duly and validly issued, fully paid and nonassessable. Parent has validly reserved a sufficient number of authorized but unissued shares of Parent Common Stock to pay the Merger Consideration payable by Parent under this Agreement. The Parent Common Stock, when so issued and delivered in accordance with the provisions of this Agreement, shall be free and clear of all Encumbrances, other than those contemplated by this Agreement and the Ancillary Agreements and any restrictions on transfer created by applicable securities Laws and will not have been issued in violation of applicable Laws, applicable NYSE MKT or other applicable stock exchange rules or regulations, or any preemptive rights or rights of first refusal or similar rights.

4.7 Absence of Certain Changes. Between September 30, 2013 and the date hereof, there has not been any change in the financial condition, properties, assets, liabilities, business or results of operations of Parent or Merger Sub, which change by itself or in conjunction with all other such changes, whether or not arising in the ordinary course of business, consistent with past practice, has had or can reasonably be expected to have a Material Adverse Effect on Parent or Merger Sub.

4.8 Capital Stock. The authorized capital stock of Parent consists of 500,000,000 shares of common stock, par value $0.001 per share and 1,000,000 shares of preferred stock, par value $0.001. As of January 20, 2014 there were issued and outstanding 102,710,286 shares of common stock and no shares of preferred stock.

4.9 Absence of Litigation. There are no claims, actions, suits, proceedings pending and neither Parent nor Merger Sub has received any written notice of any governmental investigations, inquiries or subpoenas pending against Parent or Merger Sub, that would prevent, enjoin, alter or materially delay the Merger as described herein and to the Knowledge of the Parent or Merger Sub, none of the foregoing have been threatened in writing against Parent or Merger Sub. Parent and Merger Sub is not subject to any outstanding order, judgment, writ, injunction or decree that could prevent, enjoin, alter or materially delay the Merger, or that would materially interfere with the ability of Parent or Merger Sub to consummate the Merger.

4.10 Capitalization of Merger Sub. Merger Sub is a corporation newly formed by Parent for the sole purpose of effecting the Merger, and has not and will not engage in any activity other than as contemplated in this Agreement. Merger Sub has no liabilities, and is not a party to any Contracts, except as otherwise contemplated by this Agreement. The authorized capital stock of Merger Sub consists of 1,000 shares of Common Stock, par value $0.001 per share, all of which were outstanding as of the date of this Agreement. All of the issued and outstanding capital stock of Merger Sub is, and at the Effective Time will be, owned by Parent, and has been duly authorized, validly issued and is fully paid and nonassessable, and has been issued in compliance with all applicable federal and state securities laws. Other than as set forth in this Section 4.10, there are (i) no other shares of capital stock or voting securities of Merger Sub and (ii) no outstanding rights, options, warrants, conversion rights, stock appreciation rights, redemption rights, repurchase rights, calls, commitments, preemptive or other rights or agreements of any kind that obligate Parent or Merger Sub to issue or sell any shares of capital stock or other securities of Merger Sub or any securities or obligations convertible or exchangeable into or exercisable for, or that give any Person a right to subscribe for or acquire, any securities of Merger Sub, and no securities or obligations evidencing such rights are authorized, issued or outstanding.

4.11 Compliance With Law; Permits. Parent has conducted, and is conducting, its business in compliance in all material respects with all applicable Laws. Parent has obtained, owns, holds or lawfully uses all material Permits which are necessary for it to conduct its business as currently conducted, or by which any of the properties or assets owned or used by Parent is subject, free and clear of all Liens. Each such Permit is valid and in full force and effect, and Parent has not received written notice regarding any (i) violation of, conflict with, or failure to conduct its business in compliance with, any applicable Law or material Permit or (ii) any termination, revocation, cancellation, suspension or other impairment or modification of, any material Permit. Parent is not in default (or received notice of any claim of default) with respect to any material Permit.

ARTICLE V

COVENANTS OF THE COMPANY

5.1 Conduct of Business. During the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement or the Closing Date, except with the prior written consent of Parent, the Company shall:

(a) maintain its corporate existence, pay its debts and taxes when due, pay or perform other obligations when due, and carry on its business in accordance with the provisions of this Agreement and in compliance with all Laws, Authorizations and Contracts;

(b) use its reasonable best efforts to preserve intact its present business organization;

(c) maintain its books and records in accordance with current practice, and to use its reasonable best efforts to maintain in full force and effect all Authorizations and Policies;

(d) use its reasonable best efforts to obtain an amendment and waiver (“*** Amendment”) to that certain *** Agreement, dated *** between *** and the Company, which *** Amendment shall be in a form reasonably acceptable to Parent; and

(e) use its reasonable best efforts to conduct its business in such a manner that on the Closing Date the representations and warranties of the Company contained in this Agreement shall be true and correct, as though such representations and warranties were made on and as of such date, and the Company shall use its reasonable best efforts to cause all of the conditions to the obligations of Parent and Merger Sub under this Agreement to be satisfied as soon as practicable following the date hereof.

5.2 Negative Covenants. Except as expressly provided in this Agreement, the Company shall not without the prior written consent of Parent:

(a) adopt or propose any amendment to the Organizational Documents of the Company;

(b) declare, set aside or pay any dividend or other distribution (whether in cash, stock or other property) with respect to any securities;

(c) (i) issue or authorize for issuance any securities, or (ii) make any change in any issued and outstanding securities, or redeem, purchase or otherwise acquire any securities, other than with respect to the issuance of securities upon the exercise of Company Stock Options or Company Warrants;

(d) mortgage, pledge or permit to become subject to Liens (other than Permitted Liens) any properties or assets of the Company;

(e) be party to (i) any merger, acquisition, consolidation, recapitalization, liquidation, dissolution or similar transaction involving the Company or (ii) any purchase of all or any substantial portion of the assets or securities of the Company; or

(f) (A) other than file income Tax Returns for calendar year 2012, file any Tax Return or amendment to any Tax Return unless copies of such Tax Return or amendment have first been delivered to Parent for its review and approval at a reasonable time prior to filing, (B) except as required by applicable Law, make or change any material election in respect of Taxes or adopt or change any accounting method in respect of Taxes, or (C) enter into any closing agreement, settle any claim or assessment in respect of Taxes, or consent to any extension or waiver of the limitation period applicable to any claim or assessment in respect of Taxes;

(g) enter into any severance or termination arrangement with any employee or consultant which include any covenants, obligations or liabilities that will continue or survive on or after the Closing, other than as set forth on Schedule 5.2(g);

(h) incur any Indebtedness, or make any capital expenditures or commit to make any capital expenditures which, in any one case exceeds $10,000 or which in the aggregate exceed $30,000;

(i) enter into or renew any Contract that the Company would have been required to disclose under Section 3.14(a), other than as set forth on Schedule 5.2(i);

***	Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission.

(j) modify any of the Company’s insurance policies in effect on the date of this Agreement;

(k) waive, release, assign, settle or compromise any material claims, settle any proceeding or initiated proceeding;

(l) sell, lease, transfer or assign any material property or assets of the Company, other than as set forth on Schedule 5.2(l);

(m) amend any of the Benefit Plans unless required by applicable Law or requested by Parent;

(n) delay or postpone the payment of accounts payable or other Liabilities, in each case, outside the ordinary course of business, consistent with past practice, make any change in its accounting principles or practices or the methods by which such principles or practices are applied for financial reporting purposes (except as required by GAAP), or write down or write up (or fail to write down or write up in accordance with GAAP consistent with past practice) the value of any inventories or revalue any of their respective assets other than in the ordinary course of business consistent with past practice and in accordance with GAAP; or

(o) agree, whether in writing or otherwise, to do any of the foregoing.

5.3 Access to Information. Upon reasonable notice, the Company shall afford to Parent’s officers, directors, employees, accountants, counsel, consultants, advisors and agents (“Parent Representatives”) reasonable access to and the right to inspect, during normal business hours, all of the properties, assets, records, Contracts and other documents related to the Company, and shall permit them to reasonably consult with the officers, employees, accountants, counsel and agents of the Company for the purpose of making such investigation of the Company as Parent shall reasonably request; provided, however, that Parent shall not interfere with any of the operations or business activities of the Company. The Company shall furnish to Parent all such documents and copies of documents and records and information with respect to the Company and copies of any working papers relating thereto as Parent may reasonably request. Notwithstanding anything to the contrary in this Agreement, the Company shall not be required to disclose any information to Parent if such disclosure would, in the reasonable discretion of the Company, (a) cause significant competitive harm to the Company if the transactions contemplated hereby are not consummated, (b) jeopardize any attorney-client or other legal privilege or (iii) contravene any applicable Laws.

5.4 Notification of Certain Matters. The Company shall give prompt notice to Parent of any fact, event or circumstance known to it that (a) individually or taken together with all other facts, events and circumstances known to it, has had or could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect on the Company, (b) would cause or constitute a material breach of any of its representations, warranties, covenants or agreements contained herein, (c) the failure of any condition precedent to Parent’s and Merger Sub’s obligations, (d) any notice or other communication from any third party alleging that the consent of such third party is or may be required in connection with the Merger, (e) any notice or other communication from any Governmental Entity in connection with the Merger or (f) any Actions commenced relating to the Company that, if pending on the date of this Agreement, would have been required to have been disclosed pursuant to Section 3.13; provided, however, that the delivery of any notice pursuant to this Section 5.4 shall not limit or otherwise affect any remedies available to Parent or prevent or cure any misrepresentations, breach of warranty or breach of covenant. From time to time prior to the Closing, the Company shall have the right to supplement or amend the Company Disclosure Schedule with respect to any matter hereafter arising after the delivery of the Company Disclosure Schedule pursuant to this Agreement; provided, however, that such supplements or amendments to the Company Disclosure Schedule shall not be deemed to amend or otherwise modify the Company Disclosure Schedule delivered on the date hereof or the representations and warranties of the Company contained herein or otherwise have any effect on either (i) the satisfaction of the conditions to Parent’s and Merger Sub’s obligations to close hereunder or (ii) the rights of Parent Indemnitees to seek indemnification hereunder for the matters disclosed therein.

5.5 Information Statement; Notice to Company Stockholders.

(a) The Company will prepare an information statement in form and substance reasonably acceptable to Parent (the “Information Statement”) relating to this Agreement and the Merger. The Company shall ensure that the information in the Information Statement (i) will not contain any untrue statement of material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading and (ii) complies with applicable Law; provided, however, that the Company makes no representation in this Section 5.5(a) with respect to any information provided by Parent for inclusion in the Information Statement. The Company shall not include any information of or with respect to Parent without the prior written consent of Parent (which shall not be unreasonably withheld). Parent shall ensure that such information included in the Information Statement (i) will not contain any untrue statement of material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading, and (ii) complies with applicable Law.

(b) As soon as practicable after the date hereof, but not earlier than the later to occur of (i) the second (2nd) Business Day after the date hereof or (ii) the distribution date requested by Parent (which shall not be later than the date the Company is required to provide statutory notices to the Company Stockholders pursuant to applicable Law) (the “Mailing Date”), the Company shall deliver (in any manner permitted by applicable Law) to each Company Stockholder the Information Statement and notice of the Company Stockholders’ approval and adoption of this Agreement and the consummation of the Transactions, together with the notice of dissenters’ rights required pursuant to Section 262 of the DGCL or, if applicable, Chapter 13 of the California Corporations Code, to Company Stockholders who may elect dissenters’ rights under such law. Thereafter, subject to Section 2.9, the Company shall deliver by any manner permitted by DGCL and, if applicable, the California Corporations Code any subsequent notice required to be delivered with respect to Dissenting Shares pursuant to DGCL and, if applicable, the California Corporations Code.

5.6 Distribution Schedule. The Company shall prepare and deliver to Parent and Stockholders’ Representative within two (2) Business Days before the Closing a certificate signed by the Chief Executive Officer of the Company in a form reasonably acceptable to Parent as to the capitalization of the Company immediately prior to the Effective Time and the allocation of the Merger Consideration among the Stockholders pursuant to this Agreement (the “Distribution Schedule”). The Distribution Schedule shall include the following organized by each stock certificate:

(a) The certificate number;

(b) the name and last known address (as listed in the corporate record books of the Company) of each Stockholder;

(d) the Pro Rata Share allocable to such certificate;

(e) amount of Closing Consideration shares allocable to such certificate, rounded down to the nearest whole number;

(f) amount of Holdback Amount allocable to such certificate, rounded down to the nearest whole number; and

(g) whether the certificate is a “covered security” under Treasury Regulation Section 1.6045-1(a)(15)(i), a “ covered security” acquired on or after January 1, 2011 and, if so, the acquisition date, acquisition price and acquisition price per share therefor.

5.7 Section 280G Approval. Prior to the Closing Date, the Company shall (a) secure from each Person who is, with respect to the Company, a “disqualified individual” (within the meaning of Section 280G of the Code) that has a right to any payments and/or benefits that would be deemed to constitute “parachute payments” (within the meaning of Section 280G of the Code) a waiver of such Person’s rights to any such payments and/or benefits (the “Waived 280G Benefits”) applicable to such Person so that all remaining payments and/or benefits applicable to such Person shall not be deemed to be “excess parachute payments” (within the meaning of Section 280G of the Code) and (b) solicit the approval of Stockholders pursuant to the Required Company Stockholder Vote, to the extent and in the manner required under Sections 280G(b)(5)(A)(ii) and 280G(b)(5)(B) of the Code and the regulations promulgated thereunder, in order to pay any Waived 280G Benefits. Target shall provide drafts of such waivers and such stockholder approval materials, together with such background materials and calculations used to determine whether any payment and/or benefit constitutes a parachute payment, to the Parent for its review and comment at least three (3) business days prior to obtaining such waivers and soliciting such approval, and the Company shall include any changes or comments thereto reasonably requested by the Parent. Neither the Company nor any of its Affiliates shall pay any of the Waived 280G Benefits if such payment is not approved by the Company Stockholders pursuant to the Required Company Stockholder Vote as contemplated above.

5.8 Exclusivity. Except with respect to this Agreement and the transactions contemplated hereby, the Company agrees that it will not, and it will cause its directors, officers, employees, Affiliates and other agents and representatives (including any investment banking, legal or accounting firm retained by it or any of them and any individual member or employee of the foregoing) (each, an “Agent”) not to: (a) initiate, encourage, solicit or seek, directly or indirectly, any inquiries or the making or implementation of any proposal or offer (including any proposal or offer to its stockholders or any of them) with respect to a merger, acquisition, consolidation, recapitalization, liquidation, dissolution, equity investment or similar transaction involving, or any purchase of all or any substantial portion of the assets or any securities of, the Company (any such proposal or offer being hereinafter referred to as a “Proposal”); (b) engage in any negotiations concerning, or provide any confidential information or data to, or have any substantive discussions with, any person relating to a Proposal; (c) otherwise facilitate or cooperate in any effort or attempt to make, implement or accept a Proposal; or (d) enter into Contract with any Person relating to a Proposal. The Company shall promptly (and in any event within 48 hours) notify Parent orally and in writing, if any inquiries, proposals or offers related to a Proposal are received by, any confidential information or data is requested from, or any negotiations or discussions related to a Proposal are sought to be initiated or continued with, it, any of its directors, officers, employees and Affiliates or, to the Knowledge of the Company, any other Agent. Such notice shall disclose the terms and conditions of, any such Proposal, inquiry or request, and shall include a description of the material terms of such proposal; provided, that in no event shall the Company be required to disclose the identity of the party making such Proposal.

5.9 D&O Insurance. Prior to the Effective Time, Company shall purchase a fully pre-paid tail policy under the Company’s existing directors’ and officers’ liability insurance policy, which (i) has an effective term of 6 years years from the Effective Time, (ii) covers those persons who are currently covered by the Company’s existing directors’ and officers’ liability insurance policy in effect as of the date of this Agreement and for matters occurring at or prior to the Effective Time, and (iii) contains coverage terms comparable to the terms currently in effect as of the date of this Agreement.

ARTICLE VI

COVENANTS OF THE COMPANY AND PARENT

6.1 Public Announcements. Neither Parent, Merger Sub nor the Company shall make, or cause to be made, any press release or other public statement or any statement to any analyst or member of the press concerning the transactions contemplated by this Agreement without the approval of the other party hereto; provided, however, that Parent may, without such approval, but with prior notice to and consultation with the Company, to the extent reasonably practicable, as to the contents and timing thereof, make such press releases or other public statements as it reasonably believes are required under the rules of the NYSE MKT LLC or applicable securities Laws.

6.2 Further Assurances. Upon the terms and subject to the conditions hereof each of the parties hereto shall execute such documents and other instruments and take such further actions as may be reasonably required to carry out the provisions hereof and consummate the Merger and the transactions contemplated hereby.

6.3 Tax Matters.

(a) Allocation of Taxes. In the case of any Taxes relating to a Tax period that includes (but does not end on) the Closing Date (the “Straddle Period”), the portion of such Tax which relates to the pre-closing Tax period shall (i) in the case of any Taxes other than Taxes based upon or related to income, gains or receipts, be deemed to be the amount of such Tax for the entire Straddle Period multiplied by a fraction the numerator of which is the number of days in the pre-closing Tax period (including the Closing Date) and the denominator of which is the number of days in the entire Straddle Period, and (ii) in the case of any Tax based upon or related to income, gains or receipts be deemed equal to the amount which would be payable if the relevant Straddle Period ended on the Closing Date.

(b) Preparation of Tax Returns. Parent shall prepare or cause to be prepared and file or cause to be filed all Tax Returns for the Company that are required to be filed after the Closing Date. All Tax Returns filed by Parent after the Closing Date will be prepared in a manner consistent with the past practice and custom of the Company to the extent consistent with applicable Law. Parent shall provide a draft copy of such Tax Returns to the Stockholders’ Representative for its review at least ten (10) Business Days prior to the due date thereof. Parent shall consider in good faith the reasonable comments of the Stockholders’ Representative and to the extent that filing such Tax Returns could result in a Tax liability of the Company for a pre-closing Tax period or liability of the Stockholders for indemnification under this Agreement, Parent shall not file such Tax Returns without the Stockholders’ Representative’s consent, which consent shall not be unreasonably withheld, delayed or conditioned.

(c) Amendment of Tax Returns. Unless otherwise required by applicable Law, Parent shall not, and shall not permit or cause the Company or any of Parent’s Affiliates to re-file or amend (or cause to be re-filed or amended) any Tax Return of the Company for any pre-closing Tax period or any Straddle Period, or make (or cause to be made) any Tax election or take any other action relating to Taxes with respect to such period that may give rise to an indemnification obligation pursuant to this Agreement, in each case without the prior written consent of the Stockholders’ Representative, which consent shall not be unreasonably withheld, delayed or conditioned.

(d) Tax Contests. After the Closing Date, Parent, the Company and the Stockholders’ Representative, respectively, shall inform the other party in writing of the commencement of any claim, audit, investigation, examination, or other proceeding or self-assessment relating in whole or in part to Taxes of the Company with respect to a pre-closing Tax period or Straddle Period (“Tax Contest”). After the Closing Date, Parent shall have the exclusive right to represent the interests of Parent in any and all Tax Contests; provided, however, that the Stockholders’ Representative shall have the right to participate in any such Tax Contest and to employ counsel at its own expense (which shall be deemed reimbursable expenses under Section 9.10) of its choice (which counsel shall be reasonably acceptable to Parent) for purposes of such participation to the extent that any such Tax Contest could reasonably be expected to result in a Tax indemnification liability of the Stockholders pursuant to this Agreement. In the event that Parent proposes to compromise or settle any Tax Contest, or consent or agree to any Tax liability, relating to the Company that would result in an indemnity payment by the Stockholders, the Stockholders’ Representative shall have the right to review such proposed compromise, settlement, consent or agreement. Parent shall not agree or consent to compromise or settle any Tax Contest on a basis that would result in a Tax liability of the Company for a pre-closing Tax period or liability of the Stockholders for indemnification unless (i) the Stockholders’ Representative consents to such settlement, compromise or concession, which consent will not be unreasonably withheld, conditioned or delayed, or (ii) Parent shall have agreed in writing to accept responsibility and liability for the payment of such Taxes and to forego any indemnification under this Agreement with respect to such Taxes. In the event of any conflict or overlap between the provisions of this Section 6.3(d) and Section 9.4, the provisions of this Section 6.3(d) shall govern.

(e) Cooperation. Parent, the Company and the Stockholders’ Representative shall cooperate fully as and to the extent reasonably requested by the other party in connection with the preparation and filing of any Tax Return required of the Company, and the defense of any Tax Contest, claim, audit, litigation or other proceeding, with respect to Taxes which may be payable by the Company for a pre-closing Tax period or Straddle Period. Parent, the Company and the Stockholders’ Representative agree to abide by all record retention requirements of, or record retention agreements entered into with, any Tax authority, and to give the other parties hereto reasonable written notice prior to transferring, destroying or discarding any such books and records and, if any of the other parties hereto so requests, Parent, the Company or the Stockholders’ Representative, as the case may be, shall allow the other party to take possession of such books and records.

ARTICLE VII

CONDITIONS TO MERGER

7.1 Conditions to Each Party’s Obligation to Effect the Merger. The obligations of Parent, Merger Sub and the Company to consummate the Merger are subject to the satisfaction on or prior to the Closing Date that no temporary restraining order, preliminary or permanent injunction or other Order preventing the consummation of the Merger shall be in effect. No Law shall have been enacted or shall be deemed applicable to the Merger which makes the consummation of the Merger illegal.

7.2 Conditions to Obligations of Parent and Merger Sub to Effect the Merger. The obligations of Parent and Merger Sub to effect the Merger are subject to the satisfaction (or waiver by Parent in its sole discretion) of the following further conditions:

(a) The representations and warranties of the Company set forth in Article III of this Agreement shall have been true and correct in all material respects (except for such representations and warranties that are qualified by their terms by a reference to materiality or “Material Adverse Effect”, which representations and warranties as so qualified shall be true and correct in all respects) at and as of the date hereof and shall be true and correct in all material respects at and as of the Closing Date as if made at and as of the Closing Date, except to the extent that such representations and warranties refer specifically to an earlier date, in which case such representations and warranties shall have been true and correct in all material respects as of such earlier date, and Parent shall have received a certificate dated the Closing Date signed on behalf of the Company by the Chief Executive Officer of the Company to such effect.

(b) The Company shall have performed in all material respects all obligations required to be performed by it under this Agreement at or prior to the Closing Date and Parent shall have received a certificate dated as of the Closing Date signed on behalf of the Company by the Chief Executive Officer of the Company to such effect.

(c) Since the date of this Agreement there shall not have occurred a Material Adverse Effect on the Company or any change, development or effect which, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect on the Company, and Parent shall have received a certificate dated the Closing Date signed on behalf of the Company by the Chief Executive Officer of the Company to such effect.

(d) The Company shall have taken all corporate action necessary to approve the transactions contemplated by this Agreement. The Company shall have furnished Parent and Merger Sub with a certificate of the Secretary of the Company, dated the Closing Date, certifying that: (i) attached thereto is a true and complete copy of resolutions adopted unanimously by the Board of Directors of the Company approving this Agreement and the Merger (such resolutions to be in form and substance reasonably satisfactory to Parent); (ii) attached thereto is a true and complete copy of the Executed Written Consent effecting the Required Company Stockholder Vote; and (iii) that such resolutions have not been amended and are in full force and effect as of the Closing Date.

(e) (i) no Action shall be pending or threatened in writing before any court or other Governmental Entity or before any other Person wherein an unfavorable Order would (A) prevent consummation of the Merger, (B) affect adversely the right of Parent or its Affiliates to control the Company or (C) restrain or prohibit Parent’s ownership or operation of all or any material portion of the business or assets of the Surviving Corporation and its Subsidiaries, taken as a whole, or compel Parent or its Affiliates to dispose of or hold separate all or any material portion of the business or assets of the Surviving Corporation, taken as a whole, or of Parent; and (ii) no such Order shall be in effect.

(f) The Company shall have obtained the consents and waivers set forth on Schedule 7.2(f) (the “Required Consents”).

(g) The Company shall have delivered to Parent a duly executed and certified FIRPTA Certificate for purposes of satisfying Parent’s obligations under Treasury Regulation Section 1.1445-2(c)(3) (the “FIRPTA Certificate”).

(h) The Company shall have delivered to Parent resignations from the directors and officers of the Company, other than Edwin (Ed) L. Parsley, D.O., in office immediately prior to the Effective Time.

(i) No more than two (2) Business Days prior to the Closing Date, the Company shall have furnished Parent and Merger Sub with a certificate of the Chief Executive Officer of the Company, dated as of the Closing Date, (A) certifying the computation of Net Cash (including Effective Time Cash, Company Effective Time Acquisition Expenses and Company Effective Time Indebtedness) of the Company as of the Effective Time, (B) attaching a pay-off letter in form and substance reasonably satisfactory to Parent duly executed by each holder of Company Effective Time Indebtedness together with wire instructions for the payment thereof and (C) attaching a final invoice from each Person to whom Company Effective Time Acquisition Expenses are owed together with wire instructions for the payment thereof (other than any Company Effective Time Acquisition Expenses payable to the Terminated Employees, which shall be payable in accordance with the terms of the Separation Agreements) (the “Net Cash Closing Certificate”).

(j) The Company shall have delivered to Parent certificates of good standing for the Company from the Secretary of State of the State of Delaware and California, each dated no more than five (5) Business Days prior to the Closing Date.

(k) Parent and Merger Sub shall have received an opinion from counsel for the Company in substantially the form attached hereto as Exhibit E.

(l) The Company shall have received the Required Company Stockholder Vote.

(m) The Company shall have terminated the Company Stock Option Plan and shall have provided Parent with satisfactory evidence thereof.

(n) All outstanding Company Stock Options and Company Stock Equivalents shall have been exercised or terminated and the Company shall have provided Parent with satisfactory evidence thereof.

(o) The Company shall not have any outstanding Liens (other than Permitted Liens).

(p) The Company shall not have any outstanding Company Effective Time Acquisition Expenses (other than amounts payable to Terminated Employees pursuant to the Separation Agreements) and the Company shall have delivered a certificate of the Company dated the Closing Date signed on behalf of the Company by the Chief Executive Officer of the Company to such effect.

(q) All approvals, waivers and consents necessary for consummation of or in connection with the Merger and the several transactions contemplated hereby shall have timely obtained from each Governmental Entity.

(r) None of the Key Employee Agreements and Company Stockholder Agreements shall have been rescinded (or attempted to have been rescinded) by any of the parties thereto and each of the Key Employee Agreements and Company Stockholder Agreements shall remain in full force and effect.

(s) The Company Contracts listed on Schedule 7.2(s) shall be terminated and the Company shall have provided Parent with satisfactory evidence thereof.

(t) The Company’s employees set forth on Schedule 7.2(t) (the “Terminated Employees”) shall have entered into separation agreements and/or releases providing for the termination of such employees’ employment effective immediately prior to the Effective Time and release of the Company, Merger Sub and Parent, and which shall be in form and substance reasonably satisfactory to Parent (the “Separation Agreements”).

(u) The Company’s employees set forth on Schedule 7.2(u) (the “Continuing Employees”) shall be employed by the Company and their respective employment agreements or offer letters as currently in effect, as applicable, shall be in effect, at the Closing.

(v) ***, shall have each entered into a transition and release agreement providing for release of the Company, Merger Sub and Parent and providing for certain transition services, each of which shall be in form and substance reasonably satisfactory to Parent.

(w) Parent shall have received approval for listing the Parent Shares from the NYSE MKT LLC.

(x) With respect to any payment of cash, stock or otherwise that constitutes a “parachute payment” pursuant to Section 280G of the Code, the Stockholders, pursuant to the Required Company Stockholder Vote, shall have (i) approved pursuant to a method provided for in the regulations promulgated under Section 280G of the Code any such “parachute payments” or (ii) shall have voted upon and disapproved such parachute payments, and, as a consequence, such “parachute payments” shall not be made or provided for in any manner.

7.3 Conditions to Obligation of the Company to Effect the Merger. The obligation of the Company to effect the Merger is subject to the satisfaction (or waiver by the Company in its sole discretion) of the following further conditions:

(a) The representations and warranties of Parent and Merger Sub set forth in this Agreement shall have been true and correct in all material respects at and as of the date hereof and shall be true and correct in all material respects at and as of the Closing Date as if made at and as of the Closing Date, except to the extent that such representations and warranties refer specifically to an earlier date, in which case such representations and warranties shall have been true and correct in all material respects as of such earlier date, and the Company shall have received a certificate dated the Closing Date signed on behalf of Parent by the President of Parent to such effect.

(b) Parent and Merger Sub shall have performed all obligations required to be performed by them under this Agreement at or prior to the Closing Date. The Company shall have received a certificate signed on behalf of Parent by the President or Chief Financial Officer of Parent to such effect.

ARTICLE VIII

TERMINATION

8.1 Termination.

(a) This Agreement may be terminated and the Merger abandoned at any time prior to the Effective Time (with any termination by Parent also being an effective termination by Merger Sub):

(i) by mutual written consent of Parent and the Company;

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(ii) by Parent or the Company if:

(1) the Merger is not consummated on or before February 28, 2014; provided, however, that the right to terminate this Agreement under this clause (ii)(1) shall not be available to any party whose breach of a representation, warranty, covenant or agreement under this Agreement has been the cause of or resulted in the failure of the Closing to occur on or before such date; or

(2) a Governmental Entity shall have issued an Order or taken any other action, in any case having the effect of permanently restraining, enjoining or otherwise prohibiting the Merger, which Order or other action is final and non-appealable;

(iii) by Parent if:

(1) any condition to the obligations of Parent hereunder becomes incapable of fulfillment other than as a result of a breach by Parent of any covenant or agreement contained in this Agreement, and such condition is not waived by Parent;

(2) there has been a breach by the Company of any representation, warranty, covenant or agreement contained in this Agreement or if any representation or warranty of the Company shall have become untrue, in either case such that the conditions set forth in Section 7.2(a) or Section 7.2(b) would not be satisfied; provided, that if such breach of or inaccuracy in the Company’s representations and warranties is curable by the Company prior to the Closing Date through the exercise of commercially reasonable efforts, then Parent may not terminate this Agreement under this Section 8.1(a)(iii)(2) prior to the earlier of (i) ten (10) calendar days following the receipt by the Company of written notice of such breach from Parent, or (ii) the Closing Date (it being understood that Parent may not terminate this Agreement pursuant to this Section 8.1(a)(iii)(2) if it shall have materially breached this Agreement or if such breach by the Company is cured so that such conditions would then be satisfied);

(3) each of an Executed Written Consent and a Company Stockholder Agreement duly executed by each of the Required Stockholders have not been delivered to Parent within three (3) hours of the execution of this Agreement; or

(iv) by the Company if:

(1) any condition to the obligations of the Company hereunder becomes incapable of fulfillment other than as a result of a breach by the Company of any covenant or agreement contained in this Agreement, and such condition is not waived by the Company; or

(2) there has been a breach by Parent of any representation, warranty, covenant or agreement contained in this Agreement or if any representation or warranty of Parent shall have become untrue, in either case such that the conditions set forth in Section 7.3(a) or Section 7.3(b) would not be satisfied; provided, that if such breach of or inaccuracy in Parent’s representations and warranties is curable by Parent prior to the Closing Date through the exercise of commercially reasonable efforts, then the Company may not terminate this Agreement under this Section 8.1(a)(iv)(2) prior to the earlier of (i) ten (10) calendar days following the receipt by Parent of written notice of such breach from the Company, or (ii) the Closing Date (it being understood that the Company may not terminate this Agreement pursuant to this Section 8.1(a)(iv)(2) if it shall have materially breached this Agreement or if such breach by Parent is cured so that such conditions would then be satisfied).

(b) The party desiring to terminate this Agreement pursuant to Sections 8.1(a) (ii), (iii) or (iv) shall give written notice of such termination to the other parties hereto.

8.2 Effect of Termination. In the event of termination of this Agreement as provided in Section 8.1, this Agreement shall immediately become void and there shall be no liability or obligation on the part of the Company or Parent or their respective officers, directors, stockholders or Affiliates, except as set forth in Section 8.3; provided, however, that (a) the provisions of Section 6.1 (Public Announcements) and Section 8.3 (Remedies) and Article X of this Agreement shall remain in full force and effect and survive any termination of this Agreement and (b) no such termination shall relieve any party hereto for any damages incurred or suffered by the other party as a result of an intentional or willful breach of this Agreement; provided, however, in the event that this Agreement is terminated by Parent pursuant to Section 8.1(a)(iii) or Company pursuant to Section 8.1(a)(iv), then the non-terminating party shall promptly (but in no event later than two (2) Business Days after such termination) reimburse the legal fees and expenses incurred by the terminating party up to $ ^*** .

8.3 Remedies. Any party terminating this Agreement pursuant to Section 8.1 shall have the right to recover damages sustained by such party as a result of any intentional, material breach by the other party of any representation, warranty, covenant or agreement contained in this Agreement or fraud or willful misrepresentation; provided, however, that the party seeking relief is not in breach of any representation, warranty, covenant or agreement contained in this Agreement under circumstances which would have permitted the other party to terminate the Agreement under Section 8.1.

ARTICLE IX

INDEMNIFICATION

9.1 Survival.

(a) Except as otherwise expressly provided in this Section 9.1, all representations and warranties contained in Articles III and IV of this Agreement shall survive the Closing for a period of *** (the “Ending Date”), provided, however, (i) the representations and warranties set forth in Section 3.7 (the “Tax Representations”) shall survive the Closing for a period of *** and (ii) the representations and warranties set forth in Sections 3.2 (the “Authority Representations”), 3.4 (the “Capitalization Representations”), 4.2 (Authority and Enforceability) and 4.8 (Capital Stock), shall survive the Closing indefinitely. All covenants and agreements that by their terms apply, or that are to be performed in whole or in part at or after the Closing, shall survive from and after the Effective Time for the period provided in such covenant or agreement, if any, or otherwise until fully performed, and the covenants and agreements contained in this Section 9.1 and Article X shall survive indefinitely.

(b) The period for which a representation or warranty survives the Closing is referred to herein as the “Applicable Survival Period.” To the extent that a claim for indemnification under this Section 9.1 is based upon facts or circumstances to which more than one Applicable Survival Period may be applicable, the longest of such Applicable Survival Periods shall apply. In the event notice of claim for indemnification under Section 9.2 is given within the Applicable Survival Period, the representation or warranty that is the subject of such indemnification claim (whether or not formal legal Action shall have been commenced based upon such claim) shall survive with respect to such claim until such claim is finally resolved. The Indemnitor shall indemnify the Indemnitee for all Losses (subject to the limitations set forth herein, if applicable) that the Indemnitee may incur in respect of such claim, regardless of when incurred.

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9.2 Indemnification by the Stockholders.

(a) Subject to the limitations set forth herein, the Stockholders (each a “Stockholder Indemnitor”, and collectively the “Stockholder Indemnitors”) shall, severally and not jointly, in accordance with their Pro Rata Amount, indemnify and defend Parent, Merger Sub and their respective Affiliates and their respective stockholders, members, managers, officers, directors, employees, agents, successors and assigns (the “Parent Indemnitees”) against, and shall hold them harmless from, any and all losses, damages, claims (including third party claims), charges, Liabilities, actions, suits, proceedings, interest, penalties, Taxes, costs and expenses (including reasonable legal, consultant, accounting and other professional fees, costs of sampling, testing, investigation, removal, treatment and remediation of contamination and reasonable fees and costs incurred in enforcing rights under this Agreement)(collectively, “Parent Losses”) actually incurred by any Parent Indemnitee that result from, arise out of, or in connection with, or otherwise with respect to:

(i) any inaccuracy or breach of any representation or warranty made by the Company in Article III of this Agreement;

(ii) any breach by the Company of any covenant or agreement contained in this Agreement^;

(iii) any fraud or willful misconduct by the Company with respect to this Agreement;

(iv) any Proceeding that is brought by or on behalf of a Stockholder in his/her/its capacity as a holder of the Company’s capital stock, other than any action brought to enforce a Stockholder’s rights under this Agreement or any Ancillary Agreement;

(v) any Dissenting Share Payments;

(vi) any inaccuracy in the Net Cash as of the Effective Time, where the actual Net Cash as of Closing is less than the Net Cash as set forth in the Net Cash Closing Certificate;

(vii) any inaccuracy in or failure to calculate correctly the amounts set forth in the Distribution Schedule; and

(viii) any of the matters set forth in Schedule 9.2(a)(viii).

(b) The Stockholder Indemnitors shall not be liable for any Parent Losses pursuant to Section 9.2(a)(i) (other than Parent Losses related to the Tax Representations, Authority Representations or Capitalization Representations) unless and until the aggregate amount of all Parent Losses incurred by the Parent Indemnitees under Section 9.2(a)(i) (other than Parent Losses related to the Tax Representations, Authority Representations or Capitalization Representations) exceeds $ ^*** , in which event the Parent Indemnitees will have the right to be indemnified for all Parent Losses from the first dollar (the “Basket Amount”).

(i) under Section 9.2(a)(i) (other than breaches of the Tax Representations, Authority Representations and Capitalization Representations) shall in no event exceed *** ; and

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(ii) under (A) Section 9.2(a)(i) (solely with respect to breach of the Tax Representations, Authority Representations and Capitalization Representations) or (B) any of Sections 9.2(a)(ii)-(viii), shall in no event exceed ***.

9.3 Indemnification by Parent.

(a) Subject to the limitations set forth herein, the Parent (“Parent Indemnitor”) shall indemnify and defend the Stockholders (the “Stockholder Indemnitees”) against, and shall hold them harmless from, any and all losses, damages, claims (including third party claims), charges, Liabilities, actions, suits, proceedings, interest, penalties, Taxes, costs and expenses (including reasonable legal, consultant, accounting and other professional fees, costs of sampling, testing, investigation, removal, treatment and remediation of contamination and fees and costs incurred in enforcing rights under this Agreement) (collectively, “Stockholder Losses”, together with Parent Losses, “Losses”) resulting from, arising out of, or incurred by any Stockholder Indemnitee in connection with, or otherwise with respect to:

(i) any inaccuracy or breach of any representation or warranty made by the Parent or Merger Sub in Article IV of this Agreement;

(ii) any breach by Parent or Merger Sub of any covenant or agreement contained in this Agreement; and

(iii) any fraud or willful misconduct by Parent or Merger Sub with respect to this Agreement.

(b) The Parent Indemnitor shall not be liable for any Stockholder Losses pursuant to Section 9.3(a)(i) (other than with respect to Parent’s obligation to issue shares of Parent Common Stock hereunder and Stockholder Losses related to the inaccuracy of Sections 4.2 or 4.8) unless and until the aggregate amount of all Stockholder Losses incurred by the Stockholder Indemnitees under Section 9.3(a)(i) (other than with respect to Parent’s obligation to issue shares of Parent Common Stock hereunder and Stockholder Losses related to the inaccuracy of Sections 4.2 or 4.8) exceeds the Basket Amount.

(i) under Section 9.3(a)(i) (other than Stockholder Losses related to the inaccuracy of Section 4.2) shall in no event exceed the Holdback Amount (computed as the amount equal to the Holdback Amount multiplied by the Closing Price); and

(ii) under (A) Section 9.3(a)(i) (solely with respect to Stockholder Losses related to the inaccuracy of Section 4.2) or (B) any of Sections 9.3(a)(ii)-(iii), shall in no event exceed the Merger Consideration (computed as the amount equal to the Merger Consideration paid or payable multiplied by the Closing Price) (other than with respect to Parent’s obligation hereunder to issue shares of Parent Common Stock).

9.4 Indemnification Procedure for Third Party Claims.

(a) In the event that an Indemnitee receives notice of the assertion of any claim or the commencement of any Action by a third party in respect of which indemnity may be sought under the provisions of this Section 9.4 (a “Third Party Claim”), the Indemnitee shall promptly notify, in the case of a Parent Indemnitee, the Stockholders’ Representative, and in the case of a Stockholder Indemnitee, Parent in writing of such Third Party Claim, setting forth such Third Party Claim in reasonable detail (such notice, a “Notice of Claim”); provided that the failure or delay in notifying such Person of such Third Party Claim will not relieve the Indemnitors of any Liability the Indemnitors may have to the Indemnitee, except and only to the extent that the Indemnitor has been materially prejudiced by such failure.

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(b) The Stockholders’ Representative shall, at its expense, (which shall be deemed reimbursable expenses under Section 9.10) be entitled to participate in any defense of such Third Party Claim and shall have the right to receive copies of all pleadings, notices and communications with respect to the Third Party Claim to the extent that receipt of such documents does not affect any privilege relating to any Indemnitee; provided, however, that any Indemnitee shall have full control over the litigation, including settlement and compromise thereof. The Indemnitee may not bind the Indemnitors to a settlement of any Third Party Claim without the consent of the Stockholders’ Representative, which shall not be unreasonably withheld, conditioned or delayed. If the Stockholders’ Representative consents to any settlement (or if such consent is unreasonably withheld, conditioned or delayed), such consent shall be determinative as to the existence of and amount of Losses. The consent of the Stockholders’ Representative with respect to any settlement of any such Third Party Claims shall be deemed to have been given unless the Stockholders’ Representative shall have objected within thirty (30) days after a written request for such consent by Parent. All reasonable costs and expenses incurred by Indemnitee in so defending a Third Party Claim shall constitute Losses.

(c) With respect to any Third Party Claim subject to indemnification under this Article IX: (i) both Indemnitee subject to such Third Party Claim and the Stockholders’ Representative shall keep the other Person fully informed in all material respects of the status of such Third Party Claim and any related Proceedings at all stages thereof where such Person is not represented by its own counsel and (ii) the parties agree (each at its own expense) to render to each other such assistance as they may reasonably require of each other and to cooperate in good faith with each other in order to ensure the proper and adequate defense of any Third Party Claim.

(d) With respect to any Third Party Claim subject to indemnification under this Article IX, the parties shall cooperate in such a manner as to preserve in full (to the extent possible) the confidentiality of all confidential information and the attorney-client and work-product privileges. In connection therewith, each party agrees that: (i) it will use commercially reasonable efforts, in respect of any Third Party Claim in which it has assumed or has participated in the defense, to avoid production of confidential information (consistent with applicable Law and rules of procedure) and (ii) all communications between any parties hereto and counsel responsible for or participating in the defense of any third-party claim will, to the extent possible, be made so as to preserve any applicable attorney-client or work-product privilege.

(e) In connection with any Third Party Claim, the Company on behalf of the Indemnitors hereby consents to the nonexclusive jurisdiction of any court in which an Action in respect of a Third Party Claim is brought against any Indemnitee for purposes of any claim that the Indemnitee may have under this Section 9.3(e) with respect to such Action or the matters alleged therein and agrees that process may be served on the Indemnitor with respect to such a claim anywhere in the world.

(f) Parent may reduce the number of shares of Parent Common Stock constituting the Holdback Amount to account for any Losses indemnifiable pursuant this Article IX accrued and finally determined during the period of time from the Closing up to and including the Release Date, with the value of each such share of Parent Common Stock to be equal to the Closing Price. If the Indemnitee is a Stockholder Indemnitee, the Parent Indemnitor shall promptly deliver cash to the Stockholders, in accordance with the instructions provided to the Parent Indemnitor by the Stockholders’ Representative, for any Losses finally determined and indemnifiable pursuant this Article IX.

9.5 Indemnification Procedures for Non-Third Party Claims. In the event of a claim that does not involve a Third Party Claim being asserted against it, the Indemnitee shall promptly send a written notice of claim to, in the case of a Parent Indemnitee, the Stockholders’ Representative, and in the case of a Stockholder Indemnitee, Parent; provided that the failure or delay in notifying such Person of such claim will not relieve the Indemnitor of any Liability the Indemnitor may have to the Indemnitee, except and only to the extent that the Indemnitor has been materially prejudiced by such failure. The notice of claim shall set forth the amount, if known, or, if not known, an estimate of the foreseeable maximum amount of claimed Losses (which estimate shall not be conclusive of the final amount of such Losses) and a description of the basis for such claim. The Indemnitor will have thirty (30) days from receipt of such notice of claim to dispute the claim, and the parties thereafter shall attempt to resolve the dispute by negotiation in good faith; provided, that if the parties are unable to reach agreement within sixty (60) days of such notice, the dispute shall be submitted for final adjudication to the applicable court sitting in the State of Delaware in accordance with Section 10.6. If the Indemnitor does not give notice to the Indemnitee that it disputes such claim within thirty (30) days after its receipt of the notice of claim, the claim specified in such notice of claim will be conclusively deemed a Loss subject to indemnification hereunder.

9.6 Limitation on Losses.

(a) The remedies provided in this Article IX shall be the exclusive post-Closing remedies of the parties hereto in connection with any claim, cause of action, suit, injunction, judgment, decree, settlement, litigation, investigation or proceeding arising out of this Agreement, other than such items alleging fraud or willful misconduct; provided, that nothing herein is intended to waive or bar any equitable remedies of a party.

(b) Notwithstanding anything to the contrary contained herein, the amount of any Losses shall be reduced by any indemnity, contribution or similar payment (including proceeds from insurance, net of any premium or deductible paid by an Indemnitee, that is actually received by the applicable Indemnitee with respect to the underlying claim for indemnification.

(c) Losses shall exclude punitive, incidental, consequential, or special damages, or diminution in value, except to the extent such Losses are specifically awarded by an arbitrator or Governmental Entity to a third party and paid to such third party by an Indemnitee pursuant to a Third Party Claim.

9.7 Effect of Investigation; Reliance. The right to indemnification, payment of Losses or any other remedy will not be affected by any investigation conducted with respect to, or any knowledge acquired (or capable of being acquired) at any time, whether before or after the execution and delivery of this Agreement or the Effective Time, with respect to the accuracy or inaccuracy of or compliance with, any representation, warranty, covenant or agreement made by or on behalf of the Company or any other matter. The waiver of any condition based on the accuracy of any such representation or warranty, or on the performance of or compliance with any such covenant or agreement, will not affect the right to indemnification, payment of Losses, or any other remedy based on any of such representation, warranty, covenant or agreement. No Indemnitee shall be required to show reliance on any representation, warranty, certificate or other agreement in order for such Indemnitee to be entitled to indemnification hereunder. Parent and the Company acknowledge that such Losses, if any, would relate to unresolved contingencies existing on the date of this Agreement, which if resolved on the date of this Agreement would have led to a reduction in Merger Consideration that Parent would have paid in the Merger. All indemnification rights hereunder shall survive the execution and delivery of this Agreement and the consummation of the Merger indefinitely, regardless of any investigation, inquiry or examination made for or on behalf of, or any knowledge of either Parent or any of the other Indemnitees or the acceptance by Parent of any certificate or opinion.

9.8 Tax Treatment of Indemnification Payments. Except as otherwise required by applicable Law, the parties shall treat any indemnification payment made hereunder as an adjustment to the Merger Consideration payable under this Agreement.

9.9 Damages Scrape. In connection with this Article IX, any “Material Adverse Effect” or other materiality or similar qualifications in the representations, warranties, covenants and agreements of the Company, Parent or Merger Sub, as applicable, shall be disregarded solely for purposes of calculating Losses hereunder.

9.10 Stockholders’ Representative; Power of Attorney.

(a) Appointment. By virtue of the adoption of this Agreement and the approval of the Merger by the Stockholders and/or accepting the consideration payable to a Stockholder, each Stockholder (regardless of whether or not such Stockholder executed the Written Consent) hereby:

(i) authorizes, empowers and appoints the Stockholders’ Representative to act as the sole and exclusive agent, attorney-in-fact and representative;

(ii) authorizes and empowers the Stockholders’ Representative to (a) take any and all actions (including, without limitation, executing and delivering any documents, incurring any costs and expenses on behalf of the Stockholders and making any and all determinations) which may be required or permitted by this Agreement or Ancillary Agreements to be taken by the Stockholders, (b) exercise such other rights, power and authority, as are authorized, delegated and granted to the Stockholders’ Representative pursuant to this Agreement or Ancillary Agreements, and (c) exercise such rights, power and authority as are incidental to the foregoing, in each case without having to seek or obtain the consent of any Person under any circumstance; and

(iii) adopts and approves the terms and conditions relating to the Stockholders’ Representative set forth in this Section 9.10.

Any such actions taken, exercises of rights, power or authority, and any decision or determination made by the Stockholder’s Representative consistent therewith, shall be absolutely and irrevocably binding on each Stockholder as if such Stockholder personally had taken such action, exercised such rights, power or authority or made such decision or determination in such Stockholder’s capacity. The powers, immunities and rights to indemnification granted to the Stockholders’ Representative hereunder: (i) are coupled with an interest and shall be irrevocable and survive the death, incompetence, bankruptcy or liquidation of the respective Stockholder and shall be binding on any successor thereto, and (ii) shall survive the delivery of an assignment by any Stockholder of the whole or any fraction of his, her or its interest in the Holdback Amount.

(b) Acceptance. Stockholders’ Representative accepts its appointment as Stockholders’ Representative.

(c) Replacement. The person serving as the Stockholders’ Representative may be replaced from time to time by the Stockholders who held more than a eighty percent (80%) of the Company Capital Stock (the “Stockholder Majority”) immediately prior to the Effective Time, upon not less than ten (10) days’ prior written notice to Parent and with Parent’s written consent, which shall not be unreasonably withheld. The Stockholders’ Representative may resign upon not less than ten (10) days’ prior written notice to Parent and the Stockholders; provided, however, that the Stockholders’ Representative shall continue to fulfill his duties and obligations as Stockholders’ Representative until a replacement has been approved by the Stockholders who held more than a majority of the Company Capital Stock. The immunities and rights to indemnification shall survive the resignation or removal of the Stockholders’ Representative and the Closing and/or any termination of this Agreement. No bond shall be required of the Stockholders’ Representative. Notices or communications to or from the Stockholders’ Representative shall constitute notice to or from each of the Stockholders.

(d) No Liability; Indemnification. The Stockholders’ Representative shall not be liable for any actions taken or omitted to be taken under or in connection with this Agreement or the Ancillary Agreements, except for such actions taken or omitted to be taken resulting from the Stockholders’ Representative’s willful misconduct or fraud. Without limiting the generality of the foregoing, the Stockholders’ Representative shall be entitled to rely on the advice of counsel, public accountants or other independent experts experienced in the matter at issue or any actions taken pursuant to instructions given by the Stockholder Majority, and any error in judgment or other act or omission of the Stockholders’ Representative pursuant to such advice or instruction shall in no event subject the Stockholders’ Representative to liability by any Stockholder. Parent hereby acknowledges and agrees that the Stockholders’ Representative may engage the Company’s current counsel to represent the Stockholders’ Representative in matters relating to this Agreement and that such representation would be adverse to the interests of the Surviving Corporation. Parent and the Company hereby waive any right that Parent or the Surviving Corporation might have in the future to object to any such representation.

Furthermore, each Stockholder shall be liable for, severally (and not jointly), in accordance with his, her or its Pro Rata Share, and shall indemnify the Stockholders’ Representative from and against, any loss, liabilities or expenses (including, without limitation, reasonable attorneys’ fees and expenses) paid or incurred by the Stockholders’ Representative in connection with the performance of its duties as Stockholders’ Representative, or as a result of or in the defense of any claim brought against the Stockholders’ Representative relating to the acts or omissions of the Stockholders’ Representative hereunder (however, the foregoing indemnification shall not apply in the event of any action or proceeding which finally adjudicates the liability of the Stockholders’ Representative hereunder for its willful misconduct or fraud). The payment of such liabilities and expenses shall first be made by the Stockholders’ Representative directly from the Stockholders out of distributions to them from the Holdback Amount and thereafter the Stockholders’ Representative shall have the right to demand payment with respect to such expenses from each Stockholder severally (and not jointly) in accordance with the Stockholders’ Pro Rata Share; provided, however, that neither Parent nor the Surviving Corporation shall have any liability with respect to such items. The Stockholders acknowledge that the Stockholders’ Representative shall not be required to expend or risk its own funds or otherwise incur any financial liability in the exercise or performance of any of its powers, rights, duties or privileges or administration of its duties.

(e) Notice; Reliance. Any notice or communication given or received by, and any decision, action, failure to act within a designated period of time, agreement, consent, settlement, resolution or instruction of, the Stockholders’ Representative shall constitute a notice or communication to or by, or a decision, action, failure to act within a designated period of time, agreement, consent, settlement, resolution or instruction of all the Stockholders and shall be final, binding and conclusive upon each such Stockholder; and the Indemnitee shall be entitled to rely upon any such notice, communication, decision, action, failure to act within a designated period of time, agreement, consent, settlement, resolution or instruction as being a notice or communication to or by, or a decision, action, failure to act within a designated period of time, agreement, consent, settlement, resolution or instruction of, each and every such Stockholder. The Indemnitee is hereby relieved from any liability to any Person for any acts done by them in accordance with any such notice, communication, decision, action, failure to act within a designated period of time, agreement, consent or instruction of the Stockholders’ Representative. Furthermore, the Stockholders’ Representative shall be entitled to: (i) rely upon the Distribution Schedule, (ii) rely upon any signature believed by it to be genuine, and (iii) reasonably assume that a signatory has proper authorization to sign on behalf of the applicable Stockholder or other party.

(f) Role of Stockholders’ Representative. Without limiting the generality or effect of Section 9.10(a), any claims or disputes between or among any Indemnitee, the Stockholders’ Representative and/or any one or more Stockholders relating to this Agreement or the transactions contemplated hereby or thereby shall in the case of any claim or dispute asserted by or against or involving any such Stockholder (other than any claim against or dispute with the Stockholders’ Representative), be asserted or otherwise addressed solely by the Stockholders’ Representative on behalf of such Stockholder (and not by such Stockholder acting on its own behalf).

(g) Access to Information. Stockholders’ Representative shall (i) treat confidentially and not disclose any nonpublic information from or about Parent, the Company or the Surviving Corporation to anyone (except on a need to know basis to individuals who agree to treat such information confidentially) and (ii) enter into a confidentiality agreement in a reasonable and customary form to the extent requested by Parent or the Surviving Corporation.

ARTICLE X

MISCELLANEOUS

10.1 Notices.

(a) For a notice or other communication (a “Notice”) under this Agreement to be valid, it must be in writing and signed by the sending party, and the sending party must use one of the following methods of delivery: (i) personal delivery; (ii) registered or certified mail, in each case, return receipt requested and postage prepaid; (iii) overnight courier, with all fees prepaid, or (iv) facsimile, with confirmation of transmission.

(b) For a Notice to be valid, it must be addressed to the receiving party at one or more addresses listed below for the receiving party or to any other address designated by the receiving party in a Notice in accordance with this Section 10.1.

If to the Stockholders’ Representative or any Stockholder:

Fortis Advisors LLC

Attention: Notice Department

Facsimile No.: (858) 408-1843 Email: notices@fortisrep.com

with a copy to (which shall not constitute notice):

Latham & Watkins LLP

12670 High Bluff Drive

San Diego, CA 92130

Attention: Cheston J. Larson

Facsimile No.: (858) 523-5450

If to the Parent, Merger Sub and post-Closing, Company:

Mast Therapeutics, Inc.

12390 El Camino Real, Suite 150,

San Diego, California

Attention: Brian Culley

Facsimile No.: (858) 552-0876

with a copy to (which shall not constitute notice):

DLA Piper LLP (US)

4365 Executive Drive, Suite 100

San Diego, CA 92121

Attention: Michael Kagnoff

Facsimile No.: (858) 638-5122

(c) Subject to Section 10.1(d), a valid Notice is effective when received by the receiving party in accordance with Sections 10.1(a) and 10.1(b). A Notice is deemed to have been received as follows:

(i) If it is delivered in person or sent by registered or certified mail or by overnight courier, upon the earlier of (A) receipt as indicated by the date on the signed receipt or as otherwise established by the sending party and (B) two (2) Business Days after the Business Day on which it is sent to the receiving party. If it is delivered by facsimile, on the date the facsimile is transmitted with confirmation of transmission.

(ii) If the receiving party rejects or otherwise refuses to accept it, or if it cannot be delivered because of a change in address for which no Notice was given, then upon that rejection, refusal or inability to deliver.

(d) If a Notice is received after 5:00 p.m. PST on a Business Day at the location specified in the address for the receiving party, or on a day that is not a Business Day, then the Notice is deemed received at 9:00 a.m. PST on the next Business Day.

(e) If more than one method for delivery of a Notice under Section 10.1(a) is used, the earliest Notice date under Section 10.1(c) will control.

(f) If a Notice is to be given under this Section 10.1 to a permitted successor or assign of a person or entity, then such Notice shall be given in accordance with this Section 10.1 to such successor or assign.

10.2 Amendments and Waivers. No amendment of this Agreement will be effective unless it is in writing and signed by the parties hereto. No waiver of any provision of this Agreement will be effective unless it is in writing and signed by the party granting the waiver, and no such waiver will constitute a waiver of satisfaction of any other provision of this Agreement. To be valid, any document signed by a party in accordance with this Section 10.2 must be signed by a party authorized to do so. No failure or delay by any party in exercising any right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof of the exercise of any other right, power or privilege.

10.3 Expenses. Except as otherwise provided in this Agreement, and subject to Section 8.2 hereof, each party shall bear its own costs and expenses in connection with this Agreement, the Ancillary Agreements and the transactions contemplated hereby and thereby, including all legal, accounting, financial advisory, consulting and all other fees and expenses of third parties, whether or not the transactions contemplated by this Agreement and the Ancillary Agreements are consummated.

10.4 Assignment and Delegation.

(a) No party may assign any part of its rights, or delegate any of its obligations, under this Agreement, except (i) with the other parties’ prior written consent, and (ii) Parent may assign its rights and obligations under this Agreement, in whole or in part, (A) to any of its Affiliates, so long as Parent continues to guarantee its obligations hereunder, (B) for collateral security purposes to any lender providing financing to the Parent or its Affiliates, (C) to any subsequent purchaser of all or substantially all of the assets of the Company, so long as subsequent purchaser agrees to assume Parent’s obligations hereunder or (D) pursuant to a change of control, merger or consolidation of Parent. No party shall unreasonably withhold its consent to assignment. For purposes of this Section 10.4, (i) “assignment” means any assignment, whether voluntary or involuntary, by merger, consolidation, dissolution, operation of law or any other manner, (ii) a “change of control” means an acquisition by any Person of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or more of either (1) the then outstanding shares of common stock of Parent or (2) the combined voting power of the then outstanding voting securities of Parent entitled to vote generally in the election of directors and “merger” refers to any merger in which a party participates, regardless of whether it is the surviving or disappearing corporation.

(b) Any purported assignment of rights or delegation of obligations in violation of this Section 10.4 is void.

(c) Subject to Section 10.4(a) and Section 10.4(b), this Agreement shall be binding upon each of the Parties’ respective heirs, executors, administrators, legal representatives and permitted successors and assigns.

10.5 Governing Law. The Laws of the State of Delaware, without giving effect to principles of conflict of Laws, govern all matters arising out of or relating to this Agreement and all of the transactions it contemplates.

10.6 Consent to Jurisdiction. The parties (a) hereby irrevocably and unconditionally submit to the jurisdiction of the state courts of Delaware and to the jurisdiction of the United States District Court for the District of Delaware for the purpose of any suit, action or other proceeding arising out of or based upon this Agreement, (b) agree not to commence any suit, action or other proceeding arising out of or based upon this Agreement except in the state courts of Delaware or the United States District Court for the District of Delaware, and (c) hereby waive, and agree not to assert, by way of motion, as a defense, or otherwise, in any such suit, action or proceeding, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment or execution, that the suit, action or proceeding is brought in an inconvenient forum, that the venue of the suit, action or proceeding is improper or that this Agreement or the subject matter hereof may not be enforced in or by such court. Each of the parties to this Agreement consents to personal jurisdiction for any equitable action sought in the U.S. District Court for the District of Delaware or any court of the State of Delaware having subject matter jurisdiction. EACH PARTY HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE ANCILLARY AGREEMENTS AND THE TRANSACTIONS CONTEMPLATED HEREBY AND THEREBY OR THE ACTIONS OF SUCH PARTY IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE AND ENFORCEMENT HEREOF AND THEREOF.

10.7 Counterparts. The parties may sign this Agreement in several counterparts, each of which will be deemed an original but all of which together will constitute one instrument. The parties agree that delivery of this Agreement may be effected by means of an exchange of facsimile or other electronic copies.

10.8 Third Party Beneficiaries. This Agreement does not and is not intended to confer any rights or remedies upon any Person, including any employee, any beneficiary or dependents thereof, or any collective bargaining representative thereof, other than the parties to this Agreement; provided, however, that in the case of Article IX, the other Indemnitees and their respective heirs, executors, administrators, legal representatives, successors and assigns.

10.9 Entire Agreement. This Agreement, the Ancillary Agreements, the Exhibits, the Company Disclosure Schedule, Parent Disclosure Schedule and the other documents, instruments and other agreements specifically referred to in this Agreement or delivered under this Agreement constitute the final agreement between the parties and is the complete and exclusive expression of the parties’ agreement on the subject matter of this Agreement. This Agreement supersedes all prior oral or written agreements relating to this Agreement. The provisions of this Agreement may not be explained, supplemented, or qualified through evidence of trade usage or a prior course of dealings or performance.

10.10 Captions. All captions contained in this Agreement are for convenience of reference only, do not form a part of this Agreement and shall not affect in any way the meaning or interpretation of this Agreement.

10.11 Disclosure Schedule. The Company Disclosure Schedule has been arranged in sections corresponding to each representation and warranty set forth in Article III. The Parent’s Disclosure Schedule has been arranged in sections corresponding to each representation and warranty set forth in Article IV. Nothing in the Company Disclosure Schedule or Parent Disclosure Schedule shall be deemed adequate to disclose an exception to a representation or warranty made herein, however, unless such Company Disclosure Schedule or Parent Disclosure Schedule identifies the exception with reasonable particularity. The mere listing (or inclusion of a copy) of a document or other item shall not be deemed adequate to disclose an exception to a representation or warranty made herein (unless the representation or warranty has to do with the existence of the document or item itself). If and to the extent any information required to be furnished in any section of the Company Disclosure Schedule is contained in the Agreement or in any section of the Company Disclosure Schedule, such information shall be deemed to be included in all sections of the Company Disclosure Schedule to the extent the relevance of such disclosure to such other section or sections is reasonably apparent on its face. Nothing in the Company Disclosure Schedule is intended to broaden or limit the scope of any representation, warranty or covenant of the Company contained in this Agreement, and the disclosure of any item in the Company Disclosure Schedule shall not constitute an admission that such item is material or required to be disclosed.

10.12 Severability . If any provision of this Agreement is held invalid, illegal or unenforceable in any jurisdiction, the remainder of this Agreement, or application of that provision to any Persons or circumstances, or in any jurisdiction, other than those as to which it is held unenforceable, will not be affected by that unenforceability and will be enforceable to the fullest extent permitted by Law.

10.13 Specific Performance. The Parent and the Company each agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed by them in accordance with the terms hereof and that each party shall be entitled to specific performance of the terms hereof, in addition to any other remedy at Law or equity.

10.14 Interpretation. The parties hereto have participated jointly in the negotiation and drafting of this Agreement, and any rule of construction or interpretation otherwise requiring this Agreement to be construed or interpreted against any party by virtue of the authorship of this Agreement shall not apply to the construction and interpretation hereof.

ARTICLE XI

DEFINITIONS

11.1 Definitions. When used in this Agreement, the following terms shall have the meanings assigned to them in this Section 11.1, or in the applicable Section of this Agreement to which reference is made in this Section 11.1.

“Affiliate” means, with respect to any specified Person, any other Person directly or indirectly controlling, controlled by or under common control with such specified Person.

“Acquisition Expenses” means (i) all fees and expenses accrued or incurred by the Company in connection with the Merger or other transactions contemplated by this Agreement as of immediately prior to the Effective Time, including all fees for legal, accounting, investment banking, tax advisory, financial advisory services, directors’ and officers’ tail policies (including, without limitation the tail policy required by Section 5.9), and all other fees, and expenses of third parties accrued or incurred in connection with the negotiation and effectuation of the terms and conditions of this Agreement, the Merger and other transactions contemplated hereby, (ii) amounts required to be paid by or on behalf of the Company to any current or former employee, equityholder, officer, manager, director or other Person in connection with the consummation of the Merger or any of the other transactions contemplated hereby, including, without limitation, any performance or other bonus, management carve-out plan or other similar plan, program or arrangement, and accrued or incurred by the Company as of immediately prior to the Effective Time or as a result of the consummation of the Merger, (iii) any severance or other similar payments, including accrued vacation, accrued paid time off and accrued bonuses and other similar compensation paid or payable in connection with the termination by the Company of any Terminated Employees, including, without limitation, such amounts payable to the Terminated Employees pursuant to the Separation Agreements, and (iv) the employer portion of any employment or payroll Taxes payable by the Company in respect of any of the foregoing.

“AIR001” means a pharmaceutical composition which is currently under development by the Company or has previously been under development by the Company that incorporates or comprises either (a) sodium nitrite (or any other nitrite salts) as a therapeutically active agent or (b) a compound that produces sodium nitrite (or any other nitrite salts).

“Ancillary Agreements” means the Stockholders’ Agreement, Key Employee Agreements and the other agreements, instruments and documents delivered pursuant to this Agreement or the Ancillary Agreements.

“Authorization” means any authorization, approval, consent, certificate, license, permit or franchise of or from any Governmental Entity or pursuant to any Law.

“Business Day” means a day other than a Saturday, Sunday or other day on which banks located in San Diego are authorized or required by Law to close.

“Cash” means the amount of consolidated cash, cash equivalents, marketable securities and bank deposits of the Company, as reflected in bank statements, cash equivalents and certificates of deposit less escrowed amounts or other restricted cash balances and less the aggregate amount of all “paid checks, wires, and cash in transit” (i.e., current checks and stale checks, in each case, written but not cleared) drawn on bank accounts of the Company on or prior to the date of determination, calculated in accordance with GAAP applied on a basis consistent with the preparation of the Financial Statements.

“Closing Consideration” means the Merger Consideration less the Holdback Amount.

“Closing Price” means the average of the closing prices per share of Parent Common Stock on the NYSE MKT as reported in The Wall Street Journal during the ten (10) trading days ending on the trading day immediately prior to the Closing Date.

“Code” means the Internal Revenue Code.

“Company Effective Time Acquisition Expenses” means incurred but unpaid Acquisition Expenses of the Company as of immediately prior to the Effective Time.

“Company Effective Time Indebtedness” means accrued but unpaid Indebtedness of the Company as of immediately prior to the Effective Time.

“Company Intellectual Property” means the Owned Intellectual Property and the Licensed Intellectual Property.

“Company Know-How” means all Know-How owned, or purported to be owned, by the Company.

“Company Stock Equivalents” means, other than Company Stock Options and Company Preferred Stock, options, Company Warrants, purchase rights, subscription rights, conversion rights, exchange rights or any other Contracts that, directly or indirectly, could require the Company to issue, sell or otherwise cause to become outstanding shares of Company Capital Stock.

“Company Stock Options” means options to purchase shares of Company Common Stock issued pursuant to the Company Stock Option Plan.

“Company Stock Option Plan” means the Company’s 2006 Equity Incentive Plan.

“Contract” means any agreement, contract, license, lease, commitment, arrangement or understanding, written or oral, including any sales order and purchase order.

“Effective Time Cash” means the amount equal to Cash as of immediately prior to the Effective Time calculated in accordance with GAAP applied on a basis consistent with the preparation of the Financial Statements.

“Environmental Law” means any and all federal, state, local, provincial and foreign, civil and criminal laws, statutes, ordinances, orders, common law, codes, rules, regulations, Environmental Permits, judgments, decrees, injunctions, or Contracts with any Governmental Entity, relating to the protection of health and the Environment, worker health and safety, and/or governing the handling, use, generation, treatment, storage, transportation, disposal, manufacture, distribution, formulation, packaging, labeling, or Release of or exposure to Hazardous Materials.

“FDA” means the Food and Drug Administration.

“Government Bid” means any offer made by Company, which, if accepted, would result in a Government Contract.

“Government Grant” means any grants received from any Governmental Entity.

“Governmental Entity” means any entity or body exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to United States federal, state, local, or municipal government, foreign, international, multinational or other government, including any department, commission, board, agency, bureau, subdivision, instrumentality, official or other regulatory, administrative or judicial authority thereof, and any non-governmental regulatory body to the extent that the rules and regulations or orders of such body have the force of Law.

“Hazardous Material” means petroleum, petroleum hydrocarbons or petroleum products, petroleum by-products, radioactive materials, asbestos or asbestos-containing materials, gasoline, diesel fuel, pesticides, radon, urea formaldehyde, mold, lead or lead-containing materials, polychlorinated biphenyls; and any other chemicals, materials, substances or wastes in any amount or concentration which are now or hereafter (a) become defined as or included in the definition of “hazardous substances,” “hazardous materials,” “hazardous wastes,” “extremely hazardous wastes,” “restricted hazardous wastes,” “toxic substances,” “toxic pollutants,” “pollutants,” “regulated substances,” “solid wastes,” or “contaminants” or words of similar import, under any Environmental Law or (b) are regulated by or for which Liability can be imposed under any Environmental Law.

“Holdback Amount” means an amount of unregistered shares of Parent Common Stock equal to the product of the Merger Consideration multiplied by 0.80, rounded down to the nearest whole number.

“Indebtedness” means any of the following: (a) all obligations for borrowed money; (b) any obligations evidenced by bonds, debentures, notes or other similar instruments for the payment of money; (c) any obligations to pay the deferred purchase price of property or services; (d) any obligations as lessee under leases that have been, or should be, recorded as capitalized leases under GAAP; (e) any indebtedness created or arising under any conditional sale or other title retention agreement with respect to acquired property; (f) any obligations, contingent or otherwise, under or with respect to acceptance credit, letters of credit or similar facilities; (g) any obligation with respect to interest rate and currency cap, collar, hedging or swap Contracts; (h) any obligation secured by a Lien; (i) a guarantee of the obligations of any other Person; (j) any guaranty of any of the foregoing; (k) any accrued interest, fees and charges in respect of any of the foregoing; (l) all issued but uncleared checks issued; (m) accrued liabilities and accounts payable outstanding and (n) any prepayment premiums and penalties, and any other fees, expenses, indemnities and other amounts payable as a result of the prepayment or discharge of any of the foregoing.

“Indemnitees” means the Stockholder Indemnitees and/or the Parent Indemnitees, as the context requires.

“Indemnitors” means the Stockholder Indemnitors and/or the Parent Indemnitor, as the context requires.

“Intellectual Property” means all (a) Patents, (b) Trademarks, (c) domain names, URLs and any other addresses for use on the Internet or any other computer network or communication system, (d) copyrights and registrations and applications therefor, together with all renewals, extensions, translations, adaptations, derivations and combinations therefor, works of authorship, publications, documentation, website content, rights in fonts and typefaces, and database rights, (e) rights of publicity, rights of privacy, royal warrants and moral rights, (f) Know-How, (g) Software, (h) other intellectual property or similar corresponding or equivalent right to any of the foregoing or other proprietary or Contract right relating to any of the foregoing (including remedies against infringements thereof and rights of protection of interest therein under the laws of all jurisdictions) and (i) copies and tangible embodiments thereof, in each case whether or not the same are in existence as of the date of this Agreement or developed after such date and in any jurisdiction throughout the world.

“Know-How” means all know-how, trade secrets, confidential and proprietary information, concepts, ideas, knowledge, rights in research and development, financial, marketing and business data, pricing and cost information, plans (including business and marketing plans), algorithms, formulae, inventions, processes, techniques, technical data, designs, drawings (including engineering and auto-cad drawings), specifications, databases, blue prints, and customer and supplier lists and information, in each case whether or not known to the public prior to the date of the Term Sheet, dated as of December 19, 2013, by and between Parent and the Company, whether patentable or not and whether or not reduced to practice.

“Knowledge of the Company” or any similar phrase means with respect to any fact or matter, the actual knowledge as of the date of this Agreement of each officer of the Company, including *** after reasonable inquiry of the employees of the Company that (i) directly report to such individual in the scope of their employment and (ii) are directly responsible for the information that is the subject of the applicable representation or warranty.

“Law” means any statute, law (including common law), constitution, treaty, ordinance, code, order, decree, judgment, rule, regulation and any other binding requirement or determination of any Governmental Entity.

“Liabilities” means any direct or indirect liabilities, obligations, expenses, Indebtedness, claims, losses, damages, deficiencies, guarantees, endorsements or commitments of any nature whatsoever, asserted or unasserted, known or unknown, absolute or contingent, accrued or unaccrued, due or to become due, liquidated or unliquidated, matured or unmatured or otherwise.

“Licensed Intellectual Property” means all Intellectual Property that any Person other than the Company owns and that the Company is permitted or licensed to use in the operation of its business, whether or not currently used by the Company.

“Lien” means, with respect to any property or asset, any lien (statutory or otherwise), mortgage, pledge, charge, security interest, hypothecation, community property interest, equitable interest, servitude, option, right (including rights of first refusal), restriction (including restrictions on voting, transfer or other attribute of ownership), lease, license, other rights of occupancy, adverse claim, reversion, reverter, preferential arrangement or any other encumbrance in respect of such property or asset.

“Material Adverse Effect” means any change, development, event, effect or occurrence that, individually or in the aggregate, is material and adverse to the business, assets, properties, condition (financial or otherwise) or results of operations of such party or to the ability of such party to perform its obligations under this Agreement or to consummate the Agreement; provided, however, that a Material Adverse Effect shall not include any change, development, event, effect or occurrence resulting from (i) any changes that generally affect the industries in which the Parent or Company operates, as applicable; (ii) any changes in general economic, financial, political, market or regulatory conditions that do not disproportionately affect Parent or the Company, as applicable; (iii) any change in GAAP or applicable Laws; or (iv) any changes resulting from the public announcement or pendency of this Agreement or any of the transactions contemplated hereby or compliance with the terms of, or the taking of any action required by, this Agreement.

“Merger Consideration” means an amount of unregistered shares of Parent Common Stock, rounded down to the nearest whole number, equal to (i) the product of (A) the Net Cash, as set forth in the Net Cash Closing Certificate, multiplied by (B) 1.5 (ii) divided by the Closing Price.

^***	Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission.

“Net Cash” means (A) Effective Time Cash, less (B) the sum of (x) Company Effective Time Indebtedness and (y) Company Effective Time Acquisition Expenses.

“Order” means any award, injunction, judgment, decree, order, ruling, subpoena or verdict or other decision entered, issued or rendered by any Governmental Entity.

“Organizational Documents” means, with respect to any entity, the certificate of incorporation or formation, the articles of incorporation, by-laws, articles of organization, partnership agreement, limited liability company agreement, formation agreement, joint venture agreement or other similar organizational documents of such entity (in each case, as amended).

“Owned Intellectual Property” means all Intellectual Property owned, or purported to be owned, by the Company.

“Parent Common Stock” means the common stock of the Parent, par value $0.001 per share.

“Patents” means all patents (including utility and design patents), patent applications, Patent Cooperation Treaty filings, patent disclosures and all related extensions, continuations, continuations-in-part, divisions, reissues, and reexaminations, utility models, certificates of invention and design patents, and all extensions thereto.

“Permits” means all permits, licenses, franchises, security clearances, consents, orders, waivers, approvals and other authorizations of or from, or registration, notification, declaration or filing with any Governmental Entity.

“Permitted Liens” means (i) liens for current real or personal property taxes not yet due and payable or being contested in good faith and with respect to which the Company maintains adequate reserves in accordance with GAAP, (ii) workers’, carriers’ and mechanics’ or other like liens incurred in the ordinary course of business with respect to which payment is not due and that do not materially impair the conduct of the Company’s business or the present or proposed use of the affected property,(iii) for any Intellectual Property, non-exclusive licenses granted by the Company to its customers in the ordinary course of business and on the Company’s standard form of customer agreement, and (iv) any restriction or limitation imposed by this Agreement.

“Person” means an individual, a corporation, a partnership, a limited liability company, a trust, an unincorporated association, a Governmental Entity or any agency, instrumentality or political subdivision of a Governmental Entity, or any other entity or body.

“Pro Rata Share means an amount equal to the quotient obtained by dividing (i) the amount of Merger Consideration payable to such Stockholder pursuant to Section 2.1, by (ii) the aggregate amount of Merger Consideration payable to all Stockholders pursuant to Section 2.1. The sum of all Stockholders’ Pro Rata Share shall not exceed 100%.

“Registered Intellectual Property” means all Owned Intellectual Property and all Licensed Intellectual Property that is exclusively licensed to the Company, in each case that is subject to registrations, applications for registration, or other filings with or issuances by any Governmental Entity.

“Securities Act” means the Securities Act of 1933, as amended.

“Software” means all computer programs, proprietary software, including any and all software implementations of algorithms, models and methodologies, whether in source code or object code, operating systems, design documents, website code and specifications, flow-charts, user manuals and training materials relating thereto and any translations thereof.

“Subcontractor” shall mean a party that has entered into a Government Contract with Company to provide support, products, or services for the performance of any portion of the substantive project or program under a Government Contract.

“Subsidiary” or “Subsidiaries” means, with respect to any party, any Person, of which (i) such party or any Subsidiary of such party is a general partner (excluding partnerships, the general partnership interests of which held by such party or any Subsidiary of such party do not have a majority of the voting interest in such partnership) or (ii) at least a majority of the securities or other interests having by their terms ordinary voting power to elect a majority of the Board of Directors or others performing similar functions with respect to such Person is directly or indirectly owned or controlled by such party and/or by any one or more of its Subsidiaries.

“Tax” or “Taxes” means any and all federal, state, local, or foreign net or gross income, gross receipts, net proceeds, sales, use, ad valorem, value added, franchise, bank shares, withholding, payroll, employment, excise, property, abandoned property, escheat, deed, stamp, alternative or add-on minimum, environmental, profits, windfall profits, transaction, license, lease, service, service use, occupation, severance, transfer taxes, unemployment, social security, workers’ compensation, capital, premium, and other taxes, assessments, customs, duties, fees, levies, or other governmental charges of any nature whatever, whether disputed or not, together with any interest, penalties, additions to tax, or additional amounts with respect thereto.

“Tax Returns” means any return, declaration, report, claim for refund, or information return or statement relating to Taxes, including any schedule or attachment thereto, and including any amendment thereof.

“Third Party” means any Person other than the Company, Parent, Merger Sub, Stockholders’ Representative or their respective Affiliates.

“Trademarks” means all trademarks, service marks, trade dress, brand names, certification marks, logos, slogans, rights in designs, industrial designs, corporate names, trade names, business names, geographic indications and other designations of source, origin, sponsorship, endorsement or certification, together with the goodwill associated with any of the foregoing, in each case whether registered or unregistered, and all applications and registrations therefor

“$” means United States dollars.

11.2 Other Defined Terms. The following terms have the meanings assigned to such terms in the Sections of the Agreement set forth below:



Action		3.15

Agreement		Preface

Applicable Survival Period		9.1(b)

Audited Financial Statements		3.6(a)

Authority Representations		9.1(a)

Basket Amount		9.2(b)

Benefit Plan(s)		3.16(a)

Capitalization Representations		9.1(a)

Certificates		2.3(a)

Closing		1.2



Closing Date		1.2

COBRA		3.16(c)

Company		Preface

Company Capital Stock		3.4(a)

Company Common Stock		3.4(a)

Company Contracts		3.14(a)

Company Disclosure Schedule		Preamble Article III

Company Preferred Stock		3.4(a)

Company Stockholder		2.1(a)

Company Stockholder Agreement		Recitals

Company Warrants		3.4(c)

Constituent Corporations		1.1

Continuing Employees		7.2(u)

DGCL		1.1

Dissenting Share Payments		2.9(b)

Dissenting Shares		2.9(a)

Distribution Schedule		5.6

Effective Time		1.2

Ending Date		9.1(a)

ERISA		3.16(a)

Executed Written Consent		Recitals

Financial Statements		3.6(a)

FIRPTA Certificate		7.2(g)

GAAP		3.6(a)

Government Contracts		3.14(a)(xiv)

Grants		3.9

HIPAA		3.12(l)

Information Statement		5.5(a)

Interim Financial Statements		3.6(a)

Key Employee		Recitals

Key Employee Agreements		Recitals

Losses		9.3(a)

Mailing Date		5.5(b)

Merger		1.1

Merger Sub		Preface

Net Cash Closing Certificate		7.2(i)

Notice		10.1(a)



Notice of Claim		9.4(a)

Parent		Preface

Parent Disclosure Schedule		Preamble Article IV

Parent Financial Statements		4.5

Parent Indemnitees		9.2(a)

Parent Indemnitor(s)		9.3(a)

Parent Intellectual Property		4.12

Parent Losses		9.2(a)

Parent Representatives		5.3

*** Amendment		5.1(a)

Policies		3.19

Privacy Agreements		3.12(l)

Privacy & Data Security Policies		3.12(m)

Public Documents		4.4

Release Date		2.3(b)

Required Company Stockholder Vote		3.2(c)

Required Consents		7.2(f)

Required Stockholder(s)		Recitals

Separation Agreements		7.2(t)

Shares		3.4(b)

Stockholder		2.1(a)

Stockholder Indemnitee(s)		9.3(a)

Stockholder Indemnitor(s)		9.2(a)

Stockholder Losses		9.3(a)

Stockholder Majority		9.10(a)(iii)

Stockholders’ Representative		Preface

Surviving Corporation		1.1

Tax Contests		6.3(d)

Tax Representations		9.1(a)

Terminated Employees		7.2(t)

Third Party Claim		9.4(a)

Trade Secrets		3.12(p)

Transmittal Letter		2.3(a)

Treasury Shares		2.1(a)(ii)

Waived 280G Benefits		5.7

409A Plan		3.7(g)

^***	Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission.

11.3 Interpretation.

(a) The meaning assigned to each term defined herein shall be equally applicable to both the singular and the plural forms of such term and vice versa, and words denoting either gender shall include both genders as the context requires. Where a word or phrase is defined herein, each of its other grammatical forms shall have a corresponding meaning.

(b) The terms “hereof”, “herein” and “herewith” and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole and not to any particular provision of this Agreement.

(c) When a reference is made in this Agreement to an Article, Section, paragraph, Exhibit or Schedule, such reference is to an Article, Section, paragraph, Exhibit or Schedule to this Agreement unless otherwise specified.

(d) The word “include”, “includes”, and “including” when used in this Agreement shall be deemed to be followed by the words “without limitation”, unless otherwise specified.

(e) A reference to any party to this Agreement or any other agreement or document shall include such party’s predecessors, successors and permitted assigns.

(f) Reference to any Law means such Law as amended, modified, codified, replaced or reenacted, and all rules and regulations promulgated thereunder.

(g) The parties have participated jointly in the negotiation and drafting of this Agreement. Any rule of construction or interpretation otherwise requiring this Agreement to be construed or interpreted against any party by virtue of the authorship of this Agreement shall not apply to the construction and interpretation hereof.

(h) All accounting terms used and not defined herein shall have the respective meanings given to them under GAAP.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

IN WITNESS WHEREOF, Parent, Merger Sub and the Company have caused this Agreement to be signed by their respective officers thereunto, duly authorized as of the date first written above.


MAST THERAPEUTICS, INC.

By:		/s/ Brian M. Culley
Name:		Brian M. Culley
Title:		CEO

AIRES PHARMACEUTICALS, INC.

By:		/s/ Wendy Johnson
Name:		Wendy Johnson
Title:		CEO

AP ACQUISITION SUB, INC.

By:		/s/ Brian M. Culley
Name:		Brian M. Culley
Title:		CEO

Solely with respect to Section 2.8(b), Section 6.3 and Article IX:

FORTIS ADVISORS LLC, in its capacity as the Stockholders’ Representative

By:		/s/ Ryan Simkin
Name:		Ryan Simkin

[SIGNATURE PAGE TO MERGER AGREEMENT]

WAIVER OF CLOSING CONDITIONS

Reference is made that certain Merger Agreement, (“Agreement”), dated as of February 7, 2014, by and among Mast Therapeutics, Inc. a Delaware corporation (“Parent”), AP Acquisition Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Parent (“Merger Sub”), and Aires Pharmaceuticals, Inc., a Delaware corporation (the “Company”), and, solely with respect to Section 2.8(b), Section 6.3, and Article IX hereof, Fortis Advisors LLC, a Delaware limited liability company, in its capacity as representative of the Company Stockholders (the “Stockholders’ Representative”) All capitalized terms not otherwise defined herein shall have the meanings ascribed thereto under the Agreement.

WHEREAS, the obligations of the Parent and Merger Sub to effect the Merger are subject to the satisfaction (or waiver by Parent in its sole discretion) of each of the conditions specified in Section 7.2 of the Agreement.

WHEREAS, notwithstanding the fact that Edwin L. Parsley (“Parsley”) was identified as a Key Employee in the Merger Agreement, Parsley never signed a Key Employee Agreement.

WHEREAS, the Company terminated the employment of Parsley and entered into a release agreement in a form reasonably satisfactory to Parent (the “Release Agreement”).

WHEREAS, in accordance with an Employment Agreement, dated October 15, 2012, by and between Parsley and the Company, and the Release Agreement, Parsley is due a severance payment in the amount of $ *** (the “Severance Payment”) and a continuation of group health benefits payment in the amount of $ *** (the “Special Severance Payment” and, together with the Severance Payment, the “Severance Package”).

WHEREAS, the amounts due as part of the Severance Package are Acquisition Expenses under the Merger Agreement.

WHEREAS, Parent is willing to forego the treatment of $ *** as Acquisition Expenses.

WHEREAS, Parent has elected to waive certain of the conditions to Closing specified in Section 7.2 of the Agreement as set forth herein below and to proceed to the Closing of the transactions contemplated by the Agreement.

NOW, THEREFORE, in consideration of, Parsley entering into the Release Agreement and the covenants and agreements of Parent, Merger Sub and the Company set forth herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows.

1. Parent hereby waives, solely with respect to Parsley, the condition set forth in Section 7.2(r) of the Agreement requiring the Key Employee Agreements to not have been rescinded (or attempted to have been rescinded) by any of the parties thereto and each of the Key Employee Agreements to remain in full force and effect.

2. Parent hereby waives, solely with respect to Parsley, the condition set forth in Section 7.2(u) of the Agreement requiring the Continuing Employees to be employed by the Company and their respective employment agreements or offer letters as currently in effect, as applicable, to be in effect, at the Closing.

^***	Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission.

3. Each of Parent, Merger Sub and the Company hereby agrees that the amount of $ *** shall not be treated as Acquisition Expenses.

Nothing in this Waiver of Closing Conditions shall be interpreted as a waiver of any other requirements specified in the Agreement and all rights not expressly waived herein shall remain in full force and effect immediately after the execution hereof. The validity, performance, construction and effect of this Waiver shall be governed by the laws of the State of Delaware, without giving effect to principles of conflict of Laws, govern all matters arising out of or relating to this Waiver. This Waiver may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Facsimile or other electronically transmitted signatures shall be as effective as original signatures.

[Remainder of Page Left Intentionally Blank]

^***	Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission.

THE UNDERSIGNED, has caused this Waiver to be duly executed as of this 26th day of February, 2014.


MAST THERAPEUTICS, INC.

By:		/s/ Brian Culley
Name:		Brian Culley
Title:		Chief Executive Officer


AP ACQUISITION SUB, INC.

By:		/s/ Brian Culley
Name:		Brian Culley
Title:		Chief Executive Officer


ACKNOWLEDGED AND AGREED:

AIRES PHARMACEUTICALS, INC.

By:		/s/ Wendy Johnson
Name:		Wendy Johnson
Title:		Chief Executive Officer

[Signature Page to Waiver of Closing Conditions]

EX-10.1

Exhibit 10.1

FORM OF STOCKHOLDER AGREEMENT

This STOCKHOLDER AGREEMENT (this “Agreement”) is entered into as of the 7th day of February, 2014, by and among Mast Therapeutics, Inc., a Delaware corporation (“Parent”), the undersigned holder (“Stockholder”) of capital stock of Aires Pharmaceuticals, Inc., a Delaware corporation (the “Company”), and the Company. Any capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Merger Agreement (defined below).

RECITALS

A. Stockholder has executed and delivered this Agreement in connection with that certain Agreement and Plan of Merger, dated as of February 7, 2014, by and between Parent, the Company, AP Acquisition Sub, Inc. (“Merger Sub”) and Stockholders’ Representative (the “Merger Agreement”), pursuant to which Merger Sub shall be merged with and into the Company and the separate corporate existence of Merger Sub shall thereupon cease (the “Merger”) and the Company shall be the surviving corporation (the “Surviving Corporation”) following the Merger.

B. Whereas simultaneously herewith, the Stockholder has executed and delivered a written consent approving and adopting the Merger and the Merger Agreement (the “Written Consent”).

C. As of the date hereof, Stockholder holds that number of shares of capital stock of the Company (the “Company Shares”) set forth on the signature page hereto.

D. Upon the consummation of the Merger and in connection therewith, certain holders of capital stock of the Company shall receive a right to receive a portion of the Merger Consideration, which is comprised of shares of common stock, par value $0.001, of Parent (such shares issued as Merger Consideration, the “Parent Shares” together with the Company Shares, the “Shares”), subject to adjustment as provided in the Merger Agreement and if and when payable in accordance with the terms of the Merger Agreement, as more specifically set forth in the Merger Agreement and the Distribution Schedule.

E. Stockholder understands and acknowledges that Company and Parent are entitled to rely on (x) the truth and accuracy of Stockholder’s representations contained herein and (y) Stockholder’s performance of the obligations set forth herein.

NOW, THEREFORE, in consideration of the premises and the covenants and agreements set forth in the Merger Agreement and in this Agreement, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:

1. Restrictions on Shares.

(a) Stockholder shall not, at any time prior to the Restriction Expiration Date, (i) offer, sell, assign, transfer, pledge, contract to sell, or otherwise dispose of, any Parent Shares or securities convertible into or exercisable or exchangeable for capital stock of Parent, (ii) enter into any swap, hedge or other agreement or arrangement that transfers in whole or in part, the economic risk of ownership of any Parent Shares or securities convertible into or exercisable or exchangeable for capital stock of Parent, or (iii) engage in any short selling of any Parent Shares or securities convertible into or exercisable or exchangeable for capital stock of Parent, except for transfers (A) to any trust for the direct benefit of Stockholder, (B) if such Stockholder is a natural person, to such Stockholder’s parents, siblings, spouse, children, nieces, nephews or grandchildren or any person sharing the Stockholder’s household (other than a tenant or employee), or a trust for the direct benefit of any of the foregoing, (C) by will or intestacy to Stockholder’s legal representative, (D) to an Affiliate (as defined under the Securities Act of 1933, as amended (the “Securities Act”) and the rules and regulations promulgated thereunder) of such Stockholder, or (E) distributions of securities to partners, members or stockholders of the Stockholder not involving a disposition for value; provided, however, that any such transfer described in clauses (A) – (E) above shall be permitted only if, as a condition to the effectiveness of such transfer, (x) the transferee agrees in writing to be bound to all of the terms set forth in this Agreement and (y) such transfer would not require the registration of such Parent Shares pursuant to any applicable federal, state or other securities laws or result in Parent being required to register any class of its equity securities with any Governmental Entity, and, with respect to clauses (D) and (E), unless waived by Parent, Parent shall receive a written opinion reasonably satisfactory to Parent and Parent’s counsel to such effect that such transfer would not require the registration of such Parent Shares. For clarity, the foregoing restrictions in this Section 1(a) shall apply only to transactions relating to the Parent Shares and not to transactions relating to securities of Parent acquired in any transactions other than pursuant to the Merger Agreement. As used herein, the term “Restriction Expiration Date” shall mean the sixth-month anniversary of the Closing Date.

(b) Stockholder shall not, at any time prior to the Effective Time, (i) offer, sell, assign, transfer, pledge, contract to sell, or otherwise dispose of, any Company Shares or securities convertible into or exercisable or exchangeable for capital stock of the Company, (ii) enter into any swap, hedge or other agreement or arrangement that transfers in whole or in part, the economic risk of ownership of any Company Shares or securities convertible into or exercisable or exchangeable for capital stock of the Company, or (iii) engage in any short selling of any Company Shares or securities convertible into or exercisable or exchangeable for capital stock of the Company, except for transfers (A) to any trust for the direct benefit of Stockholder, (B) by will or intestacy to Stockholder’s legal representative, or (C) to an Affiliate (as defined under the Securities Act and the rules and regulations promulgated thereunder) of such Stockholder; provided, however, that any such transfer shall be permitted only if, as a condition to the effectiveness of such transfer, (x) the transferee agrees in writing to be bound to all of the terms set forth in this Agreement and (y) such transfer would not require the registration of such Company Shares pursuant to any applicable federal, state or other securities laws or result in the Company being required to register any class of its equity securities with any Governmental Entity.

(c) Except pursuant to the terms of this Agreement or that certain Second Amended and Restated Voting Agreement, dated April 17, 2013, by and among the Company and the founders, investors and significant holders listed therein (the “Company Voting Agreement”), Stockholder shall not, directly or indirectly, grant any proxies or powers of attorney with respect to any of the Shares, deposit any of the Shares into a voting trust, or enter into a voting agreement with respect to any of the Shares.

(d) Stockholder shall not, directly or indirectly, take any action that would make any representation or warranty contained herein untrue or incorrect or have the effect of impairing the ability of Stockholder to perform its obligations under this Agreement or preventing or delaying the consummation of any of the transactions contemplated hereby.

(e) At any time prior to the Proxy Expiration Date (as defined below), to the extent Stockholder holds capital stock of Parent, Stockholder agrees to enter into a lock-up agreement in a form reasonably requested by the underwriters for a public offering of the capital stock of Parent (an “Underwriter Lock-up Agreement”); provided, however, that (i) under no circumstances shall Stockholder be obligated to enter into, or otherwise restricted by, such an Underwriter Lock-up Agreement to the extent the lock-up period provided for therein extends past the date which is ninety (90) days from and following the date of the underwriting agreement relating to such offering; (ii) all executive officers and directors of Parent shall also have agreed not to sell publicly their shares of Parent’s capital stock in the offering on substantially the same terms; and (iii) no such Underwriter Lock-up Agreement related to such a public offering shall be amended, modified, waived or terminated unless each Underwriter Lock-up Agreement with all holders of capital stock of Parent is also amended, modified or waived in a similar manner or terminated.

(f) Any shares of capital stock of the Company that Stockholder purchases or with respect to which Stockholder otherwise acquires beneficial ownership after the date of this Agreement and prior to the Effective Time shall be subject to the terms and conditions of this Agreement to the same extent as if they constituted Company Shares.

2. Agreement to Vote Company Shares. At any time on or after the date of the Merger Agreement and prior to the Effective Time, at every meeting of the stockholders of the Company called with respect to any of the following, and at every adjournment thereof, and on every action or approval by written resolution or consent of the stockholders of the Company with respect to any of the following, Stockholder shall vote the Company Shares in respect of which Stockholder is entitled to vote at any such meeting or in connection with any such written consent (a) in favor of the adoption of the Merger Agreement and the approval of the Merger and the Merger Agreement and the transactions contemplated thereby, (b) against any Proposal and (c) against any other matter that would reasonably be expected to impede, interfere with, delay, postpone or adversely affect the Merger or any of the transactions contemplated thereby; provided, however, that nothing in this Agreement shall preclude Stockholder from exercising full power and authority to vote the Company Shares in Stockholder’s sole discretion for or against any proposal submitted to a vote of the Company Stockholders to approve any payment which would, in the absence of such approval, constitute a parachute payment under Section 280G of the Internal Revenue Code of 1986 (as amended, the “Code”).

3. Irrevocable Proxy. Concurrently with the execution and delivery of this Agreement, Stockholder shall deliver to Parent a duly executed irrevocable proxy in the form attached hereto as Exhibit A (the “Proxy”) with respect to (i) each and every meeting of stockholders of Parent or action or approval by written resolution or consent of stockholders of Parent from and after the Effective Time and through the date that is the thirty (30)-month anniversary of the Closing Date (the “Proxy Expiration Date”) covering the total number of Parent Shares in respect of which Stockholder is entitled to vote at any such meeting or in connection with any such written consent and (ii) each and every meeting of Company Stockholders or action or approval by written resolution or consent of Company Stockholders from and after the date hereof and prior to the earlier of (A) the Effective Time or (B) termination of the Merger Agreement covering the total number of Company Shares in respect of which Stockholder is entitled to vote at any such meeting or in connection with any such written consent related to the subject matter of Section 2 hereof. Notwithstanding anything to the contrary in this Agreement, such Proxy shall not apply to any proposal submitted to a vote of the Company Stockholders to approve any payment which would, in the absence of such approval, constitute a parachute payment under Section 280G of the Code, and Stockholder shall continue to have full power and authority to vote the Company Shares in Stockholder’s sole discretion for or against any such proposal. Upon the execution of this Agreement by Stockholder, Stockholder hereby revokes any and all prior proxies (other than the Proxy) given by Stockholder and shall not grant any subsequent proxies until after the Proxy Expiration Date. The parties hereby acknowledge that nothing in this Stockholders’ Agreement or the Proxy shall effect the Company’s existing drag along rights as set forth in Section 4 of the Company Voting Agreement.

4. Representations, Warranties and Covenants of Stockholder. Stockholder hereby represents, warrants and covenants to Parent as of the date hereof and as of the Effective Time as follows:

(a) Stockholder is the beneficial owner of the Company Shares set forth on the signature page hereto and, except as otherwise set forth on the signature page hereto, (i) has held such Company Shares at all times since the date set forth on such signature page and (ii) did not acquire any such Company Shares in contemplation of the Merger. The Company Shares set forth on the signature page hereto constitute Stockholder’s entire interest in the outstanding capital stock of the Company. No person not a signatory to this Agreement has a beneficial interest in or a right to acquire or vote any of the Company Shares (other than, if Stockholder is a partnership, the rights and interest of persons and entities that own partnership interests in Stockholder under the partnership agreement governing Stockholder and applicable partnership law). The Company Shares are and will be at all times up until the Closing Date free and clear of any and all liens, claims, options, charges or other encumbrances, other than (x) restrictions on transfer arising under applicable securities laws and the Company’s Bylaws and (y) restrictions on transfer under this Agreement and the Existing Agreements (as defined below) to which the Stockholder is a party that will terminate as of the Closing. Stockholder’s principal residence or place of business is set forth on the signature page hereto.

(b) If Stockholder is an entity, Stockholder is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization. Stockholder has all requisite power and authority (if Stockholder is an entity) or legal capacity (if Stockholder is a natural person) to enter into this Agreement, and each other agreement, document or certificate to which it, he or she may become a party pursuant to this Agreement or the Merger Agreement (each, a “Stockholder Ancillary Agreement”), and to perform its, his or her obligations under this Agreement and each Stockholder Ancillary Agreement. The execution and delivery of this Agreement and each Stockholder Ancillary Agreement by Stockholder and the consummation by Stockholder of the transactions contemplated hereby and thereby have been duly authorized by all necessary action, if any, on the part of Stockholder. This Agreement has been, and on the Closing Date each Stockholder Ancillary Agreement will have been, duly executed and delivered by Stockholder and constitutes, or when executed by Stockholder shall constitute, a valid and binding obligation of Stockholder, enforceable against Stockholder in accordance with its terms, subject to the effect of (a) applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to rights of creditors generally and (b) rules of law and equity governing specific performance, injunctive relief and other equitable remedies.

(c) No consent, approval, order, authorization, release or waiver of, or registration, declaration or filing with, any Person (not including a Governmental Entity) or to the knowledge of the Stockholder, any Governmental Entity, is necessary or required to be made or obtained by Stockholder to enable Stockholder to lawfully execute and deliver, enter into, and perform its, his or her obligations under this Agreement or any Stockholder Ancillary Agreement.

(d) Stockholder understands and agrees that, pursuant to the Merger Agreement, (i) Stockholder has certain obligations to indemnify Parent and certain other Parent Indemnitees as and to the extent set forth in the Merger Agreement and (ii) a portion of the Closing Consideration to which Stockholder may otherwise be entitled shall constitute security for those obligations and part of which will be held back as the Holdback Amount.

(e) There is no private or governmental action, suit, proceeding, claim, mediation, arbitration or investigation pending before any Governmental Entity (each of the foregoing, an “Action”) against Stockholder that relates in any way to this Agreement, the Merger Agreement, any Stockholder Ancillary Agreement or any of the transactions contemplated hereby or thereby. To the knowledge of Stockholder, (a) no such Action has been threatened and (b) there is no reasonable basis for any such Action.

(f) Stockholder is not, in his/her/its capacity as such, obligated for the payment of any fees or expenses of any investment banker, broker, finder or similar party in connection with the origin, negotiation or execution of the Merger Agreement or in connection with the Merger or any other transaction contemplated by the Merger Agreement. Neither Parent nor the Surviving Corporation shall incur any Liabilities, either directly or indirectly, to any such investment banker, broker, finder or similar party as a result of the Merger Agreement or the Merger or any other transaction contemplated by the Merger Agreement.

(g) The Stockholder shall observe and comply with the Securities Act, and any and all other applicable federal or state securities laws, as now in effect and as from time to time amended and including those hereafter enacted or promulgated, in connection with any offer, sale, exchange, transfer, pledge or other disposition of the Parent Shares or any part thereof.

(h) To the extent received by Stockholder, the Parent Shares will be acquired for investment for the Stockholders’ own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and the Stockholder has no present intention of selling, granting any participation in, or otherwise distributing the same. By executing this Agreement, the Stockholder further represents that such Stockholder does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to any of the Parent Shares.

(i) The Stockholder is, and at the Closing will be, an “accredited investor” within the meaning of Rule 501 under the Securities Act, as presently in effect. Stockholder has substantial experience in evaluating and investing in securities of companies and acknowledges that it has the capacity to protect its own interests in connection therewith, can bear the economic risk of its investment and has such knowledge and experience in financial or business matters that it is capable of evaluating the merits and risks of the investment in the Parent Shares. If other than an individual, Stockholder also represents it has not been organized for the purpose of acquiring the Parent Shares.

(j) Stockholder has received or has had full access to the most recent annual report of Parent on Form 10-K under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and each subsequent report or document filed by Parent with the Securities and Exchange Commission (the “SEC”) under Sections 13(a), 14 and 15(d) of the Exchange Act, and any other information Stockholder considered necessary or appropriate to make an informed investment decision with respect to the Merger and the Parent Shares, in each case a reasonable period of time prior to entering into this Agreement. Stockholder has had an opportunity to ask questions and receive answers from Parent regarding the terms and conditions of the Merger Agreement and to obtain additional information necessary to verify any information furnished to Stockholder or to which Stockholder had access, in each case a reasonable period of time prior to entering into this Agreement. Stockholder further understands and acknowledges that Parent may raise additional funds in the future through debt or equity financings to support its operations and any future equity financing could result in dilution to Stockholder and any future debt financing could likely involve covenants restricting Parent’s business activities.

(k) Stockholder understands that the Parent Shares are characterized as “restricted securities” under the federal securities laws inasmuch as they are being acquired from Parent in a transaction not involving a public offering and that under such laws and applicable regulations such securities may be resold without registration under the Securities Act only in certain limited circumstances. In this connection, Stockholder represents that it is familiar with Rule 144 under the Securities Act, as presently in effect, and understands the resale limitations imposed thereby and by the Securities Act.

(l) Subject to terms of any Underwriter Lock Up Agreement, Stockholder shall not offer, sell, exchange, transfer, pledge or otherwise dispose of any of the Parent Shares until the trading day after the Restriction Expiration Date and unless at that time either:

(i) such transaction is permitted pursuant to the provisions of Rule 144 under the Securities Act or is pursuant to an effective registration statement;

(ii) counsel representing Stockholder, reasonably satisfactory to Parent, shall have advised Parent in a written opinion letter reasonably satisfactory to Parent and Parent’s counsel, and upon which Parent and its counsel may rely, that no registration under the Securities Act is required in connection with the proposed offer, sale, exchange, transfer, pledge or other disposition; or

(iii) an authorized representative of the SEC shall have rendered written advice to Stockholder (sought by Stockholder or counsel to Stockholder, with a copy thereof and of all other related communications delivered to Parent) to the effect that the SEC will take no action, or that the staff of the SEC will not recommend that the SEC take action, with respect to the proposed offer, sale, exchange, transfer, pledge or other disposition if consummated.

5. Covenants of Stockholder. Stockholder hereby covenants to Parent, as follows:

(a) Stockholder (in its, his or her capacity as such) shall not, directly or indirectly, take any action prohibited by Section 5.1 of the Merger Agreement.

(b) Stockholder hereby irrevocably and unconditionally waives and agrees not to exercise any rights of appraisal or any dissenters’ rights that Stockholder may have (whether under Section 262 of the Delaware General Corporation Law or, if applicable, Chapter 13 of the California Corporations Code) or could potentially have or acquire in connection with the execution and delivery of the Merger Agreement or the consummation of the Merger.

(c) Stockholder hereby agrees not to modify, revoke or rescind the Written Consent or any resolution contained therein and further agrees not to adopt any resolutions modifying, rescinding or revoking the Written Consent or any resolution contained therein or otherwise precluding approval of the Merger, the Merger Agreement or the adoption of the Merger Agreement, unless and until the Merger Agreement is terminated pursuant to Article 8 thereof. Stockholder agrees that it will not bring, commence, institute, maintain, prosecute, participate in or voluntarily aid any action, claim, suit or cause of action, in law or in equity, in any court or before any Governmental Entity, which (a) challenges the validity of or seeks to enjoin the operation of any provision of the Written Consent or this Agreement or the execution and delivery of the Merger Agreement or the consummation of the Merger and the other transactions contemplated thereby or (b) alleges that the execution and delivery of the Written Consent or this Agreement by Stockholder, either alone or together with the other written consents or voting or stockholder agreements and proxies to be delivered in connection with the execution of the Merger Agreement, breaches any fiduciary duty, whether of the board of directors of the Company or any member thereof or of any holder of capital stock of the Company.

(d) Stockholder has received and reviewed and understands the terms of the Merger Agreement and agrees to be bound by the terms and conditions of those provisions of the Merger Agreement purporting to bind the Company Stockholders, including, without limitation, the designation and empowerment of the Stockholders’ Representative, and any and all provisions relating to the Holdback Amount and any and all indemnification obligations of the Company Stockholders.

6. Releases. Stockholder acknowledges and agrees, on behalf of itself (or, as applicable, himself or herself) and each of its (or, as applicable, his or her) current or former affiliates, officers, directors, employees, managers, general partners, principals, advisors, agents, servants, or other representatives (including without limitation attorneys, accountants, consultants, bankers and financial advisors), heirs, beneficiaries, estates, executors, administrators, trustees, successors or assigns (each a “Releasing Party”) that:

(a) Releasing Party (i) has no Claims (defined below), (ii) has not transferred or assigned, or purported to transfer or assign, any Claims and (iii) shall not transfer or assign, or purport to transfer or assign, any Claims, in each case, relating to the Company against the Company, Parent or Merger Sub, or their respective current or former affiliates, officers, directors, employees, managers, partners, principals, advisors, agents, servants, stockholders, members, investors, equity holders or other representatives (including without limitation attorneys, accountants, consultants, bankers and financial advisors), successors or assigns (collectively, the “Released Parties”).

(b) Releasing Party hereby irrevocably and unconditionally releases and forever discharges the Released Parties from any and all claims, demands, allegations, assertions, complaints, controversies, charges, duties, grievances, rights, causes of action, suits, liabilities, debts, obligations, promises, commitments, agreements, guarantees, endorsements, duties, damages, costs, losses, debts and expenses (including attorneys’ fees and costs incurred) of any nature whatsoever (whether direct or indirect, known or unknown, disclosed or undisclosed, matured or unmatured, accrued or unaccrued, asserted or unasserted, absolute or contingent, determined or conditional, express or implied, fixed or variable and whether vicarious, derivative, joint, several or secondary) relating to the Company (collectively, “Claims”); provided, however, that the foregoing release shall not cover (i) rights of Company Stockholders under the Merger Agreement or any other rights that Stockholder may have under this Agreement, or any Stockholder Ancillary Agreement, (ii) if Stockholder is a present or former employee of the Company, rights to earned but unpaid cash compensation and unpaid vacation, or unreimbursed business expenses incurred in the ordinary course and reimbursable pursuant to the Company’s business expense policy, (iii) rights to separation benefits (e.g., severance, equity acceleration) upon termination of service in connection with the Merger, (iv) Claims under the Benefit Plans, if any, or (v) Claims for exculpation, indemnification or advancement of expenses from the Company, if any (whether pursuant to any agreement, the Company’s certificate of incorporation, the Company’s by-laws or any Law).

(c) Releasing Party acknowledges and agrees that it, he or she is familiar with Section 1542 of the Civil Code of the State of California (“Section 1542”), which provides as follows:

A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM OR HER MUST HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR.

Releasing Party hereby waives and relinquishes any rights and benefits that Releasing Party may have under Section 1542 or any similar statute or common law principle of any jurisdiction. Releasing Party acknowledges that it, he or she may hereafter discover facts in addition to or different from those that Releasing Party now knows or believes to be true with respect to the subject matter of this release, but it is Releasing Party’s intention to fully and finally and forever settle and release any and all Claims (other than as set forth in the proviso included in subsection (b) above) that do now exist, may exist or heretofore have existed with respect to the subject matter of this release. In furtherance of this intention, the releases contained herein shall be and remain in effect as full and complete releases notwithstanding the discovery or existence of any such additional or different facts.

(d) Releasing Party acknowledges and agrees that it, he or she (i) has read this release and understands its terms and has been given an opportunity to ask questions of the Company’s representatives, and (ii) does not rely, and has not relied, on any representation or statement not set forth in this release made by any representative of the Company or any other Person with regard to the subject matter, basis or effect of this release or otherwise.

(e) This release is effective upon, and subject to, the consummation of the Merger as contemplated in the Merger Agreement, and shall become null and void, and shall have no effect whatsoever, without any action on the part of any Person, upon termination of the Merger Agreement in accordance with its terms.

(f) For the avoidance of doubt and notwithstanding anything to the contrary in this Agreement, “Releasing Party” shall not include any stockholder, member, limited partner, other equity holder or any portfolio company of a Stockholder that is in the business of making investments in companies.

7. Appointment of Stockholders’ Representative. The Stockholders’ Representative has been designated, and Stockholder hereby confirms the designation of the Stockholders’ Representative, as the representative of Stockholder and as the attorney-in-fact and agent for and on behalf of Stockholder with respect to claims for indemnification under Article 9 of the Merger Agreement and the taking by the Stockholders’ Representative of any and all actions and the making of any decisions required or permitted to be taken by the Stockholders’ Representative under the Merger Agreement, including without limitation the exercise of all powers, authority and responsibilities set forth in Section 9.10 of the Merger Agreement.

8. Confidentiality. Except with the prior written consent of Parent, from the date hereof and until the later of (i) the date of *** , and (iii) solely with respect to any terms in the Merger Agreement or any ancillary documents thereto for which Parent obtains confidential treatment from the SEC, the date such confidential treatment expires and is not renewed or pending renewal by Parent, Stockholder agrees to keep confidential and not disclose (other than to its officers, directors, employees, trustees, beneficiaries, attorneys and other advisors with a bona fide need to know, or any general partner, limited partner, member, subsidiary or parent (and their respective representatives) for the purpose of evaluating its investment in the Company, provided that such Persons have an obligation or duty of confidentiality, whether pursuant to the ethical or professional rules of such Person’s profession or have agreed to confidentiality restrictions at least as restrictive as those contained herein) (a) the terms and conditions and existence of this Agreement and Stockholder Ancillary Agreements and the Merger Agreement and the transactions contemplated hereby and thereby, (b) matters regarding the interpretation, performance, breach or termination hereof or thereof, and (c) all confidential and/or proprietary information of the Company or Parent (including, without limitation, Company Intellectual Property) obtained by Stockholder or its directors, officers, employees, agents or representatives prior to the Effective Time, except to the extent that (i) such information has otherwise been made public, (ii) any such information is reasonably necessary for enforcing Stockholder’s rights hereunder or thereunder, (iii) any such information is disclosed to any Governmental Entity or arbitrators in connection with any legal or other proceedings involving a dispute between Stockholder and Parent, (iv) any such information is independently developed by Stockholder without reference or usage of any information that would otherwise be considered confidential and/or proprietary information of the Company or Parent (including, without limitation, Company Intellectual Property) hereunder, (v) Stockholder is required by applicable Law to divulge or disclose any such information (in which case Stockholder shall promptly notify Parent in advance of disclosing such information and use commercially reasonable efforts to cooperate with Parent to limit such disclosure to the extent permitted under applicable Law), or (vi) disclosure or use of such information by any Stockholder who remains an employee or consultant of the Company, solely in connection with the performance of Stockholder’s responsibilities and in accordance with any other confidentiality obligations or Company policies that such Stockholder may be subject to. *** .

9. Termination of Existing Agreements. Each Stockholder and the Company hereby agrees that the following agreements (to the extent the Stockholder is a party thereto) shall terminate effective as of the Effective Time without the need for any further action: the Second Amended and Restated Investor Rights Agreement, dated April 17, 2013, by and between the Company and the investors listed on Schedule A thereto; the Second Amended and Restated Voting Agreement, dated April 17, 2013, by and among the Company and the founders, investors and significant holders listed on Schedule A thereto; and the Second Amended and Restated Co-Sale Agreement, dated April 17, 2013, by and among the Company and the founders, investors and other holders listed on Schedule A thereto (collectively, the “Existing Agreements”). Each Stockholder further agrees that following the Effective Time such agreements shall no longer be in force or effect and that following the Effective Time any and all rights of such Stockholder under such agreements shall be terminated. Following the termination of the Merger Agreement, this covenant and agreement to terminate shall have no further force or effect and be deemed null and void.

***	Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission.

10. Miscellaneous.

10.1 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or by commercial delivery service, or mailed by registered or certified mail (return receipt requested) to the parties hereto at the following address (or at such other address for a party as shall be specified by like notice) or sent via facsimile (with confirmation of receipt) or electronic mail to the parties hereto if a facsimile number or an e-mail address is provided below (or is provided subsequently by a party by notice given pursuant to this provision):

(i)

if to Parent, to:

Mast Therapeutics, Inc.

12390 El Camino Real, Suite 150,

San Diego, California

Attention: Brian Culley

Facsimile No.: (858) 552-0876

with

a copy (which shall not constitute notice) to:

DLA Piper LLP (US)

4365 Executive Drive, Suite 100

San Diego, CA 92121

Attention: Michael Kagnoff

Facsimile No.: (858) 638-5122

(ii)

if to the Company, to:

Aires Pharmaceuticals, Inc.

4365 Executive Drive Suite 1500

San Diego, CA 92121

Facsimile No.: (858) 366-9671

with

a copy (which shall not constitute notice) to:

Latham & Watkins LLP

12670 High Bluff Drive

San Diego, CA 92130

Attention: Cheston J. Larson

Facsimile No.: (858) 523-5450

(iii) if to Stockholder, at the address set forth below Stockholder’s signature at the end hereof, or, at the election of Parent, to the Stockholders’ Representative at the address set forth below.

Fortis Advisors LLC

Attention: Notice Department

Facsimile No.: (858) 408-1843

Email: notices@fortisrep.com

10.2 Interpretation. When a reference is made in this Agreement to Sections or Exhibits, such reference shall be to a Section of or an Exhibit to this Agreement unless otherwise indicated. The words “include,” “includes” and “including” when used herein shall be deemed in each case to be followed by the words “without limitation.” The phrases “the date of this Agreement”, “the date hereof”, and terms of similar import, unless the context otherwise requires, shall be deemed to refer to the date first above written.

10.3 Specific Performance; Injunctive Relief. The parties hereto acknowledge that Parent will be irreparably harmed and that there will be no adequate remedy at law for a violation of any of the covenants or agreements of Stockholder set forth herein or in the Proxy. Therefore, it is agreed that, in addition to any other remedies that may be available to Parent upon any such violation of this Agreement or the Proxy, Parent shall have the right to enforce such covenants and agreements and the Proxy by specific performance, injunctive relief or by any other means available to Parent at law or in equity and Stockholder hereby waives the defense that there is an adequate remedy at law or that the award of specific performance, injunctive relief or other means available in equity is not an appropriate remedy for any reason of law or equity and waives any requirement for the security or posting of any bond in connection with such enforcement.

10.4 Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same instrument and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other parties hereto; it being understood that all parties need not sign the same counterpart.

10.5 Entire Agreement; Nonassignability; Parties in Interest. This Agreement and the documents and instruments and other agreements specifically referred to herein or delivered pursuant hereto (including the proxies granted by Stockholder pursuant to Section 3) (i) constitute the entire agreement among the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof, and (ii) are not intended to confer, and shall not be construed as conferring, upon any person other than the parties hereto any rights or remedies hereunder. Except as provided in Section 1(a) and Section 1(b), neither this Agreement nor any of the rights, interests, or obligations under this Agreement may be assigned or delegated, in whole or in part, by operation of law or otherwise, by either party without the prior written consent of the other party, and any such assignment or delegation that is not consented to shall be null and void, except this Agreement, together with any rights, interests or obligations of Parent hereunder, may be assigned or delegated in whole or in part by Parent without the prior written consent of the Stockholder. Subject to the preceding sentence, this Agreement shall be binding upon, inure to the benefit of, and be enforceable by and against, the parties hereto and their respective permitted successors and assigns (including, without limitation, any Person to whom any Shares are sold, transferred or assigned pursuant to Section 1). All authority conferred herein shall survive the death or incapacity of the Stockholder and in the event of Stockholder’s death or incapacity, any obligation of the Stockholder hereunder shall be binding upon the heirs, personal representatives, successors and assigns of the Stockholder.

10.6 Severability. In the event that any provision of this Agreement, or the application thereof, becomes or is declared by a court of competent jurisdiction to be illegal, void or unenforceable, the remainder of this Agreement shall continue in full force and effect and the application of such provision to other persons or circumstances shall be interpreted so as reasonably to effect the intent of the parties hereto. The parties hereto further agree to use their reasonable best efforts to replace such void or unenforceable provision of this Agreement with a valid and enforceable provision that shall achieve, to the extent possible, the economic, business and other purposes of such void or unenforceable provision.

10.7 Remedies Cumulative. Except as otherwise provided herein, any and all remedies herein expressly conferred upon a party shall be deemed cumulative with and not exclusive of any other remedy conferred hereby, or by law or equity upon such party, and the exercise by a party of any one remedy shall not preclude the exercise of any other remedy.

10.8 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware without reference to such state’s principles of conflicts of law. Each of the parties hereto irrevocably consents to the exclusive jurisdiction of any court located within the State of Delaware, in connection with any matter based upon or arising out of this Agreement or the matters contemplated herein, agrees that process may be served upon them in any manner authorized by the laws of the State of Delaware for such persons and waives and covenants not to assert or plead any objection which they might otherwise have to such jurisdiction and such process.

10.9 Additional Documents, Etc. Stockholder shall execute and deliver any additional documents necessary or desirable, in the reasonable opinion of Parent, to carry out the purpose and intent of this Agreement. Without limiting the generality or effect of the foregoing or any other obligation of Stockholder hereunder, Stockholder hereby authorizes Parent to deliver a copy of this Agreement to Company and hereby agrees that each of Company and Parent may rely upon such delivery as conclusively evidencing the representations, warranties, covenants, releases and waivers of Stockholder, in each case for purposes of all agreements and instruments to which such representations, warranties, covenants, releases and/or waivers are applicable or relevant.

10.10 Term; Termination; Waiver.

(a) This Agreement shall not be effective unless and until the Merger Agreement is executed by all parties thereto and shall thereafter remain in effect in accordance with its terms unless and until terminated in accordance with this Section 10.10.

(b) This Agreement and the parties’ obligations provided herein shall automatically terminate, without any notice or other action by any Person, upon the termination of the Merger Agreement pursuant to Section 8.1(a) thereof. Upon such automatic termination of this Agreement, no party shall have any further obligations or liabilities under this Agreement, provided, however, that the provisions of Sections 6, 8 and 10 shall survive the termination of this Agreement.

(c) Sections 1(b) and 2 and the Irrevocable Proxy with respect to the Company Shares under Section 3 shall expire and terminate at the earlier of (i) the termination of the Merger Agreement pursuant to Section 8.1(a) thereof, and (ii) the Effective Time.

(d) Section 1(c) and the Irrevocable Proxy with respect to the Parent Shares shall expire and terminate on the earlier of the (i) the termination of the Merger Agreement pursuant to Section 8.1(a) thereof and (ii) the Proxy Expiration Date. Stockholder acknowledges and understands that the specific date on which the Proxy Expiration Date will occur is not presently known.

(e) Stockholder hereby waives all notice and other applicable provisions under the Existing Agreements to which the Stockholder is a party and the Company Certificate of Incorporation with respect to the transactions contemplated by the Merger Agreement.

10.11 Acknowledgements. Each party to this Agreement acknowledges that (a) Latham & Watkins LLP, counsel for the Company, represented the Company in connection with the Merger and related transactions, (b) DLA Piper LLP (US), counsel for Parent, represented Parent and Merger Sub in connection with this Agreement, the Merger and related transactions, (c) neither such firm has represented Stockholder in connection with this Agreement, the Merger or otherwise and (d) Stockholder acknowledges that it, he or she has had the opportunity to consult with its, his or her own counsel.

[Remainder of Page Left Intentionally Blank]

IN WITNESS WHEREOF, the parties hereto have caused this Stockholder Agreement to be executed as of the date first above written.


MAST THERAPEUTICS, INC.

By:
Name:
Title:

[SIGNATURE PAGE TO STOCHOLDER AGREEMENT]

IN WITNESS WHEREOF, the parties hereto have caused this Stockholder Agreement to be executed as of the date first above written.


AIRES PHARMACEUTICALS, INC.

By:
Name:		Wendy Johnson
Title:		President and Chief Executive Officer

[SIGNATURE PAGE TO STOCHOLDER AGREEMENT]

IN WITNESS WHEREOF, the parties hereto have caused this Stockholder Agreement to be executed as of the date first above written.


		Name of Stockholder:



		Address:


		(Print Telephone Number)


		(Social Security or Tax I.D. Number)


		Company Shares beneficially owned on the date hereof: __________ shares of Common Stock _________ shares of Series A Preferred Stock _________ shares of Series B-1 Preferred Stock _________ shares of Series B-2 Preferred Stock _________ shares of Series C-1 Preferred Stock _________ shares of Series C-2 Preferred Stock State of Residence:

[SIGNATURE PAGE TO STOCHOLDER AGREEMENT]

STOCKHOLDER AGREEMENT & WRITTEN CONSENT OF THE STOCKHOLDERS

SPOUSAL CONSENT

I , spouse of , have read and approve the foregoing Stockholder Agreement, including the attached Proxy, (the “Agreement”), and the written consent of the stockholders of Aires Pharmaceuticals, Inc. (the “Consent”). In consideration of the terms and conditions as set forth in the Agreement and the matters set forth in the Consent, I hereby appoint my spouse as my attorney-in-fact with respect to the exercise of any rights and obligations under the Agreement and the Consent, and agree to be bound by the provisions of the Agreement and the Consent insofar as I may have any rights or obligations in the Agreement or in the Consent under the community property laws or similar laws relating to marital or community property in effect in the state of our residence as of the date of the Agreement or the Consent.

Date_____________________________________________________

Signature of Spouse_________________________________________

Printed Name of Spouse______________________________________

EXHIBIT A

IRREVOCABLE PROXY

TO VOTE STOCK OF

MAST THERAPEUTICS, INC. and AIRES PHARMACEUTICALS, INC.

The undersigned stockholder (each a “Stockholder”) of Aires Pharmaceuticals, Inc., a Delaware corporation (“Company”), hereby irrevocably (to the fullest extent permitted by the Delaware General Corporation Law) appoints (i) the officers of Mast Therapeutics, Inc., a Delaware corporation (“Parent”), and each of them, or any other designee of Parent, as the sole and exclusive attorneys and proxies of the undersigned, with full power of substitution and resubstitution, to vote and exercise all voting and related rights (to the fullest extent that the undersigned is entitled to do so) with respect to each and every meeting of stockholders of Parent or action or approval by written resolution or consent of stockholders of Parent from and after the Effective Time and through the date that is the thirty (30)-month anniversary of the Closing Date (the “Proxy Expiration Date”) covering the total number of shares of capital stock of Parent issued to such Stockholder as Merger Consideration pursuant to the Merger Agreement (defined below) (such shares issued as Merger Consideration, the “Parent Shares”) in respect of which the undersigned is entitled to vote at any such meeting or in connection with any such written consent and (ii) the officers of the Company, and each of them, or any other designee of the Company, as the sole and exclusive attorneys and proxies of the undersigned, with full power of substitution and resubstitution, to vote and exercise all voting and related rights (to the fullest extent that the undersigned is entitled to do so) with respect to each and every meeting of stockholders of the Company or action or approval by written resolution or consent of stockholders of the Company from and after the date hereof and prior to the earlier of (A) the Effective Time or (B) termination of the Merger Agreement covering the total number of number of shares of capital stock of the Company (the “Company Shares” and together with the Parent Shares, the “Shares”) in respect of which such Stockholder is entitled to vote at any such meeting or in connection with any such written consent related to the subject matter of Section 2 of the Stockholder Agreement (defined below). Notwithstanding anything to the contrary in this Agreement, this Irrevocable Proxy shall not apply to any proposal submitted to a vote of the Company Stockholders to approve any payment which would, in the absence of such approval, constitute a parachute payment under Section 280G of the Code, and such Stockholder shall continue to have full power and authority to vote the Company Shares in such Stockholder’s sole discretion for or against any such proposal. Upon the undersigned’s execution of this Irrevocable Proxy, any and all prior proxies given by the undersigned with respect to any Shares are hereby revoked and the undersigned agrees not to grant any subsequent proxies with respect to the Shares until after the Proxy Expiration Date (as defined below). Any capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Merger Agreement.

This Irrevocable Proxy is irrevocable (to the fullest extent provided in the Delaware General Corporation Law), is coupled with an interest, including, but not limited to, that certain Stockholder Agreement dated as of even date herewith by and between Parent and the undersigned (the “Stockholder Agreement”), and is granted in consideration of Parent entering into that certain Agreement and Plan of Merger, dated as of February 7, 2014, by and between Parent, Company, AP Acquisition Sub, Inc. (“Merger Sub”) and Stockholders’ Representative (the “Merger Agreement”), which agreement provides for the merger of Company with and into Merger Sub (the “Merger”).

This Irrevocable Proxy with respect to the Company Shares shall expire and terminate at the earlier of (i) the termination of the Merger Agreement pursuant to Section 8.1(a) thereof, and (ii) the Effective Time (as defined in the Merger Agreement). This Irrevocable Proxy with respect to the Parent Shares shall expire and terminate on the earlier of the (i) the termination of the Merger Agreement pursuant to Section 8.1(a) thereof and (ii) the Proxy Expiration Date. The undersigned Stockholder acknowledges and understands that the specific date on which the Proxy Expiration Date will occur is not presently known. As used herein, the term “Proxy Expiration Date” shall mean the thirty (30) month anniversary of the Closing Date (as defined in the Merger Agreement).

The attorneys and proxies named above, and each of them, are hereby authorized and empowered by the undersigned, at any time prior to the Proxy Expiration Date, to act as the undersigned’s attorney and proxy to vote the Shares, and to exercise all voting and other rights of the undersigned with respect to the Shares (including, without limitation, the power to execute and deliver written consents pursuant to the Delaware General Corporation Law), at every annual, special or adjourned meeting of the stockholders of Company or Parent, as applicable, and in every written consent in lieu of such meeting, to the extent related to the subject matter of Section 2 or Section 3 of the Stockholder Agreement, as applicable. However, this Irrevocable Proxy with respect to the Company Shares shall not apply to any proposal submitted to the Company Stockholders to approve any payment which would, in the absence of such approval, constitute parachute payments under Section 280G of the Internal Revenue Code of 1986, as amended, and the undersigned Stockholder shall continue to have full power and authority to vote the Shares in the undersigned’s sole discretion for or against any such proposal and/or any other matter not specifically described as a Proposal in the Stockholder Agreement.

All authority herein conferred shall survive the death or incapacity of the undersigned and any obligation of the undersigned hereunder shall be binding upon the heirs, personal representatives, successors and assigns of the undersigned.

This Irrevocable Proxy may not be amended or otherwise modified without the prior written consent of Parent. This Irrevocable Proxy shall terminate, and be of no further force and effect, automatically at 5:30 p.m. (Pacific time) the Proxy Expiration Date.

[Remainder of Page Left Intentionally Blank]

Dated: _____________, ____

Name of Stockholder: ___________________

Address:

Company Shares beneficially owned on the date hereof:

_________ shares of Common Stock

_________ shares of Series A Preferred Stock

_________ shares of Series B-1 Preferred Stock

_________ shares of Series B-2 Preferred Stock

_________ shares of Series C-1 Preferred Stock

_________ shares of Series C-2 Preferred Stock

[SIGNATURE PAGE TO IRREVOCABLE PROXY]

EX-31.1

Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO

SECURITIES EXCHANGE ACT RULES 13a-14(a) AND 15(d)-14(a)

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Brian M. Culley, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q of Mast Therapeutics, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

May 5, 2014

/s/ Brian M. Culley

Brian M. Culley

Chief Executive Officer

(Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO

SECURITIES EXCHANGE ACT RULES 13a-14(a) AND 15(d)-14(a)

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Brandi L. Roberts, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q of Mast Therapeutics, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

May 5, 2014

/s/ Brandi L. Roberts

Brandi L. Roberts

Chief Financial Officer and Senior Vice President

(Principal Financial and Accounting Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Mast Therapeutics, Inc. (the “Company”) on Form 10-Q for the quarter ended March 31, 2014, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Brian M. Culley, principal executive officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(i) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and

(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

May 5, 2014

/s/ Brian M. Culley

Brian M. Culley

Chief Executive Officer

(Principal Executive Officer)

In connection with the Quarterly Report of Mast Therapeutics, Inc. (the “Company”) on Form 10-Q for the quarter ended March 31, 2014, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Brandi L. Roberts, principal financial officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(i) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and

(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

May 5, 2014

/s/ Brandi L. Roberts

Brandi L. Roberts

Chief Financial Officer and Senior Vice President

(Principal Financial and Accounting Officer)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company