Xstelos Holdings, Inc. - FORM S-1

Attached files

file	filename
EX-3.1 - Xstelos Holdings, Inc.	ex31tos107827_01242012.htm
EX-3.2 - Xstelos Holdings, Inc.	ex32tos107827_01242012.htm
EX-23.1 - Xstelos Holdings, Inc.	ex231tos107827_01242012.htm
EX-21.1 - Xstelos Holdings, Inc.	ex211tos107827_01242012.htm
EX-23.2 - Xstelos Holdings, Inc.	ex232tos107827_01242012.htm
EX-10.1 - Xstelos Holdings, Inc.	ex101tos107827_01242012.htm

As filed with the Securities and Exchange Commission on January 25, 2012

Registration No. 333-

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

____________________________

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

____________________________

XSTELOS HOLDINGS, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware

(State or Other Jurisdiction of

Incorporation or Organization)

6794

(Primary Standard Industrial

Classification Code Number)

22-3439443

(I.R.S. Employer

Identification Number)

630 Fifth Avenue, Suite 2260

New York, NY 10020

(201) 934-2000

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

____________________________

Jonathan M. Couchman

President and Chief Executive Officer

XSTELOS HOLDINGS, INC.

630 Fifth Avenue, Suite 2260

New York, NY 10020

(201) 934-2000

(Name, Address Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

____________________________

Copies to:

Adam W. Finerman, Esq.

Olshan Grundman Frome Rosenzweig & Wolosky LLP

Park Avenue Tower

65 East 55th Street

New York, New York 10022

Telephone: (212) 451-2300

Facsimile: (212) 451-2222

____________________________

Approximate Date of Commencement of Proposed Distribution to the Public: As soon as practicable after the effective date of this registration statement

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

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. (Check one):

Large accelerated filer ¨	Accelerated filer ¨

Non-accelerated filer ¨ (Do not check if a smaller reporting company)	Smaller reporting company ý

CALCULATION OF REGISTRATION FEE

Title of Each Class of Securities to be Registered	Amount to be Registered(1)	Proposed Maximum Offering Price (1)	Proposed Maximum Aggregate Offering Price (2)	Amount of Registration Fee(3)
Common stock, $0.01 par value per share	24,231,737 shares	$0.66	$15,992,946.42	$1,832.79

____________________

(1)

Represents the number of shares that may be issued by the registrant to holders of Footstar, Inc. common stock in connection with the distribution described in this prospectus.

(2)

Estimated solely for the purpose of calculating the registration fee required by Section 6(b) of the Securities Act of 1933, as amended, and calculated pursuant to Rules 457(c) and 457(f) under the Securities Act of 1933, as amended, based on the average of the high and low prices for Footstar, Inc.’s common stock on January 19, 2012, as reported on the OTC Bulletin Board quotation system.

(3)

The registration fee is calculated pursuant to Rule 457(c) by multiplying the proposed maximum aggregate offering price for all securities to be registered by 0.0001146.

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

XSTELOS HOLDINGS, INC.

630 FIFTH AVENUE, SUITE 2260

NEW YORK, NY 10020

(201) 934-2000

[●], 2012

Dear Footstar, Inc. Stockholders:

On January 19, 2012, the board of directors of Footstar, Inc., or Footstar, approved a Plan of Reorganization pursuant to which Footstar contributed all of its assets to a newly formed company, Xstelos, Inc., or Xstelos. In exchange for the contribution of all of its assets, Xstelos assumed all of Footstar’s liabilities and issued all of its shares to Footstar. Upon the effectiveness of Xstelos’s registration statement, of which the enclosed prospectus forms a part, Footstar will make a pro rata distribution of Xstelos’s shares to Footstar stockholders. As a result of the distribution, Footstar stockholders will receive one share of Xstelos common stock for each one share of Footstar common stock held at the close on business on the distribution record date, [●], 2012.

After the distribution is completed, stockholders of Footstar will own all of the outstanding shares of common stock of Xstelos, which will be proportionate to their percentage ownership of Footstar shares on the distribution record date, [●], 2012. Footstar will continue to dissolve in accordance with its plan of dissolution and cease to exist on May 5, 2012. Xstelos will continue to operate the Footstar business as a going concern following the distribution.

As a result of the contribution by Footstar of all of its assets in connection with the Plan of Reorganization, all of Footstar’s subsidiaries became subsidiaries of Xstelos, including Footstar Corporation, which became a wholly owned subsidiary of Xstelos.

No action is required on your part to receive your Xstelos shares. Footstar stockholders will not be required to pay anything to Footstar or Xstelos for the new stock or to surrender any certificates representing shares of Xstelos stock. The distribution of Xstelos shares will generally not result in a taxable event for U.S. federal income tax purposes.

The enclosed prospectus describes the distribution of shares of Xstelos and contains important information about Xstelos and its business. If you have any questions regarding the distribution, please contact Jonathan M. Couchman at 630 Fifth Avenue, Suite 2260, New York, NY 10020 or by telephone at (201) 934-2000.

	Sincerely,


	Jonathan M. Couchman President and Chief Executive Officer

The information in this preliminary prospectus is not complete and may be changed. We may not distribute these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

PRELIMINARY PROSPECTUS

SUBJECT TO COMPLETION, DATED JANUARY 25, 2012

Shares of Common Stock of

XSTELOS HOLDINGS, INC.

______________________

Xstelos Holdings, Inc., or Xstelos, is currently a wholly-owned subsidiary of Footstar, Inc., or Footstar. In the distribution described in this prospectus, Footstar will distribute all of the shares of Xstelos common stock, par value $0.01 per share, to Footstar stockholders as of [●], 2012 on a pro rata basis. Immediately after the distribution is completed, Footstar stockholders will own all of the outstanding shares of common stock of Xstelos, which will be proportionate to their percentage ownership of Footstar shares as of [●], 2012.

Immediately following this distribution, we will be an independent public company. Prior to this distribution, there has been no public market for our common stock. It is anticipated that our common stock will be quoted on the OTC Bulletin Board quotation system, or the OTCBB, under the symbol “[ ]” on or promptly after the date of this prospectus.

We are sending you this prospectus to describe the distribution. We expect the distribution to occur on or about [●], 2012. You will receive your proportionate number of shares of Xstelos common stock through our transfer agent’s book entry registration system.

No stockholder action is necessary for you to receive your shares of Xstelos. This means that you (1) do not need to pay anything to Xstelos or Footstar and (2) you do not need to surrender any of your shares of Footstar to receive your shares of Xstelos. In addition, a stockholder vote is not required for the distribution to occur.

As you review this prospectus, you should carefully consider the matters described in “Risk Factors” beginning on page 5 of this prospectus.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The date of this prospectus is , 2012

TABLE OF CONTENTS

	Page
Prospectus Summary	1
Risk Factors	5
Special Note Regarding Forward-Looking Statements	16
The Distribution	17
Dividend Policy	18
Use of Proceeds	18
Dilution	18
Business	19
Footstar Corp & Subsidiaries Pro Forma Financial Statements	32
Management’s Discussion and Analysis of Financial Condition and Results of Operations	37
Management	46
Executive Compensation	48
Certain Relationships and Related Transactions	50
Security Ownership of Certain Beneficial Owners and Management	51
United States Federal Income Tax Considerations	52
Description Of Capital Stock	54
Shares Eligible for Future Sale	55
Legal Matters	56
Experts	56
Where You Can Find More Information	56

Financial Statements	F-1

You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with different information. We are not making an offer of these securities in any state where the offer is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front of this prospectus.

Through and including , 2012 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this distribution, may be required to deliver a prospectus. This obligation is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

For Investors Outside the United States: We have not done anything that would permit this distribution or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this distribution and the distribution of this prospectus.

We obtained statistical data, market data and other industry data and forecasts used throughout this prospectus from market research, publicly available information and industry publications. We believe that the statistical data, industry data and forecasts and market research are reliable.

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PROSPECTUS SUMMARY

This summary highlights material information contained elsewhere in this prospectus and does not contain all of the information that you should consider with respect to the distribution. We urge you to read this entire prospectus carefully, including the “Risk Factors” section and consolidated financial statements and related notes appearing elsewhere in this prospectus. Unless the context provides otherwise, all references in this prospectus to “Xstelos,” “we,” “us,” “our,” or similar terms, refer to Xstelos Holdings, Inc., all references to “Footstar” refer to Footstar, Inc., and all references to “CPEX” refer to CPEX Pharmaceuticals, Inc.

Overview

We are a wholly owned subsidiary of Footstar, a Delaware corporation, which is a holding company that is currently winding down pursuant to the Amended Plan of Complete Dissolution and Liquidation of Footstar, Inc., referred to herein as the Plan of Dissolution, which was adopted by Footstar’s stockholders on May 5, 2009. On January 19, 2012, the board of directors of Footstar approved a Plan of Reorganization pursuant to which Footstar contributed all of its assets to Xstelos, including its cash, real eastate and an 80.5% interest in CPEX, a pharmaceutical company. In exchange for the contribution of all of its assets, Xstelos assumed all of Footstar’s liabilities and issued all of its shares of common stock to Footstar. These shares constitute all of the outstanding shares of Xstelos capital stock.

In the distribution described in this prospectus, Footstar will distribute all of the Xstelos shares to holders of Footstar common stock as of [●], 2012, the record date for the distribution, on a pro rata basis. Immediately after the distribution is completed, Footstar stockholders will own all of the outstanding shares of common stock of Xstelos, which shall be proportionate to their percentage ownership of Footstar shares as of the record date. Footstar will continue to dissolve in accordance with the Plan of Dissolution and cease to exist on May 5, 2012. Xstelos will continue to operate the business of Footstar and CPEX as a going concern following the distribution. No stockholder vote is required in connection with the distribution.

Corporate History

Footstar, the predecessor of Xstelos, is a holding company that is currently winding down pursuant to the Plan of Dissolution, which was adopted by Footstar’s stockholders on May 5, 2009.

Until the time it discontinued regular business operations in December 2008, Footstar had operated its business since 1961 through its subsidiaries principally as a retailer selling family footwear through licensed footwear departments in discount chains and wholesale arrangements. Commencing March 2, 2004, Footstar and most of its subsidiaries filed voluntary petitions for reorganization under Chapter 11 of Title 11 of the United States Code in the United States Bankruptcy Court. On February 7, 2006, Footstar successfully emerged from bankruptcy. As part of its emergence from bankruptcy, substantially all of Footstar’s business operations were related to the agreement pursuant to which it operated the licensed footwear departments in Kmart stores.

Following its emergence from bankruptcy, Footstar’s board of directors, with the assistance of investment bankers, evaluated a number of possible alternatives to enhance stockholder value, including acquisition opportunities, changes in the terms of Footstar’s principal contracts, including the early termination of or extension of the agreement with Kmart, the payment of one or more dividends, and the sale of its assets or stock. The board of directors determined the best course of action was to operate under the agreement with Kmart through its scheduled expiration at the end of December 2008.

On March 5, 2009, Footstar’s board of directors adopted and approved the Plan of Dissolution. On May 5, 2009, at a special meeting of stockholders of Footstar, the stockholders adopted and approved the Plan of Dissolution of Footstar, and in accordance therewith, a Certificate of Dissolution was filed with the Secretary of State of the State of Delaware and became effective on May 5, 2009. Subsequent to such time, the board of directors moved forward with the liquidation and worked toward selling all of Footstar’s remaining assets and settling all claims. Immediately after adopting the plan of dissolution, Footstar adopted the liquidation basis of accounting.

In August 2010, the Footstar board of directors was made aware of an opportunity regarding a potential strategic transaction with CPEX. As part of its assessment as to whether to pursue a transaction with CPEX, the board of directors also reevaluated whether it continued to be advisable to continue liquidating Footstar pursuant to the Plan of Dissolution. The board of directors considered that, regardless of whether a transaction with CPEX was consummated, it may be advisable to suspend liquidating Footstar pursuant to the Plan of Dissolution and pursue strategic transactions as a going concern.

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CPEX is a wholly owned subsidiary of FCB I Holdings, Inc., which is owned 80.5% by Footstar Corporation, a Texas corporation, or Footstar Corp, and 19.5% by an unaffiliated investment holding company (the “Investment Holding Company”). Footstar Corp is a wholly owned subsidiary of Xstelos as a result of the Plan of Reorganization.

Following the acquisition of CPEX, Footstar submitted for stockholder approval a proposal to revoke its Plan of Dissolution at a special meeting of stockholders held July 21, 2011. Footstar was unable to obtain the necessary approval since under Delaware law the proposal needed to be approved by a majority of outstanding shares of record as of May 5, 2009, the date the Plan of Dissolution became effective. Accordingly, to ensure that the stockholders of Footstar will continue to derive the benefit of the CPEX business through its ownership by FCB I Holdings, Inc., the Footstar board of directors approved the Plan of Reorganization.

As a result of the contribution by Footstar, the previous owner of Footstar Corp, of all of its assets in connection with the Plan of Reorganization, Footstar Corporation became a wholly owned subsidiary of Xstelos. After the distribution, Xstelos will continue to operate the CPEX business through FCB I Holding, Inc. as a going concern.

After the distribution, Xstelos’s business and operations will be the same as the business and operations of Footstar prior to the distribution, and Xstelos’s consolidated assets and liabilities are the same as the consolidated assets and liabilities of Footstar prior to its contribution of its assets to and assumption of its liabilities by Xstelos in accordance with the Plan Reorganization.

Business of CPEX

CPEX is an emerging specialty pharmaceutical company in the business of research and development of pharmaceutical products utilizing its validated drug delivery platform technology.

CPEX has U.S. and international patents and other proprietary rights to technology that facilitates the absorption of drugs. Its platform drug delivery technology is based upon CPE-215®, which enhances permeation and absorption of pharmaceutical molecules across biological membranes such as the skin, nasal mucosa and eye. CPEX’s principal product is Testim®, a gel for testosterone replacement therapy, which is a formulation of its technology with testosterone. Testim is licensed to Auxilium Pharmaceuticals, Inc., referred to herein as Auxilium, which is currently marketing it in the United States, Europe and other countries. Currently, all of our current revenue is derived from royalties on Testim sales, and CPEX has no other products in development nor does it have any agreements with third parties to develop any products at the present time.

Through the end of the 2011 fiscal year, and for at least the 2012 fiscal year, Xstelos, through FCB I Holdings, Inc., intends to continue to operate the CPEX business, including realizing revenue from its licensing agreement with Auxilium. CPEX at present is committed to maximizing the value of its existing product portfolio, including exploring joint ventures, licensing arrangements or direct investment by CPEX. Accordingly, we intend to review our patents and the pharmaceutical market for potential opportunities to monetize our intellectual property, as well as generally consider and pursue strategic transactions in the best interest of Xstelos and its stockholders.

Directors and Officers

The directors of Xstelos are Jonathan M. Couchman, Eugene I. Davis and Adam W. Finerman. Jonathan M. Couchman is the President and Chief Executive Officer of Xstelos, and is its sole executive officer. The directors and officers of Xstelos are the same individuals who are the directors and officers of Footstar and will continue as the directors and officers of Xstelos following the distribution. The compensation and benefits paid to the directors and executive officers of Xstelos will be the same as the compensation and benefits for directors and officers of Footstar.

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As a result of the distribution, Xstelos’s directors and executive officers will own common stock of Xstelos, will be issued options to purchase Xstelos identical to their current holdings in Footstar and, to that extent, their interest in the distribution is the same as that of other Footstar stockholders and, after the distribution, Xstelos stockholders. The directors and executive officers of Xstelos are not receiving any additional consideration in connection with the distribution.

U.S. Federal Income Tax Consequences

Stockholders of Xstelos will generally for federal income tax purposes (1) recognize no gain or loss as a result of the distribution, (2) have an initial tax basis in the stock of Xstelos that is the same as their adjusted tax basis in their existing Footstar stock and (3) have a holding period for federal income tax purposes for the stock of Xstelos that includes their holding period for their existing stock of Footstar. See “United States Federal Income Tax Considerations,” below.

Net Operating Losses

Footstar has experienced substantial net operating losses, or NOLs, and may use such NOLs to offset net income generated in future periods and thereby reduce its payments for taxes in such future periods. Following the Transaction, such NOLs will continue to be available to Xstelos to the extent such NOLs may be used under applicable law to offset net income in future periods. As of October 1, 2011, Footstar had NOL carryforwards for federal income tax purposes of approximately $122.6 million, although there is no assurance Xstelos will be able to avail itself of all of these NOLs.

Risks Associated With Our Business

In executing our business strategy, we face significant risks and uncertainties, as more fully described in the section entitled “Risk Factors” on page 5.

Moreover, Jonathan M. Couchman, our Chairman and Chief Executive Officer, will beneficially own 11,063,578 shares of common stock and options to purchase an additional 2,500,000 shares (on substantially the same terms as his previous option to acquire 2,500,000 shares of Footstar) after the distribution of shares in the distribution, which will represent 45.7% of the common stock of Xstelos, or 50.8% on an as-exercised basis. Following the completion of this distribution, our executive officers, directors and principal stockholders and their affiliates, will own approximately 48.4% of our outstanding common stock, or 53.2% on a fully diluted basis, allowing them to exert significant influence regarding all matters submitted to our stockholders for approval.

Company Information

We were organized as a Delaware corporation on January 20, 2012 under the name “Xstelos Holdings, Inc.”. Our principal executive offices are located at 630 Fifth Avenue, Suite 2260, New York, New York. Our telephone number is (201) 934-2000.

If you have any questions about the distribution or would like additional copies of this prospectus, you should contact Jonathan M. Couchman at 630 Fifth Avenue, Suite 2260, New York, NY 10020 or by telephone at (201) 934-2000.

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Summary of the Distribution

The Distribution	The distribution is part of the Plan of Reorganization, whereby Xstelos will become a publicly traded company and succeed to Footstar’s reporting obligations.

Distributing Company	Footstar. After the distribution, Footstar stockholders will own all of the outstanding shares of Xstelos on a pro rata basis.

Securities to Be Distributed	24,231,737 shares of Xstelos, constituting all of its outstanding capital stock. Immediately following the distribution, approximately 2,000 stockholders of record will hold shares of Xstelos common stock on a pro rata basis to their Footstar holdings as of [●], 2012, the record date for the distribution. Jonathan M. Couchman will receive an option to purchase 2,500,000 shares of Xstelos at $0.35 per share, which will have terms substantially similar to his current option to acquire 2,500,000 shares of Footstar for $0.35 per share.

Distribution of Shares	On or shortly after the distribution date, beneficial owners of shares of Footstar common stock on [●], 2012, the record date for the distribution, will receive their shares of Xstelos through our transfer agent’s book entry registration system.

Distribution Ratio	Each holder of Footstar common stock will receive one share of Xstelos common stock for each one share of Footstar common stock held as of the [●], 2012, the record date for the distribution.

Distribution Record Date	[●], 2012 (close of business).

Distribution Date	Expected to be on or about [●], 2012.

Distribution Agent	Securities Transfer Corporation.

Registrar and Transfer Agent	Securities Transfer Corporation.


Use of Proceeds	Because this is not an offering for cash, there will be no proceeds to Xstelos from the distribution.

Market for Our Common Stock	It is anticipated that our common stock will be quoted on the OTC Bulletin Board quotation system, or the OTCBB, under the symbol “[ ]” on or promptly after the date of this prospectus.

Tax Consequences	The receipt of Xstelos common stock in the distribution will generally not be a taxable event to Xstelos stockholders for U.S. federal income tax purposes. See “United States Federal Income Tax Considerations,” below.

Risk Factors	Investing in our common stock involves a high degree of risk. As an investor, you should be able to bear a complete loss of your investment. You should carefully consider the information set forth in the “Risk Factors” section beginning on page 5.

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as the other information in this prospectus (including our financial statements and the related notes appearing at the end of this prospectus), before deciding whether to invest in our common stock. The occurrence of any of the following risks could harm our business, financial condition, results of operations or growth prospects. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.

Risks Related to the Business of Xstelos

CPEX’s wholly-owned subsidiary has substantial indebtedness and is highly leveraged.

FCB I LLC, or FCB LLC or the Borrower, a wholly owned subsidiary of CPEX, borrowed approximately $64 million in the form of a secured term loan to FCB LLC in connection with the acquisition of CPEX. The term loan under the loan bears interest at “LIBOR” plus 16% per annum and matures on the earlier of January 3, 2026 or the date any of CPEX’s patents that are associated with Testim expire, and contains customary events of default for loans of such nature. A substantial portion of future cash flow, if any, will be dedicated to the payment of principal and interest on FCB LLC’s indebtedness, and may not be sufficient to fund CPEX’s projected cash needs. CPEX may not be able to access additional sources of financing, if needed, on similar terms or pricing as those that are currently in place, or at all, or otherwise obtain other sources of funding. An inability to access replacement or additional sources of financing to fund the repayment of its debt could adversely affect CPEX’s financial condition and ability to make payments on its debt.

Currently, all of CPEX’s revenues to date have been generated from royalties on Auxilium’s sales of Testim, which may be subject to generic competition in the future. Should sales of Testim decline, CPEX may be required to limit, scale back or cease operations.

All of CPEX’s revenues have been derived through royalty income from the only commercialized product utilizing CPEX’s CPE-215 technology, Testim®, which is sold by Auxilium. At the present time, CPEX has no other products. Testim® royalties totaled $23.3 million, $18.7 million and $5.9 million in the years ended December 31, 2010 and 2009 and for the period of January 1, 2011 through April 5, 2011 of CPEX, respectively, and $12.4 million for the nine months ended October 1, 2011 of Footstar Corp. The only expenses regarding Testim® that CPEX has incurred during this period are patent maintenance costs, which have not been material. Though CPEX believes that Auxilium intends to continue commercialization of Testim, sales of this product are subject to the following risks, among others:

pressure from existing or new competing products, including generic products, that may provide therapeutic, convenience or pricing advantages over Testim or may garner a greater share of the market;

growth of competitors in the androgen market where Testim® competes; and

commercialization priorities of Auxilium.

In October 2008, CPEX and Auxilium received notice that Upsher-Smith Laboratories, Inc., or Upsher-Smith, filed an Abbreviated New Drug Application, or ANDA, containing a paragraph IV certification in which it certified that it believes that its proposed testosterone gel product does not infringe CPEX’s patent covering Testim®, U.S. Patent No. 7,320,968, or the ‘968 Patent. The ‘968 Patent claims a method for maintaining effective blood serum testosterone levels for treating a hypogonadal male, and will expire in January 2025. The ‘968 Patent is listed for Testim® in Approved Drug Products with Therapeutic Equivalence Evaluations (commonly known as the Orange Book), published by the FDA. Upsher-Smith’s paragraph IV certification sets forth allegations that the ‘968 Patent will not be infringed by the manufacture, use, or sale of the product for which the ANDA was submitted. On December 4, 2008, CPEX and Auxilium filed a Hatch-Waxman patent infringement lawsuit in the United States District Court for the District of Delaware against Upsher-Smith, seeking injunctive and declaratory relief. The Court docketed this case as Civil Action No. 08-908-SLR. In June 2009, Upsher-Smith amended its answer to the complaint to include a defense and counterclaim of invalidity of the ‘968 Patent, which CPEX and Auxilium have denied. CPEX and Auxilium filed a reply to the counterclaim in July 2009 denying the invalidity of the ‘968 Patent. A patent issued by the U.S. Patent and Trademark Office, such as the ‘968 Patent, is presumed valid. As of the date of this filing, the lawsuit remains pending; however, the trial date has been removed from the Court’s calendar. Should Testim® sales be adversely impacted by any of the above risks, CPEX’s revenues will be reduced.

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In addition, Testim royalty income is dependent upon CPEX’s ability to maintain its intellectual property claims for its CPE-215 technology that is used in the Testim product. Should CPEX be unable to maintain its intellectual property position with regards to CPE-215, royalty income would be impaired.

If CPEX is unable to meet its responsibilities under any of its agreements, it may lose potential business and be subject to penalties and other damages.

CPEX has a licensing agreement with Auxilium pursuant to which CPEX licenses its CPE-215 with a testosterone formulation to Auxilium and receives royalties of 12% from Auxilium based upon Auxilium’s sales of Testim. This royalty stream is CPEX’s only source of current revenue. If CPEX does not maintain adequate patent protection for Testim, the royalty rate due to CPEX would be reduced to 2%. To date CPEX has not experienced a reduction in the royalty rate due to loss of patent protection and CPEX recently obtained patents that cover the application of testosterone with CPE-215 in the U.S. and in foreign countries that continue through 2023.

Disputes may arise with respect to certain of CPEX’s development agreements regarding the development and commercialization of products, which incorporate its intellectual property. These disputes could lead to delays in commercialization of products incorporating CPEX’s technologies or termination of the agreements.

If CPEX’s existing patents do not afford adequate protection to it, CPEX’s competitors may be able to develop competing products.

The basic patent disclosing and claiming CPE-215 technology expired in the U.S. in June 2008 and most foreign markets in 2006. The patent also expired in Canada in 2010. CPEX has filed applications in many countries that cover the application of testosterone with CPE-215. Patents for the application of testosterone with CPE-215 have been issued to CPEX in various countries, including the U.S., Canada and Europe that continue through 2023. As such, CPEX does not anticipate a significant impact from the expiration of the basic CPE-215 patent on the current Testim royalty rates due to CPEX or on CPEX’s plan of operation or future business plans. CPEX also has pending applications for other applications involving CPE-215 technology. If CPEX’s pending applications covering various applications involving CPE-215 technology are not issued as patents or if CPEX’s patents do not afford adequate protection to CPEX or its licensees, its competitors may be able to use information from CPEX’s expired and soon to expire patents to develop, manufacture and market products that compete with CPEX’s products, as well as other products using CPE-215 that CPEX otherwise might have developed.

CPEX’s patent positions and intended proprietary or similar protections are uncertain.

CPEX has filed a number of patent applications and has been granted licenses to, or has acquired, a number of patents. CPEX cannot be assured, however, that any of its issued or licensed patents will afford adequate protection to CPEX or its licensees. Furthermore, prosecuting an infringement claim is expensive and time consuming, and the outcome is unpredictable. CPEX cannot determine the ultimate scope and validity of patents that are now owned by or may be granted to third parties, the extent to which CPEX may wish, or be required, to acquire rights under such patents or the cost or availability of such rights. In the event that patent protection for technologies expire, or are not extended, revenues derived from such technologies may be reduced significantly.

Competitors may interfere with CPEX’s patent process in a variety of ways. Competitors may claim that they invented the claimed invention prior to CPEX. Competitors also may claim that CPEX is infringing their patents, interfering with or preventing the use of their technologies. Competitors also may contest CPEX’s patents by showing the patent examiner that the invention was not original, was not novel or was obvious. A competitor could claim that CPEX’s issued patents are not valid for a variety of other reasons as well.

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CPEX also relies on trade secrets, unpatented proprietary technologies and continuing technological innovations in the development and commercialization of its products. CPEX cannot be assured that others will not independently develop the same or similar technologies or obtain access to its proprietary technologies. It is unclear whether CPEX’s trade secrets will be protected under law. While CPEX uses reasonable efforts to protect its trade secrets, its employees or consultants may unintentionally or willfully disclose its information to competitors. CPEX’s employees and consultants with access to its proprietary information have entered into or are subject to confidentiality arrangements with it and have agreed to disclose and assign to it any ideas, developments, discoveries and inventions that arise from their activities for it. CPEX cannot be assured, however, that others may not acquire or independently develop similar technologies or, if effective patents in applicable countries are not issued with respect to CPEX’s products or technologies, that it will be able to maintain information pertinent to such research as proprietary technologies or trade secrets. Enforcing a claim that another person has illegally obtained and is using CPEX’s trade secrets, like patent litigation, is expensive and time consuming, and the outcome is unpredictable. In addition, CPEX may be subject to the jurisdiction of courts outside the U.S., some of which may be less willing to protect trade secrets.

CPEX’s growth depends on identifying drugs suitable for its drug delivery technology.

CPEX believes that its growth depends on the identification of pharmaceutical products that are suitable for delivery using its proprietary technologies. CPEX’s principal drug delivery technology is its CPE-215 technology. This technology, like certain other drug delivery technologies, operates to increase the amount and rate of absorption of certain drugs across biological membranes. This technology does not operate independently and must be coupled with suitable pharmaceutical products in order to provide value. Consequently, CPEX’s growth will depend to a great extent on identifying and commercializing these suitable drugs with respect to which it intends to expend significant resources and efforts. Identifying suitable products is a lengthy and complex process that may not succeed. Even if identified, products may not be available to CPEX or CPEX may otherwise be unable to enter into licenses or other agreements for their use. In CPEX’s efforts to identify suitable products, it competes with other drug delivery companies with greater research and development, financial, marketing and sales resources. If CPEX does not effectively identify drugs to be used with its technologies, improve the delivery of drugs with CPEX’s technologies and bring the improved drugs to commercial success, then it may not be able to continue its growth and will be adversely affected. At the present time, in light of CPEX’s limited operations, limited resources are being devoted to identification of such products.

Products using CPEX technology may not achieve commercial success.

CPEX is unable to predict whether any of its products will receive regulatory approvals or be successfully developed, manufactured or commercialized. Further, due to the extended testing and regulatory review process required before marketing clearance can be obtained, the time periods before commercialization of any of these products are long and uncertain. Risks during development include the possibility that:

any or all of the proposed products will be found to be ineffective;

the proposed products will have adverse side effects or will otherwise fail to receive necessary regulatory approvals;

the proposed products may be effective but uneconomical to market; or

other pharmaceutical companies may market equivalent or superior products.

If medical doctors do not prescribe CPEX’s products or the medical profession does not accept CPEX’s products, its ability to maintain its revenues will be limited.

CPEX’s business is dependent on market acceptance of its products by physicians, hospitals, pharmacists, patients and the medical community. At the present time the only product using CPEX’s CPE-215 technology is Testim, and no further products are in development. Willingness to prescribe CPEX’s products depends on many factors, including:

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perceived efficacy of its products;

convenience and ease of administration;

prevalence and severity of adverse side effects in both clinical trials and commercial use;

availability of alternative treatments;

cost effectiveness;

effectiveness of marketing strategy and the pricing of products;

publicity concerning CPEX’s products or competing products; and

ability to obtain third-party coverage or reimbursement.

Even though regulatory approval has been received for Testim, and even if any other product candidates developed by CPEX or incorporating its drug delivery technology receive regulatory approval, physicians may not prescribe these products if they are not promoted effectively. Factors that could affect success in marketing any such products include:

the effectiveness of the sales force for the product;

the effectiveness of the production, distribution and marketing capabilities for the product;

the success of competing products; and

the availability and extent of reimbursement from third-party payors.

CPEX will rely on strategic partners to conduct clinical trials and commercialize products that use its drug delivery technology.

In light of CPEX’s limited development resources and the significant time, expense, expertise and infrastructure necessary to bring new drugs and formulations from inception to market, CPEX is particularly dependent on resources from third parties to commercialize products incorporating its technologies. CPEX must enter into agreements with strategic partners to conduct clinical trials, manufacturing, marketing and sales necessary to commercialize product candidates. In addition, CPEX’s ability to apply its drug delivery technologies to any proprietary drugs will depend on its ability to establish and maintain strategic partnerships or other collaborative arrangements with the holders of proprietary rights to such drugs. Arrangements with strategic partners may be established through a single comprehensive agreement or may evolve over time through a series of discrete agreements, such as letters of intent, research agreements and license agreements. CPEX cannot be assured that it will be able to establish such strategic partnerships or collaborative arrangements on favorable terms or at all or that any agreement entered into with a strategic partner will lead to further agreements or ultimately result in commercialization of a product.

In collaborative arrangements, CPEX will depend on the efforts of its strategic partners and will have limited participation in the development, manufacture, marketing and commercialization of the products subject to the collaboration. CPEX cannot be assured that these strategic partnerships or collaborative arrangements will be successful, nor can CPEX be assured that strategic partners or collaborators will not pursue alternative technologies or develop alternative products on their own or with others, including its competitors. In addition, CPEX’s collaborators or contract manufacturers will be subject to regulatory oversight which could delay or prohibit its development and commercialization efforts. Moreover, CPEX could have disputes with its existing or future strategic partners or collaborators. Any such disagreements could lead to delays in the research, development or commercialization of potential products or could result in time-consuming and expensive litigation or arbitration.

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An interruption in the sourcing and availability of the active ingredient used in CPEX’s CPE-215 technology could cause CPEX’s product development and commercialization to slow or stop.

CPEX does not own or operate manufacturing facilities for clinical or commercial production of its product candidates. CPEX lacks the resources and the capability to manufacture any of its product candidates on a clinical or commercial scale. CPEX also lacks the resources to manufacture the excipient CPE-215, which is the major component of its CPE-215 technology. CPEX’s technology is dependent upon obtaining pharmaceutical grade CPE-215 which is available from at least two major industrial manufacturers. If a third party supplier is unable to provide CPEX with required quantities of pharmaceutical grade CPE-215 on commercially favorable terms, CPEX may be unable to continue its product development or commercialization activity.

If any of CPEX’s product candidates for which it receives regulatory approval do not achieve broad market acceptance, the potential revenues that CPEX may generate from their sales will be limited.

The commercial success of CPEX’s product candidates for which CPEX obtains marketing approval from the FDA or other regulatory authorities will depend upon the acceptance of these products by the medical community and coverage and reimbursement of them by third-party payors, including government payors. The degree of market acceptance of any of CPEX’s approved products will depend on a number of factors, including:

limitations or warnings contained in a product’s FDA-approved labeling;

changes in the standard of care for the targeted indications for either of CPEX’s product candidates could reduce the marketing impact of any superiority claims that CPEX could make following FDA approval;

limitations inherent in the approved indication for either of CPEX’s product candidates compared to more commonly-understood or addressed conditions; and

potential advantages over, and availability of, alternative treatments.

CPEX’s ability to effectively promote and sell its product candidates will also depend on pricing and cost effectiveness, including its ability to produce a product at a competitive price and its ability to obtain sufficient third-party coverage or reimbursement. CPEX will also need to demonstrate acceptable evidence of safety and efficacy as well as relative convenience and ease of administration. Market acceptance could be further limited depending on the prevalence and severity of any expected or unexpected adverse side effects associated with CPEX product candidates. If CPEX product candidates are approved but do not achieve an adequate level of acceptance by physicians, health care payors and patients, CPEX may not generate sufficient revenue from these products, and CPEX may not become or remain profitable. In addition, CPEX’s efforts to educate the medical community and third-party payors on the benefits of its product candidates may require significant resources and may never be successful.

Pharmaceutical pricing, changes in third-party reimbursement and governmental mandates are uncertain and may adversely affect CPEX.

Successful commercialization of many of CPEX’s products may depend on the availability of reimbursement for the cost of such products and related treatment from third-party healthcare payors, such as the government, private insurance plans and managed care organizations. Third-party payors are increasingly challenging the price of medical products and services. Such reimbursement may not be available for any of CPEX’s products at all or for the duration of the recommended treatment with a drug, which could materially adversely affect CPEX’s ability to commercialize that drug. The increasing emphasis on managed care in the U.S. continues to increase the pressure on pharmaceutical pricing. Some governmental agencies can compel companies to continue to produce products that are not profitable for the company due to insufficient supply. In the U.S., there have been a number of federal and state proposals to implement similar government controls. CPEX anticipates that there will continue to be a number of proposals in the U.S., as has been the case in many foreign markets. The announcement or adoption of such proposals could adversely affect CPEX. Further, CPEX’s ability to commercialize its products may be adversely affected to the extent that such proposals materially adversely affect the business, financial condition and profitability of companies that are prospective strategic partners.

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The cost of healthcare in the U.S. and elsewhere continues to be a subject of investigation and action by various governmental agencies. Certain resulting legislative proposals may adversely affect CPEX. For example, governmental actions to further reduce or eliminate reimbursement for drugs may directly diminish CPEX’s markets. In addition, legislative safety and efficacy measures may be invoked that lengthen and increase the costs of drug approval processes. Further, social, economic and other broad policy legislation may induce unpredictable changes in the healthcare environment. If any of these measures are enacted in some form, they may have a material adverse effect on CPEX’s results of operations.

Any of CPEX’s products candidates may fail or be delayed in clinical trials.

Any human pharmaceutical product developed by CPEX or a collaboration partner of CPEX’s would require clearance by the FDA for sales in the United States and by comparable regulatory agencies for sales in other countries. The process of conducting clinical trials and obtaining FDA and other regulatory approvals is expensive, takes several years and cannot be assured of success. In order to obtain FDA approval of any new product candidates using CPEX’s technologies, a New Drug Application, or a NDA, must be submitted to the FDA demonstrating that the product candidate, based on preclinical research, animal studies and human clinical trials, is safe for humans and effective for its intended use. Positive results from preclinical studies and early clinical trials do not ensure positive results in more advanced clinical trials designed to permit application for regulatory approval. CPEX’s product candidates may suffer significant setbacks in clinical trials, even in cases where earlier clinical trials show promising results. Any of CPEX’s new product candidates may produce undesirable side effects in humans that could cause CPEX or regulatory authorities to interrupt, delay or halt clinical trials of a product candidate. CPEX or its collaboration partners, the FDA or other regulatory authorities, may suspend CPEX’s clinical trials at any time if it or they believe the trial participants face unacceptable health risks or if they find deficiencies in any of the regulatory submissions for the product candidate. Other factors that can cause delay or terminate clinical trials include:

slow or insufficient patient enrollment;

slow recruitment and completion of necessary institutional approvals at clinical sites;

longer treatment time required to demonstrate efficacy;

lack of sufficient supplies of the product candidate;

adverse medical reactions or side effects in treated patients;

lack of effectiveness of the product candidate being tested;

regulatory requests for additional clinical trials; and

instability of the pharmaceutical formulations.

A delay or termination of any of CPEX’s clinical trials may have a material adverse effect on CPEX’s results of operations.

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CPEX plans to rely on third parties to conduct any future clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, CPEX may be unable to obtain regulatory approval for or commercialize its current and future product candidates.

CPEX does not have the ability to conduct clinical trials for any of its product candidates. It relies on third parties, such as contract research organizations, medical institutions, clinical investigators and contract laboratories, to conduct all of its clinical trials for its product candidates. Although CPEX relies on these third parties to conduct its clinical trials, it is responsible for ensuring that each of its clinical trials is conducted in accordance with its investigational plan and protocol. Moreover, the FDA and other non-U.S. regulatory authorities require CPEX to comply with regulations and standards, commonly referred to as Good Clinical Practices, or GCPs, for conducting, monitoring, recording and reporting the results of clinical trials to ensure that the data and results are scientifically credible and accurate and that the trial subjects are adequately informed of the potential risks of participating in clinical trials. CPEX’s reliance on third parties does not relieve CPEX of these responsibilities and requirements. If the third parties do not perform their contractual duties or obligations, do not meet expected deadlines or need to be replaced, or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to GCPs or for any other reason, CPEX may need to enter into new arrangements with alternative third parties and CPEX’s clinical trials may be extended, delayed or terminated. In addition, failure by such third parties to perform their obligations in compliance with GCPs may cause CPEX clinical trials to fail to meet regulatory requirements, which may require CPEX to repeat clinical trials.

Regulatory approvals must be obtained and maintained for products incorporating CPEX’s technology and, if approvals are delayed or withdrawn, commercialization of these products must be suspended or abandoned.

Government regulations in the United States and other countries have a significant impact on CPEX’s business and affect the research, development and marketing of products incorporating its technology. In the United States and other countries, governmental agencies have the authority to regulate the distribution, manufacture and sale of drugs. Failure to obtain or experiencing a delay in obtaining regulatory approval for CPEX’s products could result in reduction of CPEX’s expected revenues. Failure to comply with applicable regulatory requirements can, among other things, result in fines, suspension or withdrawal of regulatory approvals, product recalls, operating restrictions and/or criminal prosecution. In addition, governmental regulations may be established that could prevent, delay, modify or rescind regulatory approval of CPEX’s products.

If CPEX cannot keep pace with rapid technological change and meet the intense competition in CPEX’s industry, it may not succeed.

CPEX’s success depends, in part, on achieving and maintaining a competitive position in the development of products and technologies in a rapidly evolving industry. If CPEX is unable to continue to develop and/or acquire competitive products and technologies, its current and potential strategic partners may choose to adopt the drug delivery technologies of CPEX’s competitors. CPEX also competes generally with other drug delivery, biotechnology and pharmaceutical companies engaged in the development of alternative drug delivery technologies or new drug research and testing. Many of these competitors have substantially greater financial, technological, manufacturing, marketing, managerial and research and development resources and experience than CPEX does and represent significant competition for CPEX. CPEX’s competitors may succeed in developing competing technologies or obtaining governmental approval for products before CPEX achieves success, if at all. The products of CPEX’s competitors may gain market acceptance more rapidly than CPEX’s products. Developments by competitors may render CPEX’s existing or proposed products noncompetitive or obsolete.

The competitive position of CPEX’s drug delivery technologies is subject to the possible development by others of superior technologies. Other drug delivery technologies, including oral and injection methods, have wide acceptance, notwithstanding certain drawbacks, and are the subject of improvement efforts by other entities having greater resources. In addition, CPEX’s drug delivery technologies are limited by the number and commercial magnitude of drugs with which they can successfully be combined.

CPEX may incur substantial liabilities and may be required to limit commercialization of its products in response to product liability claims.

The testing and marketing of pharmaceutical products entails an inherent risk of product liability. CPEX may be held liable to the extent that there are any adverse reactions from the use of its products. CPEX’s products involve new methods of delivery for drugs, some of which may require precautions to prevent unintended use, especially since they are designed for patients’ self-use rather than being administered by medical professionals. The FDA may require CPEX to develop a comprehensive risk management program for its products. The failure of these measures could result in harmful side effects or death. As a result, consumers, regulatory agencies, pharmaceutical companies or others might make claims against CPEX or Xstelos. If CPEX or Xstelos cannot successfully defend themselves against product liability claims, they may incur substantial liabilities, lose market share or be required to limit commercialization of CPEX’s products.

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Regardless of merit or eventual outcome, liability claims may result in:

withdrawal of clinical trial participants;

termination of clinical trial sites or entire trial programs;

decreased demand for CPEX product candidates;

impairment of CPEX business reputation;

costs of related litigation;

substantial monetary awards to patients or other claimants;

loss of revenues; and

the inability to commercialize CPEX product candidates.

CPEX’s inability to obtain sufficient product liability insurance at an acceptable cost to protect against potential product liability claims could inhibit or prevent the commercialization of pharmaceutical products CPEX develops alone or with corporate collaborators. CPEX maintains $10.0 million in product liability and clinical trials insurance in the U.S. at an approximate cost of $70,000 per policy year. While management believes this insurance is reasonable for conducting clinical trials, CPEX cannot be assured that any of this coverage will be adequate to protect it in the event of a claim. CPEX, or any corporate collaborators, may not be able to obtain or maintain insurance at a reasonable cost, if at all. Even if CPEX’s agreements with any future corporate collaborators entitle CPEX to indemnification against losses, such indemnification may not be available or adequate if any claim arises.

The discovery of any new side effects or negative efficacy findings for CPEX’s products could significantly harm CPEX’s business.

While the safety of CPEX’s products has been, is being, and will be extensively studied in clinical trials there can be no assurance that new or more serious side effects or negative efficacy findings may not be discovered based on long term safety and efficacy studies or required reporting of adverse events regarding any of CPEX’s products after each such product has been marketed, any of which could severely harm CPEX’s business and result in one or more of the following regulatory events:

a voluntary or involuntary recall or market withdrawal of the applicable product;

labeling changes such as restriction on intended uses, additional contraindications, warnings, precautions, or adverse reactions that would limit the applicable product’s market potential;

a “boxed” warning on the label;

imposition of post-marketing surveillance studies or risk management programs;

distribution restrictions; and

adverse publicity.

In addition, one or more of the above factors would also have the potential to negatively impact regulatory registrations for the applicable product in other countries.

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Xstelos Risks

Xstelos could incur significant liability because it has assumed all of the liabilities of Footstar.

In connection with the Plan of Reorganization, Xstelos assumed all of the liabilities of Footstar, whether known or unknown, and whether arising on, prior to or after the date of adoption of the Plan of Reorganization. While we are unaware of any material liability of Footstar that exists or may arise, there is a risk Xstelos will incur substantial liability in the future as a result of its assumption of Footstar’s liabilities.

Adverse U.S. economic conditions and the current turmoil in the U.S. capital and credit markets could limit demand for Footstar’s corporate headquarters building in Mahwah, New Jersey and its property in Exeter, New Hampshire and, thus, we may not be able to timely sell such properties or on acceptable terms.

The economy in the United States is currently experiencing unprecedented disruptions, including increased levels of unemployment, the failure and near failure of a number of large financial institutions, reduced liquidity and increased credit risk premiums for a number of market participants. Economic conditions may be affected by numerous factors, including inflation and employment levels, energy prices, recessionary concerns, changes in currency exchange rates, the availability of debt and interest rate fluctuations. At this time, it is unclear whether, and to what extent, the actions taken by the U.S. government, including the passage of the Emergency Stabilization Act of 2008, the Troubled Assets Relief Program, the American Recovery and Reinvestment Act of 2009 and other measures currently being implemented or contemplated will mitigate the effects of the crisis. The current turmoil in the capital and credit markets could limit demand for our owned Mahwah Real Estate, which contains Footstar’s corporate headquarters building, improvements and 21 acres of underlying land which we have been marketing since March 2007, and property in Exeter, New Hampshire which we acquired in the acquisition of CPEX, which is a 15,700 square foot building situated on approximately 14 acres of land. At this time we cannot predict the extent or duration of any negative impact that the current disruptions in the U.S. economy will have on our ability to market our real estate on acceptable terms.

Risks Relating to this Distribution and Ownership of Our Common Stock

After this distribution, our executive officers, directors and principal stockholders will have significant influence regarding all matters submitted to our stockholders for approval.

Jonathan M. Couchman, our Chairman and Chief Executive Officer, will beneficially own 11,063,578 shares of common stock and options to purchase an additional 2,500,000 shares at $0.35 per share after the distribution of shares in the distribution, which will represent 45.7% of the common stock of Xstelos, or 50.8% on a fully diluted basis. Following the completion of this distribution our executive officers, directors and principal stockholders and their affiliates, will beneficially own approximately 48.4% of our outstanding common stock, or 53.2% on a fully diluted basis, allowing them to exert significant influence regarding all matters submitted to our stockholders for approval. For example, these persons, if they choose to act together, will exercise significant influence with respect to the election of directors and approval of any merger, consolidation, sale of all or substantially all of our assets or other business combination or reorganization. This concentration of voting power could delay or prevent an acquisition of us on terms that other stockholders may desire. The interests of this group of stockholders may not always coincide with your interests or the interests of other stockholders, and they may act in a manner that advances their best interests and not necessarily those of other stockholders, and might affect the prevailing market price for our securities.

We expect that our common stock will be quoted on the OTC Bulletin Board quotation system, which will limit the liquidity and price of our securities more than if our securities were quoted or listed on a national securities exchange and result in our stockholders not receiving the benefit of our being subject to the listing standards of a national securities exchange.

We expect that our common stock will be traded in the over-the-counter market and will be quoted on the OTC Bulletin Board quotation system, or the OTCBB, which is a FINRA-sponsored and operated inter-dealer automated quotation system. Quotation of our common stock on the OTCBB will limit the liquidity and price of our common stock more than if our common stock was quoted or listed on the a national securities exchange. Lack of liquidity will limit the price at which you may be able to sell our securities or your ability to sell our securities at all.

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Furthermore, for companies whose securities are quoted on the OTCBB, it is more difficult (1) to obtain accurate quotations, (2) to obtain coverage for significant news events because major wire services generally do not publish press releases about such companies, and (3) to obtain needed capital.

Transfer restrictions in our Certificate of Incorporation and Delaware law may have anti-takeover effects that could discourage an acquisition of us by others, even if an acquisition would be beneficial to our stockholders and may prevent attempts by our stockholders to replace or remove our current management.

Transfer restrictions in our Certificate of Incorporation could make it more difficult for a third party to acquire us or increase the cost of acquiring us, even if doing so would benefit our stockholders or remove our current management. Subject to certain exceptions, including prior exemption by the board of directors, our Certificate of Incorporation prohibits and makes void ab initio certain transfers of our common stock, to the extent that after giving effect to such purported transfer (i) the purported transferee would become a 4.75% or greater holder of our common stock, (ii) the ownership of a 4.75% stock holder’s common stock, prior to giving effect to the purported transfer would be increased or (iii) the transfer, if made by a such a 4.75% holder, results in a disposition of our common stock constituting a greater than one percent (1%) decrease in their Xstelos common stock.

In addition, we are subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with an interested stockholder for a period of three years following the date on which the stockholder became an interested stockholder, unless such transactions are approved by our board of directors. This provision could have the effect of delaying or preventing a change of control, whether or not it is desired by or beneficial to our stockholders.

State securities laws may limit secondary trading, which may restrict the state in which and conditions under which you can sell the shares offered by this prospectus.

Secondary trading in common stock sold in this offering will not be possible in any state until the common stock is qualified for sale under the applicable securities laws of the state or there is confirmation that an exemption, such as listing in certain recognized securities manuals, is available for secondary trading in the state. If we fail to register or qualify, or to obtain or verify an exemption for the secondary trading of, the common stock in any particular state, the common stock could not be offered or sold to, or purchased by, a resident of that state. In the event that a significant number of states refuse to permit secondary trading in our common stock, the liquidity for the common stock could be significantly impacted thus causing you to realize a loss on your investment.

Our common stock may be deemed a “penny stock,” which would make it more difficult for our stockholders investors to sell their shares.

Our common stock is subject to the “penny stock” rules adopted under section 15(g) of the Exchange Act of 1934, as amended, or the Exchange Act. The penny stock rules apply to non-Nasdaq companies whose common stock trades at less than $5.00 per share or that have tangible net worth of less than $5,000,000 ($2,000,000 if the company has been operating for three or more years). These rules require, among other things, that brokers who trade penny stock to persons other than “established customers” complete certain documentation, make suitability inquiries of investors and provide investors with certain information concerning trading in the security, including a risk disclosure document and quote information under certain circumstances. Many brokers have decided not to trade penny stocks because of the requirements of the penny stock rules and, as a result, the number of broker-dealers willing to act as market makers in such securities is limited. If we remain subject to the penny stock rules for any significant period, that could have an adverse effect on the market, if any, for our securities. If our securities are subject to the penny stock rules, investors will find it more difficult to dispose of the common stock.

Risks Related to Xstelos’s Use of Net Operating Losses and Other Tax Matters

We may be unable to realize the benefits of our net operating loss carryforwards.

If we undergo an ownership change, we or a successor might be unable to use all or a significant portion of our net operating loss to offset taxable income. In order to avoid an adverse impact on our ability to utilize our net operating losses for federal income tax purposes, our Certificate of Incorporation contains certain provisions intended to prevent an ownership change within the meaning of Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, from occurring.

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For accounting purposes, we cannot currently conclude that it is more likely than not that certain deferred tax assets, including our net operating losses, will be realized and, as a result, we have recorded a non-cash valuation allowance for these certain net deferred tax assets.

Our financial results may suffer if we have to write-off goodwill or other intangible assets.

A significant portion of our total assets consist of goodwill and other intangible assets in connection with the acquisition of CPEX and related licensing agreement with Auxilium for Testim. Goodwill and other intangible assets, net of accumulated amortization, accounted for 56.1% of the total assets on our consolidated balance sheet as of October 1, 2011. We may not be able to realize the value of our goodwill or other intangible assets. We evaluate on a regular reporting basis whether events and circumstances have occurred that indicate that all or a portion of the carrying amount of goodwill or other intangible assets may no longer be recoverable. Under current accounting rules, any determination that impairment has occurred would require us to write-off the impaired portion of our goodwill or the unamortized portion of our intangible assets, resulting in a charge to our earnings. Such a write-off could have a material adverse effect on our financial condition and results of operations.

Future legislation may result in Xstelos being unable to realize the tax benefits of the NOLs.

It is possible that legislation or regulations will be adopted that would limit Xstelos’s ability to use the tax benefits associated with the NOLs. However, Xstelos is not aware of any proposed changes in the tax laws or regulations that would materially impact the ability of Xstelos to use the NOLs.

Xstelos may not be able to make use of the existing tax benefits of the NOLs because Xstelos may not generate taxable income.

The use of the NOLs is subject to uncertainty because it is dependent upon the amount of United States taxable income and capital gains generated by Xstelos. Xstelos has not consistently generated taxable income on an annual basis, and there can be no assurance that Xstelos will have sufficient taxable income or capital gains in the United States in future years to use the NOLs before they expire.

The IRS could challenge the amount of the NOLs or claim that Xstelos experienced an ownership change, which could reduce the amount of NOLs that Xstelos can use.

The amount of the NOLs has not been audited or otherwise validated by the IRS. The IRS could challenge Xstelos’s view of the amount of its NOLs, which could result in an increase in the liability of Xstelos in the future for U.S. income taxes.

We will likely be a “personal holding company” and may be required to pay personal holding company taxes, which would have an adverse effect on our cash flows, results of operations and financial condition.

The Code requires any company that qualifies as a “personal holding company” to pay personal holding company taxes in addition to regular income taxes. A company qualifies as a personal holding company if (1) more than 50.0% of the value of the company’s stock is held by five or fewer individuals and (2) at least 60.0% of the company’s adjusted ordinary gross income constitutes personal holding company income, which, in our case, includes royalties from our license agreement with Auxilium. After the distribution, we have determined that we will likely meet these qualifications and become a personal holding company. As a result, our undistributed personal holding company income, which is generally taxable income with certain adjustments, including a deduction for federal income taxes and dividends paid, will be taxed at a rate of 15.0%. Whether or not we or any of our subsidiaries are classified as personal holding companies for the year ending December 31, 2012 or in future years will depend upon the amount of our personal holding company income and the percentage of our outstanding common stock that is beneficially owned by our major stockholders. The payment of personal holding company taxes in the future will have an adverse effect on our cash flows, results of operations and financial condition.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

These forward-looking statements are based on Xstelos’s current estimates and assumptions and, as such, involve uncertainty and risk. Forward-looking statements include the information concerning Xstelos’s possible or assumed future results of operations and also include those preceded or followed by the words “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “should,” “plans,” “targets” and/or similar expressions. The forward-looking statements are contained principally in the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that could cause our actual results, levels of activity, performance or achievement to differ materially from those expressed or implied by these forward-looking statements. These risks and uncertainties include, among others:

the expectation that our business and operations will continue following the distribution as presently conducted;

competition from existing products or new products that may emerge;

regulatory difficulties relating to products that have already received regulatory approval;

potential product liability claims;

our dependency on third-party manufacturers to supply or manufacture our products;

our ability to establish or maintain collaborations, licensing or other arrangements;

our ability and third parties’ abilities to protect intellectual property rights;

compliance with obligations under intellectual property licenses with third parties;

our ability to attract and retain key personnel to manage our business effectively; and

our ability to successfully invest for future growth.

The forward-looking statements are not guarantees of future performance, events or circumstances, and actual results may differ materially from those contemplated by these forward-looking statements. For these reasons, you should not place undue reliance on any forward-looking statements included in this prospectus. Except to the extent required under the federal securities laws, we do not intend to update or revise the forward-looking statements to reflect circumstances arising after the date of the preparation of the forward-looking statements. The forward-looking statements contained in this prospectus are excluded from the safe harbor protection provided by the Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act of 1933, as amended, referred to herein as the Securities Act.

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THE DISTRIBUTION

We are a wholly owned subsidiary of Footstar, which is a holding company that is currently winding down pursuant to the Plan of Dissolution, which was adopted by Footstar’s stockholders on May 5, 2009. On January 19, 2012, the board of directors of Footstar approved the Plan pursuant to which Footstar contributed all of its assets to Xstelos. In exchange for the contribution of all of its assets, Xstelos assumed all of Footstar’s liabilities and issued to Xstelos all of its common stock. These shares constitute all of the outstanding shares of Xstelos capital stock. In the distribution described in this prospectus, Footstar will distribute all of the Xstelos shares to holders of Footstar common stock as of [●], 2012, the record date for the distribution, on a pro rata basis. No stockholder vote is required in connection with the distribution.

Benefits of the Distribution

The most significant benefit to the distribution is that the CPEX business and other assets of Footstar will no longer be subject to the Plan of Dissolution of Footstar. The respective boards of Footstar and Xstelos believe the distribution to be in the best interest of their stockholders.

Plan of Reorganization

The distribution will take place in accordance with the terms and conditions of the Plan of Reorganization dated January 23, 2012 and approved by the board of directors on such date. The Plan of Reorganization generally provided for the contribution of all Footstar’s assets to Xstelos and, in exchange therefore, Xstelos assumed all of Footstar’s liabilities and issued all of its outstanding shares of common stock to Footstar. The Plan of Reorganization also provides for the pro rata distribution of Xstelos common stock to shareholders of Footstar as of the record date for the distribution. This description of the Plan of Reorganization is not complete and is qualified in its entirety by the Plan of Reorganization, which is attached as an exhibit to the Registration Statement of which this prospectus forms a part.

Results of the Distribution

After the distribution, Xstelos will be a publicly traded company and will have an obligation to file periodic reports with the SEC under the Exchange Act. Footstar stockholders will receive one share of Xstelos common stock for each one share of Footstar common stock they held on [●], 2012, the record date for the distribution. Immediately after the distribution is completed, Footstar stockholders will own all of the outstanding shares of common stock of Xstelos, which shall be proportionate to their percentage ownership of Footstar shares on [●], 2012. Footstar will continue to dissolve in accordance with the Plan of Dissolution and cease to exist on May 5, 2012, unless extended. Xstelos will continue to operate the business of Footstar as a going concern following the distribution.

After the distribution, Xstelos’s business and operations will be the same as the business and operations of Footstar, and Xstelos’s consolidated assets and liabilities are the same as the consolidated assets and liabilities of Footstar prior to its contribution of its assets to and assumption of its liabilities by Xstelos in accordance with the Plan of Reorganization.

Footstar has experienced substantial net operating losses, or “NOLs,” and may use such NOLs to offset net income generated in future periods and thereby reduce its payments for taxes in such future periods. Following the distribution, such NOLs will continue to be available to Xstelos as a successor company to the extent such NOLs may be used under applicable law to offset net income in future periods. As of January 1, 2011, Footstar had NOL carryforwards for federal income tax purposes of approximately $121.9 million, although there is no assurance Xstelos will be able to avail itself of these NOLs.

It is anticipated that our common stock will be quoted on the OTC Bulletin Board quotation system, or the OTCBB, under the symbol “[ ]” on or promptly after the date of this prospectus.

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Certificate of Incorporation and By-Laws of Xstelos

Subject to Delaware law, Xstelos will be governed by its Certificate of Incorporation and By-Laws, copies of which will be filed with the SEC as exhibits to our registration statement, of which this prospectus forms a part.

DIVIDEND POLICY

Xstelos has no intention to make dividends or distributions until such time as the board of directors of Xstelos deem advisable and in the best interest of Xstelos and its stockholders.

USE OF PROCEEDS

Because this is not an offering for cash, there will be no proceeds from the distribution.

DILUTION

Your percentage ownership in Xstelos immediately following the distribution will be proportionate to your percentage ownership in Footstar immediately prior to the distribution. Thus, you will experience no dilution in your interest in the Footstar business as a result of the distribution.

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BUSINESS

Overview

We are a wholly owned subsidiary of Footstar, a Delaware corporation, which is a holding company that is currently winding down pursuant to the Plan of Dissolution, which was adopted by Footstar’s stockholders on May 5, 2009. On January 19, 2012, the board of directors of Footstar approved a Plan of Reorganization pursuant to which Footstar contributed all of its assets to Xstelos. In exchange for the contribution of all of its assets, Xstelos assumed all of Footstar’s liabilities and issued all of its shares of common stock to Footstar. These shares constitute all of the outstanding shares of Xstelos capital stock.

In the distribution described in this prospectus, Footstar will distribute all of the Xstelos shares to holders of Footstar common stock as of [●], 2012, the record date for the distribution, on a pro rata basis. Immediately after the distribution is completed, Footstar stockholders will own all of the outstanding shares of common stock of Xstelos, which shall be proportionate to their percentage ownership of Footstar shares on [●], 2012, the record date for the distribution. Footstar will continue to dissolve in accordance with the Plan of Dissolution and cease to exist on May 5, 2012. Xstelos through FCB I Holding, Inc. will continue to operate the business of Footstar, including the CPEX business, as a going concern following the distribution. No stockholder vote is required in connection with the distribution.

Corporate History

Footstar, the predecessor of Xstelos, is a holding company that is currently winding down pursuant to the Plan of Dissolution, which was adopted by Footstar’s stockholders on May 5, 2009.

On March 5, 2009, the Footstar board of directors adopted and approved the Plan of Dissolution. On May 5, 2009, at a special meeting of stockholders of Footstar, the stockholders adopted and approved the Plan of Dissolution and Footstar’s dissolution, and in accordance therewith, a Certificate of Dissolution was filed with the Secretary of State of the State of Delaware and became effective on May 5, 2009. Subsequent to such time, the board of directors moved forward with the liquidation and worked toward selling all of Footstar’s remaining assets and settling all claims.

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On January 3, 2011, CPEX, a Delaware corporation, FCB I Holdings Inc., a Delaware corporation and FCB I Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of FCB I Holdings, Inc., entered into an Agreement and Plan of Merger. On April 5, 2011, the transaction was consummated, FCB I Acquisition Corp. merged with and into CPEX, and CPEX became a wholly owned subsidiary of FCB I Holdings, Inc. and an indirectly, majority-owned subsidiary of Footstar. Pursuant to the acquisition of CPEX, CPEX common stock that was outstanding immediately prior to the effective time thereof, other than shares held by stockholders who properly exercised their appraisal rights and shares owned by CPEX as treasury stock, was automatically cancelled and converted into the right to receive $27.25 in cash, without interest and less any applicable withholding taxes.

On April 5, 2011, in connection with the acquisition of CPEX, FCB LLC, a wholly owned subsidiary of FCB I Acquisition Corp., which became a wholly owned subsidiary of CPEX upon FCB I Acquisition Corp.’s merger with and into CPEX, borrowed approximately $64 million under that certain Loan Agreement dated as of January 3, 2011 (the “Term Loan Agreement”), by and among FCB LLC, The Bank of New York Mellon, as Agent, and certain Lenders from time to time party thereto, in the form of a secured term loan to FCB LLC. The term loan under the Term Loan Agreement bears interest at “LIBOR” plus 16% per annum, with a minimum LIBOR rate of 1%, and matures on the earlier of January 3, 2026 or the date any of CPEX’s patents that are associated with Testim®, a topical testosterone gel, expire, and contains customary events of default for loans of such nature. As part of the Term Loan Agreement, CPEX contributed to FCB LLC all of its intellectual property rights in Testim® and rights to the royalty stream pursuant to the license agreement with Auxilium, and the loan is secured by FCB LLC’s interest in all such rights. Repayment of the loan is made through a waterfall arrangement whereby, if certain conditions are met, the Testim royalty stream is distributed on a quarterly basis as follows: first to pay certain fees and expenses of Agent and FCB LLC, second to pay fees of the banks maintaining the accounts associated with the loan, third to pay any expenses of Agent used to protect the loan collateral and any other unreimbursed fees or expenses of Agent or any Lender, fourth to replenish any shortfall in the interest reserve (which is $2.5 million), fifth to pay interest due, sixth to pay 65% of the remaining royalty funds to Agent for the benefit of the Lenders as payment toward loan principal, and finally to FCB LLC for its benefit.

On April 5, 2011, in connection with the acquisition of CPEX, Footstar Corp made a $3 million bridge loan to FCB I Holdings Inc. under that certain Loan Agreement dated as of April 5, 2011, by and between FCB I Holdings Inc. and Footstar Corp. The loan bore interest at 20% per annum and provided for a fee of 3% of the principal amount (less accrued interest) payable to Footstar Corp, which was due upon repayment of the loan. The bridge loan was repaid on April 5, 2011, prior to maturity.

In addition, Black Horse Capital LP and Black Horse Capital Master Fund Ltd. (together, “Black Horse”) made a $10 million bridge loan to FCB I Holdings Inc. under that certain Loan Agreement dated as of April 5, 2011 (the “Black Horse Loan Agreement”), by and between Black Horse and FCB I Holdings Inc. The bridge loan under the Black Horse Loan Agreement had substantially the same terms as the bridge loan under the Footstar Loan Agreement, and was repaid on April 5, 2011, prior to maturity.

Since the acquisition of CPEX, CPEX has been a wholly owned subsidiary of FCB I Holdings, Inc., which is owned 80.5% by Footstar Corp, a Texas corporation, and 19.5% by the Investment Holding Company. The Investment Holding Company is affiliated with a minority Lender under the Term Loan Agreement. Footstar Corp is a wholly owned subsidiary of Xstelos as a result of the Plan of Reorganization.

In connection with the acquisition of CPEX, FCB I Holdings Inc., Footstar Corp and the Investment Holding Company became party to a Stockholders’ Agreement (the “Stockholders Agreement”), which provides for certain provisions governing the control and operation of each of FCB I Holdings, Inc., FCB I Acquisition Corp., FCB LLC and CPEX (as the surviving corporation of the merger), restrictions on the transfer of shares of FCB I Holdings Inc. common stock and various other prohibitions.

In addition, Footstar Corp became party to a consulting and advisory agreement with the Investment Holding Company for such entity to provide certain consulting and advisory services to Footstar Corp relating to intellectual property and other matters. The agreement provides for payment solely to the extent Footstar Corp has received dividends from FCB I Holdings Inc., of which there have been none to date. The annual amounts to be paid, following receipt of such dividends pursuant to the terms of the agreement, would be $1,000,000 for 2011, $750,000 for 2012, $750,000 for 2013, $500,000 for 2014 and $250,000 for 2015 and annually thereafter through the agreement termination. The agreement terminates upon the conclusion of the monetization of CPEX’s intellectual property, subject to the terms of the agreement. No payment was made in 2011.

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As a result of the contribution by Footstar of all of its assets in connection with the Plan of Reorganization, Footstar Corp became a wholly owned subsidiary of Xstelos. After the distribution, Xstelos will continue to operate the CPEX business through FCB I Holding, Inc. as a going concern.

Business of CPEX

Overview

CPEX is an emerging specialty pharmaceutical company in the business of research and development of pharmaceutical products utilizing its validated drug delivery platform technology, incorporated in Delaware in 2007. As described above, CPEX is now an indirectly, majority-owned subsidiary of Xstelos.

CPEX has U.S. and international patents and other proprietary rights to technology that facilitates the absorption of drugs. Its platform drug delivery technology is based upon CPE-215®, which enhances permeation and absorption of pharmaceutical molecules across biological membranes such as the skin, nasal mucosa and eye. CPEX’s principal product is Testim®, a gel for testosterone replacement therapy, which is a formulation of its technology with testosterone. Testim is licensed to Auxilium, which is currently marketing it in the United States, Europe and other countries. All of CPEX’s current revenue is derived from royalties on Testim sales, and CPEX has no other products in development nor does it have any agreements with third parties to develop any products at the present time.

In April 2010, CPEX announced that Serenity Pharmaceuticals, LLC (“Serenity”), its licensing and development partner, entered into a global agreement with Allergan, Inc. (“Allergan”) for the development and commercialization of Ser-120, a product candidate for the treatment of nocturia that utilizes CPEX’s patented intranasal drug delivery technology. In connection with its agreement with Serenity, Allergan assumed CPEX’s exclusive development and license agreement with Serenity under which we granted Serenity an exclusive and sub-licensable license to use CPEX’s CPE-215® permeation technology for the development of Ser-120. In return, CPEX is entitled to sales milestones and low single digit royalties on worldwide net sales following commercialization of Ser-120. In 2010, Allergan reported that Serenity and Allergan are in the process of reviewing the complete trial data from two Phase 3 trials of Ser-120, which were not sufficient for successful registration, to determine what additional trials are indicated to support development of the program. We understand that Allergan and Serenity have initiated a new Phase III trial which may be concluded in mid 2012.

Industry Overview

Specialty pharmaceutical companies like CPEX develop products to address the limitations of current therapies in selected established markets (endocrinology, urology, dermatology, neurology, etc.). These specialty markets can usually be addressed by smaller sales forces, but have the same market potential. CPEX’s pipeline products are designed to enhance safety, efficacy, ease-of-use and patient compliance. CPEX’s pipeline products also provide novel opportunities for pharmaceutical and biotechnology companies to partner with it to develop new and innovative products and extend their therapeutic franchises.

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Developing safer and more efficacious methods of delivering existing drugs is generally subject to less risk than attempting to discover new drugs, because of lower development costs. On average, it takes 10 to 15 years for an experimental new drug to progress from the laboratory to commercialization in the U.S., with an average cost of approximately $800 million to $900 million. Typically, only one in 5,000 compounds entering preclinical testing advances into human testing and only one in five compounds tested in humans is approved for commercialization. By contrast, CPEX typically considers drugs for its pipeline that already have been approved and are commercially available, have a track record of safety and efficacy and have established markets for which there is an unmet medical need. In addition, CPEX may be able to pursue an accelerated 505(b)(2) path to the market for some of its pipeline products that may translate into less time spent in the clinic and less money spent on clinical development.

The 505(b)(2) development path in turn translates into a faster time to market launch.

The vast majority of the drugs currently on the market are administered orally or by injection. Oral drug delivery methods, while simple to use, typically subject drugs to degradation initially by the stomach and secondarily to first-pass metabolism in the liver before reaching the bloodstream. In order to achieve efficacy, higher drug dosages are often used, which can increase the risk of side effects.

Injectable pharmaceuticals, while avoiding first-pass metabolism in the liver, possess several disadvantages, which can lead to decreased patient acceptance and compliance with prescribed therapy. Injectable drugs are more painful for the patient and often require medical personnel to administer. In addition, injectable drugs are typically also more expensive due to the added cost associated with their manufacturing under sterile conditions and added costs for their administration, including medical personnel, syringes, needles and other supplies. A decline in patient acceptance and compliance due to any of these reasons can delay the initiation of treatment and increase the risk of medical complications and could lead to higher healthcare costs.

Alternative Drug Delivery Technologies

Pharmaceutical and biotechnology companies recognize the benefits of alternative delivery technologies as a way of gaining a competitive advantage. It has been reported that while pharmaceutical sales in the U.S. have risen steadily over the last several years to more than $720 billion in 2008, sales growth is expected to slow over the next several years due to an extraordinary number of patent expirations and to the poor global economy. At the same time, it is estimated that the global drug delivery market has tripled in value since 2000 to approximately $78 billion (Espicom Healthcare Intelligence, 2009). The growth in the drug delivery market has been driven by the recognition of pharmaceutical and biotechnology companies that provide alternative delivery technologies that avoid first-pass liver metabolism, that are less invasive than injectable options and that enable product line and patent position extension provide an attractive combination of advantages to companies and patients. Further, these pharmaceutical and biotechnology companies often benefit from specialty pharmaceutical companies that apply their technologies to off-patent products, formulating their own proprietary products, which are then typically commercialized by larger pharmaceutical companies capable of promoting the products.

CPEX’s Permeation Enhancement Technology — The Path to Improved Drug Benefits

Permeation enhancement with CPE-215 is the drug delivery technology of CPEX. It has been proven to enhance the absorption of drugs through the nasal mucosa, skin and eye. It can be adapted to products formulated as creams, ointments, gels, solutions, sprays or patches. CPE-215 also has maintained a record of safety as a direct and indirect food additive and fragrance, and is listed on the U.S. Food and Drug Agency’s inactive ingredient list for approved use in drug applications.

We believe that potential key benefits of the patented drug delivery formulation technology of CPEX using CPE-215 may include the following therapeutic and commercial opportunities and advantages:

Improved compliance and convenience to patients requiring ongoing injection therapies and the potential for earlier acceptance of prophylactic treatment for patients reluctant to use injections;

Application to injectable peptides that could be administered intranasally with CPE-215;

Application to therapeutic molecules that are degraded by passage through the liver or would benefit from intra-nasal administration to eliminate first-pass metabolism;

Application to a variety of metabolic, neurological and other serious medical conditions;

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Opportunities for life-cycle extension strategies for existing marketed products;

Opportunities for allowing product differentiation based on benefits of administration.

Licensed Products

We earn royalty revenues on sales of Testim, a testosterone gel that incorporates our CPE-215 drug delivery technology. The product is licensed to Auxilium and was launched in the U.S. in early 2003 as a testosterone replacement therapy. Testim has been approved for marketing in Canada and 15 countries in Europe. Royalties received from Testim sales were $23.3 million, $18.7 million and $5.9 million for the years ended December 31, 2010 and 2009 and for the period of January 1, 2011 through April 5, 2011 of CPEX, respectively, and $12.4 million for the nine months ended October 1, 2011 of Footstar Corp. Auxilium uses its sales force to market Testim in the U.S. and has partnered with Paladin Labs Inc. to market the drug in Canada and with Ferring International S.A. to market the drug in Europe.

Product Pipeline

CPEX’s CPE-215 technology has been licensed to Serenity, which in turn has assigned it to Allergen as part of a global agreement for development of Serenity’s potential nocturia product. Allergen reported in 2010 that it is in the process of reviewing the data from two Phase III trials of the product candidate to determine what additional trials are indicated to support development of the program. Nasulintm, CPEX’s patented, intranasal insulin formulation, which incorporated CPE-215 as a permeation facilitator, is no longer in development. In 2010 CPEX completed a Phase 2a study of Nasulin which did not meet its primary endpoint. Based on a full review of the results of this study, CPEX determined not to proceed with any further Nasulin development activities.

Key Markets and Trends for Testim®

The testosterone replacement market has expanded as more baby-boomers enter middle age and more attention is focused on male hormonal deficiency and the benefits of replacement therapy. Symptoms associated with low testosterone levels in men include depression, decreased libido, erectile dysfunction, muscular atrophy, loss of energy, mood alterations, increased body fat and reduced bone density. This condition is currently significantly under-treated and growing patient awareness together with education continue to spur demand for testosterone replacement therapy.

Currently marketed testosterone replacement therapies deliver hormones through injections, transdermal patches or gels. Gels provide commercially attractive and efficacious alternatives to the other current methods of delivery by providing a more steady state of absorption rather than the bolus surge of injections or the irritation caused by patches, which often results in a less desirable dosage regimen.

The testosterone replacement therapy market is highly competitive. Potential competitors, some of which are described below, include large pharmaceutical companies, specialty pharmaceutical companies and biotechnology firms.

Other pharmaceutical companies may develop generic versions of Testim or any products that compete with Testim that do not infringe CPEX’s patents or other proprietary rights, and, as a result, our business may be adversely affected. For example, because the ingredients of Testim are commercially available to third parties, it is possible that competitors may design formulations, propose dosages or develop methods of administration that would be outside the scope of the claims of one or more, or of all, of CPEX’s patents. This would enable their products to effectively compete with Testim. Governmental and other pressures to reduce pharmaceutical costs may result in physicians writing prescriptions for these generic products. Increased competition from the sale of competing generic pharmaceutical products could cause a material decrease in revenue from Testim.

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The primary competition for Testim is AndroGel®, marketed by Abbott Laboratories. In February 2010, Abbott acquired Solvay Pharmaceuticals, Inc. which launched Androgel three years prior to Testim. Watson Pharmaceuticals, Inc. began co-promoting AndroGel with Solvay in late 2006, and Par Pharmaceutical Companies, Inc. began co-promoting AndroGel in early 2007, each pursuant to patent lawsuit settlement agreements with Solvay. In January 2009, the U.S. Federal Trade Commission, or FTC, and a number of private parties filed actions against Solvay, Watson and Par alleging that their respective 2006 patent lawsuit settlements related to AndroGel are unlawful. All actions were consolidated in the U.S. District Court for the Northern District of Georgia. In February 2010, the court dismissed the FTC’s claims and some of the private party claims. Certain private party claims remain pending. According to IMS, as of December 31, 2010, AndroGel accounted for 77.9% of the gel prescriptions.

Generic Competition

In October 2008, CPEX and Auxilium received notice that Upsher-Smith Laboratories, Inc. (“Upsher-Smith”) filed an Abbreviated New Drug Application, or ANDA, containing a paragraph IV certification in which it certified that it believes that its proposed testosterone gel product does not infringe CPEX’s patent covering Testim®, U.S. Patent No. 7,320,968 (the ”‘968 Patent”). The ‘968 Patent claims a method for maintaining effective blood serum testosterone levels for treating a hypogonadal male, and will expire in January 2025. The ‘968 Patent is listed for Testim in Approved Drug Products with Therapeutic Equivalence Evaluations (commonly known as the Orange Book), published by the U.S. Food and Drug Administration (“FDA”). Upsher-Smith’s paragraph IV certification sets forth allegations that the ‘968 Patent will not be infringed by the manufacture, use, or sale of the product for which the ANDA was submitted. On December 4, 2008, CPEX and Auxilium filed a Hatch-Waxman patent infringement lawsuit in the United States District Court for the District of Delaware (“the Court”) against Upsher-Smith, seeking injunctive and declaratory relief. The Court docketed this case as Civil Action No. 08-908-SLR. In June 2009, Upsher-Smith amended its answer to the complaint to include a defense and counterclaim of invalidity of the ‘968 Patent, which CPEX and Auxilium have denied. CPEX and Auxilium filed a reply to the counterclaim in July 2009 denying the invalidity of the ‘968 Patent. A patent issued by the U.S. Patent and Trademark Office, such as the ‘968 Patent, is presumed valid. As of the date of this filing, the lawsuit remains pending; however, the trial date has been removed from the Court’s calendar.

In February 2009, Auxilium filed a Citizen Petition with FDA concerning regulatory approval for testosterone gel products. In August 2009, FDA responded to Auxilium’s Citizen Petition. While FDA’s response did not address any particular proposed generic product, it stated that “any application for a testosterone gel product that has different penetration enhancers than the reference listed drug cannot be submitted as an abbreviated new drug application (ANDA) and, instead, will have to be submitted as an NDA (New Drug Application) under section 505(b) of the Federal Food, Drug, and Cosmetic Act.” Furthermore, in October, 2010, FDA issued a response to the Citizen Petition submitted on behalf of Abbott Laboratories regarding testosterone gel products. In its response, FDA reiterated that “the practical effect” of its statements is that an applicant must submit an NDA under section 505(b)(2) rather than an ANDA if its proposed product contains a different enhancer than the reference listed drug. FDA further stated that if an applicant first filed an ANDA, and later filed an NDA under Section 505(b)(2), the NDA would be treated as a separate application, suggesting that this would trigger a separate review by the agency. In July 2003, Watson and Par filed ANDAs with the FDA to be approved as generics for AndroGel. In response to these ANDAs, Solvay filed patent infringement lawsuits against these two companies to block the approval and marketing of the generic products. In 2006, all the subject companies reached an agreement pursuant to which Watson and Par agreed not to bring a generic of Androgel to the market until August 2015. During this time frame, Abbott, Watson and Par will co-promote AndroGel. In June 2009, Perrigo Israel Pharmaceuticals, Inc. (“Perrigo”) filed an ANDA with a paragraph IV certification seeking the approval of a generic version of Androgel in the United States. The paragraph IV certification procedure challenges a U.S. patent relating to Androgel which runs through the next decade. In its letter to the company, Perrigo asserted that it did not infringe the AndroGel patent because its proposed testosterone gel product contains a different formulation than the formulation protected by the AndroGel patent. In contrast, the proposed testosterone gel products that were the subject of earlier ANDAs filed by other companies, and which were the subject of prior patent litigation brought by the company, purported to be identical to the AndroGel formulation. To date, we believe that Abbott has not initiated patent infringement litigation against Perrigo. The introduction of a generic version of Androgel would have an adverse impact on the branded gel market, including taking a significant portion of branded Androgel business. Although Testim has a BX rating, meaning that pharmacists are prohibited from substituting Testim with Androgel, or a generic version of Androgel, a less expensive generic testosterone gel product could still have a material adverse affect on Testim market share and/or Testim’s formulary status, and therefore could have a material negative impact on our financial condition and results of operations.

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Other Competition

In November 2010, Axiron®, a 2% testosterone solution delivered in the armpit, was approved by the FDA for testosterone replacement therapy in men with a deficiency or absence of testosterone. Axiron was developed by Acrux Limited, an Australian company which has entered into an agreement with Eli Lilly and Company (“Lilly”) under which Lilly received worldwide rights to commercialize Axiron. Axiron is now available in the United States as a prescription medication.

In December 2010, FORTESTA, a 2% testosterone gel applied to the inner and front of the thigh, was approved by the FDA. Endo Pharmaceuticals (“Endo”), Inc. signed an agreement with U.K. based ProStrakan Group plc for exclusive U.S. rights to commercialize FORTESTA. Post-marketing requirements include a hand-washing study to be completed and submitted to the FDA by April 2012. An additional trial “Assessment of time to Eugonadal testosterone Range” was completed in 2011. In March 2011, Endo launched FORTESTA in the United States. FORTESTA is also approved in Europe and is sold by ProStrakan under the brand names Tostran, Tostrex, Fortigel and Itnogen.

In April 2011, Abbott (formerly Solvay) received FDA approval on Androgel 1.62%, a high concentration testosterone gel. Androgel 1.62% is now available in the United States.

There are several other compounds in various stages of clinical development which may compete with Testim.

Bayer Schering Pharma discovered and developed NEBIDO a novel, long-acting injectable testosterone product sold in Europe. Bayer has licensed U.S. rights for this product to Endo, which filed an NDA with the FDA in 2009 using the brand name AVEED. In December 2009, Endo received a complete response letter from the FDA regarding AVEED. In the letter the FDA requested additional information on rare but serious incidents of anaphylactic reactions and pulmonary oil microembolism among patients taking AVEED. The FDA also said in its complete response letter that Endo’s risk mitigation program for the drug was inadequate. Endo is currently evaluating the FDA’s comments and is working with the FDA to determine the regulatory pathway for AVEED. The timing of the entry of AVEED in the U.S. market is unknown.

BioSante Pharmaceuticals, Inc. initially developed Bio-T-Gel, a once-daily transdermal testosterone gel currently in late stage human clinical trials. Bio-T-Gel was licensed to Teva Pharmaceuticals USA, Inc. (“Teva”) for late stage clinical development. Teva is responsible for all Bio-T-Gel regulatory and marketing activities. An NDA for Bio-T-Gel is pending with the FDA following submission in January 2011 by Teva. The FDA has assigned a PDUFA date of February 14, 2012.

Clarus Therapeutics is developing an oral form of testosterone called OriTex, which is currently in Phase 3 clinical trials.

Ascend Therapeutics is developing a transdermal dihydrotestosterone gel therapy for late-onset hypogonadism. The product is currently in Phase 2 clinical trials to gauge efficacy.

Testim also competes with other testosterone replacement therapies such as long-acting injectables, patches, orals, a buccal tablet and implantable pellets. Other new treatments are being sought for testosterone replacement therapy; these products are in development and their future impact on the treatment of testosterone deficiency is unknown.

Research and Development

Research and development expenses, which are attributed to our investments in our research and development programs, were $7.5 million, $12.3 million and $2.9 million for the years ended December 31, 2010 and 2009 and for the period of January 1, 2011 through April 5, 2011 of CPEX, respectively, and nil million for the nine months ended October 1, 2011 of Footstar Corp Research and development expenses for the year ended December 31, 2009 and through the first quarter of 2010 were, primarily for Nasulin, CPEX’s intranasal insulin product candidate. As described above, CPEX has determined not to proceed with any further Nasulin development activities. At the present time, CPEX has substantially terminated its research and development activities.

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Sources and Availability of Raw Materials

CPEX’s technology is dependent upon obtaining pharmaceutical grade CPE-215 from third-party suppliers. CPEX does not manufacture CPE-215. Pharmaceutical grade CPE-215 is available from at least two major industrial manufacturers. Other molecules and compounds used in the development process are often proprietary to CPEX’s development partners and supplied directly by those partners.

Partners/Customers

CPEX enters into research and license agreements with other companies under which it performs research activities and license product candidates in exchange for milestone payments and royalties and/or a share of profits derived from product sales.

License Agreement with Auxilium

CPEX and Auxilium are parties to a License Agreement dated May 31, 2000 pursuant to which Auxilium obtained a sole and exclusive, worldwide, royalty-bearing license (including sub-license rights) to make, have made on their behalf, use and sell anywhere in the world any and all pharmaceutical compositions which contain (A) testosterone as the single active ingredient; and (B) CPE-215 and which are covered by a valid CPEX patent, all related patents and technology. Initially this license was based solely upon the issued U.S. Patent No. 5,023,252. Since this patent expired in June 2008, Auxilium’s license is now based upon issued U.S. Patents, No. 7,320,968 and the recently obtained six U.S. patents (see “Intellectual Property”). In addition, Auxilium was granted the exclusive right to enter into another license agreement to acquire rights in these patents and technology for the development of combination products, which right expires upon the termination of the original License Agreement. The License Agreement continues for an indefinite term but it is terminable by us if Auxilium fails to make timely payments and may also be terminated by either party if (i) the other party becomes insolvent, (ii) the other party fails to cure a breach within 30 days or (iii) CPEX is dissolved.

Pursuant to the terms of the Auxilium Agreement, we receive royalties of 12%, of Auxilium’s annual net sales of Testim in the U.S. and Canada. In the event that we do not have, or do not maintain an enforceable patent in a country in which Auxilium products are sold, the royalty rate due to us from sales in that particular country reduces from the aforementioned rates to a rate in the low single-digits.

Development and License Agreement with Serenity

In February 2008, CPEX entered into a Development and License Agreement with Serenity Pharmaceuticals Corporation, to develop Ser-120, a product candidate for the treatment of nocturia that utilizes CPEX’s patented intranasal drug delivery technology. Nocturia is a condition which causes an individual to wake one or more times at night to urinate. Serenity granted us a non-exclusive license to its technology and patents rights to conduct initial formulation activities under the Agreement. We granted Serenity an exclusive, sublicensable, worldwide license under United States Patent No. 7,244,703 and foreign equivalents and CPEX’s proprietary CPE-215 drug delivery technology to conduct research activities related to the development of Ser-120 and to make and sell the product. On April 1, 2010, CPEX announced that Serenity entered into a global agreement with Allergan, Inc. (“Allergan”) under which Allergan assumed CPEX’s development and license agreement with Serenity. In return, CPEX is entitled to sales milestones and low single digit royalties on worldwide net sales following commercialization of Ser-120. Allergan has recently reported that Serenity and Allergan are in the process of reviewing the complete trial data from two phase 3 trials of Ser-120, which were not sufficient for successful registration, to determine what additional trials are indicated to support development of the program. Xstelos understands that Allergan and Serenity have initiated a new Phase III trial which may be concluded in mid 2012.

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Business Strategy

Through the end the 2011 fiscal year, and for at least the 2012 fiscal year, Xstelos, through FCB I Holding, Inc., intends to continue to operate the CPEX business, including realizing revenue from its licensing agreement with Auxilium. CPEX at present is committed to maximizing value of its existing product portfolio, including exploring joint, ventures, licensing arrangements or direct investment by CPEX. Accordingly, we intend to review our patents and the pharmaceutical market for potential opportunities to monetize our intellectual property, as well as generally consider and pursue strategic transactions in the best interest of Xstelos and its stockholders.

Competition

Competition in the drug industry is intense. There are a number of competitors who possess capabilities relevant to the drug delivery field. In particular, we face substantial competition from companies pursuing the commercialization of products using nasal drug delivery technology. Established pharmaceutical companies, such as Archimedes Pharma Ltd, AstraZeneca PLC, Bayer Consumer Care, GlaxoSmithKline plc, and Pfizer, Inc. also have in-house nasal drug delivery research and development programs that have successfully developed products that are being marketed using nasal drug delivery technology. We also face indirect competition from other companies with expertise in alternate drug delivery technologies, such as oral, injectable, patch-based and pulmonary administration. Competitors in these fields include AstraZeneca PLC and GlaxoSmithKline plc, Alkermes Inc., Unigene Inc., Generex Biotechnology Corporation, Emisphere Technologies, Inc. and Coremed Corporation. Many of our competitors have substantially greater capital resources, research and development resources and experience, manufacturing capabilities, regulatory expertise, sales and marketing resources and established collaborative relationships with pharmaceutical companies. Our competitors, either alone or with their collaboration partners, may succeed in developing drug delivery technologies that are similar or preferable in effectiveness, safety, cost and ease of commercialization and our competitors may obtain intellectual property protection or commercialize competitive products sooner than we do.

Universities and public and private research institutions are also potential competitors. While these organizations primarily have educational objectives, they may develop proprietary technologies related to the drug delivery field or secure protection that we may need for development of our technologies and products.

We may attempt to license these proprietary technologies, but these licenses may not be available to us on acceptable terms, if at all.

Even if we are able to develop products and then obtain the necessary regulatory approvals, our success will depend to a significant degree on the commercial success of the products developed by CPEX and sold or distributed by CPEX’s collaboration partners.

We have described on page 23 the competition for Testim, the testosterone gel marketed and sold by Auxilium, including the ANDA filed by Upsher-Smith.

Intellectual Property

We actively seek to protect our pharmaceutical formulations and proprietary information by means of U.S. and foreign patents, trademarks, trade secrets as well as various other contractual arrangements. We depend on our ability to protect our intellectual property and proprietary rights, but we may not be able to maintain the confidentiality, or assure the protection, of these assets in the United States or elsewhere.

Our success depends, in large part, on our ability to protect CPEX’s current and future technologies and products and to defend its intellectual property rights. If we fail to protect our intellectual property adequately, competitors may manufacture and market products similar to CPEX’s. Patents covering our technologies have been issued to CPEX, and CPEX has filed, and expects to continue to file, patent applications seeking to protect newly developed technologies and products in various countries, including the United States. However, patents may not be issued with respect to any of CPEX’s patent applications and existing or future patents issued to or licensed by us may not provide competitive advantages for CPEX’s products. Patents that are issued may be challenged, invalidated or circumvented by competitors. Furthermore, our patent rights may not prevent our competitors from developing, using or commercializing products that are similar or functionally equivalent to our products. Where trade secrets are our sole protection, we may not be able to prevent third parties from marketing generic equivalents to CPEX’s products, reducing prices in the marketplace and reducing our profitability.

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CPEX has the following issued patents:

Patent/Technology	Jurisdiction	Expiration
Formulations and method of using macrocyclic enhancers, including CPE-215, with Testosterone, Testim® product	United States	2025(1)
Pharmaceutical formulations and methods of use patents relating to the use of nasal formulations of insulin (“Nasulin”)	United States	2024
Pharmaceutical formulations and methods of use patents relating to the combination of the macrocyclic enhancer with peptides, peptidomimetics or proteins	United States	2022

______________

(1)	Orange Book Listed Patents covering the Testim® formulation expire April 21, 2023 and January 18, 2025.

The use of CPEX technology with various products such as testosterone as well as other peptides, is covered by both U.S. and foreign patents in many major market countries. The initial patent for use of CPEX technology has expired in the United States in June 2008, in Canada in 2010 and has expired in all other markets outside the United States. CPEX has patent protection for the commercial formulations of testosterone (Testim) until 2025 and in 2010 obtained six U.S. patents covering the testosterone formulation in the United States. These latter patents were added to the currently listed Orange Book: Approved Drugs with Therapeutic Equivalence (“Orange Book”) patent for Testim, which means that there are a total of seven listed patents covering the Testim product. CPEX also has a patent for its nasal insulin formulation (Nasulin) until 2024. CPEX has applied for and continues to file patent applications covering the use of its technology worldwide; however, we cannot provide any assurance that any patents will issue.

We also rely on trade secrets, non-patented proprietary expertise and continuing technological innovation that we seek to protect, in part, by entering into confidentiality agreements with licensees, suppliers, employees, consultants and others. To this end, we require our employees, consultants and advisors to enter into agreements that prohibit the disclosure of confidential information and, where applicable, require disclosure and assignment to us of all ideas, developments, discoveries and inventions that arise from their activities for us. Additionally, these confidentiality agreements require that our employees, consultants and advisors do not bring to our attention, or use, without proper authorization, any third party’s proprietary technology. However, these agreements may be breached and there may not be adequate remedies in the event of a breach. Disputes may arise concerning the ownership of intellectual property or the applicability of confidentiality agreements. Moreover, our trade secrets and proprietary technology may otherwise become known or be independently developed by our competitors.

Third parties may claim that CPEX infringes on their proprietary rights. There has been substantial litigation in the pharmaceutical industry with respect to the manufacture, use and sale of new products. These lawsuits relate to the validity and infringement of patents or proprietary rights of third parties. We may be required to commence or defend against charges relating to the infringement of patent or proprietary rights. Any such litigation could: (i) require us to incur substantial expenses, even if we are insured or successful in the litigation; (ii) require us to divert significant time and effort of our technical and management personnel; (iii) result in the loss of our rights to develop or make certain products; (iv) require us to pay substantial monetary damages or royalties in order to license proprietary rights from third parties; and (v) prevent us from launching a developed, tested and approved product.

Assignment Agreement with Access Pharmaceuticals, Inc.

Under an Assignment Agreement with MacroChem Corporation (“MacroChem”), dated June 24, 2003, which was assumed by Access Pharmaceuticals, Inc. (“Access”) following their acquisition of MacroChem in February 2009, CPEX owns all of Access’s right, title and interest to U.S. Patent Number 6,495,124 B1 and any and all related patents and patent applications which are divisions, continuations, continuations-in-part, reissues, renewals, extensions and supplementary protection certificates (the “Access Patent Rights”). As a result of the assignment, Access retained no interest whatsoever in the Access Patent Rights. To date, CPEX has not generated any revenue from the Access Patent Rights, which expire in 2020.

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Government Regulation

Numerous governmental authorities in the U.S. and other countries extensively regulate the activities of pharmaceutical manufacturers. If we fail to comply with the applicable requirements of governmental authorities, we may be subject to administrative or judicial sanctions such as refusal of or delay in the approval of pending marketing applications or supplements to approved applications, warning letters, total or partial suspension of production, fines, injunctions, product seizures or recalls, as well as criminal prosecution.

Prior to marketing most pharmaceutical products in the U.S., the product must first be approved by the FDA. For new compounds, the regulatory approval process begins with developing preclinical laboratory supporting data and animal safety testing. The approval process generally consists of the following five principal stages:

preclinical testing (supporting safety and potential efficacy);

submission and review by the FDA of an Investigational New Drug Exemption (IND) Application;

clinical trials;

preparation and submission of the New Drug Application (NDA); and

FDA’s review and approval/disapproval of the NDA.

In some cases, further clinical trials may also be required following approval.

The IND is submitted to the FDA when the appropriate preclinical studies are completed and must be submitted to the FDA 30 days before beginning clinical studies. The IND becomes effective if the FDA does not put the investigations described in the IND on clinical hold within 30 days of receiving the IND for filing.

Human clinical trials typically are conducted in three sequential phases. Some clinical trials may include aspects of more than one phase.

Phase 1 involves the initial introduction of the pharmaceutical compound into patients or healthy human volunteers; the emphasis is on testing for dosage tolerance, metabolism, excretion, clinical pharmacology, safety (adverse effects) and possibly early evidence of effectiveness.

Phase 2 involves the first controlled clinical trial involving patients who have the targeted disease or condition and consists of safety and efficacy studies. The studies may be divided into early Phase 2 (or 2a), during which studies are performed to determine initial efficacy and late Phase 2 (or 2b) which may consist of placebo-controlled trials in a larger number of patients.

Phase 3 involves large scale, longer-term, well controlled efficacy and safety studies within an expanded patient population, frequently at multiple clinical study sites.

Throughout the drug development process, the IND must be updated continually with protocol amendments, information amendments, IND Safety Reports and Annual Reports. The FDA carefully reviews all data submitted and holds meetings with the sponsor at key stages to discuss the preclinical and clinical plans and results.

The Chemistry/Manufacturing/Controls data, clinical studies, statistical evaluation and all relevant supporting research data that has been collected over many years of development is submitted to the FDA in an NDA. Additionally, an NDA will contain complete information on the proposed manufacturing process including process, equipment and facilities validation demonstrating that the applicant is capable of consistently manufacturing a drug product of appropriate strength, quality and purity consistent with the product that was studied in the clinical trials. An NDA is an application requesting FDA approval to market a new drug for human use in interstate commerce.

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NDAs are allocated varying review priorities based on a number of factors, including the severity of the disease, the availability of alternative treatments and the risks and benefits demonstrated in clinical trials. Additional animal studies or clinical trials may be requested during the FDA review process and may delay marketing approval. After FDA approval for the initial indications, further clinical trials are necessary to gain approval for the use of the product for any additional indications. The FDA may also require post-marketing testing to monitor for adverse effects, and in some cases to provide additional information on efficacy, which can involve significant expense. CPEX’s products under development and future products to be developed must go through the approval process delineated above prior to gaining approval by the FDA for commercialization.

FDA approval is also required for the marketing of generic equivalents of an existing drug. An Abbreviated New Drug Application, or ANDA, is required to be submitted to the FDA for approval. When processing an ANDA, the FDA, in lieu of the requirement for conducting complete clinical studies, requires bioavailability and/or bioequivalence studies. Bioavailability indicates the rate and extent of absorption and levels of concentration of a drug product in the body. Bioequivalence compares the bioavailability of one drug product (in this case, the product under review) with another (usually the innovator product). When bioequivalence is established, the rate of absorption and levels of concentration of the drug in the body will closely approximate those of the previously approved drug. An ANDA may only be submitted for a drug on the basis that it is the equivalent to a previously approved drug.

In addition to obtaining FDA approval for each product, each manufacturer of drugs must register its manufacturing facilities with the FDA, and must list the drug products it manufactures at each facility. Domestic manufacturing establishments are subject to biennial inspections by the FDA and must comply with current Good Manufacturing Practices or cGMPs for drugs. To supply products for use in the U.S., foreign manufacturing establishments must also comply with U.S. cGMPs and are subject to inspection by the FDA. Such inspections generally take place upon submission of an NDA or ANDA to the FDA or at any other time deemed necessary by the FDA and can impact both the approval of drugs, and a company’s ability to continue manufacturing following approval.

Properties

We own a 15,700 square foot commercial building situated on approximately 14 acres of land in Exeter, New Hampshire. It is located approximately 50 miles north of Boston, Massachusetts. We are currently marketing this property for sale or lease.

We also own property in Mahwah, New Jersey, which contains our former corporate headquarters building, improvements and 21 acres of underlying land (collectively, the “Mahwah Real Estate”). We are actively marketing our Mahwah Real Estate. In connection with Footstar’s discontinued operations in 1995, Footstar entered into a sub-lease formerly occupied by its Thom McAn stores. The lease expires effective February 1, 2014. The obligation under the sublease is $1.8 million, although we believe that there has been a novation of obligations under such lease and may in the future bring litigation to have a court finally determine such issue. At this time, we have not recorded a liability relating to this commitment as the probability of an unfavorable outcome is remote.

In November 2011, Footstar Corp entered into a 5-year lease for executive office space in New York, New York at an approximate annual expense of approximately $97,000.

Employees

We employ 7 people as of the date of this filing, 2 of which are full-time employees. All of our employees are based in the United States. In general, we consider our relationship with our employees to be good.

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Legal Proceedings

In October 2008, CPEX and Auxilium received notice that Upsher-Smith filed an Abbreviated New Drug Application, or ANDA, containing a paragraph IV certification in which it certified that it believes that its proposed testosterone gel product does not infringe CPEX’s ‘968 Patent. The ‘968 Patent claims a method for maintaining effective blood serum testosterone levels for treating a hypogonadal male, and will expire in January 2025. The ‘968 Patent is listed for Testim in Approved Drug Products with Therapeutic Equivalence Evaluations (commonly known as the Orange Book), published by the FDA. Upsher-Smith’s paragraph IV certification sets forth allegations that the ‘968 Patent will not be infringed by the manufacture, use, or sale of the product for which the ANDA was submitted. On December 4, 2008, CPEX and Auxilium filed a Hatch-Waxman patent infringement lawsuit in the United States District Court for the District of Delaware against Upsher-Smith, seeking injunctive and declaratory relief. The Court docketed this case as Civil Action No. 08-908-SLR. In June 2009, Upsher-Smith amended its answer to the complaint to include a defense and counterclaim of invalidity of the ‘968 Patent, which CPEX and Auxilium have denied. CPEX and Auxilium filed a reply to the counterclaim in July 2009 denying the invalidity of the’ ‘968 Patent. A patent issued by the U.S. Patent and Trademark Office, such as the ‘968 Patent, is presumed valid. As of November 1, 2011, the lawsuit remains pending; however, the trial date has been removed from the Court’s calendar.

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XSTELOS HOLDINGS, INC.

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS

FOR THE NINE MONTHS ENDED OCTOBER 1, 2011

(In thousands)

	October 1, 2011
	Footstar Corp and Subsidiaries (Predecessor Company)			January 1, 2011 through April 5, 2011 CPEX Pharmaceuticals			Pro forma Adjustments				Nine Months Ended October 1, 2011

ROYALTY REVENUE	$	12,364		$	5,851		$	-			$	18,215

Operating Expenses
Selling, general and administrative expense		4,946			6,680			(4,495	)	a		7,131
Research and development		-			2,857			-				2,857
Depreciation and amortization		2,189			266			1,004		b		3,459
Total operating expenses		7,135			9,803			(3,491	)			13,447

OPERATING INCOME (LOSS)		5,229			(3,952	)		3,491				4,768

Interest expense, net		5,859			(24	)		2,720		c
								40		d
								36		e		8,631

EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		(630	)		(3,928	)		695				(3,863	)

Income tax expense (benefit) from continuing operations		(19,754	)		(1,697	)		19,822		f
								1,697		g		68

EARNINGS (LOSS) FROM CONTINUING OPERATIONS		19,124			(2,231	)		(20,824	)			(3,931	)

EARNINGS (LOSS) FROM DISCONTINUED OPERATIONS, net of tax		1,080			-			-				1,080

NET EARNINGS (LOSS)		20,204			(2,231	)		(20,824	)			(2,851	)

Less: Net earnings (loss) attributable to the noncontrolling interest		318						(874	)	h		(556	)

NET EARNINGS (LOSS) ATTRIBUTABLE TO CONTROLLING INTEREST	$	19,886		$	(2,231	)	$	(19,950	)		$	(2,295	)

See accompanying notes to unaudited pro forma condensed combined statements.

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XSTELOS HOLDINGS, INC.

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS

FOR THE YEAR ENDED

(In thousands)

	January 1, 2011
	Footstar Corp and Subsidiaries (Predecessor Company)			December 31, 2010 CPEX Pharmaceuticals			Pro forma Adjustments				Year Ended January 1, 2011

ROYALTY REVENUE	$	-		$	23,297		$	-			$	23,297

Operating Expenses
Selling, general and administrative expense		2,460			8,777			-				11,237
Research and development		-			7,510			-				7,510
Depreciation and amortization		-			702			4,014		b		4,716
Total operating expenses		2,460			16,989			4,014				23,463

OPERATING INCOME (LOSS)		(2,460	)		6,308			(4,014	)			(166	)

Interest expense, net		12			(100	)		10,880		c
								172		d
								152		e		11,116

EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		(2,472	)		6,408			(15,218	)			(11,282	)

Income tax expense (benefit) from continuing operations		(88	)		(230	)		230		g		(88	)

EARNINGS (LOSS) FROM CONTINUING OPERATIONS		(2,384	)		6,638			(15,448	)			(11,194	)

EARNINGS (LOSS) FROM DISCONTINUED OPERATIONS, net of tax		1,283			-			-				1,283

NET EARNINGS (LOSS)		(1,101	)		6,638			(15,448	)			(9,911	)

Less: Net earnings (loss) attributable to the noncontrolling interest		-			-			(1,933	)	h		(1,933	)

NET EARNINGS (LOSS) ATTRIBUTABLE TO CONTROLLING INTEREST	$	(1,101	)	$	6,638		$	(13,515	)		$	(7,978	)

See accompanying notes to unaudited pro forma condensed combined statements.

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XSTELOS HOLDINGS, INC.

NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

The unaudited pro forma condensed combined financial statements included herein have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and certain footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations; however, management believes that the disclosures are adequate to make the information presented not misleading.

The statements contained in this section may be deemed to be forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. Such statements are intended to be covered by the safe harbor to “forward-looking statements” provided by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are typically identified by the words “believe,” “expect, “anticipate,” “intend,” “estimate” and similar expressions. These forward-looking statements are based largely on management’s expectations and are subject to a number of uncertainties. Actual results could differ materially from these forward-looking statements. Footstar does not undertake any obligation to update publicly or revise any forward-looking statements.

(A.) BASIS OF PRESENTATION

The accompanying unaudited pro forma condensed combined financial statements were prepared using the purchase method of accounting. Under this method of accounting, the purchase consideration is allocated to the tangible and intangible assets acquired and liabilities assumed based on their respective fair values. For purposes of the unaudited pro forma condensed combined financial statements, the fair values were established based on the ending values of CPEX assets and liabilities on April 5, 2011, the date of the CPEX acquisition.

The unaudited pro forma condensed combined statements of operations for the nine months ended October 1, 2011 and for the year ended January 1, 2011 is presented to give effect to the acquisition of CPEX, as if it occurred on January 3, 2010. This pro forma information is based on, derived from, and should be read in conjunction with, the historical consolidated financial statements of Footstar Corp for the year ended January 1, 2011, included in this Registration Statement Filing, and the historical financial statements of CPEX for the year ended December 31, 2010, included in its Annual Report on Form 10-K filed on March 31, 2011, and for the period ended April 5, 2011, which are included elsewhere in this document. We have not adjusted the historical financial statements of either entity for any costs not related to the acquisition, recognized during the year, which may be considered to be nonrecurring. We have adjusted for certain nonrecurring charges, such as purchase accounting adjustments and charges related to restructuring such as severance, that were deemed necessary to exclude for comparability purposes.

The unaudited pro forma condensed combined financial statements are provided for illustrative purposes only. They do not purport to represent what Xstelos’s consolidated results of operations and financial position would have been had the transaction actually occurred as of the dates indicated, and they do not purport to project future consolidated results of operations or financial position.

The actual adjustments to our consolidated financial statements upon of the acquisition of CPEX will depend on a number of factors, including additional information that becomes available. Therefore, the actual adjustments may differ from the unaudited pro forma adjustments, and such differences may be material.

The process for estimating the fair values of identifiable intangible assets, and certain tangible assets requires the use of significant estimates and assumptions, including estimating future cash flows, developing appropriate discount rates, and estimating the costs, timing and probability of success to complete contracts under negotiation. Transaction costs are not included as a component of consideration transferred. The purchase price allocation is subject to finalization of Xstelos’s analysis of the fair value of the assets and liabilities of CPEX as of the effective date of the acquisition. Accordingly, the purchase price allocation in the unaudited pro forma condensed combined financial statements presented above is preliminary and may be adjusted upon completion of the final valuation. Such adjustments could be material. The final valuation is expected to be completed as soon as practicable but no later than one year after the consummation of the acquisition.

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For purposes of measuring the estimated fair value of the assets acquired and liabilities assumed as reflected in the unaudited pro forma condensed combined financial statements, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). Market participants are assumed to be buyers and sellers in the principal (most advantageous) market for the asset or liability. Additionally, fair value measurements for an asset assume the highest and best use of that asset by market participants. As a result, Xstelos may be required to value assets at fair value measures that do not reflect Xstelos intended use of those assets. Use of different estimates and judgments could yield different results.

(B.) CONSIDERATION

The acquisition of CPEX was accounted for as a purchase in accordance with FASB ASC Topic 805. The purchase price of $76.3 million (which includes cash paid and liabilities assumed) has been allocated to the estimated fair value of tangible and identifiable intangible assets acquired and liabilities assumed. The excess of the purchase price over the estimated fair value of tangible and identifiable assets acquired and liabilities assumed has been allocated to intangible assets based on management’s estimate and pending a final valuation.

Pursuant to the CPEX Transaction, CPEX common stock that was outstanding immediately prior to the effective time of the CPEX Transaction, other than shares held by stockholders who properly exercised their appraisal rights and shares owned by CPEX as treasury stock, was automatically cancelled and converted into the right to receive $27.25 in cash, without interest and less any applicable withholding taxes.

The preliminary estimated total purchase price of the acquisition is as follows (in thousands):

Components of consideration:
Cash paid to CPEX Pharmaceuticals, Inc. shareholders at closing	$	75,443
CPEX liabilities assumed by Footstar		854
Gross consideration at closing	$	76,297

The following table summarizes the components of the total consideration determined for accounting purposes under ASC Topic 805 which reflect the allocation of the purchase consideration based on management’s preliminary estimate of the fair value of the CPEX assets and liabilities acquired, assuming acquired as of April 5, 2011 (in thousands).

Allocation of consideration
Cash	$	15,964
Accounts receivable		5,851
Tangible fixed assets		2,077
Goodwill		10,499
Fair value of non-intangible acquired assets		1,470
Intangible assets recorded in acquisition, primarily patent and license		60,258
Net deferred tax liability		(19,822	)
Total	$	76,297

Under the acquisition method of accounting, the total estimated purchase price is allocated to CPEX's net tangible and intangible assets based on their estimated fair values at the date of the completion of the acquisition. When these transactions are completed, Xstelos will account for these transactions in accordance with Accounting Standards Codification 805-10 (“ASC 805-10”). ASC 805-10 provides guidance for recognizing and measuring identifiable assets and goodwill acquired, liabilities assumed, and any non-controlling interest in the acquiree. ASC 805-10 also requires that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value if fair value can be reasonably estimated. If the fair value of an asset or liability cannot be determined, the asset or liability that arises from a contingency, the asset or liability would be recognized in accordance with Accounting Standards Codification 30-1 (“ASC 30-1”) and if the fair value is not determinable no asset or liability would be recognized. For the purposes of preparing these unaudited pro forma condensed combined financial statements, we have established an estimated fair value of the equities being offered in this transaction as of April 5, 2011. The preliminary purchase price allocation is based on management’s estimate of acquired tangible and intangible assets and will be adjusted based on the final valuation to be completed within one year from the acquisition date. The excess of the total purchase price over the fair value of the net assets acquired has preliminarily been allocated primarily to CPEX’s patents, license agreement, and Goodwill. The acquired intangible Testim® patent and related Testim® license agreement has a useful life of approximately 15 years, with the patent expiring on January 3, 2026.

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As a result of the 2011 CPEX acquisition, Xstelos recorded a deferred tax liability which is based on the differences between the book and tax bases of assets and liabilities and on operating loss carryforwards using enacted tax rates in effect for the year in which the differences are expected to reverse.

(C.) DETAILS OF THE PRO FORMA ADJUSTMENTS (in thousands)

a.	To eliminate CPEX related acquisition costs of $4,495.

To reflect amortization expense for intangible assets acquired, which was substantially all assigned to CPEX’s patents and license agreement associated with Testim®, a topical testosterone gel. Three months expense was added to the nine months ended October 1, 2011, and twelve months expense was added to the year ended January 1, 2011. The acquired intangible asset has a useful life of approximately 15 years, with the patent expiring on January 3, 2026. Amortization expense will be a non-cash charge.

To reflect interest expense in connection with the CPEX Transaction. Three months expense was added to the nine months ended October 1, 2011, and twelve months expense was added to the year ended January 1, 2011. Borrowing of approximately $64 million were made under the Term Loan Agreement, bear interest at “LIBOR” plus 16% per annum, with a minimum LIBOR rate of 1%, and matures on the earlier of January 3, 2026 or the date any of CPEX’s patents that are associated with Testim®, a topical testosterone gel, expire, and contains customary events of default for loans of such nature.

To reflect deferred financing cost amortization expense. Three months expense was added to the nine months ended October 1, 2011 and twelve months expense was added to the year ended January 1, 2011. Deferred financing costs related to CPEX acquisition amounted to approximately $1.7 million. These costs are included in deferred financing costs and are being amortized over the estimated life of the loan, approximately 6 years, using the effective interest rate method, and recorded as a component within non-cash interest expense.

To reflect original issue discount amortization expense for the $64 million term loan related to CPEX acquisition. Three months expense was added to the nine months ended October 1, 2011 and twelve months expense was added to the year ended January 1, 2011. The original issue discount related to CPEX acquisition amounted to approximately $2.5 million. This loan origination fee is being amortized over the estimated life of the loan, approximately 6 years, using the effective interest rate method, and recorded as a component within non-cash interest expense.

f.	To eliminate the tax benefit recorded in purchase accounting resulting from the reduction in the Footstar Corp valuation allowance as a result of the CPEX acquisition.

g.	To eliminate CPEX income taxes due to Footstar's $120 million valuation allowance.

h.	To reflect the noncontrolling interest portion of net earnings (loss) based on Footstar's 80.5% ownership in CPEX. This is to give effect to the acquisition of CPEX, as if it occurred on January 3, 2010.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis together with our financial statements and the notes to those statements included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth under “Risk Factors” and elsewhere in this prospectus, our actual results may differ materially from those anticipated in these forward-looking statements.

Overview

As a result of the contribution by Footstar all of its assets in connection with the Plan of Reorganization, Footstar Corp, all of Footstar’s subsidiaries became subsidiaries of Xstelos, including Footstar Corporation, which became a wholly owned subsidiary of Xstelos. After the distribution, Xstelos will continue to operate the CPEX business as a going concern.

CPEX is a wholly owned subsidiary of FCB I Holdings, Inc., which is owned 80.5% by Footstar Corporation, a Texas corporation, and 19.5% by the Investment Holding Company.

As a result of the contribution by Footstar all of its assets in connection with the Plan of Reorganization, Footstar Corp became a wholly owned subsidiary of Xstelos. After the distribution, Xstelos will continue to operate the CPEX business as a going concern.

The following section includes a discussion of (i) the results of operations of CPEX for the fiscal years ended December 31, 2010 and December 31, 2009, (ii) the results of operations of Footstar Corp for the fiscal years ended January 1, 2011 and January 2, 2010, and (iii) the results of operations of Footstar Corp for the nine months ended October 1, 2011 and October 2, 2010. As a result of the acquisition of CPEX on April 5, 2011, the operations of CPEX are only included in Footstar Corp’s results of operations for the nine months ended October 1, 2011 beginning April 5, 2011. As a result, the discussion of the nine months ended October 1, 2011 and October 2, 2010 of Footstar Corp are not comparable.

Business of CPEX

CPEX is an emerging specialty pharmaceutical company in the business of research and development of pharmaceutical products utilizing its validated drug delivery platform technology.

CPEX has U.S. and international patents and other proprietary rights to technology that facilitates the absorption of drugs. Its platform drug delivery technology is based upon CPE-215®, which enhances permeation and absorption of pharmaceutical molecules across biological membranes such as the skin, nasal mucosa and eye. CPEX’s principal product is Testim®, a gel for testosterone replacement therapy, which is a formulation of its technology with testosterone. Testim is licensed to Auxilium, which is currently marketing it in the United States, Europe and other countries. Currently, all of our current revenue is derived from royalties on Testim sales.

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CPEX Pharmaceuticals, Inc. Results of Operations

Comparison of Fiscal Year Ended December 31, 2010 and Fiscal Year Ended December 31, 2009

The following is a discussion of the results of CPEX Pharmaceuticals, Inc.’s operations for the years ended December 31, 2010 and 2009. Inflation and changing prices have not had a material impact on revenues or results from operations in the two years ended December 31, 2010.

	Year Ended December 31,						Increase (Decrease)
	2010			2009			$			%

Royalties and other revenue	$	23,297		$	18,658		$	4,639			25	%

Operating expenses:
General and administrative		8,777			8,867			(90	)		(1	)%
Research and development		7,510			12,291			(4,781	)		(39	)%
Depreciation and amortization		702			699			3			—	%
Total operating expenses		16,989			21,857			(4,868	)		(22	)%
Income (loss) from operations		6,308			(3,199	)		9,507
Other, net		100			159			(59	)		(37	)%
Income (loss) before taxes		6,408			(3,040	)		9,448
Provision (benefit) for income taxes		(230	)		—			(230	)
Net income (loss)	$	6,638		$	(3,040	)	$	9,678

Royalties and other revenue increased 25% to $23.3 million in 2010 from $18.7 million in 2009 due entirely to royalties earned on increased sales of Testim. For the year ended December 31, 2010, Testim prescriptions were reported to have grown approximately 11% compared to the same period in 2009. The long-term prospects for Testim sales are subject to resolution of CPEX’s patent infringement suit against Upsher-Smith, which has made an ANDA filing for a generic version of Testim, as described above in “Business—Generic Competition”.

General and administrative costs decreased 1% to $8.8 million in 2010 compared to $8.9 million in 2009, primarily due to a net decrease in advisory and consulting expenses. During 2010, there was a substantial decrease in legal fees associated with the legal proceedings described under Note 10 — Commitments, Contingencies and Concentrations — Legal Proceedings in the accompanying Notes to the consolidated financial statements for CPEX which were offset by an increase in fees and expenses relating to the exploration of strategic alternatives.

Research and development expenses consist primarily of costs associated with the development of Nasulin, which was CPEX’s product candidate in development until March 2010 when CPEX determined to cease Nasulin development activities. These costs include costs of clinical trials, manufacturing supplies and other development materials, compensation and related benefits for research and development personnel, costs for consultants, and various overhead costs. Research and development costs are expensed as incurred. Research and development costs decreased to $7.5 million in 2010 compared to $12.3 million in 2009, primarily due to a $4.7 million decrease in spending on clinical trials following the discontinuation of the Nasulin clinical trial program and a $1.2 million decrease in employee related expenses. These decreases were partially offset by a $1.5 million increase in spending on preclinical activities during the year ended December 31, 2010.

Provision for income taxes for the year ended December 31, 2010 is a net credit of $230,000. During 2010, CPEX determined that it was more likely than not that it would realize its net deferred tax assets for which there was a valuation allowance. Accordingly, it reversed its valuation allowance of $2.9 million which was partially offset by current and deferred income taxes of $2.7 million. No tax benefit was recorded during the year ended December 31, 2009 as future operating profits could not be reasonably assured at that time. See Note 8 — Provision for Income Taxes in the accompanying consolidated financial statements for CPEX for additional information.

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Footstar Corporation Results of Operations

Comparison of Nine Months Ended October 1, 2011 and Nine Months Ended October 2, 2010

Royalty Revenue

Royalty revenue increased $12.4 million, or 100%, for nine months ended October 1, 2011 compared with no revenue for nine months ended October 2, 2010. The increase in revenue is due to the acquisition of CPEX on April 5, 2011 which provides Footstar Corp with royalty revenue from the acquired licensing agreement associated with Testim®, a topical testosterone gel. The nine months is represented by the period from January 2, 2011 to October 1, 2011, however, the revenue reported is only from the date of acquisition through October 1, 2011.

SG&A Expenses

SG&A expenses increased $3.2 million, or 185.8%, to $4.9 million for nine months ended October 1, 2011 compared with $1.7 million for nine months ended October 2, 2010. This increase is predominately due to $2.4 million legal and professional expense, of which $1.6 million is related to the acquisition of CPEX, and $0.9 million of severance benefits incurred relating to former CPEX employees.

Depreciation and Amortization

Depreciation and amortization expense increased $2.2 million, or 100.0%, for nine months ended October 1, 2011 compared with no expense for nine months ended October 2, 2010. This increase is solely due to $2.2 million amortization expense of intangible assets comprised of CPEX’s patents and related license agreement associated with Testim®, a topical testosterone gel. The nine months is represented by the period from January 2, 2011 to October 1, 2011, however, amortization expense reported is only from the date of acquisition through October 1, 2011.

Operating Income

Operating income increased $6.9 million to $5.2 million for nine months ended October 1, 2011 compared with a $1.7 million operating loss for nine months ended October 2, 2010. The $6.9 million increase in operating income is basically due the addition of CPEX royalty revenue offset by increases in legal and professional expenses, severance benefit related expenses, and amortization expense, all related to the acquisition of CPEX.

Interest Expense

Interest expense increased $5.9 million for nine months ended October 1, 2011 compared with a de minimis expense for nine months ended October 2, 2010. This increase is due to $5.9 million interest expense on the note payable executed in connection with the acquisition of CPEX. The nine months is represented by the period from January 2, 2011 to October 1, 2011, however, interest expense related to the note payable reported is only from the date the note payable was executed through October 1, 2011.

Income Tax benefit

As a result of the 2011 CPEX acquisition, Xstelos recorded an approximately $19.8 million deferred tax liability and reduced approximately $19.8 million of the valuation allowance against its NOL carryforward tax asset, which is reflected as an income tax benefit as of October 1, 2011.

Comparison of Fiscal Year Ended January 1, 2011 and Fiscal Year Ended January 2, 2010

Revenue

No revenue was reported for either period as Footstar was operating under the plan of liquidation.

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SG&A Expenses

SG&A expenses decreased $2.2 million, or 47.0%, to $2.5 million in fiscal 2010 compared with $4.7 million in fiscal 2009. This decrease is predominately due to $1.0 million in lower building maintenance expenses, with $0.6 million less salaries and related benefits and $0.4 million in lower board of director fees.

Depreciation and Amortization

No depreciation and amortization expenses were reported for either period.

Operating Income

Operating loss decreased $2.2 million or 47.0%, to $2.5 million in fiscal 2011 compared with a $4.7 million operating loss in fiscal 2010. This decrease is predominately due to $1.0 million in lower building maintenance expenses, with $0.6 million less salaries and related benefits and $0.4 million in lower board of director fees.

Interest Expense

De minimis interest expense was reported for both periods as Footstar was operating under the plan of liquidation.

Liquidity and Capital Resources

At October 1, 2011, Footstar Corp had cash and cash equivalents of approximately $11.4 million, which, along with the royalties from Testim pursuant to the licensing agreement with Auxilium, we believe will be sufficient to fund our operations and our cash requirements for at least the next twelve months. Our cash includes balances maintained in commercial bank accounts. There can be no assurance that changes in our research and development plans or other events affecting our revenues or operating expenses will not result in the earlier depletion of our funds. In appropriate situations, which will be strategically determined, we may seek funding from other sources, including, but not limited to, contribution by others to joint ventures and other collaborative or licensing arrangements for the development, testing, manufacturing and marketing of products currently under development or sales of debt or equity securities.

On April 5, 2011, in connection with the acquisition of CPEX, FCB LLC, a wholly owned subsidiary of FCB I Acquisition Corp., which became a wholly owned subsidiary of CPEX upon FCB I Acquisition Corp.’s merger with and into CPEX, borrowed approximately $64 million under the Term Loan Agreement. The term loan under the Term Loan Agreement bears interest at “LIBOR” plus 16% per annum and matures on the earlier of January 3, 2026 or the date any of CPEX’s patents that are associated with Testim®, a topical testosterone gel, expire, and contains customary events of default for loans of such nature. As part of the Term Loan Agreement, CPEX contributed to FCB LLC all of its intellectual property rights in Testim® and rights to the royalty stream pursuant to the license agreement with Auxilium, and the loan is secured by FCB LLC’s interest in all such rights. Repayment of the loan is made through a waterfall arrangement whereby, if certain conditions are met, the Testim royalty stream is distributed on a quarterly basis as follows: first to pay certain fees and expenses of Agent and FCB LLC, second to pay fees of the banks maintaining the accounts associated with the loan, third to pay any expenses of Agent used to protect the loan collateral and any other unreimbursed fees or expenses of Agent or any Lender, fourth to replenish any shortfall in the interest reserve (which is $2.5 million), fifth to pay interest due, sixth to pay 65% of the remaining royalty funds to Agent for the benefit of the Lenders as payment toward loan principal, and finally to FCB LLC for its benefit.

Our largest source and use of cash were financing and investing related to the CPEX acquisition. Footstar Corp generated positive cash flow from operations due to our acquisition of CPEX. At October 1, 2011, we had cash and cash equivalents of approximately $11.4 million.

As of October 1, 2011 accounts receivable totaled $6.6 million, of which all are generally collected within three months.

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On February 24, 2010, Footstar announced that its board of directors declared a $.10 per share liquidating cash distribution to shareholders of record as of March 8, 2010. The distribution totaled $2.2 million and was paid on March 12, 2010 from current balances in cash and cash equivalents.

Net cash provided by operating activities for nine months ended October 1, 2011 was $3.1 million, directly related to net earnings of $20.2 million, adding $2.3 million of non-cash depreciation and amortization expense, and $0.7 million attributable to the decrease in accounts payable, accrued expenses and other current liabilities, and other miscellaneous items totaling $0.4 million, which was partially offset by the reversal of $19.8 million of non-cash deferred tax benefit and an increase in accounts receivable of $0.7 million. Net cash provided by operating activities for nine months ended October 2, 2010 was $3.2 million, primarily consisting of a decrease of $3.4 in prepaid expenses and other current assets, and miscellaneous items of $0.4 million, was partially offset by stock based compensation of $0.6 million.

Cash used in investing activities was $59.5 million and cash provided by financing activities was $59.1 million for the nine months ended October 1, 2011 compared to no investing activities and using $2.8 million in cash in financing activities for nine months ended October 2, 2010. The investing and financing activities for nine months ended October 1, 2011 are directly associated to the CPEX acquisition on April 5, 2011. Footstar paid $2.2 million in a special cash distribution to shareholders and paid $0.7 million in mortgage note payments for nine months ended October 2, 2010.

Factors that could affect our short and long term liquidity include, among other things, the amount of royalties received from Auxilium, any change in the estimated net realizable value of CPEX, the payment of any further dividends or distributions, and our ability to market our Mahwah Real Estate and Exeter, New Hampshire property on acceptable terms.

Letters of Credit

In the past, Footstar Corp entered into standby letters of credit to secure certain obligations, including insurance programs and duties related to the import of its merchandise. These standby letters of credit, before balances were drawn down by the beneficiaries, were cash collateralized at 103% of face value, plus a reserve for future fees (the “L/C Cash Collateral”), with Bank of America as issuing bank. In connection therewith, Bank of America had been granted a first priority security interest and lien upon the L/C Cash Collateral. On May 24, 2010, the Bank of America N.A. L/C Cash Collateral account terminated by its terms.

On May 10, 2010, $1.8 million, representing 100% of the amounts for which letters of credit have been provided, were drawn down by the beneficiaries. We do not anticipate recovery of $1.5 million of this amount for its Workers Compensation insurance programs. As of October 1, 2011, the remaining balance held by the beneficiaries totals $1.2 million and is recorded as Prepaid Expenses and included as a liability in Accrued Expenses. On July 26, 2011, Footstar Corp recovered $.25 million from its Workers Compensation insurance programs.

Long Term Debt

In connection with the CPEX Transaction, on April 5, 2011 the Borrower borrowed approximately $64 million under the Term Loan Agreement by and among Borrower, The Bank of New York Mellon, as Agent, and certain Lenders from time to time party thereto, in the form of a secured term loan to Borrower. The term loan under the Term Loan Agreement bears interest at “LIBOR” plus 16% per annum, with a minimum LIBOR rate of 1%, and matures on the earlier of January 3, 2026 or the date any of CPEX’s patents that are associated with Testim®, a topical testosterone gel, expire, and contains customary events of default for loans of such nature. The loan was issued at a discount of 2.34%. The original issue discount (OID) was $1.5 million. The OID is equal to the difference between the stated face amount of the loan and actual cash received. This OID is being amortized over the estimated life of the loan, approximately 6 years, using the effective interest rate method, and is recorded as a component within non-cash interest expense. The loan is collateralized by patents and a license agreement associated with Testim®, that were acquired in the CPEX transaction. The loan agreement requires certain financial reporting and non financial covenants.

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Critical Accounting Policies, Estimates and Judgments

The Financial Accounting Standards Board (“FASB”) made the Accounting Standards Codification (“ASC”) effective for financial statements issued for interim and annual periods ended after September 15, 2009. The ASC combines all previously issued authoritative generally accepted accounting principles (“GAAP”) into one set of guidance codified by subject area. Subsequent revisions to GAAP by the FASB are incorporated into the ASC through issuance of Accounting Standards Updates (“ASU”).

The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reporting periods. We evaluate these estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements appearing in this registration statement of which this prospectus forms a part, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating our financial statements.

Fiscal Years

The accompanying financial statements include the consolidated results of operations, assets and liabilities for the 53-week fiscal year ended January 1, 2011 and for the 52-week fiscal year ended January 2, 2010.

Cash Equivalents

Cash and cash equivalents consist of highly liquid instruments with maturities of three months or less from the date acquired and stated at cost that approximates their fair market value. At times Xstelos has cash and cash equivalents balances in excess of the FDIC and SIPC insured limits.

Royalties Receivable and Allowances for Doubtful Accounts

CPEX enters into collaboration and research agreements whereby it may receive milestone payments, research fees and/or royalties. Accounts receivable from these agreements are recorded at their net realizable value, generally as services are performed or as milestones and royalties are earned. When necessary, receivable balances are reported net of an estimated allowance for uncollectible accounts. Estimated uncollectible receivables are based on the amount and status of past due accounts, contractual terms with customers, the credit worthiness of customers and the history of uncollectible accounts. Royalties receivable as of October 1, 2011, and related revenues from the date of acquisition through October 1, 2011, are royalties due from its licensee, Auxilium for sales of Testim®. All receivables are uncollateralized and therefore are subject to credit risk.

Real Estate

Footstar Corp has been marketing its Mahwah Real Estate since May 5, 2007. Footstar Corp estimates that the fair value of the real estate, less estimated closing costs, is approximately $6.2 million. This estimate is based on unobservable inputs and as such the actual amount ultimately realized upon disposition of this real estate could be materially different.

Footstar Corp, through its acquisition of CPEX, owns a 15,700 square foot commercial building situated on approximately 14 acres of land in Exeter, New Hampshire. It is located approximately 50 miles north of Boston, Massachusetts. Xstelos is currently marketing this property for sale or lease. Footstar Corp estimates that the fair value of the real estate, less estimated closing costs, is approximately $1.6 million. This estimate is based on unobservable inputs and as such the actual amount ultimately realized upon disposition of this real estate could be materially different.

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Intangible Assets

Costs incurred in connection with acquiring licenses, patents, and other proprietary rights are capitalized as intangible assets. These assets are amortized on a straight-line basis over the applicable useful life from the dates of acquisition. Such assets are reviewed whenever events or changes in circumstances indicate that the assets may be impaired, by comparing the carrying amounts to their estimated future undiscounted cash flows, and adjustments are made for any diminution in value below the carrying value.

Income Taxes

Footstar Corp records deferred tax assets and liabilities based on the differences between the book and tax bases of assets and liabilities and on operating loss carryforwards using enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. These amounts are adjusted, as appropriate, to reflect enacted changes in tax rates expected to be in effect when the temporary differences reverse.

Footstar Corp determined the deferred tax provision under the liability method, whereby deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using currently enacted tax rates.

Revenue Recognition

CPEX recognizes revenue from royalties on Auxilium’s sales of Testim in accordance with ASC 605-10-S99-1, which requires sales to be recorded upon delivery, provided that there is evidence of a final arrangement, there are no uncertainties surrounding acceptance, title has passed, collectability is reasonably assured and the price is fixed or determinable. Since 2003, Auxilium has sold Testim to pharmaceutical wholesalers and chain drug stores, which have the right to return purchased products prior to the units being dispensed through patient prescriptions. Based on historical experience, CPEX is able to reasonably estimate future product returns on sales of Testim and as a result, did not defer Testim royalties for the nine months ended October 1, 2011.

Stock Based Compensation

Footstar Corp accounts for its stock based employee compensation plans under ASC 718 and ASC 505-50. ASC 718-10 and ASC 505-50 address the accounting for shared based payment transactions in which an enterprise receives employee services for equity instruments of the enterprise or liabilities that are based on the fair value of the enterprise's equity instruments or that may be settled by the issuance of such equity instruments. ASC 718-10 and ASC 505-50 require that such transactions be accounted for using a fair value based method.

Stock compensation expense reported by Footstar Corp is for the stock options or restricted stock under the Xstelos plans, and accordingly, these transactions do not affect our common stock. The stock compensation expense reported by Footstar Corp is included in the Parent Investment.

In considering the fair value of the underlying stock when the Footstar grants options or restricted stock, Footstar considers several factors including the fair values established by market transactions. Stock-based compensation includes significant estimates and judgments of when stock options might be exercised, forfeiture rates and stock price volatility. The timing of option exercises is out of Footstar Corp’s control and depends upon a number of factors including Footstar’s market value and the financial objectives of the holders of the options. These estimates can have a material impact on Footstar Corp’s stock compensation expense but will have no impact on Footstar Corp’s cash flows.

Footstar Corp accounts for equity awards of Footstar issued to non-employees providing services on behalf of Footstar Corp in accordance with ASC Topic 505-50 (formerly EITF No. 96-18 “Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with, Selling Goods or Services.”). ASC 505-50 requires Footstar Corp to measure the fair value of Footstar equity instruments using the stock prices and other measurement assumptions as of the earlier of either the date at which a performance commitment by the counterparty is reached or the date at which the counterparty's performance is complete.

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Recently Issued Accounting Pronouncements

In May 2011, the FASB issued amended guidance on fair value measurements. This newly issued accounting standard clarifies the application of certain existing fair value measurement guidance and expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This accounting standard is effective on a prospective basis for annual and interim reporting periods beginning on or after December 15, 2011. Footstar Corp does not expect that adoption of this standard will have a material impact on its financial position or results of operations.

In June 2011, the FASB issued authoritative guidance related to the Presentation of Comprehensive Income. This standard eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. The new requirements are effective for public entities for fiscal years beginning after December 15, 2011 and interim and annual periods thereafter, with early adoption permitted. As this accounting standard only requires enhanced disclosure, the adoption of this standard will not impact Footstar Corp’s financial position or results of operations.

Contingencies and Litigation

Litigation Matters

Footstar Corp is involved in various and routine litigation matters, which arise through the normal course of business. Management believes that the resolution of these matters will not have a material adverse effect on the final liquidation of Footstar. While it firmly maintains that all pending claims are meritless, Footstar Corp will, however, continue to expend costs as it vigorously defends against these claims.

Thom McAn: In connection with Footstar Corp’s discontinued operations in 1995, Footstar Corp entered into a sublease formerly occupied by its Thom McAn stores. The lease expires effective February 1, 2014. Footstar Corp believes that there has been a novation of its obligations under such lease and may bring litigation to have a court finally determine such issue. At this time, Footstar Corp has not recorded a liability relating to this commitment as the probability of an unfavorable outcome is remote.

Upsher-Smith Litigation: In October 2008, CPEX and Auxilium received notice that Upsher-Smith had filed an Abbreviated New Drug Application, or ANDA containing a paragraph IV certification in which Upsher-Smith certified that it believes its proposed generic version of Testim does not infringe on the ‘968 Patent. The ’968 Patent claims a method for maintaining effective blood serum testosterone levels for treating a hypogonadal male, and will expire in January 2025. The ’968 Patent is listed for Testim® in Approved Drug Products with Therapeutic Equivalence Evaluations (commonly known as the Orange Book), published by the FDA. Upsher-Smith’s paragraph IV certification sets forth allegations that the ’968 Patent will not be infringed by the manufacture, use, or sale of its proposed generic product. On December 4, 2008, CPEX and Auxilium filed a Hatch-Waxman infringement lawsuit in the United States District Court for the District of Delaware against Upsher-Smith seeking injunctive and declaratory relief. The Court docketed this case as Civil Action No. 08-908-SLR. In June 2009, Upsher-Smith amended its answer to the complaint to include a defense and counterclaim of invalidity of the ’968 Patent, which CPEX and Auxilium have denied. A patent issued by the U.S. Patent and Trademark Office (USPTO), such as the ’968 Patent, is presumed valid. As of the date of this filing, the lawsuit remains pending; however, the trial date has been removed from the Court’s calendar.

CPEX has filed continuation and divisional applications with the USPTO relating to the ’968 Patent. Six patents, U.S. Patent Nos. 7,608,605; 7,608,606; 7,608,607; 7,608,608; 7,608,609; and 7,608,610, were issued from these applications, which may provide further market protection. Each of these six patents has been listed in the Orange Book with respect to Testim®.

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CPEX and its affiliates will vigorously pursue the Hatch-Waxman patent infringement lawsuit. However, if CPEX is unsuccessful in obtaining an injunction to keep Upsher-Smith’s proposed version of Testim® off the market until the patent protection expires, or in defending the ’968 Patent covering Testim®, sales of Testim® and royalties relating to Testim® sales could be materially reduced.

Off-Balance Sheet Arrangements

None.

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MANAGEMENT

Executive Officers and Directors

The following table sets forth the name, age and position of each of our directors and executive officers.

Name	Age	Position
Jonathan M. Couchman	42	Chairman of the Board, President and Chief Executive Officer
Eugene I. Davis	56	Director
Adam W. Finerman	46	Director

The business experience for the past five years (and, in some instances, for prior years) of each of our executive officers and directors are as follows:

Jonathan M. Couchman. Mr. Couchman was appointed Chief Financial Officer of Footstar effective August 11, 2009. Mr. Couchman became President and Chief Executive Officer of Footstar effective January 1, 2009. He was appointed President, Chief Executive Officer and Chairman of the Board of Xstelos on January 23, 2012. Prior to that, on December 9, 2008 Mr. Couchman was Chief Wind-Down Officer of Footstar. He was appointed Chairman of the Board of Footstar on February 7, 2006. He is the Managing Member of Couchman Capital LLC, the general partner and investment manager of Couchman Investments LP and Couchman Partners LP, private investment partnerships established in 2001 and the investment manager of Couchman International Ltd., a private partnership established in 2001. He is a member of the CFA Institute and the New York Society of Security Analysts and holds a Bachelor of Science in Finance from the California State University at Chico. Mr. Couchman’s extensive investment experience, as well as his work-out experience, gives him strong insight into the challenges and issues facing Xstelos.

Eugene I. Davis. Mr. Davis served as Chairman and Chief Executive Officer of Pirinate Consulting Group, L.L.C., a privately-held consulting firm specializing in crisis and turn-around management and strategic advisory services for public and private business entities, since 1999. Prior to joining Pirinate Consulting, Mr. Davis was Chief Operating Officer of Total-Tel USA Communications, Inc., President of Emerson Radio Corp. and Chief Executive Officer of Sport Supply Group, Inc. Mr. Davis has served as director for numerous public and private companies across various industries. Mr. Davis has served as a Company director since March 2006 and currently serves on the boards of Atlas Air Worldwide Holdings, Inc., Dex One Corporation, GSI Group, Inc., Spectrum Brands, Inc. and U.S. Concrete, Inc. Mr. Davis is a director of the following companies but will not stand for re-election at the 2011 annual meeting of stockholders: Knology, Inc., Roomstore, Inc., SeraCare Life Sciences, Inc. and Spansion Inc. Mr. Davis is also a director of Trump Resorts Entertainment, Inc., whose common stock is registered under the Securities Exchange Act of 1934, as amended, but does not trade. Mr. Davis is currently on the boards of Ambassadors International, Inc., Global Power Equipment Group, Orchid Cellmark Inc., Rural/Metro Corp., Smurfit-Stone Container Corporation and YRC Worldwide, Inc. On April 1, 2011, Ambassadors International announced that it had entered into an agreement to sell the Windstar Cruises’ business and operations to Whippoorwill Associates, Inc., a private investment firm, through the chapter 11 legal process, after which Ambassadors International will no longer be a public company. On April 6, 2011, Orchid Cellmark announced that it has entered into a transaction pursuant to which it will be acquired by Laboratory Corporation of America Holdings. On March 28, 2011, Rural/Metro announced that it entered into a definitive agreement that provides for the acquisition of Rural/Metro by the private equity firm Warburg Pincus in a going-private transaction. Smurfit-Stone has announced a transaction to be acquired by Rock-Tenn Company. YRC Worldwide has announced that it has entered into a non-binding term sheet regarding a restructuring. Mr. Davis will no longer serve as a director of Orchid Cellmark, Rural/Metro, Smurfit-Stone or YRC Worldwide upon closing of those transactions or will resign by December 31, 2011 if the transactions have not closed by that time.

During the past five years, Mr. Davis has also been a director of American Commercial Lines Inc., Delta Airlines, Foamex International Inc., Granite Broadcasting Corporation, Ion Media Networks, Inc., Media General, Inc., Mosaid Technologies, Inc., Ogelbay Norton Company, PRG-Schultz International Inc., Silicon Graphics International, Terrastar Corp., Tipperary Corporation and Viskase, Inc. Mr. Davis brings to the Xstelos board of directors experience with companies emerging from chapter 11 restructuring processes and also has significant experience as a director of public companies.

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Mr. Davis holds a Bachelor of Arts from Columbia College, a Masters of International Affairs in International Law and Organization from the School of International Affairs of Columbia University and a Juris Doctorate from the Columbia University School of Law.

Mr. Davis has substantial public board experience and expertise in the corporate governance arena acquired through his service on a number of public company boards and as the Chairman and Chief Executive Officer of PIRINATE Consulting Group, LLC. Mr. Davis is a well-seasoned businessman and brings to us significant executive experience in a variety of industries, including power and energy, telecommunications, automotive, manufacturing, high-technology, medical technologies, metals, financial services, consumer products and services, import-export, mining and transportation and logistics. In addition, he has significant financial expertise.

Adam W. Finerman. Mr. Finerman is a Partner with the law firm of Olshan Grundman Frome Rosenzweig & Wolosky LLP, based in New York City, since 1998. Mr. Finerman is an experienced corporate and securities lawyer whose practice includes expertise in proxy contests and in mergers and acquisitions. He also has extensive experience representing publicly and privately held buyers and sellers in mergers, asset acquisitions and divestitures, and stock purchase transactions. Mr. Finerman counsels corporate clients on SEC reporting requirements, other public company obligations, and corporate governance practices and related matters. His practice also includes the representation of numerous public companies in their transactional and securities work as well as general corporate advice. Mr. Finerman has served as Corporate Secretary of Forward Industries, Inc., a Nasdaq listed company, since October 2011. Mr. Finerman holds a Bachelor of Science from the Wharton School, University of Pennsylvania, a Juris Doctorate from the University of Pennsylvania School of Law and a Masters of Business Administration from the Wharton School, University of Pennsylvania. Mr. Finerman’s extensive legal experience will provide valuable insight to the board of directors.

Director Independence

The board of directors of Xstelos has adopted the independence criteria established by Nasdaq for determining director independence. The board of directors has determined that of its current board members each of Messrs. Davis and Finerman are independent as defined under the listing requirements of Nasdaq. The board of directors does not have a separately standing Nominating, Compensation or Audit Committee at this time. Mr. Couchman is not considered independent under Nasdaq’s listing standards applicable to Audit Committee members. In making its determinations regarding these directors, the board of directors assessed all of the information provided by each director in response to inquiries concerning his independence and concerning any business, family, employment, transactional, or other relationship or affiliation of such director with Footstar and Xstelos.

Arrangements Regarding Nomination for Election to the Board of Directors

There are no arrangements regarding nomination for election to the Xstelos board of directors.

Board Committees

The Xstelos board of directors has not formed any standing committees.

Audit Committee

The entire board of directors serves the function of the Audit Committee. The board has determined that Mr. Davis qualifies as an “audit committee financial expert” in accordance with SEC rules. This designation is an SEC disclosure requirement related to Mr. Davis’s experience and understanding of accounting and auditing matters and is not intended to impose any additional duty, obligation or liability on Mr. Davis.

Family Relationships

There are no family relationships between any of our directors or executive officers.

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EXECUTIVE COMPENSATION

Xstelos has not yet paid any compensation to any of its executive officers. The form and amount of the compensation to be paid to each of Xstelos’s executive officers in any future period will be determined by Xstelos’s board of directors, subject to the terms of any applicable agreements.

The section sets forth the executive compensation information for Footstar during the years ended January 1, 2011 and December 31, 2011. After the distribution described in this prospectus is completed, executive officers of Xstelos will be compensated by Xstelos and Footstar will no longer pay any executive compensation.

Summary Compensation Table

The table below summarizes the total compensation paid during fiscal 2011 and 2010 to, or earned by, each of the named executive officers of Footstar.

Name and Principal Position	Year	Salary ($)		Bonus ($)(2)		Option Awards ($)(1)		All other compensation ($)(2)		Total ($)
Jonathan M. Couchman Chairman, Chief Executive Officer and President	2011		494,718		500,000		0		0		994,718
	2010		513,155		0		214,949		0		728,104

______________

(1)	The amounts in this column reflect the aggregate grant date fair value computed in accordance with Black-Scholes option pricing model and FASB ASC Topic 718.

(2)	The bonus to Mr. Couchman was awarded in January 2012 in respect of his performance in fiscal year 2011.

On January 6, 2012, the independent directors of the board of directors unanimously approved the payment of a discretionary cash bonus of $500,000 to Jonathan M. Couchman, Footstar Corp’s President, Chief Executive Officer and Chief Financial Officer, on account of his superior performance in 2011. The discretionary cash bonus was awarded in recognition of the extraordinary leadership of Footstar Corp by Mr. Couchman in 2011, including without limitation in Footstar’s negotiations with and subsequent acquisition of CPEX, which was completed on April 5, 2011, the completion of financing arrangements in connection with the CPEX acquisition, and the management of Footstar Corp after the CPEX acquisition including restructuring and integrating CPEX’s assets with those of Footstar Corp.

Employment Agreements and Arrangements

All employees of Footstar and Xstelos, including Mr. Couchman, are employed on an “at-will” basis.

Outstanding Equity Awards at Fiscal Year-End Table

The following table sets forth certain information, on an award-by-award basis, for each Named Executive Officer concerning unexercised options to purchase common stock that have not yet vested and is outstanding as of December 31, 2011:

	Option Awards
Name	Number of Securities Underlying Unexercised Options (#) Exercisable		Option Exercise Price ($)		Option Expiration Date
Jonathan M. Couchman		2,500,000		0.35	March 14, 2020

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On March 15, 2010, Mr. Couchman was awarded a stock option to purchase up to 2,500,000 shares of Footstar’s common stock at an exercise price of $0.40 per share (after giving effect to the liquidating cash dividend of $0.10 paid on March 12, 2010). The exercise price was adjusted in accordance with the terms of the initial grant from $0.40 to $0.35 due to a $0.05 dividend paid to the stockholders of Footstar on October 7, 2010. On the date of the grant, the closing stock price of Footstar’s stock price was $0.23. The stock option was fully vested at the time of the grant. The stock option expires upon the tenth anniversary of the grant date. Mr. Couchman will be awarded a option to purchase Xstelos shares on substantially the same terms in connection with the distribution.

On March 15, 2010, Footstar issued shares of common stock having an aggregate fair value of $500,000 on the grant date, or 2,173,913 shares, to Jonathan M. Couchman, in lieu of any cash compensation for base salary for Mr. Couchman’s services as President, Chief Executive Officer and Chief Financial Officer for the twelve months commencing March 1, 2010.

Director Compensation

Compensation Paid to Non-Employee Directors

Non-employee directors receive a combination of cash and equity compensation. Mr. Couchman, currently the only employee serving on the board of directors, has not received any separate compensation for his services as a director since becoming an employee on December 9, 2008.

The board of directors may request that certain directors perform additional services, from time to time, on behalf of the board of directors and may compensate those directors in the manner that the Board deems appropriate.

Each eligible director may elect, prior to the end of Footstar’s first fiscal quarter of the year, to receive in lieu of his or her cash director fees for that year, shares of fully vested Footstar common stock with a fair market value equal to the amount of those fees.

On March 15, 2010, at the election of Messrs. Finerman and Davis, Footstar issued shares of common stock having an aggregate fair value of $50,000 on the grant date, or 217,391 shares, to each of Adam Finerman and Eugene Davis, Footstar’s non-employee directors, in lieu of cash compensation for their service as directors in 2010 to which they would otherwise be entitled. In addition, Messrs. Finerman and Davis elected to receive their full retainer ($50,000) for fiscal 2009 in the form of 17,668 shares of restricted stock and Mr. Finerman elected to receive his full retainer ($50,000) for fiscal 2008 in the form of 12,285 shares of restricted stock. Mr. Finerman has also elected to receive his full retainer ($50,000) for fiscal 2011 in shares of restricted stock and through October 1, 2011 earned 47,840 shares.

After the distribution, the Xstelos board of directors will establish a director compensation plan for Xstelos.

Director Compensation Table

The table below summarizes the director compensation paid by Footstar to non-employee directors for fiscal 2011.

Name	Fees Earned or Paid in Cash ($)(1)		Stock Awards ($)		All Other Compensation ($)		Total ($)
Eugene I. Davis	$	50,000	$	-	$	0	$	50,000
Adam W. Finerman	$	50,000	$	-	$	0	$	50,000

__________________

(1)	Mr. Finerman elected to receive his full retainer ($50,000) in 68,322 shares of Footstar stock.

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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Company Policy and Procedure Regarding Transactions with Related Persons

The Xstelos board of directors has determined the absence of any “related person transaction” since January 20, 2012, the date of incorporation of Xstelos, involving any director, director nominee or executive officer of Xstelos, any known 5% stockholder of Xstelos or any immediate family member of any of the foregoing persons (together “related persons”). A “related person transaction” generally means a transaction in which Xstelos was or is to be a participant and the amount involved exceeds the lesser of $120,000 or one percent of the average of Xstelos’s total assets at fiscal year end for the last two completed fiscal years (determined without regard to the amount of profit or loss involved in the transaction) and in which a related person had or will have a direct or indirect material interest (as determined under SEC rules related to related person transactions).

Director Independence

After the distribution, Xstelos is not and will not be subject to the listing requirements of any securities exchange or Nasdaq. However, the board of directors of Xstelos has adopted the independence criteria established by Nasdaq for determining director independence. The board of directors of Xstelos has determined that of our current board members each of Messrs. Davis and Finerman are independent as defined under the listing requirements of Nasdaq, and will continue to be independent after the distribution. The board of directors of Xstelos does not have a separately standing Nominating, Compensation or Audit Committee at this time. Mr. Couchman is not considered independent under Nasdaq’s listing standards applicable to Audit Committee members. In making its determinations regarding these directors, the board of directors assessed all of the information provided by each director in response to inquiries concerning his independence and concerning any business, family, employment, transactional, or other relationship or affiliation of such director with Xstelos.

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Prior to the distribution, all of our shares of common stock will be held by Footstar. The following table sets forth, to the best of our knowledge, information as to the ownership of our common stock after the completion of the distribution that we expect will be held by (1) each person or entity expected by us to beneficially own more than 5% of the outstanding shares of our common stock; (2) each of our directors and named executive officers; and (3) all of our directors and executive officers as a group. Except as otherwise indicated, ownership of shares by the persons named below includes sole voting and investment power held by such persons, and includes options to purchase shares of our common stock exercisable within 60 days of January 23, 2012. The percentage of shares owned is based on 24,183,897 shares outstanding as of January 23, 2012, and, if applicable, includes options to purchase shares of our common stock exercisable within 60 days of January 23, 2012.

	Shares Beneficially Owned Prior to Offering				Shares Beneficially Owned After the Offering (1)
Name of Beneficial Owner (2)	Number		Percentage		Number			Percentage
Jonathan M. Couchman		—		—		13,563,578	(3)		50.8	%
Eugene I. Davis		—		—		278,394			1.2	%
Adam W. Finerman		—		—		375,519			1.5	%
All directors and executive officers as a group (three persons)		—		—		14,196,999	(3)		53.2	%

______________

(1)

Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and includes sole voting and investment power with respect to securities, and includes restricted or deferred shares. Each beneficial owner’s percentage ownership of common stock is determined by assuming that options that are held by such person, but not those held by any other person, and that are exercisable within 60 days of January 23, 2012, have been exercised.

(2)	The business address of the directors and executive officers is 630 Fifth Avenue, Suite 2260, New York, New York.

(3)	The amount shown includes 2,500,000 shares issuable pursuant to stock options with an exercise price of $0.35 per share which, as of January 23, 2012, were currently exercisable.

All of our stockholders, including our officers and directors, will own a number and proportion of Xstelos shares equal to that of their Footstar shares held as of [●], 2012, the record date for the distribution.

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UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS

The following summary describes the material United States federal income tax consequences generally applicable to an Footstar stockholder that receives Xstelos common stock in the distribution described in this prospectus. Except where noted, this summary deals only with a stockholder who holds their Footstar common stock as a capital asset. This summary is qualified in its entirety by reference to, and is based upon, laws, regulations, rulings and decisions now in effect, all of which are subject to change, which changes may or may not be retroactive.

For purposes of this summary, a “U.S. holder” means a beneficial owner of Footstar common stock who is any of the following for U.S. federal income tax purposes: (i) a citizen or resident of the United States, (ii) a corporation created or organized in or under the laws of the United States, any state thereof, or the District of Columbia, (iii) an estate the income of which is subject to U.S. federal income taxation regardless of its source, or (iv) a trust if (1) its administration is subject to the primary supervision of a court within the United States and one or more U.S. persons have the authority to control all of its substantial decisions, or (2) it has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person. A non-U.S. holder of Footstar common stock is a stockholder who is not a U.S. holder.

This summary is based upon provisions of the Internal Revenue Code of 1986, as amended (the “Code”), and regulations, rulings, and judicial decisions as of the date hereof. Those authorities may be changed, perhaps retroactively, so as to result in U.S. federal income tax considerations different from those summarized below.

This summary does not represent a detailed description of the U.S. federal income tax consequences to a stockholder in light of his, her or its particular circumstances. In addition, it does not represent a description of the U.S. federal income tax consequences to a stockholder who is subject to special treatment under the U.S. federal income tax laws and does not address the tax considerations applicable to stockholders who may be subject to special tax rules, such as: partnerships; financial institutions; insurance companies; real estate investment trusts; regulated investment companies; grantor trusts; tax-exempt organizations; dealers or traders in securities or currencies; stockholders who hold Footstar common stock as part of a position in a straddle or as part of a hedging, conversion or integrated transaction for U.S. federal income tax purposes or U.S. holders that have a functional currency other than the U.S. dollar; stockholders who actually or constructively own 10 percent or more of Footstar’s voting stock; or a non-U.S. holder who is a U.S. expatriate, “controlled foreign corporation” or “passive foreign investment company.”

Moreover, this description does not address the U.S. federal estate and gift tax, alternative minimum tax or other tax consequences of the distribution.

If any entity classified as a partnership for U.S. federal income tax purposes holds Footstar common stock, the tax treatment of an owner of such entity will generally depend on the status of the owner and the activities of the entity.

Each stockholder should consult his, her or its own tax advisers concerning the particular U.S. federal tax consequences of the distribution, as well as the consequences arising under the laws of any other taxing jurisdiction, including any state, local or foreign income tax consequences.

To ensure compliance with Treasury Department Circular 230, each stockholder is hereby notified that: (a) any discussion of U.S. federal tax issues in this prospectus is not intended or written to be used, and cannot be used, by such holder for the purpose of avoiding penalties that may be imposed on such holder under the Code; (b) any such discussion has been included by Xstelos in furtherance of the distribution on the terms described herein; and (c) each such holder should seek advice based on its particular circumstances from an independent tax advisor.

As a result of the distribution, for federal income tax purposes, holders of Footstar common stock will: (1) recognize no gain or loss upon the receipt of common stock of Xstelos in the distribution; (2) have an initial tax basis in the common stock of Xstelos received in the distribution that is the same as their adjusted tax basis in their Footstar common stock; and (3) have a holding period for federal income tax purposes for common stock of Xstelos that includes their holding period for their Footstar common stock.

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In addition, (a) Xstelos will not, for federal income tax purposes, recognize any taxable gain or loss as a result of the distribution and (b) the distribution and the adoption of the transfer restrictions in the Xstelos Certificate of Incorporation will not, for federal income tax purposes, impair the ability of Xstelos and other members of their affiliated group which file consolidated income tax returns to utilize the net operating loss carryforwards.

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DESCRIPTION OF CAPITAL STOCK

General

Currently, our authorized capital stock consists of 1,100 shares, of which (i) 1,000 are designated as common stock, par value $0.01 per share, and (ii) 100 are designated as preferred stock, par value $0.01 per share. We anticipate amending our Certificate of Incorporation to increase the authorized shares to 31,000,000 (i) of which 30,000,000 will be designated as common stock, par value $0.01 per share, and (ii) 1,000,000 of which will be designated as preferred stock, par value $0.01 per share, immediately prior to the distribution.

The following description of our capital stock are summaries and are qualified by reference to the Certificate of Incorporation and By-laws of Xstelos. Copies of these documents will be filed with the SEC as exhibits to our registration statement, of which this prospectus forms a part.

Common Stock

As a result of the distribution there will be 24,183,897 shares of common stock issued and outstanding that are held of record by approximately 2,000 stockholders. In connection with the distribution, Mr. Couchman will be granted a stock option to purchase up to 2,500,000 shares of Xstelos common stock at an exercise price of $0.35 per share, the terms of which will be substantially similar to his current option to purchase 2,500,000 shares of Footstar common stock at $0.35 per share.

Holders of common stock are entitled to one vote per share on matters on which our stockholders vote. There are no cumulative voting rights. At any meeting of the stockholders, all matters, with certain exceptions and subject to applicable law, are to be decided by the vote of a majority of votes present and entitled to vote. Directors are to be elected by a plurality of the votes cast in the election of directors.

Subject to any preferential dividend rights of any outstanding shares of preferred stock, holders of common stock are entitled to receive dividends, if declared by the Xstelos board of directors, out of funds that we may legally use to pay dividends. If we liquidate or dissolve, holders of common stock are entitled to share ratably in our assets once our debts and any liquidation preference owed to any then-outstanding preferred stockholders are paid. Our Certificate of Incorporation does not provide the common stock with any redemption, conversion or preemptive rights. All shares of common stock that are outstanding as of the date of this prospectus and, upon issuance and sale, all shares we are distributing in this distribution, will be fully paid and nonassessable.

Anti-Takeover Effects of Delaware Law and Our Corporate Charter Documents

Transfer Restrictions

Subject to certain exceptions, including prior exemption by the board of directors, our Certificate of Incorporation prohibits and makes void ab initio certain transfers of our common stock, to the extent that after giving effect to such purported transfer (i) the purported transferee would become a 4.75% or greater holder of our common stock, (ii) the ownership of a 4.75% stock holder’s common stock, prior to giving effect to the purported transfer would be increased or (iii) the transfer, if made by a such a 4.75% holder, results in a disposition of our common stock constituting a greater than one percent (1%) decrease in their Xstelos common stock.

Delaware Law

Xstelos is subject to the provisions of Section 203 of the DGCL. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a three-year period following the time that this stockholder becomes an interested stockholder, unless the business combination is approved in a prescribed manner. A “business combination” includes, among other things, a merger, asset or stock sale or other transaction resulting in a financial benefit to the interested stockholder. An “interested stockholder” is a person who, together with affiliates and associates, owns, or did own within three years prior to the determination of interested stockholder status, 15% or more of the corporation’s voting stock. Under Section 203, a business combination between a corporation and an interested stockholder is prohibited unless it satisfies one of the following conditions:

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before the stockholder became interested, the board of directors approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder;

upon completion of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the voting stock outstanding shares owned by persons who are directors and also officers, and employee stock plans, in some instances; or

at or after the time the stockholder became interested, the business combination was approved by the board of directors of the corporation and authorized at an annual or special meeting of stockholders by the affirmative vote of at least two-thirds of the outstanding voting stock which is not owned by the interested stockholder.

Transfer Agent and Registrar

Upon the completion of this distribution, the transfer agent and registrar for our common stock will be Securities Transfer Corporation.

Listing

Prior to this distribution, there has been no public market for our common stock. It is anticipated that our common stock will be quoted on the OTC Bulletin Board quotation system, or the OTCBB, under the symbol “[ ]” on or promptly after the date of this prospectus.

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this distribution, there has been no public market for our common stock, and we cannot assure you that a significant public market for our common stock will develop or be sustained after this distribution.

All shares distributed to Footstar stockholders in the distribution will be freely tradable without restriction or further registration under the Securities Act, except that any shares received in the distribution by our “affiliates,” as that term is defined in Rule 144 under the Securities Act, may generally only be sold in compliance with the limitations of Rule 144 described below.

Rule 144

Under Rule 144 as in effect on the date of this prospectus, once we have been a reporting company subject to the reporting requirements of Section 13 or Section 15(d) of the Exchange Act for at least 90 days immediately prior to the sale of the shares, an affiliate who has beneficially owned restricted shares of our common stock for at least six months would be entitled to sell within any three-month period a number of shares that does not exceed the greater of either of the following:

1% of the number of shares of common stock then outstanding; or

the average weekly trading volume of our common stock during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale.

In addition, any sales by affiliates under Rule 144 are also limited by manner of sale provisions and notice requirements and the availability of current public information about us.

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LEGAL MATTERS

The validity of the shares of our common stock offered hereby will be passed upon for us by Olshan Grundman Frome Rosenzweig & Wolosky LLP (“Olshan”). Mr. Finerman, a partner with Olshan, is a director of Xstelos and will receive shares of Xstelos in the distribution.

EXPERTS

The consolidated balance sheets of Footstar Corp and Subsidiaries (Predecessor Company) as of January 1, 2011 and January 2, 2010 and the related consolidated statements of operations, parent investment and cash flows for each of the years in the two-year period ended January 1, 2011 have been audited by EisnerAmper LLP, an independent registered public accounting firm, as stated in their report which is included herein. Such financial statements have been included herein in reliance on the report of such firm given upon their authority as experts in accounting and auditing.

BDO USA, LLP, the independent registered public accounting firm for CPEX, has audited CPEX’s balance sheets as of December 31, 2010 and 2009, and the related statements of operations, changes in stockholders’ equity and cash flows for the years ended December 31, 2010 and 2009, as set forth in their report. We have included our financial statements in this prospectus and in this registration statement in reliance on BDO USA, LLP’s report given on their authority as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the SEC a registration statement on Form S-1, including exhibits and schedules, under the Securities Act with respect to the securities to be distributed pursuant to this prospectus. This prospectus does not contain all the information contained in the registration statement. For further information with respect to us and the securities to be distributed in this distribution, we refer you to the registration statement and the exhibits and schedules attached to the registration statement. Statements contained in this prospectus as to the contents of any contract, agreement or other document referred to are not necessarily complete. When we make such statements, we refer you to the copies of the contracts or documents that are filed as exhibits to the registration statement because those statements are qualified in all respects by reference to those exhibits.

Upon the completion of this distribution, we will be subject to the informational requirements of the Exchange Act and we intend to file annual, quarterly and current reports, proxy statements and other information with the SEC. You can read our SEC filings, including the registration statement, at the SEC’s website at www.sec.gov. You may also read and copy any document we file with the SEC at its public reference facility at 100 F Street, N.E., Washington, D.C. 20549, on official business days during the hours of 10:00 am to 3:00 pm.

You may also obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the SEC at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference facility.

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FOOTSTAR CORP & SUBSIDIARIES (PREDECESSOR COMPANY)

INDEX TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


Consolidated Balance Sheets as of October 1, 2011 (unaudited) and January 1, 2011 (Predecessor Company)	F-2

Unaudited Consolidated Statements of Operations for the nine months ended October 1, 2011 and October 2, 2010 (Predecessor Company)	F-3

Unaudited Consolidated Statement of Equity for the nine months ended October 1, 2011 (Predecessor Company)	F-4

Unaudited Consolidated Statements of Cash Flows for the nine months ended October 1, 2011 and October 2, 2010 (Predecessor Company)	F-5

Notes to Unaudited Consolidated Financial Statements	F-6

F-1

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FOOTSTAR CORP & SUBSIDIARIES (PREDECESSOR COMPANY)

CONSOLIDATED BALANCE SHEETS

(In thousands)

	October 1, 2011		January 1, 2011
	Unaudited
Assets
Current assets:
Cash and cash equivalents	$	11,441	$	8,720
Accounts receivable		6,571		-
Prepaid expenses and other current assets		994		300
Fixed assets held for sale		439		-
Assets of discontinued operations		1,506		1,541
Deferred tax asset		1,532		-
Total current assets		22,483		10,561
Restricted cash		2,500		-
Real Estate		7,810		6,173
Intangible asset, net		58,068		-
Deferred financing costs and other noncurrent assets		2,070		169
Goodwill		10,499		-
TOTAL ASSETS	$	103,430	$	16,903
Liabilities and Equity
Current liabilities:
Accounts payable	$	80	$	13
Accrued expenses		1,866		265
Income taxes payable		64		-
Current maturities of long term debt, net of original issue discount		14,833		-
Liabilities of discontinued operations		1,698		2,100
Total current liabilities		18,541		2,378
Deferred tax liability, net		1,532		-
Long term debt, net of current maturities and original issue discount		47,740		-
Total liabilities		67,813		2,378
Commitments and Contingencies
Equity:
Parent investment		34,519		14,525
Noncontrolling interest		1,098		-
Total equity		35,617		14,525
TOTAL LIABILITIES AND PARENT EQUITY	$	103,430	$	16,903

The accompanying notes are an integral part of these unaudited consolidated financial statements.

F-2

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FOOTSTAR CORP & SUBSIDIARIES (PREDECESSOR COMPANY)

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands)

	Nine Months Ended
	October 1, 2011			October 2, 2010
ROYALTY REVENUE	$	12,364		$	—

Operating Expenses
Selling, general and administrative expense		4,946			1,731
Depreciation and amortization		2,189			-
Total operating expenses		7,135			1,731

OPERATING INCOME (LOSS)		5,229			(1,731	)

Interest income		7			—
Interest expense		(5,866	)		(11	)

EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		(630	)		(1,742	)

Income tax benefit		(19,754	)		(47	)

EARNINGS (LOSS) FROM CONTINUING OPERATIONS		19,124			(1,695	)

EARNINGS (LOSS) FROM DISCONTINUED OPERATIONS, net of tax		1,080			1,153

NET EARNINGS (LOSS)		20,204			(542	)

Less: Net earnings attributable to the noncontrolling interest		318			—

NET EARNINGS (LOSS) ATTRIBUTABLE TO CONTROLLING INTEREST	$	19,886		$	(542	)

The accompanying notes are an integral part of these unaudited consolidated financial statements.

F-3

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FOOTSTAR CORP & SUBSIDIARIES (PREDECESSOR COMPANY)

UNAUDITED CONSOLIDATED STATEMENTS OF EQUITY

(In thousands)

	Parent Investment		Noncontrolling interest		Total Equity
Balance at January 1, 2011	$	14,525	$	-	$	14,525
Net earnings		19,886		318		20,204
Capital contributions		-		780		780
Issuance of stock for services		108		-		108
Balance at October 1, 2011	$	34,519	$	1,098	$	35,617

The accompanying notes are an integral part of these unaudited consolidated financial statements.

F-4

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FOOTSTAR CORP & SUBSIDIARIES (PREDECESSOR COMPANY)

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Nine Months Ended
	October 1, 2011			October 2, 2010
Cash flows from operating activities:
Net earnings (loss)	$	20,204		$	(542	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		2,345			—
Deferred tax benefit		(19,822	)		—
Stock incentive plans		—			215
Issuance of stock for services		108			367
Changes in operating assets and liabilities, net of acquisitions:
Increase in accounts receivable		(720	)		—
Decrease in prepaid expenses and other current assets		479			3,380
Decrease in other noncurrent assets		45			454
Decrease (increase) in accounts payable, accrued expenses and other current liabilities		668			(455	)
Decrease (increase) in income taxes payable and other long-term liabilities		(189	)		(179	)

Net cash provided by operating activities		3,118			3,240

Cash flows from investing activities:
Acquisition of CPEX, net of cash acquired		(59,479	)		—

Net cash used in investing activities		(59,479	)		—

Cash flows from financing activities:
Special cash distribution paid		—			(2,157	)
Proceeds from long-term debt, net of original issue discount		62,500			—
Restricted cash		(2,500	)		—
Deferred financing costs		(1,698	)		—
Cash contribution from noncontrolling interest		780			—
Payments on mortgage note		—			(687	)

Net cash provided by (used in) financing activities		59,082			(2,844	)

Net increase in cash and cash equivalents		2,721			396
Cash and cash equivalents, beginning of period		8,720			9,821

Cash and cash equivalents, end of period	$	11,441		$	10,217

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid	$	6,194		$	62
Taxes paid	$	—		$	1
Noncash financing activities
Original issue discount on long-term debt	$	1,500		$	—

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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FOOTSTAR CORP & SUBSIDIARIES (PREDECESSOR COMPANY)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1.Business and Basis of Presentation

Organization

Footstar Corp is a wholly owned subsidiary of Footstar, Inc. (“Footstar”), a Delaware corporation, which is a holding company that is currently winding down pursuant to the Amended Plan of Complete Dissolution and Liquidation of Footstar, Inc. (the “Plan of Dissolution”), which was adopted by Footstar, Inc.’s stockholders on May 5, 2009.

On January 19, 2012, the board of directors of Footstar, Inc. approved a Plan of reorganization pursuant to which Footstar, Inc. contributed all of its assets to Xstelos Holdings, Inc. In exchange for the contribution of all of its assets, Xstelos Holdings, Inc. assumed all of Footstar, Inc.’s liabilities and issued all of its shares of common stock to Footstar, Inc. The contribution of all of the assets and liabilities of Footstar, Inc. essentially represents the stock of its wholly-owned subsidiary, Footstar Corp, which is the operating entity. The shares exchanged constitute all of the outstanding shares of Xstelos Holdings, Inc. capital stock (see Note 13 - Subsequent Events).

The consolidated financial statements of Footstar Corp and Subsidiaries (Predecessor Company) or the “Company”, were determined in accordance with the rules and regulations of the U.S. Securities and Exchange Commission to represent the consolidated historical assets and liabilities contributed to Xstelos Holdings, Inc.

The consolidated financial statements have been prepared by the Company without audit in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) and should be read in conjunction with the audited Consolidated Financial Statements for the fiscal years ended January 1, 2011 and January 2, 2010, included elsewhere in this registration statement. The balance sheet at January 1, 2011 was derived from those audited financial statements. In the opinion of management, the statements reflect all adjustments necessary for a fair presentation of the results of interim periods. The results for any interim period are not necessarily indicative of the results to be expected for a full year, or any other period.

General

Until the time it discontinued regular business operations in December 2008, Footstar had operated its business since 1961 through its subsidiaries primarily as a retailer selling family footwear through licensed footwear departments in discount chains and wholesale arrangements. Commencing March 2, 2004, Footstar and most of its subsidiaries filed voluntary petitions for reorganization under Chapter 11 of Title 11 of the United States Code in the United States Bankruptcy Court. On February 7, 2006, Footstar successfully emerged from bankruptcy. As part of its emergence from bankruptcy, substantially all of Footstar’s business operations were related to the agreement pursuant to which it operated the licensed footwear departments in Kmart stores (the “Kmart Agreement”).

Following its emergence from bankruptcy, Footstar’s Board of Directors, with the assistance of investment bankers, evaluated a number of possible alternatives to enhance shareholder value, including acquisition opportunities, changes in the terms of Footstar’s principal contracts, including the early termination of or extension of the Kmart Agreement, the payment of one or more dividends, and the sale of Footstar’s assets or stock. The Board of Directors determined the best course of action was to operate under the Kmart Agreement through its scheduled expiration at the end of December 2008.

Through its scheduled expiration of the Kmart Agreement, at the end of December 2008, the Company’s business operations related to which it operated licensed footwear departments in various department stores, have been classified as discontinued operations. Therefore, all related operations, impairment losses and disposal costs, gains and losses on disposition attributable to these licensed footwear departments have been aggregated in a single caption entitled “Net Loss From Discontinued Operations" on the accompanying consolidated statements of operations (see Note 3 – Discontinued Operations).

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In May 2008, the Board of Directors determined that it was in the best interests of Footstar and its stockholders to liquidate and ultimately dissolve after the expiration of the Kmart Agreement in December 2008 (and other miscellaneous contracts through the end of such term) and to sell and/or dispose of any of Footstar’s other remaining assets, including its owned property in Mahwah, New Jersey, which contains its corporate headquarters building, improvements and 21 acres of underlying land (collectively, the “Mahwah Real Estate”). Under the terms of the Kmart Agreement, Kmart was required to purchase from Footstar, all of the remaining inventory in the Kmart footwear departments at values set forth in the Kmart Agreement. The process of selling the inventory to Kmart commenced immediately after the expiration of the Kmart Agreement on December 31, 2008. During 2009, Footstar received approximately $55.3 million related to the liquidation sale of the inventory from Kmart in full satisfaction of all of Kmart’s obligations. Following the sale of the inventory to Kmart during early 2009, Footstar’s principal remaining non-cash asset consisted of the Mahwah Real Estate.

Also in May 2008, the Board of Directors approved the Plan of Complete Liquidation of Footstar, Inc. (the “Original Plan”), which provided for the complete liquidation and ultimate dissolution of Footstar after expiration of the Kmart Agreement in December 2008.

On March 5, 2009, the Board of Directors adopted and approved the Plan of Dissolution. The Plan of Dissolution reflects technical and legal changes to the Original Plan consistent with the Delaware General Corporate Law and was intended to modify, supersede and replace the Original Plan in order to more efficiently facilitate the liquidation and dissolution of Footstar in the best interests of its stockholders. The Plan of Dissolution provides for the complete, voluntary liquidation of Footstar providing for the sale of its remaining assets and the wind down of Footstar’s business as described in the Plan of Dissolution and of the distributions of available cash to stockholders as determined by the Board of Directors by the end of the three year period. On May 5, 2009, at a special meeting of stockholders of Footstar, the stockholders adopted and approved the Plan of Dissolution and Footstar’s dissolution. Subsequent to such time, the Board of Directors moved forward with the liquidation, and worked toward selling all of Footstar’s remaining assets and settling all claims.

As discussed below, on April 5, 2011, Footstar Corp completed the CPEX Transaction pursuant to the CPEX Transaction Agreement. As a result of the CPEX Transaction, FCB Acquisition merged with and into CPEX, with CPEX surviving as a wholly owned subsidiary of FCB Holdings. FCB Holdings is owned 80.5% by Footstar Corp and 19.5% by an unaffiliated investment holding company. Footstar Corp is a wholly-owned subsidiary of Footstar.

On July 21, 2011, Footstar held a special meeting of its stockholders to vote on a proposal to revoke the Plan of Dissolution (“Dissolution Proposal”). The shares represented at the meeting did not constitute a quorum of stockholders with respect to the Dissolution Proposal, and accordingly, no action was taken with respect to this matter. In light of the failure to revoke the Plan of Dissolution, and the resulting inability to proceed with the Merger Proposal, Footstar is considering other alternatives (see Note 13 - Subsequent Events).

Footstar is considering various options to permit stockholders to continue to participate in earnings resulting from the Plan of reorganization, if any, after Footstar is completely dissolved. These options include, without limitation, taking the actions necessary to distribute the common stock of Footstar Corp, or another subsidiary to be formed, to Footstar stockholders.

CPEX Pharmaceuticals, Inc. Acquisition

In August 2010, the Board of Directors was made aware of an opportunity regarding a potential strategic transaction with CPEX Pharmaceuticals, Inc. (“CPEX”), an emerging specialty pharmaceutical company whose shares were traded on the Nasdaq Capital Market under the symbol “CPEX”. Substantially all of CPEX’s revenue is a royalty stream under a licensing agreement with Auxilium Pharmaceuticals, Inc. (“Auxilium”) pursuant to which CPEX licenses its CPE-215 technology with a testosterone formulation to Auxilium and receives royalties of 12% from Auxilium based upon Auxilium’s sales of Testim. Testim is a gel for testosterone replacement therapy, which is a formulation of CPEX’s technology with testosterone. Auxilium is currently marketing Testim in the United States, Europe and other countries. From August 2010 through January 3, 2011, Footstar negotiated the terms of a strategic merger transaction with CPEX pursuant to which CPEX would become a majority-owned indirect subsidiary of Footstar (the “CPEX Transaction”).

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On January 3, 2011, CPEX, FCB I Holdings Inc., a Delaware corporation (“FCB Holdings”), and FCB I Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of FCB Holdings (“FCB Acquisition”), entered into an Agreement and Plan of Merger (the “CPEX Transaction Agreement”).

On April 5, 2011, the parties completed the CPEX Transaction pursuant to the CPEX Transaction Agreement. As a result of the CPEX Transaction, FCB Acquisition merged with and into CPEX, with CPEX surviving as a wholly owned subsidiary of FCB Holdings. The unaudited consolidated financial statements include the results of CPEX from the date of acquisition.

The acquisition of CPEX was accounted for as a purchase under FASB ASC Topic 805. The purchase price of approximately $76.3 million (which includes cash paid and liabilities assumed) has been allocated to the estimated fair value of tangible and identifiable intangible assets acquired and liabilities assumed. The excess of the purchase price over the estimated fair value of tangible and identifiable assets acquired and liabilities assumed has been allocated to intangible assets based on management’s estimate and pending a final valuation.

On April 5, 2011, in connection with the CPEX Transaction, FCB I LLC (“Borrower”), a wholly owned subsidiary of FCB Acquisition which became a wholly owned subsidiary of CPEX upon FCB Acquisition’s merger with and into CPEX, borrowed approximately $64 million under that certain Loan Agreement dated as of January 3, 2011 (the “Term Loan Agreement”), by and among Borrower, The Bank of New York Mellon, as Agent, and certain Lenders from time to time party thereto, in the form of a secured term loan to Borrower. The term loan under the Term Loan Agreement bears interest at “LIBOR” plus 16% per annum, with a minimum LIBOR rate of 1%, and matures on the earlier of January 3, 2026 or the date any of CPEX’s patents that are associated with Testim®, a topical testosterone gel, expire, and contains customary events of default for loans of such nature. As part of the Term Loan Agreement, CPEX contributed to Borrower all of its intellectual property rights in Testim® and rights to the royalty stream pursuant to the license agreement with Auxilium, and the loan is secured by Borrower’s interest in all such rights. Repayment of the loan is made through a waterfall arrangement whereby, if certain conditions are met, the Testim royalty stream is distributed on a quarterly basis as follows: first to pay certain fees and expenses of Agent and Borrower, second to pay fees of the banks maintaining the accounts associated with the loan, third to pay any expenses of Agent used to protect the loan collateral and any other unreimbursed fees or expenses of Agent or any Lender, fourth to replenish any shortfall in the interest reserve (which is $2.5 million), fifth to pay interest due, sixth to pay 65% of the remaining royalty funds to Agent for the benefit of the Lenders as payment toward loan principal, and finally to Borrower for its benefit.

Upon consummation of the CPEX Transaction, FCB Holdings is owned 80.5% by Footstar Corp and 19.5% by an unaffiliated investment holding company (the “Investment Holding Company”). The Investment Holding Company is affiliated with a minority Lender under the Term Loan Agreement (as defined above).

On April 4, 2011, in connection with the CPEX Transaction, Footstar Corp made a $3 million bridge loan to FCB Holdings under that certain Loan Agreement dated as of April 4, 2011 (the “Footstar Loan Agreement”), by and between FCB Holdings and Footstar Corp. The loan bore interest at 20% per annum and provided for a fee of 3% of the principal amount (less accrued interest) payable to Footstar, which was due upon repayment of the loan. The bridge loan was repaid on April 5, 2011, prior to maturity.

On April 4, 2011, in connection with the CPEX Transaction, Black Horse Capital LP and Black Horse Capital Master Fund Ltd. (together, “Black Horse”) made a $10 million bridge loan to FCB Holdings under that certain Loan Agreement dated as of April 4, 2011 (the “Black Horse Loan Agreement”), by and between Black Horse and FCB Holdings. The bridge loan under the Black Horse Loan Agreement had substantially the same terms as the bridge loan under the Footstar Loan Agreement, and was repaid on April 5, 2011, prior to maturity. The Company will also reimburse Black Horse for transaction fees related to the CPEX acquisition of approximately $830,000, which are included in accounts payable as of October 1, 2011, and expensed in the accompanying Statement of Operations for the nine months ended October, 1, 2011.

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Footstar Corp is party to a consulting and advisory agreement with the Investment Holding Company for such entity to provide certain consulting and advisory services to Footstar Corp relating to intellectual property and other matters. The agreement provides for payment solely to the extent Footstar Corp has received dividends from FCB Holdings, of which there have been none to date. The annual amounts to be paid, following receipt of such dividends pursuant to the terms of the agreement, would be $1,000,000 for 2011, $750,000 for 2012, $750,000 for 2013, $500,000 for 2014 and $250,000 for 2015 and annually thereafter through the agreement termination. The agreement terminates upon the conclusion of the monetization of CPEX’s intellectual property, subject to the terms of the agreement. The Company has accrued, and expensed, approximately $750,000 as of October 1, 2011 under this agreement, though it is not anticipated that any payment will be made through the first quarter of 2012.

Direct acquisition costs, consisting of investment banking fees and legal fees directly related to the acquisition of approximately $0.4 million incurred during the year ended January 1, 2011, and approximately $1.5 million incurred during the nine months ended October 1, 2011, were expensed as period costs, and are not capitalized. Financing costs amounted to approximately $1.7 million. These costs were not expensed as acquisition costs, but treated as loan origination costs and are included in deferred financing costs in the accompanying balance sheet and will be amortized over the estimated life of the loan, approximately 6 years, using the effective interest rate method, and recorded as a component within non-cash interest expense. Amortization of $82,840 was expensed from the date of the loan through October 1, 2011, leaving a balance of $1,614,755 as of October 1, 2011.

Components of consideration:
Cash paid to CPEX Pharmaceuticals, Inc. shareholders at closing	$	75,443
CPEX liabilities assumed by Footstar		854
Gross consideration at closing	$	76,297

Allocation of consideration
Cash	$	15,964
Accounts receivable		5,851
Tangible fixed assets		2,077
Goodwill		10,499
Fair value of non-intangible acquired assets		1,470
Intangible assets recorded in acquisition, primarily patents and license		60,258
Net deferred tax liability		(19,822	)
Total	$	76,297

Presented below is unaudited pro forma financial information assuming the acquisition of CPEX occurred at the beginning of the earliest period presented, and excludes certain nonrecurring charges, such as purchase accounting adjustments and charges related to restructuring such as severance, that were deemed necessary to exclude for comparability purposes. Additionally the reduction of the valuation allowance of approximately $19.8 million (see Note 9) has been reflected as if it occurred on January 2, 2010 (in thousands):

	Nine Months Ended October 1, 2011			Nine Months Ended October 2, 2010
Revenue	$	18,215		$	16,869
Earnings from continuing operations	$	(3,931	)	$	10,018
Net earnings	$	(2,851	)	$	(8,865	)
Net earnings attributable to Non-controlling Interest	$	(556	)	$	(1,729	)
Net earnings attributable to Controlling Interest	$	(2,295	)	$	(7,136	)

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Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its majority owned, and wholly-owned, subsidiaries which were derived from the historical accounting records of Footstar Corp and reflect the historical financial positions, results of operations, and cash flows for the periods described herein. Intercompany balances and transactions between the entities have been eliminated. For simplicity of presentation, these consolidated financial statements are referred to as financial statements herein.

2. Significant Accounting Policies

The Financial Accounting Standards Board (FASB) made the Accounting Standards Codification (ASC) effective for financial statements issued for interim and annual periods ended after September 15, 2009. The ASC combines all previously issued authoritative generally accepted accounting principles (“GAAP”) into one set of guidance codified by subject area. Subsequent revisions to GAAP by the FASB are incorporated into the ASC through issuance of Accounting Standards Updates (ASU).

Fiscal Years

The accompanying financial statements include the unaudited consolidated results of operations, for the fiscal nine months ended October 1, 2011 and the fiscal nine months ended October 2, 2010, and assets and liabilities as of October 1, 2011 and January 1, 2011.

Cash Equivalents

Cash and cash equivalents consist of highly liquid instruments with maturities of three months or less from the date acquired and stated at cost that approximates their fair market value. At times the Company has cash and cash equivalents balances in excess of the FDIC and SIPC insured limits.

At October 1, 2011, restricted cash of $2,500,000 pledged to support a bank credit facility, is classified as a non-current asset. The restricted cash serves as collateral for loan in connection with the CPEX Transaction that provides financial assurance that the Company has the ability to service the loan, as discussed in Note 8. The cash is held in custody by the issuing bank, is restricted as to withdrawal or use, and is currently not invested and does not bear interest.

Royalties Receivable and Allowances for Doubtful Accounts

CPEX did not write-off any uncollectible receivables for the nine months ended October 1, 2011. In addition, Footstar reviewed all receivable balances and concluded that no allowance for doubtful accounts was necessary as of October 1, 2011.

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets primarily consist of self insured workman’s compensation insurance claims, estimated by the insurance agency, actual costs may vary. Prepaid expenses are recorded at cost and expensed as they are incurred.

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Real Estate

The Company has been marketing its Mahwah Real Estate since May 5, 2007. The Company estimates that the fair value of the real estate, less estimated closing costs, is approximately $6.2 million. This estimate is based on unobservable inputs and as such the actual amount ultimately realized upon disposition of this real estate could be materially different (see Note 5 - Fair Value Measurements).

The Company, through its acquisition of CPEX, owns a 15,700 square foot commercial building situated on approximately 14 acres of land in Exeter, New Hampshire (“Exeter”). It is located approximately 50 miles north of Boston, Massachusetts. The Company is currently marketing this property for sale or lease. The Company estimates that the fair value of the real estate, less estimated closing costs, is approximately $1.6 million. This estimate is based on unobservable inputs and as such the actual amount ultimately realized upon disposition of this real estate could be materially different (see Note 5 - Fair Value Measurements).

Goodwill and Intangible Assets

The assets acquired in the CPEX acquisition included approximately $60.3 million of intangible assets which were assigned primarily to CPEX’s patents and license agreement associated with Testim®, a topical testosterone gel. The acquired intangible asset has a useful life of approximately 15 years, with the patent expiring on January 3, 2026.

Goodwill is recorded when the consideration paid for an acquisition exceeds the fair value of the identifiable net tangible and identifiable intangible assets acquired. ASC 350 requires Goodwill not to be amortized but must be reviewed for impairment at least annually and if a triggering event were to occur in an interim period. The Company performs at least an annual assessment of goodwill for impairment or whenever events or circumstances indicate that the carrying value of goodwill may not be recoverable from future cash flows. The Company assesses recoverability using several methodologies to determine fair value of a reporting unit, which include the present value of estimated future cash flows. The analysis is based upon available information regarding expected future cash flows of each reporting unit discounted at estimated market rates. Discount rates are based upon the cost of capital specific to the reporting unit. If the carrying value of the reporting unit exceeds the fair value of the reporting unit, a second analysis is performed to allocate the fair value to all assets and liabilities. If, based on the second analysis, it is determined that the indicated fair value of goodwill of the reporting unit is less than the carrying value, the Company would recognize impairment for the excess of carrying value over fair value of goodwill.

Included in the acquisition of CPEX, the company recorded Goodwill of approximately $10.5 million.

In September 2011, the FASB issued authoritative guidance that permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The Company plans to adopt this guidance in fiscal 2012 in connection with its annual testing of goodwill for impairment.

Income Taxes

As discussed further in Note 9 – Income Taxes, the Company records deferred tax assets and liabilities based on the differences between the book and tax bases of assets and liabilities and on operating loss carryforwards using enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. These amounts are adjusted, as appropriate, to reflect enacted changes in tax rates expected to be in effect when the temporary differences reverse.

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The Company follows ASC 740 when accounting for tax contingencies. The guidance prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken or expected to be taken on a tax return. Under GAAP, tax benefits are initially recognized in the consolidated financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions must initially and subsequently be measured as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon effective settlement with the tax authority assuming full knowledge of the position and relevant facts.

At the adoption date of ASC 740, the Company did not have any unrecognized tax benefits. The Company does not expect that the amount of unrecognized tax benefits will significantly increase or decrease within the next twelve months. The Company’s policy is to recognize interest and penalties related to tax matters in the income tax provision in the Consolidated Statements of Operations. The amount of interest and penalties for the nine months ended October 1, 2011 and October 2, 2010, were insignificant. Tax years beginning in 2006 are generally subject to examination by taxing authorities, although net operating losses from all years are subject to examinations and adjustments for at least three years following the year in which the attributes are used.

The Company determined the deferred tax provision under the liability method, whereby deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using currently enacted tax rates.

As of October 1, 2011 the Company recorded a net deferred tax asset of approximately $52.3 million and a related valuation allowance of approximately $32.0 million. In connection with the preparation of previous years consolidated financial statements, the Company reviewed the valuation of deferred tax assets based on positive evidence, such as projections of future taxable earnings along with negative evidence, such as operational uncertainties, no taxable income in carryback period, and liquidation of the Kmart business (which accounted for substantially all of the net sales and net profits). For accounting purposes, the Company cannot rely on anticipated long-term future profits to utilize deferred tax assets. As a result, the Company could not conclude that it is more likely than not that certain deferred tax assets will be realized and have recorded a non-cash valuation allowance on net deferred tax asset. In connection with the CPEX acquisition, the Company concluded that approximately $19.8 million of the valuation allowance should be reduced to the extent of the deferred tax liability resulting from the non-deductable intangible asset amortization. This reduction is reflected in the October 1, 2011 financial statements as an income tax benefit (see Note 9 – Income taxes).

The Internal Revenue Service Code requires any company that qualifies as a “personal holding company” to pay personal holding company taxes in addition to regular income taxes. A company qualifies as a personal holding company if (1) more than 50.0% of the value of the company’s stock is held by five or fewer individuals and (2) at least 60.0% of the company’s adjusted ordinary gross income constitutes personal holding company income, which, in our case, includes royalties from our license agreement with Auxilium. Management has determined that Footstar will likely meet these qualifications and become taxed as a personal holding company. As a result, the undistributed personal holding company income, which is generally taxable income with certain adjustments, including a deduction for federal income taxes and dividends paid, will be taxed at a rate of 15.0%. Whether or not the Company, or any of its subsidiaries, are classified as personal holding companies in future years will depend upon the amount of our personal holding company income and the percentage of our outstanding common stock that is beneficially owned by our major stockholders. The Company does not expect to be classified as a personal holding company for 2011.

Mortgage Liability

The mortgage liability was collateralized by the corporate headquarters located in Mahwah, NJ. The mortgage bore interest at 8.08% annually, was payable in blended quarterly payments of $353,809, and was completely satisfied on May 1, 2010.

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Revenue Recognition

CPEX recognizes revenue from royalties on Auxilium’s sales of Testim in accordance with the Financial Standards Accounting Board (the “FASB”) Accounting Standards Codification (“FASB ASC”) 605-10-S99-1, which requires sales to be recorded upon delivery, provided that there is evidence of a final arrangement, there are no uncertainties surrounding acceptance, title has passed, collectability is reasonably assured and the price is fixed or determinable. Since 2003, Auxilium has sold Testim to pharmaceutical wholesalers and chain drug stores, which have the right to return purchased products prior to the units being dispensed through patient prescriptions. Based on historical experience, CPEX is able to reasonably estimate future product returns on sales of Testim and as a result, did not defer Testim royalties for the nine months ended October 1, 2011. Total royalty revenue recognized from the date of acquisition through October 1, 2011 was approximately $12.3 million.

Stock Based Compensation

The Company accounts for its stock based employee compensation plans under ASC 718 and ASC 505-50. ASC 718-10 and ASC 505-50 address the accounting for shared based payment transactions in which an enterprise receives employee services for equity instruments of the enterprise or liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. ASC 718-10 and ASC 505-50 require that such transactions be accounted for using a fair value based method.

Stock compensation expense reported by the Company is for the stock options or restricted stock under the Footstar, Inc. plans, and accordingly, these transactions do not affect the Common Stock of the Company. The stock compensation expense reported by the Company is included in the Parent Investment.

In considering the fair value of the underlying stock when Footstar, Inc. grants options or restricted stock, Footstar, Inc. considers several factors including the fair values established by market transactions. Stock-based compensation includes significant estimates and judgments of when stock options might be exercised, forfeiture rates and stock price volatility. The timing of option exercises is out of the Company’s control and depends upon a number of factors including Footstar, Inc’s market value and the financial objectives of the holders of the options. These estimates can have a material impact on the Company’s stock compensation expense but will have no impact on the Company’s cash flows.

The Company accounts for equity awards of Footstar, Inc. issued to non-employees providing services on behalf of the Company in accordance with ASC Topic 505-50 (formerly EITF No. 96-18 “Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with, Selling Goods or Services.”). ASC 505-50 requires the Company to measure the fair value of Footstar, Inc. equity instruments using the stock prices and other measurement assumptions as of the earlier of either the date at which a performance commitment by the counterparty is reached or the date at which the counterparty’s performance is complete.

Use of Estimates

The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which require management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the revenues and expenses reported during the period, and includes, among others, allocations of CPEX purchase price, lives of intangible assets and valuation allowances on deferred taxes. These estimates and assumptions are based on management’s judgment and available information and, consequently, actual results could differ from these estimates.

CPEX is subject to a number of risks common to companies in the life sciences industry. Principal among these risks are the uncertainties of the drug development process, technological innovations, development of the same or similar technological innovations by the Company’s competitors, protection of proprietary technology, compliance with government regulations and approval requirements, uncertainty of market acceptance of products, dependence on key individuals, product liability, and the need to obtain additional financing necessary to fund future operations.

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While management believes that the accounting estimates in the Company’s consolidated financial statements are based on sound measurement criteria, actual future events can and often do result in outcomes that can be materially different from these estimates or forecasts. There have been no material changes to any of the critical accounting estimates.

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents. The Company deposits its cash and cash equivalents with major financial institutions. Management believes that credit risk related to these deposits is minimal.

Fair Value Measurements

The Company measures fair value in accordance with Statement ASC 820, Fair Value Measurements (“ASC 820”). ASC 820 defines fair value, establishes a framework and gives guidance regarding the methods used for measuring fair value, and expands disclosures about fair value measurements. ASC 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, there exists a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

· Level 1 - unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access as of the measurement date.

· Level 2 - inputs other than quoted prices included within Level 1 that are directly observable for the asset or liability or indirectly observable through corroboration with observable market data.

· Level 3 - unobservable inputs for the asset or liability only used when there is little, if any, market activity for the asset or liability at the measurement date.

This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value (see Note 5 - Fair Value Measurements).

3. Discontinued Operations

Through its scheduled expiration of the Kmart Agreement, at the end of December 2008, the Company’s business operations related to which it operated licensed footwear departments in various department stores, have been classified as discontinued operations, for all periods presented. Therefore, all related operations, impairment losses and disposal costs, gains and losses on disposition attributable to these licensed footwear departments have been aggregated in a single caption entitled “Net Loss From Discontinued Operations" on the accompanying consolidated statements of operations.

Assets of discontinued operations are summarized as follows (in thousands):

	October 1, 2011		January 1, 2011
Prepaid expenses, primarily cash collateral for worker’s compensation obligations	$	1,506	$	1,541
	$	1,506	$	1,541

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Liabilities of discontinued operations are summarized as follows (in thousands):

	October 1, 2011		January 1, 2011
Accrued expenses	$	472	$	549
Income taxes payable		20		20
Worker’s compensation liability		1,206		1,531
	$	1,698	$	2,100

Summarized statements of operations data for discontinued operations are as follows (in thousands):

	Nine Months Ended October 1, 2011			Nine Months Ended October 2, 2010
Net revenue	$	—		$	—
Cost of products sold		—			—
Gross Profit		—			—
Selling, general and administrative expense		(1,012	)		(1,174	)
Operating income		1,012			1,174
Interest expense		—			21
Earnings from discontinuing operations before income taxes		1,012			1,153
Income tax benefit		(68	)		—
Earnings from discontinued operations	$	1,080		$	1,153

4. Reduction in Workforce

Severance and benefit activity for nine months ended October 1, 2011 and October 2, 2010 (in thousands):

	Nine Months Ended October 1, 2011			Nine Months Ended October 2, 2010
Beginning termination benefits accrual	$	6		$	40
Costs (adjustment) charged to expense, primarily CPEX related		860			(34	)
Cash payments		(737	)		—
Ending termination benefits accrual	$	129		$	6

5. Fair Value Measurements

Effective January 1, 2008, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, “Fair Value Measurement and Disclosure,” which defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and expands disclosure about fair value measurements. The Company uses the following methods for determining fair value in accordance with FASB ASC Topic 820. For assets and liabilities that are measured using quoted prices in active markets for the identical asset or liability, the total fair value is the published market price per unit multiplied by the number of units held without consideration of transaction costs (Level 1). Assets and liabilities that are measured using significant other observable inputs are valued by reference to similar assets or liabilities, 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 (Level 2). For all remaining assets and liabilities for which there are no significant observable inputs, fair value is derived using an assessment of various discount rates, default risk, credit quality and the overall capital market liquidity (Level 3).

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The following table summarizes the basis used to measure certain financial assets and liabilities at fair value on a recurring basis in the consolidated balance sheet (in thousands):

Fair Value Measurements at October 1, 2011

Description	Balance at October 1, 2011		Quoted Prices in Active Markets for Identical Items (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash in bank, including restricted cash	$	9,752	$	9,752	$	—	$	—
Money market funds		4,189		4,189		—		—
Real estate		7,810		—		—		7,810

Fair Value Measurements at January 1, 2011

Description	Balance at January 1, 2011		Quoted Prices in Active Markets for Identical Items (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash in bank	$	3,381	$	3,381	$	—	$	—
Money market funds		5,339		5,339		—		—
Real estate		6,173		—		—		6,173

Money Market Funds – money market funds are valued using quoted market prices. Accordingly, money market funds are categorized in Level 1 of the fair value hierarchy.

The Company is marketing its Mahwah and Exeter Real Estate, to sell or lease. As of October 1, 2011, the Company estimates that the fair value of the real estate, less estimated closing costs, is approximately $7.8 million. This estimate is based on unobservable inputs and as such the actual amount ultimately realized upon disposition of this real estate could be materially different.

The following table represents the reconciliation of all assets and liabilities measured and recorded at fair value on a recurring basis using significant unobservable inputs (level 3) (in thousands):

	Real Estate
Balance at January 1, 2011	$	6,173
Exeter real estate		1,637
Balance at October 1, 2011	$	7,810

6. Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following (in thousands):

	October 1, 2011		January 1, 2011
Insurance	$	213	$	290
Corporate income taxes		290		—
Other current assets		491		10
	$	994	$	300

7. Intangible Assets

Intangible assets consist of the following (in thousands):

	October 1, 2011
Patents, trademarks, and license agreement	$	60,258
Less-accumulated amortization		(2,190	)
	$	58,068

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Amortization expense for patents and related patent costs of approximately $2.2 million has been recorded in selling, general and administrative expense in the accompanying Unaudited Consolidated Statements of Operations for the nine months ended October 1, 2011. The Company expects to incur approximately $4.4 million of amortization expense for each of the next 14 years.

8. Long Term Debt

As further discussed in Note 1, on April 5, 2011, in connection with the CPEX Transaction, the Borrower borrowed approximately $64 million under the Term Loan Agreement by and among Borrower, The Bank of New York Mellon, as Agent, and certain Lenders from time to time party thereto, in the form of a secured term loan to Borrower. The term loan under the Term Loan Agreement bears interest at “LIBOR” plus 16% per annum, with a minimum LIBOR rate of 1%, and matures on the earlier of January 3, 2026 or the date any of CPEX’s patents that are associated with Testim®, a topical testosterone gel, expire, and contains customary events of default for loans of such nature.

The balance of the loan at October 1, 2011 was approximately $64 million. Interest totaling approximately $5.9 million was expensed in the accompanying statement of operations for the nine months ended October 1, 2011. The rate applicable to this loan was 17% at October 1, 2011.

The $64 million loan was issued at a discount of 2.34%, for total net proceeds of $62.5 million, with an effective interest rate of 18%. The original issue discount (OID) was $1.5 million. The OID is equal to the difference between the stated face amount of the loan and actual cash received. This OID is being amortized over the estimated life of the loan, approximately 6 years, using the effective interest rate method, and is recorded as a component within non-cash interest expense. Amortization of $73,197 was expensed from the date of the loan through October 1, 2011, leaving the OID with a balance of $1,426,803 as of October 1, 2011.

The $64 million loan is collateralized by patents and a license agreement associated with Testim®, that were acquired in the CPEX transaction. The loan agreement requires certain financial reporting and non financial covenants.

9. Income Taxes

Footstar, Inc. files a consolidated federal income tax return that includes the operations of the Company. The Company files its own state tax returns that do not include the operations of Footstar, Inc. Whereas the Company is wholly owned by Footstar, Inc., and whereas the Company is Footstar, Inc.’s only subsidiary, and whereas Footstar, Inc. does not have any operations of its own; all tax information reported in these financial statements are ultimately derived from the Company’s operations determined on a standalone basis as if the Company filed its own tax return. As such, the tax expense, and tax assets and liabilities, contained in these financial statements, only reflect those of Footstar Corp.

The Company has available for federal and state income tax purposes net operating loss carryforwards (“NOLs”), subject to review by the authorities, aggregating approximately $122.6 million and $121.9 million, respectively, as of October 1, 2011 and January 1, 2011 that, if not utilized, will begin expiring for federal purposes in 2025, and state net operating losses that have already begun expiring. Utilization of the net operating loss carry forwards may be subject to an annual limitation in the event of a change in ownership in future years as defined by Section 382 of the Internal Revenue Code and similar state provisions. In assessing the realizability of deferred taxes, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized based on projections of our future taxable earnings. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.

As a result of the 2011 CPEX acquisition, the Company recorded an approximately $19.8 million net deferred tax liability and reduced approximately $19.8 million of the valuation allowance against its NOL carryforward tax asset, which is reflected as an income tax benefit.

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Significant components of the Company’s deferred tax assets and liabilities are as follows (in thousands):

	October 1, 2011			January 1, 2011
Deferred tax asset:
Employee benefits	$	464		$	402
NOL carryforward		47,201			46,915
Property and equipment		4,593			4,390
Total gross deferred tax assets		52,258			51,707
Less valuation allowance		(31,946	)		(51,707	)
Total deferred tax assets	$	20,312		$	—

Deferred tax liability:
Intangible assets		20,312			—
Total deferred tax liability	$	20,312		$	—

10. Stock Based Compensation Plans and Employment Agreements

The Company records stock based compensation in accordance with FASB ASC Topic 718 “Compensation – Stock Compensation,” which requires all companies to measure and recognize compensation expense at fair value for all stock-based payments to employees and directors. The Company uses the Black-Scholes option-pricing model to estimate fair value of grants of employee and director stock options.

The employees of Footstar Corp participate in two stock plans of Footstar, Inc. As such, the stock based compensation expense, and option quantities, recorded in these financial statements, reflect those of Footstar Corp. Stock compensation expense reported by Footstar Corp is the value of Footstar, Inc’s stock, accordingly, these transactions do not affect the Common Stock of Footstar Corp.

The Company calculates expected volatility for a share-based grant based on historic daily stock price observations of our common stock during the period immediately preceding the grant that is equal in length to the expected term of the grant. FASB ASC Topic 718 also requires that estimated forfeitures be included as a part of the estimate of expense as of the grant date. The Company has used historical data to estimate expected employee behaviors related to option term, exercises and forfeitures. With respect to both grants of options and awards of restricted stock, the risk free rate of interest is based on the U.S. Treasury rates appropriate for the expected term of the grant or award.

A summary of option activity for the nine months ended October 1, 2011 and for the year ended January 1, 2011 is presented below.

	Shares			Weighted Average Exercise Price
Balance : January 2, 2010		191,240		$	31.28
Granted		2,500,000			0.40
Exercised		—			—
Forfeited		(65,100	)		21.75

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Balance : January 1, 2011	2,626,140		$	2.12
Options Exercisable: January 1, 2011	2,626,140		$	2.12

Balance : January 1, 2011	2,626,140		$	2.12
Granted	—			—
Exercised	—			—
Forfeited	(63,500	)		(46.18	)
Balance : October 1, 2011	2,562,640		$	1.03
Options Exercisable: October 1, 2011	2,562,640		$	1.03

On March 15, 2010, Mr. Couchman, Chief Executive Officer and Chief Financial Officer, was awarded a stock option to purchase up to 2,500,000 shares of the Company’s common stock at an exercise price of $0.40 per share (after giving effect to the liquidating cash dividend of $0.10 paid on March 12, 2010). On the date of the grant, the closing stock price was $0.23. The stock option was fully vested at the time of the grant. The stock option expires upon the earlier of the tenth anniversary of the grant date and the payment of the final liquidation distribution to Footstar, Inc.’s stockholders. Footstar, Inc. believed that granting a stock option with an exercise price substantially above the market price per share at the time of the grant would further incentive Mr. Couchman to work to maximize stockholder value. The fair value of these options were estimated at $214,949, which is expensed in the accompanying financial statements, using Black-Scholes-Merton modeling, using the following assumptions:

Expected holding period (years)	2.17
Risk-free interest rate	2.00	%
Dividend yield	0	%
Expected volatility	91.81	%

Included in Mr. Couchman’s original stock option agreement of March 15, 2010, is a provision that the Board of Directors is required to adjust the agreement to reflect certain changes, including the declaration of cash dividends. On November 21, 2011, based on the Board of Directors declaration of a special cash distribution of $0.05 per share of the Company’s common stock on October 7, 2010, the Company’s Board of Directors reduced Mr. Couchman’s exercise price by $0.05 in accordance with the terms of the initial grant, from $0.40 to $0.35. No other terms of the options were modified. Due to this modification, and in accordance with FASB ASC Topic 718, an incremental expense of $104,507 will be recognized on November 21, 2011. The modification valuation used an expected holding period of 0.48 years and an expected volatility of 72.22%, with all other assumptions remaining the same.

Footstar, Inc.’s effective stock incentive plans include the shareholder-approved 1996 Incentive Compensation Plan (the “1996 Plan”) and the non-shareholder-approved 2000 Equity Incentive Plan (the “2000 Plan”), which is to be used exclusively for non-executive officers of Footstar, Inc. Under the 1996 Plan, a maximum of 3,100,000 shares may be issued in connection with stock options, restricted stock, deferred stock and other stock-based awards, of which 1,621,873 are available for issuance. Under the 2000 Plan, a maximum of 2,000,000 shares may be issued in connection with stock options, restricted stock, deferred stock and other stock-based awards, of which 1,752,442 are available for issuance. The number of shares of common stock available under such plans is subject to adjustment for recapitalization, merger, and other similar events.

On May 5, 2009, Footstar, Inc. de-registered all of the securities registered under the 1996 Incentive Compensation Plan and the 2000 Equity Incentive Plan that remained unsold as of this date. Footstar, Inc. has no plans to make any additional grants under any of these plans.

The following table provides information relating to the potential dilutive effect and shares available for grant under each of Footstar, Inc.’s stock compensation plans.

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Plan Category	Number of Shares to be Issued upon Exercise of Outstanding Options/Awards		Weighted Average Exercise Price of Outstanding Options		Number of Shares Issued, Inception to Date as of October 1, 2011		Number of Shares Remaining Available for Future Issuance, as of October 1, 2011
1996 Incentive Compensation Plan		546,394	$	15		931,733		1,621,873
2000 Equity Incentive Plan		101,215		32		146,343		1,752,442
Total		647,609	$	15		1,078,076		3,374,315

2006 Non-Employee Director Stock Plan

On Footstar, Inc.’s emergence from bankruptcy on February 7, 2006, the 2006 Non-Employee Director Stock Plan (the “2006 Plan”) became effective. Pursuant to its terms, no further grants are permitted to be made under the 2006 Plan.

The 2006 Director Stock Plan provided for an automatic initial grant of 10,000 shares of restricted common stock to each eligible director. Beginning with the 2007 annual meeting of Footstar, Inc., Footstar, Inc. made additional, annual grants to each eligible director of 10,000 shares of restricted common stock, or such other amount determined by the Board of Directors of Footstar, Inc. (the “Board”), subject to the provisions of the 2006 Director Stock Plan. In connection with the annual grant in 2007, the Board determined that for equitable reasons 20,965 shares of restricted stock should be granted to each eligible director instead of the 10,000 shares that would otherwise have been automatically granted under the terms of the plan. All prior grants were fully vested in 2009 upon the adoption of the Plan of Dissolution.

In addition to the grants eligible directors received under the 2006 Plan, each non-employee director of Footstar, Inc. shall receive $50,000 annually, which shall be paid quarterly in cash in equal installments, unless any such director elects to receive common stock in lieu of cash.

On May 5, 2009, Footstar, Inc. de-registered all of the securities registered under the 2006 Plan that remained unsold as of this date.

Stock Issued for Services

On March 15, 2010, the Company issued shares of common stock having an aggregate fair value of $500,000 on the grant date, or 2,173,913 shares, to Mr. Couchman, in lieu of any cash compensation for base salary for Mr. Couchman’s services as President, Chief Executive Officer and Chief Financial Officer for the twelve months commencing March 1, 2010. As these shares vest over a fiscal one year service period, the Company recognized expense of approximately $292,000 for nine months ended October 2, 2010, and approximately $83,000 for the nine months ended October 1, 2011.

Also on March 15, 2010, the Company issued shares of common stock having an aggregate fair value of $50,000 on the grant date, or 217,391 shares, to each of Adam Finerman and Eugene Davis, the Company’s non-employee directors, in lieu of cash compensation for their service as directors in 2010 to which they would otherwise be entitled. As these shares vest over the 2010 calendar period, the Company recognized expense of $75,000 for nine months ended October 2, 2010.

Mr. Finerman elected to receive his full retainer ($50,000) for fiscal 2011 in the form of shares of restricted stock in lieu of cash compensation for service as a director in 2011 to which he would otherwise be entitled. For the nine months ended October 1, 2011, the Company issued shares of common stock having an aggregate fair value of $25,000 on the grant date, or 30,948 shares, to Mr. Finerman, in lieu of cash compensation for service as director for the first two quarters of 2011.

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11. Letters of Credit

In the past, the Company entered into standby letters of credit to secure certain obligations, including insurance programs and duties related to the import of our merchandise, of our now discontinued operations. These standby letters of credit, before balances were drawn down by the beneficiaries, were cash collateralized at 103% of face value, plus a reserve for future fees (the “L/C Cash Collateral”) totaled $1.9 million, with Bank of America as issuing bank. In connection therewith, Bank of America had been granted a first priority security interest and lien upon the L/C Cash Collateral. On May 24, 2010, the Bank of America N.A. L/C Cash Collateral account terminated by its terms.

On May 10, 2010, $1.8 million, representing 100% of the amounts for which letters of credit have been provided, were drawn down by the beneficiaries. The Company does not anticipate recovery of $1.75 million of this amount for its Workers Compensation insurance programs. As of October 1, 2011, the remaining balance that is being held by the beneficiaries totals $1.2 million, and is included in assets of discontinued operations.

On May 20, 2010, $0.1 million, representing the L/C Cash Collateral was refunded to the Company.

On September 9, 2010, the Company recovered $0.05 million from a beneficiary for custom duties.

On July 26, 2011, the Company recovered $0.25 million from our Workers Compensation insurance programs, which reduced the amount collateralized.

12. Commitments and Contingencies

Litigation Matters

The Company is involved in various and routine litigation matters, which arise through the normal course of business. Management believes that the resolution of these matters will not have a material adverse effect on the final liquidation of the Company. While it firmly maintains that all pending claims are meritless, the Company will, however, continue to expend costs as it vigorously defends against these claims.

Thom McAn: In connection with the Company’s discontinued operations in 1995, the Company entered into a sublease formerly occupied by its Thom McAn stores. The lease expires effective February 1, 2014. The obligation under the sublease is $1.8 million as of the date of this filing, although the Company believes that there has been a novation of its obligations under such lease and may bring litigation to have a court finally determine such issue. At this time, the Company has not recorded a liability relating to this commitment as the probability of an unfavorable outcome is remote.

Upsher-Smith Litigation: In October 2008, CPEX and Auxilium received notice that Upsher-Smith Laboratories, Inc. (“Upsher-Smith”) had filed an Abbreviated New Drug Application, or ANDA containing a paragraph IV certification in which Upsher-Smith certified that it believes its proposed generic version of Testim does not infringe CPEX’s patent, U.S. Patent No. 7,320,968 (“the ‘968 Patent”). The ‘968 Patent claims a method for maintaining effective blood serum testosterone levels for treating a hypogonadal male, and will expire in January 2025. The ‘968 Patent is listed for Testim® in Approved Drug Products with Therapeutic Equivalence Evaluations (commonly known as the Orange Book), published by the U.S. Food and Drug Administration (“FDA”). Upsher-Smith’s paragraph IV certification sets forth allegations that the ‘968 Patent will not be infringed by the manufacture, use, or sale of its proposed generic product. On December 4, 2008, CPEX and Auxilium filed a Hatch-Waxman infringement lawsuit in the United States District Court for the District of Delaware (“the Court”) against Upsher-Smith seeking injunctive and declaratory relief. The Court docketed this case as Civil Action No. 08-908-SLR. In June 2009, Upsher-Smith amended its answer to the complaint to include a defense and counterclaim of invalidity of the ‘968 Patent, which CPEX and Auxilium have denied. A patent issued by the U.S. Patent and Trademark Office (USPTO), such as the ‘968 Patent, is presumed valid. As of the date of this filing, the lawsuit remains pending; however, the trial date has been removed from the Court’s calendar.

CPEX has filed continuation and divisional applications with the USPTO relating to the ‘968 Patent. Six patents, U.S. Patent Nos. 7,608,605; 7,608,606; 7,608,607; 7,608,608; 7,608,609; and 7,608,610, were issued from these applications, which may provide further market protection. Each of these six patents has been listed in the Orange Book with respect to Testim®.

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CPEX and its affiliates will vigorously pursue the Hatch-Waxman patent infringement lawsuit. However, if CPEX is unsuccessful in obtaining an injunction to keep Upsher-Smith’s proposed version of Testim® off the market until the patent protection expires, or in defending the ‘968 Patent covering Testim®, sales of Testim® and royalties relating to Testim® sales could be materially reduced.

Material Agreements

Senior Executive Employment Agreements: The company has an employment agreement with Jonathan Couchman, CEO and CFO, which either party may terminate giving a 30 day notice.

13. Subsequent Events

In November 2011, Footstar Corp entered into a 5-year lease for executive office space in New York, New York at an approximate annual expense of approximately $97,000.

Registration Statement Filing

On January 19, 2012, the board of directors of Footstar, Inc. approved a Plan of Reorganization pursuant to which Footstar, Inc. will contribute all of its assets to Xstelos Holdings, Inc. In exchange for the contribution of all of its assets, Xstelos Holdings, Inc. will assume all of Footstar, Inc.’s liabilities and issue all of its shares of common stock to Footstar, Inc. The shares exchanged constitute all of the outstanding shares of Xstelos Holdings, Inc. capital stock. The contribution of all of the assets and liabilities of Footstar, Inc. essentially represents the stock of its wholly-owned subsidiary, Footstar Corp.

The result of the above contemplated transaction is to distribute Xstelos Holdings, Inc. shares, which Footstar will own after the transaction is completed, to the stockholders of Footstar, Inc., as a principal distribution. Consequently, as Footstar, Inc. concludes the Plan of Dissolution, within the statutory dissolution period ending on May 5, 2012, the previous stockholders of Footstar, Inc. will then be stockholders of Xstelos Holdings, Inc. Though this plan, Footstar is able to permit stockholders to continue to participate in earnings resulting from the Plan of reorganization, if any, after Footstar is completely dissolved.

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FOOTSTAR CORP & SUBSIDIARIES (PREDECESSOR COMPANY)

INDEX TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

Reports of Independent Registered Public Accounting Firm	F-24

Consolidated Balance Sheets as of January 1, 2011 and January 2, 2010 (Predecessor Company)	F-25

Consolidated Statements of Operations for the years ended January 1, 2011 and January 2, 2010 (Predecessor Company)	F-26

Consolidated Statements of Parent Investment for the years ended January 1, 2011 and January 2, 2010 (Predecessor Company)	F-27

Consolidated Statements of Cash Flows for the years ended January 1, 2011 and January 2, 2010 (Predecessor Company)	F-28

Notes to Consolidated Financial Statements	F-29

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Footstar Corp (Predecessor Company):

We have audited the accompanying consolidated balance sheets of Footstar Corp and Subsidiaries (Predecessor Company, as described in Note 1 to the financial statements) as of January 1, 2011 and January 2, 2010, and the related statements of operations, parent investment, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly we express no such opinion. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Footstar Corp and Subsidiaries (Predecessor Company) at January 1, 2011 and January 2, 2010, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

/s/ EisnerAmper LLP

Edison, New Jersey

January 23, 2012

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FOOTSTAR CORP & SUBSIDIARIES (PREDECESSOR COMPANY)

CONSOLIDATED BALANCE SHEETS

(In thousands)

	January 1, 2011		January 2, 2010
Assets
Current assets:
Cash and cash equivalents	$	8,720	$	9,821
Prepaid expenses and other current assets		300		1,598
Assets of discontinued operations		1,541		4,003
Total current assets		10,561		15,422

Real Estate		6,173		6,173
Other assets		169		454

TOTAL ASSETS	$	16,903	$	22,049

Liabilities and Parent Investment
Current liabilities:
Accounts payable	$	13	$	52
Accrued expenses		265		158
Current maturities of long term debt				687
Liabilities of discontinued operations		2,100		2,890
Total liabilities		2,378		3,787

Commitments and Contingencies

Parent investment		14,525		18,262

TOTAL LIABILITIES AND PARENT INVESTMENT	$	16,903	$	22,049

The accompanying notes are an integral part of these consolidated financial statements.

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FOOTSTAR CORP & SUBSIDIARIES (PREDECESSOR COMPANY)

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands)

	Year Ended
	January 1, 2011			January 2, 2010
NET REVENUE	$	—		$	—
Cost of products sold		—			—

Gross Profit		—			—
Selling, general and administrative expense		2,460			4,644

OPERATING LOSS		(2,460	)		(4,644	)
Interest expense		12			104

LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		(2,472	)		(4,748	)
Income tax benefit on continuing operations		(88	)		(1,524	)

LOSS FROM CONTINUING OPERATIONS		(2,384	)		(3,224	)

EARNINGS (LOSS) FROM DISCONTINUED OPERATIONS, net of tax		1,283			(2,898	)

NET LOSS	$	(1,101	)	$	(6,122	)

The accompanying notes are an integral part of these consolidated financial statements.

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FOOTSTAR CORP & SUBSIDIARIES (PREDECESSOR COMPANY)

CONSOLIDATED STATEMENTS OF PARENT INVESTMENT

FOR THE YEARS ENDED JANUARY 1, 2011 AND JANUARY 2, 2010

(In thousands)

Balance at January 3, 2009	$	104,380
Net loss		(6,122	)
Special cash distribution		(80,890	)
Cash used to repurchase equity awards		(45	)
Common stock incentive plans		939
Balance at January 2, 2010		18,262

Net loss		(1,101	)
Special cash distribution		(3,367	)
Common stock incentive plans		215
Issuance of stock for services		516
Balance at January 1, 2011	$	14,525

The accompanying notes are an integral part of these consolidated financial statements.

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FOOTSTAR CORP & SUBSIDIARIES (PREDECESSOR COMPANY)

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Year Ended
	January 1, 2011			January 2, 2010

Cash flows from operating activities:
Net loss	$	(1,101	)	$	(6,122	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Stock incentive plans		215			939
Issuance of stock for services		516			—
Changes in operating assets and liabilities:
Decrease in accounts receivable		—			56,875
Decrease in prepaid expenses and other assets		3,520			2,911
Decrease in other assets		525			300
Increase in accounts payable, accrued expenses and other current liabilities		(393	)		(18,389	)
Increase in income taxes payable and other long-term liabilities		(329	)		(1,049	)

Net cash provided by operating activities		2,953			35,465

Cash flows used in financing activities:
Special cash distribution paid		(3,367	)		(80,890	)
Cash used to repurchase equity awards		-			(45	)
Payments on mortgage note		(687	)		(1,294	)

Net cash used in financing activities		(4,054	)		(82,229	)

Net decrease in cash and cash equivalents		(1,101	)		(46,764	)
Cash and cash equivalents, beginning of year		9,821			56,585

Cash and cash equivalents, end of year	$	8,720		$	9,821

	Year Ended
	January 1, 2011		January 2, 2010
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid	$	62	$	211
Taxes paid	$	—	$	971

The accompanying notes are an integral part of these consolidated financial statements.

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FOOTSTAR CORP & SUBSIDIARIES (PREDECESSOR COMPANY)

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Business and Basis of Presentation

Organization

General

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On March 5, 2009, the Board of Directors adopted and approved the Plan of Dissolution. The Plan of Dissolution reflects technical and legal changes to the Original Plan consistent with the Delaware General Corporate Law and was intended to modify, supersede and replace the Original Plan in order to more efficiently facilitate the liquidation and dissolution of Footstar in the best interests of its stockholders. The Plan of Dissolution provides for the complete, voluntary liquidation of Footstar providing for the sale of its remaining assets and the wind down of Footstar’s business as described in the Plan of Dissolution and of the distributions of available cash to stockholders as determined by the Board of Directors. On May 5, 2009, at a special meeting of stockholders of Footstar, the stockholders adopted and approved the Plan of Dissolution and Footstar’s dissolution. Subsequent to such time, the Board of Directors moved forward with the liquidation, and worked toward selling all of Footstar’s remaining assets and settling all claims.

As discussed in Note 12 – Subsequent Events, on April 5, 2011, Footstar Corp completed the CPEX Transaction pursuant to the CPEX Transaction Agreement. As a result of the CPEX Transaction, FCB Acquisition merged with and into CPEX, with CPEX surviving as a wholly owned subsidiary of FCB Holdings. FCB Holdings is owned 80.5% by Footstar Corp and 19.5% by an unaffiliated investment holding company. Footstar Corp is a wholly-owned subsidiary of Footstar.

Principles of Consolidation

2. Significant Accounting Policies

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Fiscal Years

Cash Equivalents

Cash and cash equivalents consist of highly liquid instruments with maturities of three months or less from the date acquired and stated at cost that approximates their fair market value. At times the Company has cash and cash equivalents balances in excess of the FDIC and SIPC insured limits.

Prepaid Expenses and Other Current Assets

Deferred Charges and Other Noncurrent Assets

Deferred charges and other noncurrent assets are other deferred costs for periods that extend past the current 12 month period. Current portions are recorded in prepaid expenses and other current assets. Deferred charges are recorded at cost and expensed as they are incurred.

Real Estate

Income Taxes

As discussed further in Note 8 – Income Taxes, the Company records deferred tax assets and liabilities based on the differences between the book and tax bases of assets and liabilities and on operating loss carryforwards using enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. These amounts are adjusted, as appropriate, to reflect enacted changes in tax rates expected to be in effect when the temporary differences reverse.

At the adoption date of ASC 740, the Company did not have any unrecognized tax benefits. The Company does not expect that the amount of unrecognized tax benefits will significantly increase or decrease within the next twelve months. The Company’s policy is to recognize interest and penalties related to tax matters in the income tax provision in the Consolidated Statements of Operations. The amount of interest and penalties for the years ended January 1, 2011 and January 2, 2010 were insignificant. Tax years beginning in 2006 are generally subject to examination by taxing authorities, although net operating losses from all years are subject to examinations and adjustments for at least three years following the year in which the attributes are used.

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As of January 1, 2011 the Company recorded a net deferred tax asset of approximately $51.7 million and a related valuation allowance of approximately $51.7 million. In connection with the preparation of previous years consolidated financial statements, the Company reviewed the valuation of deferred tax assets based on positive evidence, such as projections of future taxable earnings along with negative evidence, such as operational uncertainties, no taxable income in carryback period, and liquidation of the Kmart business (which accounted for substantially all of the net sales and net profits). For accounting purposes, the Company cannot rely on anticipated long-term future profits to utilize deferred tax assets. As a result, the Company could not conclude that it is more likely than not that certain deferred tax assets will be realized and have recorded a non-cash valuation allowance on net deferred tax asset (see Note 8 – Income taxes).

Mortgage Liability

Stock Based Compensation

In considering the fair value of the underlying stock when Footstar, Inc. grants options or restricted stock, Footstar, Inc. considers several factors including the fair values established by market transactions. Stock-based compensation includes significant estimates and judgments of when stock options might be exercised, forfeiture rates and stock price volatility. The timing of option exercises is out of the Company’s control and depends upon a number of factors including Footstar, Inc.’s market value and the financial objectives of the holders of the options. These estimates can have a material impact on the Company’s stock compensation expense but will have no impact on the Company’s cash flows.

The Company accounts for equity awards of Footstar, Inc. issued to non-employees providing services on behalf of the Company in accordance with ASC Topic 505-50 (formerly EITF No. 96-18 “Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with, Selling Goods or Services.”) ASC 505-50 requires the Company to measure the fair value of Footstar, Inc. equity instruments using the stock prices and other measurement assumptions as of the earlier of either the date at which a performance commitment by the counterparty is reached or the date at which the counterparty’s performance is complete.

Use of Estimates

The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which require management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the revenues and expenses reported during the period. These estimates and assumptions are based on management’s judgment and available information and, consequently, actual results could differ from these estimates.

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Concentrations of Credit Risk

Fair Value Measurements

· Level 1 - unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access as of the measurement date.

· Level 3 - unobservable inputs for the asset or liability only used when there is little, if any, market activity for the asset or liability at the measurement date.

This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value (see Note 5 - Fair Value Measurements).

3. Discontinued Operations

Through its scheduled expiration of the Kmart Agreement, at the end of December 2008, the Company’s business operations related to which it operated licensed footwear departments in various department stores, have been classified as discontinued operations, for all periods presented. Therefore, all related operations, impairment losses and disposal costs, gains and losses on disposition attributable to these licensed footwear departments have been aggregated in a single caption entitled “Net Loss From Discontinued Operations" on the accompanying consolidated statements of operations.

Assets of discontinued operations are summarized as follows (in thousands):

	January 1, 2011		January 2, 2010
Prepaid expenses, primarily cash collateralized for worker’s compensation obligations	$	1,541	$	3,763
Insurance escrow		-		240
	$	1,541	$	4,003

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Liabilities of discontinued operations are summarized as follows (in thousands):

	January 1, 2011		January 2, 2010
Accrued expenses	$	549	$	848
Income taxes payable		20		20
Worker’s compensation liability		1,531		2,022
	$	2,100	$	2,890

Summarized statements of operations data for discontinued operations are as follows (in thousands):

	Year Ended
	January 1, 2011			January 2, 2010

Net revenue	$	-		$	2,500
Cost of products sold		-			(29	)
Gross profit		-			2,529
Selling, general and administrative expense		(1,305	)		5,414
Operating gain (loss)		1,305			(2,885	)
Interest expense		22			109
Gain on disposal		-			96
Earnings (loss) from discontinued operations	$	1,283		$	(2,898	)

4. Reduction in Workforce

Cash payments to terminated employees totaling approximately $0 and $7.97 million, respectively, were paid for the years ended January 1, 2011 and January 2, 2010. As of January 1, 2011 and January 2, 2010, the Company has an accrual of approximately $6,000 and $40,000, respectively, relating to severance and benefit costs included in accrued expenses.

Severance and benefit activity for the years ended January 1, 2011 and January 2, 2010 (in thousands):

Balance at January 3, 2009	$	6,760
Costs charged to expense		1,250
Cash payments		(7,970	)
Termination benefits accrual January 2, 2010		40
Expense adjustment		(34	)
Termination benefits accrual January 1, 2011	$	6

5. Fair Value Measurements

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The following table summarizes the basis used to measure certain financial assets and liabilities at fair value on a recurring basis in the consolidated balance sheet (in thousands):

Fair Value Measurements at January 1, 2011

Description	Balance at January 1, 2011		Quoted Prices in Active Markets for Identical Items (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash in bank	$	3,381	$	3,381	$	-	$	-
Money market funds		5,339		5,339		-		-
Real estate		6,173		-		-		6,173

Fair Value Measurements at January 2, 2010

Description	Balance at January 1, 2011		Quoted Prices in Active Markets for Identical Items (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash in bank	$	466	$	466	$	-	$	-
Money market funds		9,355		9,355		-		-
Real estate		6,173		-		-		6,173

Money Market Funds – money market funds are valued using quoted market prices. Accordingly, money market funds are categorized in Level 1 of the fair value hierarchy.

The Company has been marketing its Mahwah Real Estate since March 2007. As of January 1, 2011, the Company estimates that the fair value of the real estate, less estimated closing costs, is approximately $6.2 million. This estimate is based on unobservable inputs and as such the actual amount ultimately realized upon disposition of this real estate could be materially different. There was no change in this value from January 2, 2010 to January 1, 2011.

6. Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following (in thousands):

	January 1, 2011		January 2, 2010
Insurance	$	290	$	290
Corporate income taxes		-		1,306
Other current assets		10		2
	$	300	$	1,598

7. Accrued Expenses

Accrued expenses consisted of the following (in thousands):

	January 1, 2011		January 2, 2010
Legal and professional fees	$	236	$	62
Payroll and related expenses		11		70
Utilities and other accrued expenses		18		26
	$	265	$	158

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8. Income Taxes

Footstar, Inc. files a consolidated federal income tax return that includes the operations of the Company. The Company files its own state tax returns that do not include the operations of Footstar, Inc. Whereas Footstar Corp is wholly owned by Footstar, Inc., and whereas the Company is Footstar, Inc.’s only subsidiary, and whereas Footstar, Inc. does not have any operations of its own; all tax information reported in these financial statements are ultimately derived from the Company’s operations determined on a standalone basis as if the Company filed its own tax return. As such, the tax expense, and tax assets and liabilities, contained in these financial statements, only reflect those of Footstar Corp.

The Company has available for federal and state income tax purposes net operating loss carryforwards (“NOLs”), subject to review by the authorities, aggregating approximately $121.9 million and $121.1 million, respectively, for years ended January 1, 2011 and January 2, 2010 that, if not utilized, will begin expiring for federal purposes in 2025, and state net operating losses that have already begun expiring. Utilization of the net operating loss carry forwards may be subject to an annual limitation in the event of a change in ownership in future years as defined by Section 382 of the Internal Revenue Code and similar state provisions. In assessing the realizability of deferred taxes, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized based on projections of our future taxable earnings. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.

Except as described below, the Company has not recorded a provision for, or benefit from, income taxes in the accompanying consolidated financial statements due to recurring losses and the uncertainty of the future realization of its deferred tax assets. Accordingly, as of January 1, 2011 the Company recorded a deferred tax asset of approximately $51.7 million and a related valuation allowance of approximately $51.7 million. In connection with the preparation of previous years consolidated financial statements, the Company reviewed the valuation of deferred tax assets based on positive evidence, such as projections of future taxable earnings along with negative evidence, such as operational uncertainties, no taxable income in carryback period, and liquidation of the Kmart business (which accounted for substantially all of the net sales and net profits). For accounting purposes, the Company cannot rely on anticipated long-term future profits to utilize deferred tax assets. As a result, the Company could not conclude that it is more likely than not that certain deferred tax assets will be realized and have recorded a non-cash valuation allowance on net deferred tax asset.

Significant components of the Company’s deferred tax assets at January 1, 2011 and January 2, 2010 are as follows (in thousands):

	January 1, 2011			January 2, 2010
Deferred tax asset:
Employee benefits	$	402		$	496
NOL carryforward		46,915			46,624
Property and equipment		4,390			4,586
Total gross deferred tax assets		51,707			51,706
Less valuation allowance		(51,707	)		(51,706	)
Total deferred tax assets	$	-		$	-

Income tax expense (benefit) differs from the “expected” income tax expense (benefit) computed by applying the U.S. federal income tax of 35% to income before income taxes from continuing operations as follows (in thousands):

	For the year ended
	January 1, 2011			January 2, 2010
Computed expected income tax benefit	$	(865	)	$	(1,662	)
Increases (decreases) in income taxes resulting from:
State income taxes, net of federal tax benefit		(74	)		(344	)
Other		(93	)		28
Valuation allowance		944			454
Net income tax expense	$	(88	)	$	(1,524	)

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9. Stock Based Compensation Plans and Employment Agreements

The employees of Footstar Corp participate in two stock plans of Footstar, Inc. As such, the stock based compensation expense, and option quantities, recorded in these financial statements, reflect those of Footstar Corp. Stock compensation expense reported by Footstar Corp is the value of Footstar, Inc.’s stock; accordingly, these transactions do not affect the Common Stock of Footstar Corp.

A summary of option activity as of January 1, 2011 and changes during the 24 months ended is presented below.

	Shares			Weighted Average Exercise Price
Balance : January 3, 2009		323,725		$	30.58
Granted		-			-
Exercised		-			-
Forfeited		(132,485	)		29.57
Balance : January 2, 2010		191,240		$	31.28
Options Exercisable: January 2, 2010		191,240		$	31.28

Balance : January 2, 2010		191,240		$	31.28
Granted		2,500,000			0.40
Exercised		-			-
Forfeited		(65,100	)		21.75
Balance : January 1, 2011		2,626,140		$	2.12
Options Exercisable: January 1, 2011		2,626,140		$	2.12

On March 15, 2010, Mr. Couchman, Chief Executive Officer and Chief Financial Officer, was awarded a stock option to purchase up to 2,500,000 shares of the Company’s common stock at an exercise price of $0.40 per share (after giving effect to the liquidating cash dividend of $0.10 paid on March 12, 2010). On the date of the grant, the closing stock price was $0.23. The stock option was fully vested at the time of the grant. The stock option expires upon the earlier of the tenth anniversary of the grant date or the payment of the final liquidation distribution to Footstar, Inc.’s stockholders. Footstar, Inc. believed that granting a stock option with an exercise price substantially above the market price per share at the time of the grant would further incentive Mr. Couchman to work to maximize stockholder value. The fair value of these options were estimated at $214,949, which is expensed in the accompanying financial statements, using Black-Scholes-Merton modeling, using the following assumptions:

Expected holding period (years)	2.17
Risk-free interest rate	2.00	%
Dividend yield	0	%
Expected volatility	91.81	%

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Included in Mr. Couchman’s original stock option agreement of March 15, 2010, is a provision that the Board of Directors is required to adjust the agreement to reflect certain changes, including the declaration of cash dividends. On November 21, 2011, and based on the Board of Directors declaration of a special cash distribution of $0.05 per share of the Company’s common stock on October 7, 2010, the Company’s Board of Directors reduced Mr. Couchman’s exercise price by $0.05 in accordance with the terms of the initial grant, from $0.40 to $0.35. No other terms of the options were modified. Due to this modification, and in accordance with FASB ASC Topic 718, an incremental expense of $104,507 will be recognized on November 21, 2011. The modification valuation used an expected holding period of 0.48 years and an expected volatility of 72.22%, with all other assumptions remaining the same.

The following table provides information relating to the potential dilutive effect and shares available for grant under each of Footstar, Inc.’s stock compensation plans.

Plan Category	Number of Shares to be Issued upon Exercise of Outstanding Options/Awards		Weighted Average Exercise Price of Outstanding Options		Number of Shares Issued, Inception to Date as of January 1, 2011		Number of Shares Remaining Available for Future Issuance, as of January 1, 2011
1996 Incentive Compensation Plan		546,394	$	15		931,733		1,621,873
2000 Equity Incentive Plan		101,215		32		146,343		1,752,442
Total		647,609	$	15		1,078,076		3,374,315

The table below provides information relating to deferred restricted stock units and performance-based stock awards:

	Deferred Shares and Units			Weighted Average Grant Date Fair Value
Non-vested, January 3, 2009		189,383		$	4
Granted		-			-
Canceled		-			-
Vested		(189,383	)		4
Non-vested, January 2, 2010 and January 1, 2011		-		$	-

The total fair value of shares vested during 2009 was $0.2 million.

2006 Non-Employee Director Stock Plan

On Footstar, Inc.’s emergence from bankruptcy on February 7, 2006, the 2006 Non Employee Director Stock Plan (the “2006 Plan”) became effective. Pursuant to its terms, no further grants are permitted to be made under the 2006 Plan.

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The following table provides information relating to the status of, and changes in, stock units granted under the 2006 Plan:

Director Stock Plan Units

	Stock Units			Weighted Average Grant Date Fair Value
Non-vested, January 3, 2009		174,964		$	5
Granted		55,000			3
Cancelled		(38,965	)		—
Shares Vested		(190,999	)		3
Non-vested, January 2, 2010 and January 1, 2011		—		$	—

The total fair value of shares vested during 2009 was approximately $0.5 million.

On May 5, 2009, Footstar, Inc. de-registered all of the securities registered under the 2006 Plan that remained unsold as of this date.

Stock Issued for Services

On March 15, 2010, the Company issued shares of common stock having an aggregate fair value of $500,000 on the grant date, or 2,173,913 shares, to Mr. Couchman, in lieu of any cash compensation for base salary for Mr. Couchman’s services as President, Chief Executive Officer and Chief Financial Officer for the twelve months commencing March 1, 2010. As these shares vest over a fiscal one year service period, which began on March 1, 2010, the Company recognized expense of approximately $416,000 through January 1, 2011. The remaining $84,000 will be expensed in fiscal 2011.

10. Letters of Credit

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On May 10, 2010, $1.8 million, representing 100% of the amounts for which letters of credit have been provided, were drawn down by the beneficiaries. The Company does not anticipate recovery of $1.75 million of this amount for its Workers Compensation insurance programs. As of January 1, 2011, the remaining balance that is being held by the beneficiaries totals $1.5 million, and is included in assets of discontinued operations.

On May 20, 2010, $0.1 million, representing the L/C Cash Collateral was refunded to the Company.

On September 9, 2010, the Company recovered $0.05 million from a beneficiary for custom duties.

11. Commitments and Contingencies

Litigation Matters

Material Agreements

Senior Executive Employment Agreements: The company has an employment agreement with Jonathan Couchman, CEO and CFO, which either party my terminate giving a 30 day notice.

12. Subsequent Events

In November 2011, Footstar Corp entered into a 5-year lease for executive office space in New York, New York at an approximate annual expense of $97,000.

CPEX Pharmaceuticals, Inc. Acquisition

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The acquisition of CPEX was accounted for as a purchase under FASB ASC Topic 805. The purchase price of $76.3 million (which includes cash paid and liabilities assumed) has been allocated to the estimated fair value of tangible and identifiable intangible assets acquired and liabilities assumed. The excess of the purchase price over the estimated fair value of tangible and identifiable assets acquired and liabilities assumed has been allocated to intangible assets based on management’s estimate and pending a final valuation.

On April 5, 2011, in connection with the CPEX Transaction, FCB I LLC (“Borrower”), a wholly owned subsidiary of FCB Acquisition which became a wholly owned subsidiary of CPEX upon FCB Acquisition’s merger with and into CPEX, borrowed approximately $64 million under that certain Loan Agreement dated as of January 3, 2011 (the “Term Loan Agreement”), by and among Borrower, The Bank of New York Mellon, as Agent, and certain Lenders from time to time party thereto, in the form of a secured term loan to Borrower. The term loan under the Term Loan Agreement bears interest at “LIBOR” plus 16% per annum and matures on the earlier of January 3, 2026 or the date any of CPEX’s patents that are associated with Testim®, a topical testosterone gel, expire, and contains customary events of default for loans of such nature. As part of the Term Loan Agreement, CPEX contributed to Borrower all of its intellectual property rights in Testim® and rights to the royalty stream pursuant to the license agreement with Auxilium, and the loan is secured by Borrower’s interest in all such rights. Repayment of the loan is made through a waterfall arrangement whereby, if certain conditions are met, the Testim royalty stream is distributed on a quarterly basis as follows: first to pay certain fees and expenses of Agent and Borrower, second to pay fees of the banks maintaining the accounts associated with the loan, third to pay any expenses of Agent used to protect the loan collateral and any other unreimbursed fees or expenses of Agent or any Lender, fourth to replenish any shortfall in the interest reserve (which is $2.5 million), fifth to pay interest due, sixth to pay 65% of the remaining royalty funds to Agent for the benefit of the Lenders as payment toward loan principal, and finally to Borrower for its benefit.

On April 4, 2011, in connection with the CPEX Transaction, Footstar Corp made a $3 million bridge loan to FCB Holdings under that certain Loan Agreement dated as of April 5, 2011 (the “Footstar Loan Agreement”), by and between FCB Holdings and Footstar Corp. The loan bore interest at 20% per annum and provided for a fee of 3% of the principal amount (less accrued interest) payable to Footstar, which was due upon repayment of the loan. The bridge loan was repaid on April 5, 2011, prior to maturity.

On April 5, 2011, in connection with the CPEX Transaction, Black Horse Capital LP and Black Horse Capital Master Fund Ltd. (together, “Black Horse”) made a $10 million bridge loan to FCB Holdings under that certain Loan Agreement dated as of April 5, 2011 (the “Black Horse Loan Agreement”), by and between Black Horse and FCB Holdings. The bridge loan under the Black Horse Loan Agreement had substantially the same terms as the bridge loan under the Footstar Loan Agreement, and was repaid on April 5, 2011, prior to maturity. Footstar Corp is party to a consulting and advisory agreement with the Investment Holding Company for such entity to provide certain consulting and advisory services to Footstar Corp relating to intellectual property and other matters. The agreement provides for payment solely to the extent Footstar Corp has received dividends from FCB Holdings, of which there have been none to date. The annual amounts to be paid, following receipt of such dividends pursuant to the terms of the agreement, would be $1,000,000 for 2011, $750,000 for 2012, $750,000 for 2013, $500,000 for 2014 and $250,000 for 2015 and annually thereafter through the agreement termination. The agreement terminates upon the conclusion of the monetization of CPEX’s intellectual property, subject to the terms of the agreement. It is not anticipated that any payment will be made through the first quarter of 2012.

Direct acquisition costs, consisting of investment banking fees and legal fees directly related to the acquisition of approximately $0.4 million were expensed as period costs during the year ended January 1, 2011, and are not capitalized. Financing costs amounted to approximately $1.7 million. These costs were not expensed as acquisition costs, but treated as loan origination costs will be included in deferred financing costs.

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Components of consideration:
Cash paid to CPEX Pharmaceuticals, Inc. shareholders at closing	$	75,443
CPEX liabilities assumed by Footstar		854
Gross consideration at closing	$	76,297

Allocation of consideration
Cash	$	15,964
Accounts receivable		5,851
Tangible fixed assets		2,077
Goodwill		10,499
Fair value of non-intangible acquired assets		1,470
Intangible assets recorded in acquisition, primarily patent and license		60,258
Net deferred tax liability		(19,822	)
Total	$	76,297

As a result of the CPEX acquisition, in 2011, the Company removed approximately $19.8 million of the valuation allowance against its NOL carryforward tax asset, which amount was reflected as an income tax benefit.

Registration Statement Filing

On January 19, 2012, the board of directors of Footstar, Inc. approved a Plan of reorganization pursuant to which Footstar, Inc. contributed all of its assets to Xstelos Holdings, Inc. In exchange for the contribution of all of its assets, Xstelos Holdings, Inc. assumed all of Footstar, Inc.’s liabilities and issued all of its shares of common stock to Footstar, Inc. The shares exchanged constitute all of the outstanding shares of Xstelos Holdings, Inc. capital stock. The contribution of all of the assets and liabilities of Footstar, Inc. essentially represents the stock of its wholly-owned subsidiary, Footstar Corp.

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CPEX PHARMACEUTICALS, INC. AND SUBSIDIARY (PREDECESSOR COMPANY)

INDEX TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

	Page
Unaudited Condensed Consolidated Balance Sheet as of April 5, 2011	F-44
Unaudited Condensed Consolidated Statement of Operations for the period January 1, 2011 to April 5, 2011	F-45
Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Equity for the period January 1, 2011 to April 5, 2011	F-46
Unaudited Condensed Consolidated Statement of Cash Flows for the period January 1, 2011 to April 5, 2011	F-47
Notes to Unaudited Condensed Consolidated Financial Statements	F-48

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CPEX PHARMACEUTICALS, INC. AND SUBSIDIARY (PREDECESSOR COMPANY)

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET

(In thousands except per share data)

	April 5, 2011
Assets

Current assets:
Cash and cash equivalents	$	15,964
Royalties receivable		5,851
Income taxes recoverable		1,086
Prepaid expenses and other		53
Total current assets		22,954
Non-current assets:
Fixed assets, net		2,552
Intangible assets, net		1,545
Note receivable		331
Long-term deferred tax assets		2,543
Total non-current assets		6,971
Total assets	$	29,925

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	228
Accrued expenses		625
Total current liabilities		853
Commitments and contingencies		—

Stockholders’ equity:
Series A preferred stock, $1.00 par value, authorized 1,000 shares, issued and outstanding, none		—
Common stock, $0.01 par value, authorized 35,000 shares, issued and outstanding, 2,766 shares at April 5, 2011		28
Additional paid-in capital		28,391
Retained earnings		653
Total stockholders’ equity		29,072
Total liabilities and stockholders’ equity	$	29,925

The accompanying Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of these financial statements.

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CPEX PHARMACEUTICALS, INC. AND SUBSIDIARY (PREDECESSOR COMPANY)

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(In thousands except per share data)

	For the Period January 1, 2011 to April 5, 2011
Revenues:
Royalties	$	5,851
Operating expenses:
General and administrative		6,680
Research and development		2,857
Depreciation and amortization		266
Total operating expenses		9,803
Loss from operations		(3,952	)
Other income:
Interest income		24
Loss before taxes		(3,928	)
Provision for income taxes		(1,697	)
Net loss	$	(2,231	)

Net loss per common share:
Basic	$	(0.85	)
Diluted	$	(0.85	)
Weighted average common shares outstanding:
Basic	$	2,621
Diluted	$	2,621

The accompanying Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of these financial statements.

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CPEX PHARMACEUTICALS, INC. AND SUBSIDIARY (PREDECESSOR COMPANY)

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands)

								Retained
	$0.01 Par Value				Additional			Earnings
	Common Stock				Paid-In			(Accumulated
	Shares		Amount		Capital			Deficit)			Total
Balance at January 1, 2011		2,617	$	26	$	28,760		$	2,884		$	31,670
Net loss		—		—		—			(2,231	)		(2,231	)
Share-based compensation		—		—		823			—			823
Exercise of stock options and vesting of restricted stock units		5		—		—			—			—
Cash used to repurchase equity awards		144		2		(1,192	)		—			(1,190	)
Balance at April 5, 2011		2,766	$	28	$	28,391		$	653		$	29,072

The accompanying Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of these financial statements.

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CPEX PHARMACEUTICALS, INC. AND SUBSIDIARY (PREDECESSOR COMPANY)

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(In thousands)

	For the Period January 1, 2011 to April 5, 2011
Cash flows from operating activities:
Net loss	$	(2,231	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		266
Share-based compensation expense		823
Deferred tax assets		(655	)
Changes in operating assets and liabilities:
Royalties receivable		577
Income taxes recoverable		(1,086	)
Prepaid expenses and other current assets		131
Other assets		(4	)
Accounts payable and accrued expenses		(1,289	)
Income taxes payable		(1,535	)
Net cash used in operating activities		(5,003	)
Cash flows from investing activities:
Net cash provided by (used in) investing activities		—
Cash flows from financing activities:
Cash used to repurchase equity awards		(1,190	)
Net cash used in financing activities		(1,190	)
Net decrease in cash and cash equivalents		(6,193	)
Cash and cash equivalents at beginning of period		22,157
Cash and cash equivalents at end of period	$	15,964

The accompanying Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of these financial statements.

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CPEX PHARMACEUTICALS, INC. AND SUBSIDIARY (PREDECESSOR COMPANY)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — DESCRIPTION OF BUSINESS

CPEX Pharmaceuticals, Inc. was incorporated in 2007 in the State of Delaware and has one wholly-owned subsidiary, CPEX Park, LLC (which may be referred to as “CPEX” or the “Company”). CPEX is an emerging specialty pharmaceutical company in the business of research and development of pharmaceutical products utilizing its validated drug delivery platform technology. The Company was initially the drug delivery business of Bentley Pharmaceuticals, Inc. (referred to as “Bentley”) which was spun off in June 2008 in connection with the sale of Bentley’s remaining business. Shares of CPEX stock were distributed to Bentley stockholders after the close of business on June 30, 2008 by means of a stock dividend (the “Separation”). Each Bentley stockholder of record on June 20, 2008 received one CPEX share for every ten shares of Bentley common stock. Bentley has no ownership interest in CPEX subsequent to the spin-off.

The CPEX platform drug delivery technology is based upon CPE-215®, which enhances permeation and absorption of pharmaceutical molecules across biological membranes such as the skin, nasal mucosa and eye.

The first product of CPEX is Testim®, a gel for testosterone replacement therapy that is a formulation of CPE-215 with testosterone. Testim is licensed to Auxilium Pharmaceuticals, Inc. which is currently marketing the product in the United States, Europe and other countries.

On January 4, 2011 the Company announced that it had entered into a definitive agreement with FCB I Holdings Inc. (“FCB”), a newly formed company which is controlled by Footstar Corporation, under which FCB, through a wholly-owned subsidiary, would acquire all of the outstanding common stock of CPEX for $27.25 per share in cash. The transaction price represented a premium of 11% over the Company’s closing stock price on January 3, 2011 and a 142% premium over the price of CPEX shares on January 7, 2010, the day prior to the date a third party publicly stated its intention to make an unsolicited offer for the Company. The transaction was initially unanimously approved by the Company’s Board of Directors, and subsequently was approved by CPEX stockholders on March 24, 2011. The closing of the transaction occurred on April 5, 2011. Upon closing of the transaction, CPEX became a wholly-owned subsidiary of FCB and its common stock ceased to trade on the NASDAQ Capital Market. The Company is a predecessor to Footstar Corp.

Footstar Corporation, a wholly-owned subsidiary of Footstar, Inc., a public company, holds an 80.5% equity interest in FCB.

The Company is subject to a number of risks common to companies in the life sciences industry. Principal among these risks are the uncertainties of the drug development process, technological innovations, development of the same or similar technological innovations by the Company’s competitors, protection of proprietary technology, compliance with government regulations and approval requirements, uncertainty of market acceptance of products, dependence on key individuals, product liability, and the need to obtain additional financing necessary to fund future operations.

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. In the opinion of Company’s management, all adjustments that are of a normal recurring nature, considered necessary for fair presentation, have been included in the accompanying condensed consolidated financial statements. These unaudited condensed consolidated financial statements for the interim period are not necessarily indicative of results for the full year. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s audited financial statements included herein for the year ended December 31, 2010.

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Principles of consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, CPEX Park, LLC.

Segment Data

The Company manages its operations on a consolidated, single segment basis for purposes of assessing performance and making operating decisions. Accordingly, the Company has only one reporting segment.

Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and cash equivalents and restricted cash

The Company considers all highly liquid investments with remaining maturities of three months or less when purchased to be cash equivalents for purposes of classification in the Condensed Consolidated Balance Sheet and the Condensed Consolidated Statement of Cash Flows. The cash and cash equivalents of CPEX include cash balances maintained in commercial bank accounts, amounts invested in overnight sweep investments and cash deposits in money market accounts. The Company’s cash balances exceed the limits of amounts insured by the Federal Deposit Insurance Corporation; however, because deposits are maintained at highly rated financial institutions management believes there is not a significant risk of loss of uninsured amounts.

Royalties receivable and allowances for doubtful accounts

The Company enters into collaboration and research agreements whereby the Company may receive milestone payments, research fees and/or royalties. Accounts receivable from these agreements are recorded at their net realizable value, generally as services are performed or as milestones and royalties are earned. When necessary, receivable balances are reported net of an estimated allowance for uncollectible accounts. Estimated uncollectible receivables are based on the amount and status of past due accounts, contractual terms with customers, the credit worthiness of customers and the history of uncollectible accounts. The Company’s royalties receivable as of April 5, 2011 and revenues for the period January 1, 2011 to April 5, 2011 are royalties due from its licensee, Auxilium for sales of Testim®. All receivables are uncollateralized and therefore subject to credit risk.

The Company did not write-off any uncollectible receivables in the period January 1, 2011 to April 5, 2011. In addition, the Company reviewed all receivable balances and concluded that no allowance for doubtful accounts was necessary as of April 5, 2011.

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Fixed assets

Fixed assets are stated at cost. Depreciation is computed using the straight-line method over the following estimated economic lives of the assets:

	Years
Buildings and improvements	30
Equipment	3-7
Furniture and fixtures	5-7
Other	5

Expenditures for replacements and improvements that significantly add to productive capacity or extend the useful life of an asset are capitalized, while expenditures for maintenance and repairs are charged to operations as incurred. When assets are sold or retired, the cost of the asset and the related accumulated depreciation are removed from the accounts and any gain or loss is recognized currently.

Intangible assets

Revenue recognition

The Company recognizes revenue from royalties on Auxilium’s sales of Testim in accordance with the Financial Standards Accounting Board (the “FASB”) Accounting Standards Codification (“FASB ASC”) 605-10-S99-1 (Prior authoritative literature: SAB No. 104, Revenue Recognition), which requires sales to be recorded upon delivery, provided that there is evidence of a final arrangement, there are no uncertainties surrounding acceptance, title has passed, collectability is reasonably assured and the price is fixed or determinable. Since 2003, Auxilium has sold Testim to pharmaceutical wholesalers and chain drug stores, which have the right to return purchased products prior to the units being dispensed through patient prescriptions. Based on historical experience, the Company is able to reasonably estimate future product returns on sales of Testim and as a result, the Company did not defer Testim royalties for the period January 1, 2011 to April 5, 2011. Total royalty revenue recognized for the period January 1, 2011 to April 5, 2011 was approximately $5.9 million.

Employee severance expense

In connection with the transaction with FCB, as of April 5, 2011, the employment of John A. Sedor, the Company’s President and Chief Executive Officer, Robert P. Hebert, the Company’s Vice President and Chief Financial Officer, Lance Berman, the Company’s Senior Vice President and Chief Medical Officer, and Nils Bergenhem, the Company’s Vice President and Chief Scientific Officer, was terminated. Severance costs in connection with their employment termination totaled $3.4 million for the period from January 1, 2011 to April 5, 2011. The expenses were recorded in the Condensed Consolidated Statement of Operations as follows:

	For the Period January 1, 2011 to April 5, 2011
	(In thousands)
General and administrative expenses	$	1,844
Research and development expenses		1,548
	$	3,392

Fair value measurements

The carrying amounts of cash and cash equivalents, royalties receivable, accounts payable and accrued expenses approximate fair value because of their short-term nature.

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FASB ASC 820-10-20 clarifies that the definition of fair value retains the exchange price notion and focuses on the price that would be received to sell the asset or paid to transfer the liability (an exit price), not the price that would be paid to acquire the asset or received to assume the liability (an entry price). The inputs used to measure fair value are categorized by a fair value hierarchy, Level 1 through Level 3, the highest priority being given to Level 1 and the lowest priority to Level 3. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs shall be used to measure fair value to the extent that observable inputs are not available.

The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis as of April 5, 2011 and the amounts as they correspond to the respective level within the fair value hierarchy established by FASB ASC 820-10-50.

			Fair Value Measurements at April 5, 2011 Using:
	Total at April 5, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In thousands)
Assets:
Money market funds(1)	$	5	$	5		—		—
Total assets at fair value	$	5	$	5		—		—

____________

(1)	Included in cash and cash equivalents in the accompanying consolidated balance sheet.

Research and development

Research and development expenses consist primarily of compensation and related benefits for research and development personnel, costs associated with the clinical trials of the Company’s product candidates, manufacturing supplies and other development materials, costs for consultants, and various overhead costs. Research and development costs are expensed as incurred consistent with FASB Topic ASC 730 Prior authoritative literature: SFAS No. 2, Accounting for Research and Development Costs).

Provision for income taxes

Pursuant to the provisions of FASB ASC Topic 740 (Prior authoritative literature: Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, Accounting for Income Taxes), the Company recognizes interest and penalties related to uncertain tax positions as a component of the provision for income taxes. There were no unrecognized tax positions relating to the Company. As of April 5, 2011, the tax years 2008 through 2010 are the years that are open to examination.

Basic and diluted net income per common share

Basic and diluted net income per common share is based on the weighted average number of shares of common stock outstanding during each period in accordance with ASC Topic 260 ( Prior authoritative literature : EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities). Basic and diluted net loss per share for the period January 1, 2011 to April 5, 2011 was $1.82. Weighted average shares outstanding for the period January 1, 2011 to April 5, 2011 were approximately 2,621,000 shares. Basic and diluted net loss per common share is computed the same for the period January 1, 2011 to April 5, 2011, since the Company reported a loss for the period, and as there were no common stock equivalents at April 5, 2011.

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Share-based compensation

Prior to April 5, 2011 the Company had one share-based compensation plan, its Amended and Restated 2008 Equity Incentive Plan (the “Plan”). The Plan, which was stockholder approved, permitted awards of unrestricted common stock, restricted stock, restricted stock units, options to purchase CPEX common stock, stock appreciation rights and stock equivalents for the Company’s employees, directors and consultants. Equity awards were generally granted with an exercise price equal to the high and low trading prices of the Company’s common stock on the grant date. Equity awards generally vested ratably over one to four year periods and expired 10 years from the grant date. Shares issued upon exercise of options or upon vesting of restricted stock units were generally issued from previously unissued shares of the Company.

On April 5, 2011, pursuant to the terms of the definitive agreement with FCB, the Company terminated all offerings of its securities pursuant to its existing registration statements, all of which covered the Company’s Plan.

Prior to the Separation, all equity awards were granted by Bentley. In accordance with the Employee Matters Agreement between the Company and Bentley, upon the Separation, outstanding Bentley awards held by U.S. employees, directors and consultants were converted into an adjusted Bentley award and a CPEX award. The number of common shares underlying the CPEX awards was calculated as one-tenth of the number of common shares underlying the original Bentley awards. The price of the CPEX awards was determined by multiplying the original exercise price of the Bentley awards by the when-issued trading price of CPEX common stock on the Separation Date and then dividing that number by the closing Bentley trading price on the Separation Date. These CPEX awards were granted under the Plan.

The Company follows the provisions of Statement of FASB ASC Topic 718 (Prior authoritative literature: SFAS No. 123(R), Share-Based Payment). Compensation expense is recognized, based on the requirements of ASC Topic 718, for all share-based payments.

The fair value of options granted was calculated using the Black-Scholes option valuation model. ASC Topic 718 also requires companies to use an estimated forfeiture rate when calculating the expense for the period. The Company has applied an estimated forfeiture rate to remaining unvested awards based on historical experience in determining the expense recorded in the Company’s statement of operations. This estimate is periodically evaluated and adjusted as necessary. Ultimately, the actual expense recognized over the vesting period was for those shares that vest. See Note 6 for further discussion.

NOTE 3 — FIXED ASSETS

Fixed assets consist of the following:

	April 5
	2011
	(In thousands)
Land	$	787
Buildings and improvements		1,183
Equipment		2,047
Furniture and fixtures		256
		4,273
Less-accumulated depreciation		(1,721	)
	$	2,552

In 2010, following management’s decision not to proceed with the development of NasulinTM, our patented, intranasal insulin formulation, which incorporated CPE-215 as a permeation facilitator, management identified certain equipment related to the manufacture of Nasulin that it did not expect to use in the future. At that time, the Company determined that the plan of sale criteria as set forth in FASB ASC 360-10-45 (Prior authoritative literature: Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”), had been met. The carrying value of the manufacturing equipment, which the Company believed approximates fair value, was based upon the original acquisition cost of approximately $626,000 less continuing depreciation expense through the date that plan of sale criteria were met of approximately $109,000. The resulting carrying value of approximately $517,000 was recorded separately within other current assets on the Company’s Condensed Consolidated Balance Sheet as of December 31, 2010. The Company did not recognize any gains or losses related to this equipment during the year ended December 31, 2010. During 2011, management withdrew its plan to sell the equipment related to the manufacture of Nasulin. As a result of this decision, in accordance with FASB ASC 360-10-35-44, the equipment was reclassified as held-for-use. Additionally, $89,000 depreciation expense has been recorded during 2011 related to these assets, which represents the expense that would have been recorded during the period they were considered held-for-sale.

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Depreciation expense of approximately $148,000 has been charged to operations as a component of Depreciation and amortization expense in the Condensed Consolidated Statement of Operations for the period January 1, 2011 to April 5, 2011.

NOTE 4 — INTANGIBLE ASSETS

Intangible assets consist of the following:

	April 5
	2011
	(In thousands)
Patents and related patent costs	$	5,107
Less-accumulated amortization		(3,562	)
	$	1,545

Amortization expense for drug licenses was approximately $118,000 for the period January 1, 2011 to April 5, 2011, and has been recorded in Depreciation and amortization expense in the accompanying Condensed Consolidated Statement of Operations.

NOTE 5 — ACCRUED EXPENSES

Accrued expenses consist of the following:

	April 5
	2011
	(In thousands)
Accrued payroll and related taxes	$	187
Accrued professional fees		97
Other accrued expenses		341
	$	625

NOTE 6 — EQUITY AND SHARE-BASED COMPENSATION

As previously stated, as of April 5, 2011 the Company’s one share-based compensation plan, which was stockholder approved, permitted awards of unrestricted common stock, restricted stock, restricted stock units, options to purchase CPEX common stock, stock appreciation rights and stock equivalents for the Company’s employees, directors and consultants. On June 18, 2009, the Company’s stockholders approved, among other things, the addition of 100,000 shares of common stock to the reserve of shares available for issuance under the Plan. The table below presents the Company’s option activity for the period January 1, 2011 to April 5, 2011:

	Number of Options (in 000’s)			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (in 000’s)
Options outstanding, January 1, 2011		330		$	14.36
Granted		-
Exercised		(278	)		14.06

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Redeemed	(52	)	15.91
Forfeited and expired	-
Options outstanding, April 5, 2011	-
Vested and expected to vest, April 5, 2011	-
Options exercisable, April 5, 2011	-

On April 5, 2011, prior to the closing of the transaction with FCB, each outstanding unvested and non-exercisable stock option became fully exercisable. At that time, options to purchase 277,886 shares of CPEX common stock were exercised on a net exercise basis, resulting in the issuance of 134,458 shares of the Company’s common stock. In addition, for options to purchase an additional 52,400 shares of common stock, the Company paid the difference between the FCB share offer price ($27.25 per share) and the option exercise price resulting in a cash outlay of approximately $594,000. The intrinsic value of option exercises in 2011 was approximately $4,258,000.

The fair value of each option award granted to employees was estimated on the date of grant using the Black-Scholes option valuation model. There were no option awards granted to employees for the period January 1, 2011 to April 5, 2011.

In addition to the stock options described above, the Company has granted restricted stock units to its employees. The common shares subject to the restricted stock units are generally issued when they vest. The table below presents the Company’s restricted stock unit activity for the period January 1, 2011 to April 5, 2011:

	Number of Restricted Stock Units (in 000’s)			Weighted Average Grant Date Fair Value		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (in 000’s)
Restricted stock units outstanding, January 1, 2011		19		$	12.12
Granted		—
Vested (1)		(16	)		11.36
Redeemed		(3	)		13.58
Forfeited		—
Restricted stock units outstanding, April 5, 2011		-
Vested and expected to vest, April 5, 2011		-

(1) Includes 750 restricted stock units that have vested but for which the underlying common shares are not settled or issued.

In addition to the vesting of 15,611 RSUs, prior to closing of the acquisition transaction with FCB, the Company paid the difference between the FCB share offer price ($27.25 per share) and the RSU grant price for 21,876 RSUs, which included 18,850 previously vested RSUs for which the underlying common shares had not been settled or issued, resulting in a cash outlay of approximately $596,000.

Share-based compensation expense relative to grants of stock options and restricted stock units for the period from January 1, 2011 to April 5, 2011 totaled $0.8 million. The expenses were recorded in the Consolidated Statement of Operations as follows:

	For the Period January 1, 2011 to April 5, 2011
	(In thousands)
General and administrative expenses	$	467
Research and development expenses		356
	$	823

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No related compensation expense was capitalized as the cost of an asset and there was no impact on net cash provided by operating activities or net cash used in financing activities as a result of these share-based transactions.

Stockholder Rights Plan

Pursuant to the Rights Agreement that was adopted by the Board of Directors of the Company on June 12, 2008, the Board of Directors declared a dividend of one Right for each outstanding share of common stock payable to stockholders of record at the close of business on June 23, 2008. Each Right, when exercisable, entitled the registered holder to purchase one one-thousandth of a share of Series A preferred stock, par value $0.01 per share, at a purchase price of $100 per share, subject to adjustment. The Rights Agreement was designed to prevent a potential acquirer from gaining control of the Company without fairly compensating all of the Company’s stockholders and to protect the Company from coercive takeover attempts. The Rights would have become exercisable only if a person or group of affiliated persons beneficially acquired 15% or more of the Company’s common stock (subject to certain exceptions).

As explained in Note 1 – Description of Business, on January 4, 2011 the Company entered into a definitive agreement with FCB under which FCB will acquire all of the Company’s outstanding common stock. Accordingly, the Company’s Board of Directors amended the Rights Agreement, making it inapplicable to, among other things, the merger with FCB.

NOTE 7 — PROVISION FOR INCOME TAXES

The provision for income taxes for the period January 1, 2011 to April 5, 2011, for CPEX is as follows:

	For the Period January 1, 2011 to April 5, 2011
	(In thousands)
Current:
State	$	(75	)
Federal		(967	)
Deferred:
State		138
Federal		(793	)
Total benefit for income taxes	$	(1,697	)

A reconciliation of the income tax (benefit) provision using the federal statutory rate to the CPEX effective income tax rate is as follows:

	For the Period January 1, 2011 to April 5, 2011
	(In thousands)
Income tax benefits at federal statutory rates	$	(1,336	)
State income taxes (net of federal benefit)		139
2010 provision to tax return differences		(246	)
Tax credits		(246	)
Other		(8	)
Total tax benefit	$	(1,697	)

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2010 provision to tax return differences arise from recognition of certain legal and consulting expenses incurred in connection with the Company entering into a definitive agreement with FCB I Holdings Inc. (“FCB”), under which FCB, through a wholly-owned subsidiary, acquired all of the outstanding common stock of CPEX for $27.25 per share in cash. These legal and consulting expenses had not been considered to be deductible for tax purposes in the 2010 tax provision.

The components of the CPEX deferred taxes are as follows:

	April 5,
	2011
	(In thousands)
Deferred tax assets:
General business credit carryforwards	$	1,245
Net operating loss carryforwards		949
Book/tax basis difference in assets		349
Total deferred tax assets	$	2,543

Net deferred tax assets of $2,543,000 consist of $1,245,000 attributable to general business credits, 949,000 of net operating loss (NOL) carryforwards and $349,000 due to book/tax difference in assets. The general business credits are attributed to the Company’s research and development activities. If not offset against future federal taxes, these general business credit carryforwards will expire in the tax year 2031. Since the Company experienced an ownership change on April 5, 2011, NOLs or general business credit carryforwards may be limited under Internal Revenue Code Section 382.

NOTE 8 — COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS

The Company is obligated to pay certain royalty payments upon commercialization of products using its CPE-215 technology acquired in 1999 and its intellectual property acquired in 2003. The royalties are primarily calculated based upon net sales of certain products generated by the intellectual property. As of April 5, 2011, no royalties are due under the agreements.

Legal Proceedings

In October 2008, CPEX and Auxilium Pharmaceuticals, Inc. (“Auxilium”) received notice that Upsher-Smith Laboratories, Inc. (“Upsher-Smith”) had filed an Abbreviated New Drug Application, or ANDA containing a paragraph IV certification in which Upsher-Smith certified that it believes its proposed generic version of Testim® does not infringe our patent, U.S. Patent No. 7,320,968 (“the ’968 Patent”). The ’968 Patent claims a method for maintaining effective blood serum testosterone levels for treating a hypogonadal male, and will expire in January 2025. The ’968 Patent is listed for Testim® in Approved Drug Products with Therapeutic Equivalence Evaluations (commonly known as the Orange Book), published by FDA. Upsher-Smith’s paragraph IV certification sets forth allegations that the ’968 Patent will not be infringed by the manufacture, use, or sale of its proposed generic product. On December 4, 2008, CPEX and Auxilium filed a Hatch-Waxman patent infringement lawsuit in the United States District Court for the District of Delaware (“the Court”) against Upsher-Smith, seeking injunctive and declaratory relief. The Court docketed this case as Civil Action No. 08-908-SLR. In June 2009, Upsher-Smith amended its answer to the complaint to include a defense and counterclaim of invalidity of the ’968 Patent, which CPEX and Auxilium have denied. A patent issued by the U.S. Patent and Trademark Office (USPTO), such as the ’968 Patent, is presumed valid. As of November 2011, the lawsuit remains pending; however, the trial date has been removed from the Court’s calendar.

CPEX has filed continuation and divisional applications with the USPTO relating to the ’968 patent. Six patents issued from these applications on October 27, 2009, namely U.S. Patent Nos. 7,608,605; 7,608,606; 7,608,607; 7,608,608; 7,608,609; and 7,608,610, which may provide us with further market protection. Each of these six patents has been listed in the Orange Book with respect to Testim®.

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CPEX is committed to protecting its intellectual property rights and will vigorously pursue the Hatch-Waxman patent infringement lawsuit against Upsher-Smith. However, if CPEX is unsuccessful in obtaining an injunction to keep Upsher-Smith’s proposed version of Testim® off the market until the patent protection expires, or in defending the ’968 Patent covering Testim®, sales of Testim® and CPEX’s royalties relating to Testim® sales will be materially reduced.

Agreement for a Potential Joint Venture

On March 17, 2009, the Company signed an agreement with Heights Partners, LLC (“Heights”) to evaluate the desirability for the Company to enter into a joint venture arrangement with Heights for the development of specified product candidates. Under the agreement, the parties evaluated several product candidates and on October 15, 2009, the Company advised Heights that it had selected two products for the collaboration. Under the terms of the agreement, the parties had to execute a joint venture or other contractual arrangement within 90 days, or by January 13, 2010, to conduct such collaboration. This deadline was later extended by the parties, most recently until November 30, 2010. Under the agreement, the Company paid $300,000 to Heights as an advance against its initial contribution to the potential joint venture. This payment was evidenced by a promissory note payable by Heights to CPEX and secured by a first priority security interest in Height’s intellectual property, including, without limitation, patents, patent applications and know-how relating to any of several specified product development projects, all licenses and other agreements with respect to the foregoing and all proceeds received by Heights from the sale or license of any of such intellectual property or products covered by any such intellectual property. Under the terms of the agreement as amended, the promissory note, which is included in non-current assets in the accompanying Consolidated Balance Sheet as of April 5, 2011, together with interest, was originally due in October 2009. The due date of the promissory note was later extended, most recently until November 30, 2010, the same deadline as for the execution of a joint venture agreement, if any. Under the terms of the agreement as amended, upon execution of a joint venture or other contractual arrangement, Heights would contribute the amounts payable under the note to the joint venture as the Company’s initial investment in the joint venture or other arrangement. The agreement, as amended, provides that if the parties were unable to execute a joint venture agreement by November 30, 2010, all amounts advanced by the Company would become payable by Heights to the Company and either party would have the right to seek to terminate the obligation to form the joint venture. This deadline passed without both parties agreeing to an extension. As a result, the initial contribution of $300,000, which is included in Notes receivable in the accompanying Condensed Consolidated Balance Sheet as of April 5, 2011, together with interest, became due. Notwithstanding the terms of the promissory note, to date Heights has declined to make payment of the principal or interest relating to such note. The Company intends to vigorously pursue collection of the promissory note and believes it is collectible under the original agreement.

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CPEX PHARMACEUTICALS, INC. AND SUBSIDIARY (PREDECESSOR COMPANY)

INDEX TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

	Page

Report of Independent Registered Public Accounting Firm	F-59
Consolidated Balance Sheets as of December 31, 2010 and 2009	F-60
Consolidated Statements of Operations for the Years Ended December 31, 2010 and 2009	F-61
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2010 and 2009	F-62
Consolidated Statements of Cash Flows for the Years Ended December 31, 2010 and 2009	F-63
Notes to Consolidated Financial Statements	F-64

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of

CPEX Pharmaceuticals, Inc.

Exeter, New Hampshire

We have audited the accompanying consolidated balance sheets of CPEX Pharmaceuticals, Inc. and its subsidiary (Predecessor Company) (the “Company”) as of December 31, 2010 and 2009, and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have nor were we engaged to perform an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements referred to above present fairly, in all material respects, the financial position of CPEX Pharmaceuticals, Inc. and its subsidiary as of December 31, 2010 and 2009, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

/s/ BDO USA, LLP

Boston, Massachusetts

March 31, 2011

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CPEX PHARMACEUTICALS, INC. AND SUBSIDIARY (PREDECESSOR COMPANY)

CONSOLIDATED BALANCE SHEETS

(In thousands)

	December 31, 2010		December 31, 2009
ASSETS
Current assets:
Cash and cash equivalents	$	22,157	$	13,695
Accounts receivable		6,428		5,289
Prepaid expenses and other current assets		701		582
Short-term deferred tax assets		306		—
Total current assets		29,592		19,566
Non-current assets:
Fixed assets, net		2,183		2,938
Intangible assets, net		1,663		2,211
Restricted cash		—		1,000
Note receivable		327		311
Long-term deferred tax assets		1,582		—
Other		—		17
Total non-current assets		5,755		6,477
Total assets	$	35,347	$	26,043

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	697	$	1,374
Income taxes payable		1,535		—
Accrued expenses		1,445		1,633
Total current liabilities		3,677		3,007
Commitments and contingencies (Note 10)
Stockholders’ equity:
Series A preferred stock, $1.00 par value, authorized 1,000 shares, issued and outstanding, none		—		—
Common stock, $0.01 par value, authorized 35,000 shares, issued and outstanding, 2,617 and 2,537 shares at December 31, 2010 and December 31, 2009, respectively		26		25
Additional paid-in capital		28,760		26,765
Retained earnings (accumulated deficit)		2,884		(3,754	)
Total stockholders’ equity		31,670		23,036
Total liabilities and stockholders’ equity	$	35,347	$	26,043

The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.

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CPEX PHARMACEUTICALS, INC. AND SUBSIDIARY (PREDECESSOR COMPANY)

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

	For the Year Ended December 31,
	2010			2009
Revenues:
Royalties and other revenue	$	23,297		$	18,658
Operating expenses:
General and administrative		8,777			8,867
Research and development		7,510			12,291
Depreciation and amortization		702			699
Total operating expenses		16,989			21,857
Income (loss) from operations		6,308			(3,199	)
Other income (expenses):
Interest income		101			162
Interest expense		(2	)		(3	)
Other, net		1			—
Income (loss) before taxes		6,408			(3,040	)
Provision (benefit) for income taxes		(230	)		—
Net income (loss)	$	6,638		$	(3,040	)
Net income (loss) per common share:
Basic	$	2.57		$	(1.21	)
Diluted	$	2.46		$	(1.21	)
Weighted average common shares outstanding:
Basic		2,578			2,511
Diluted		2,699			2,511

The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.

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CPEX PHARMACEUTICALS, INC. AND SUBSIDIARY (PREDECESSOR COMPANY)

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands)

	$0.01 Par Value Common Stock				Additional Paid-In		Retained Earnings						Other Comprehensive Income
	Shares		Amount		Capital		(Accumulated Deficit)			Total			(loss)

Balance at December 31, 2008		2,484	$	25	$	24,532	$	(714	)	$	23,843		$	—
Net loss		—		—		—		(3,040	)		(3,040	)		(3,040	)
Share-based compensation		—		—		1,764		—			1,764			—
Issuance of common stock in lieu of cash as 401(k) matching contributions		18		—		172		—			172			—
Issuance of common stock in lieu of cash compensation		30		—		293		—			293			—
Exercise of stock options and vesting of restricted stock units		5		—		4		—			4			—
Balance at December 31, 2009		2,537		25		26,765		(3,754	)		23,036			(3,040	)
Net income		—		—		—		6,638			6,638			6,638
Share-based compensation		—		—		1,096		—			1,096			—
Issuance of common stock in lieu of cash as 401(k) matching contributions		7		1		141		—			142			—
Exercise of stock options and vesting of restricted stock units		73		—		636		—			636			—
Excess tax benefits from share-based awards		—		—		122		—			122			—
Balance at December 31, 2010		2,617	$	26	$	28,760	$	2,884		$	31,670		$	3,598

The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.

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CPEX PHARMACEUTICALS, INC. AND SUBSIDIARY (PREDECESSOR COMPANY)

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	For the Year Ended December 31,
	2010			2009
Cash flows from operating activities:
Net income (loss)	$	6,638		$	(3,040	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		702			699
Share-based compensation expense		1,096			1,764
Deferred taxes		(1,888	)		—
Issuance of common stock in lieu of cash as 401(k) matching contributions		142			172
Excess tax benefits from share-based awards		(122	)		—
Non-cash charge for write-down of intangible assets		98			—
Changes in operating assets and liabilities:
Receivables		(1,139	)		(844	)
Prepaid expenses and other current assets		383			(10	)
Other assets		17			(9	)
Accounts payable and accrued expenses		(865	)		670
Income taxes payable		1,657			—
Net cash provided by (used in) operating activities		6,719			(598	)
Cash flows from investing activities:
Additions to fixed assets		(15	)		(398	)
Additions to intangible assets		—			(224	)
Note receivable		—			(300	)
Restricted cash		1,000			—
Net cash provided by (used in) investing activities		985			(922	)
Cash flows from financing activities:
Proceeds from the exercise of stock options		636			4
Excess tax benefits from share-based awards		122			—
Net cash provided by financing activities		758			4
Net increase (decrease) in cash and cash equivalents		8,462			(1,516	)
Cash and cash equivalents at beginning of year		13,695			15,211
Cash and cash equivalents at end of year	$	22,157		$	13,695
Cash paid for interest	$	2		$	3
Cash paid for income taxes	$	—		$	—
Supplemental Disclosures of Non-Cash Financing and Investing Activities
The Company has issued common stock in lieu of cash to its executive officers and other employees as a portion of their 2008 bonus during the year as follows:
Shares		—			30
Amount	$	—		$	293

The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.

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CPEX PHARMACEUTICALS, INC. AND SUBSIDIARY (PREDECESSOR COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — DESCRIPTION OF BUSINESS

CPEX Pharmaceuticals, Inc. (which may be referred to as “CPEX” or the “Company”) was incorporated in 2007 in the State of Delaware and has one wholly-owned subsidiary, CPEX Park, LLC. CPEX is an emerging specialty pharmaceutical company in the business of research and development of pharmaceutical products utilizing its validated drug delivery platform technology. The Company was initially the drug delivery business of Bentley Pharmaceuticals, Inc. (referred to as “Bentley”) which was spun off in June 2008 in connection with the sale of Bentley’s remaining business. Shares of CPEX stock were distributed to Bentley stockholders after the close of business on June 30, 2008 by means of a stock dividend (the “Separation”). Each Bentley stockholder of record on June 20, 2008 received one CPEX share for every ten shares of Bentley common stock. Bentley has no ownership interest in CPEX subsequent to the spin-off.

On January 4, 2011, the Company announced that it had entered into a definitive agreement with FCB I Holdings Inc. (“FCB”), a newly formed company which is controlled by Footstar Corporation, under which FCB, through a wholly-owned subsidiary, will acquire all of the Company’s outstanding common stock for $27.25 per share in cash. The transaction was initially approved by CPEX’s Board of Directors and was subsequently approved by CPEX’s stockholders on March 24, 2011. The closing of the transaction is subject to the satisfaction of customary closing conditions, provided, the closing of the transaction may not occur prior to April 4, 2011. See Note 9 — Subsequent Events for additional information.

The Company is subject to a number of risks common to emerging companies in the life sciences industry. Principal among these risks are the uncertainties of the drug development process, technological innovations, development of the same or similar technological innovations by the Company’s competitors, protection of proprietary technology, compliance with government regulations and approval requirements, uncertainty of market acceptance of products, dependence on key individuals, product liability, and the need to obtain additional financing necessary to fund future operations. Pending completion of the merger agreement with FCB, the Company’s growth may be dependent upon the successful commercialization of new products and partnering arrangements.

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and reflect the accounts of the Company and its subsidiary. All intercompany accounts and transactions have been eliminated. In the accompanying Consolidated Statements of Changes in Stockholders’ Equity for the year ended December 31, 2009, 18,000 shares and $172,000 has been reclassified from Share-based compensation to Issuance of common stock in lieu of cash as 401(k) matching contributions to conform to the current period’s presentation. Additionally, in the accompanying Consolidating Balance Sheet as of December 31, 2009, $11,000 has been reclassified from Prepaid expenses and other current assets to Notes receivable to conform to the current period’s presentation.

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Principles of consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, CPEX Park, LLC.

Segment Data

Use of estimates

Cash and cash equivalents and restricted cash

The Company considers all highly liquid investments with remaining maturities of three months or less when purchased to be cash equivalents for purposes of classification in the Consolidated Balance Sheets and the Consolidated Statements of Cash Flows. The cash and cash equivalents of CPEX include cash balances maintained in commercial bank accounts, amounts invested in overnight sweep investments and cash deposits in money market accounts. The Company’s cash balances exceed the limits of amounts insured by the Federal Deposit Insurance Corporation; however, because deposits are maintained at highly rated financial institutions management believes there is not a significant risk of loss of uninsured amounts. At December 31, 2010, the Company’s cash and cash equivalents balance totaled $22.2 million.

In connection with intellectual property in-licensed in 2003, the Company obtained a renewable, irrevocable letter of credit in the amount of $1.0 million in favor of the assignor to guarantee future royalty payments by the Company. This letter of credit expired on June 30, 2010, and was not renewed by the Company. The $1.0 million used to secure the letter of credit had been classified as Restricted cash in the Consolidated Balance Sheet as of December 31, 2009.

Accounts receivable and allowances for doubtful accounts

The Company enters into collaboration and research agreements whereby the Company may receive milestone payments, research fees and/or royalties. Accounts receivable from these agreements are recorded at their net realizable value, generally as services are performed or as milestones and royalties are earned. When necessary, receivable balances are reported net of an estimated allowance for uncollectible accounts. Estimated uncollectible receivables are based on the amount and status of past due accounts, contractual terms with customers, the credit worthiness of customers and the history of uncollectible accounts. The Company’s accounts receivable and revenues are primarily royalties due from its licensee, Auxilium for sales of Testim®. Testim royalties represented substantially all of the accounts receivable as of December 31, 2010 and 2009 and substantially all of the revenues in the years ended December 31, 2010 and 2009. All receivables are uncollateralized and therefore subject to credit risk.

The Company did not write-off any uncollectible receivables in the years ended December 31, 2010 and 2009. In addition, the Company reviewed all receivable balances and concluded that no allowance for doubtful accounts was necessary as of December 31, 2010.

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Fixed assets

Fixed assets are stated at cost. Depreciation is computed using the straight-line method over the following estimated economic lives of the assets:

	Years
Buildings and improvements	30
Equipment	3-7
Furniture and fixtures	5-7
Other	5

Expenditures for replacements and improvements that significantly add to productive capacity or extend the useful life of an asset are capitalized, while expenditures for maintenance and repairs are charged to operations as incurred. Leasehold improvements are amortized over the lesser of the useful life of the assets or over the life of the respective lease. When assets are sold or retired, the cost of the asset and the related accumulated depreciation are removed from the accounts and any gain or loss is recognized currently.

Intangible assets

Costs incurred in connection with acquiring licenses, patents, and other proprietary rights related to the business of the Company are capitalized as intangible assets. These assets are amortized on a straight-line basis for periods not exceeding fifteen years from the dates of acquisition. Such assets are reviewed whenever events or changes in circumstances indicate that the assets may be impaired, by comparing the carrying amounts to their estimated future undiscounted cash flows, and adjustments are made for any diminution in value below the carrying value. The Company did not capitalize any costs relating to acquiring patents during the year ended December 31, 2010. During the year ended December 31, 2010, the Company recorded $98,000 related to the write-down of certain intangible assets related to a license and collaboration agreement with a third-party for intranasal insulin in certain non-U.S countries. Impairment losses related to intangible assets are included in research and development expenses in the accompanying Consolidated Statements of Operations. During the year ended December 31, 2009, the Company capitalized approximately $224,000 relating to acquiring patents and did not record any impairment losses. At December 31, 2010, the Company has also reassessed the useful lives of its remaining intangible assets and has determined that the estimated useful lives are appropriate for determining amortization expense.

Revenue recognition

The Company recognizes revenue from royalties on Auxilium’s sales of Testim in accordance with the Financial Standards Accounting Board (the “FASB”) Accounting Standards Codification (“FASB ASC”) 605-10-S99-1 (Prior authoritative literature: SAB No. 104, Revenue Recognition), which requires sales to be recorded upon delivery, provided that there is evidence of a final arrangement, there are no uncertainties surrounding acceptance, title has passed, collectability is reasonably assured and the price is fixed or determinable. Since 2003, Auxilium has sold Testim to pharmaceutical wholesalers and chain drug stores, which have the right to return purchased products prior to the units being dispensed through patient prescriptions. Based on historical experience, the Company is able to reasonably estimate future product returns on sales of Testim and as a result, the Company did not defer Testim royalties for the years ended December 31, 2010 and 2009. Total royalty revenues recognized for the years ended December 31, 2010 and 2009 were $23.3 million and $18.6 million, respectively.

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Fair value measurements

On January 1, 2007, the Company adopted FASB ASC Topic 820 (Prior authoritative literature: SFAS No. 157, “Fair Value Measurements”), which provides guidance for measuring the fair value of assets and liabilities, and requires expanded disclosures about fair value measurements. FASB ASC 820-10-35-9 indicates that fair value should be determined based on the assumptions marketplace participants would use in pricing the asset or liability, and provides additional guidelines to consider in determining the market-based measurement. The adoption of FASB ASC Topic 820 did not have a material impact on the Company’s consolidated financial statements. The carrying amounts of cash and cash equivalents, trade receivables, accounts payable and accrued expenses approximate fair value because of their short-term nature. FASB ASC 820-10-20 clarifies that the definition of fair value retains the exchange price notion and focuses on the price that would be received to sell the asset or paid to transfer the liability (an exit price), not the price that would be paid to acquire the asset or received to assume the liability (an entry price). FASB ASC 820-10-35 also emphasizes that fair value is a market-based measurement, not an entity-specific measurement, therefore a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability including assumptions about risk, the effect of sale or use restrictions on an asset and non-performance risk including an entity’s own credit risk relative to a liability. FASB ASC 820-10-35 also establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from sources independent of the reporting entity (observable inputs) and (2) the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). FASB ASC 820-10-35-6 emphasizes that valuation techniques should maximize the use of observable inputs and minimize the use of unobservable inputs.

The additional disclosure requirements of FASB ASC 820-10-50 focus on the inputs used to measure fair value and for recurring fair value measurements using significant unobservable inputs and the effect of the measurement on earnings (or changes in net assets) for the reporting period. Inputs are categorized by a fair value hierarchy, Level 1 through Level 3, the highest priority being given to Level 1 and the lowest priority to Level 3. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs shall be used to measure fair value to the extent that observable inputs are not available.

The following tables present the Company’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2010 and the amounts as they correspond to the respective level within the fair value hierarchy established by FASB ASC 820-10-50.

	Fair Value Measurements at December 31, 2010 Using:
	Total at December 31, 2010		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In thousands)

Assets:
Money market funds(1)	$	20,922	$	20,922		—		—
Total assets at fair value	$	20,922	$	20,922		—		—

________________

(1) Included in cash and cash equivalents in the accompanying consolidated balance sheet.

Research and development

Research and development expenses consist primarily of costs associated with the clinical trials of the Company’s product candidates, manufacturing supplies and other development materials, compensation and related benefits for research and development personnel, costs for consultants, and various overhead costs.

Research and development costs are expensed as incurred consistent with FASB Topic ASC 730 (Prior authoritative literature: SFAS No. 2, Accounting for Research and Development Costs).

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Clinical trial expenses

Clinical trial expenses, which are reflected in research and development expenses, result from obligations under contracts with vendors, consultants, and clinical sites in connection with conducting clinical trials. The financial terms of these contracts are subject to negotiations which vary from contract to contract and may result in cash flows which are not consistent with the periods in which materials or services are provided. In accordance with FASB ASC 830-20-25-13 (Prior authoritative literature: Emerging Issues Task Force Issue No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities), these costs are capitalized upon payment and recognized as an expense according to the progress of each trial as measured by patient progression and the timing of various aspects of the trial. The progress of the trials, including the level of services performed, is determined based upon discussions with internal personnel as well as outside service providers.

Provision for income taxes

The Company adopted the provisions of FASB ASC Topic 740 (Prior authoritative literature: Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, Accounting for Income Taxes). The purpose of ASC Topic 740 is to clarify and set forth consistent rules for accounting for uncertain tax positions by requiring the application of a “more likely than not” threshold for the recognition and derecognition of tax positions. The adoption of ASC Topic 740 did not have a material effect on the Company’s financial statements. The Company recognizes interest and penalties related to uncertain tax positions as a component of the provision for income taxes. There were no unrecognized tax positions relating to the Company at the date of adoption.

In 2010, the Company reported operating profits that have utilized all previously reported Federal and state net operating loss carryforwards. In addition, as CPEX management has determined that it is more likely than not that it will realize its net deferred tax assets for which it has previously recorded a valuation allowance, the Company reversed its valuation allowance against its deferred taxes. Previous to 2010 as future operating profits could not be reasonably assured, no tax benefit was recorded for net deferred taxes. Accordingly, CPEX had established a valuation allowance equal to the full amount of the deferred tax assets. In addition, no tax benefit had been recorded for the losses generated by CPEX in the year ended December 31, 2009.

Comprehensive income and loss

The Company had no components of comprehensive income or loss other than its net income or loss for the periods presented.

Basic and diluted net income per common share

The following is a reconciliation between basic and diluted net income per common share for the twelve months ended December 31, 2010. Dilutive securities issuable for the twelve months ended December 31, 2010 included approximately 121,000 dilutive incremental shares issuable as a result of various stock options and unvested restricted stock units that were outstanding.

For the year ended December 31, 2010 (in thousands, except per share data):

	Basic EPS		Effect of Dilutive Securities		Diluted EPS
Net income	$	6,638	$	—	$	6,638
Weighted average common shares outstanding		2,578		121		2,699
Net income per common share	$	2.57	$	—	$	2.46

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Basic and diluted net loss per share for the twelve months ended December 31, 2009 was $1.21. Weighted average shares outstanding for the year ended December 31, 2009 were approximately 2,511,000 shares. Excluded from the diluted earnings per share presentation for the year ended December 31, 2009 were 509,925 common stock equivalents, which includes stock options and restricted stock units as the incremental effect of those shares would have been anti-dilutive in that period.

Share-based compensation

As of December 31, 2010 the Company had one share-based compensation plan, its Amended and Restated 2008 Equity Incentive Plan (the “Plan”). The Plan, which is stockholder approved, permits awards of unrestricted common stock, restricted stock, restricted stock units, options to purchase CPEX common stock, stock appreciation rights and stock equivalents for the Company’s employees, directors and consultants. Equity awards are generally granted with an exercise price equal to the high and low trading prices of the Company’s common stock on the grant date. Equity awards generally vest ratably over one to four year periods and expire 10 years from the grant date. Shares issued upon exercise of options or upon vesting of restricted stock units are generally issued from previously unissued shares of the Company.

The fair value of options granted was calculated using the Black-Sholes option valuation model. ASC Topic 718 also requires companies to use an estimated forfeiture rate when calculating the expense for the period. The Company has applied an estimated forfeiture rate to remaining unvested awards based on historical experience in determining the expense recorded in the Company’s Statement of Operations. This estimate is periodically evaluated and adjusted as necessary. Ultimately, the actual expense recognized over the vesting period will only be for those shares that vest. See Note 7 for further discussion.

Recently issued accounting pronouncements

In January 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-06 for Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This Update requires new disclosures for transfers in and out of Level 1 and 2 and activity in Level 3. This Update also clarifies existing disclosures for level of disaggregation and about inputs and valuation techniques. The new disclosures are effective for interim and annual periods beginning after December 15, 2009, except for the Level 3 disclosures, which are effective for fiscal years beginning after December 15, 2010 and for interim periods within those years. Other than requiring additional disclosures, adoption of this new guidance did not have a material impact on the Company’s financial statements and is not expected to have a significant impact on the reporting of the Company’s financial condition or results of operations.

In April 2010, the FASB issued ASU No. 2010-17, Revenue Recognition — Milestone Method, which provides guidance on the criteria that should be met for determining whether the milestone method of revenue recognition is appropriate. Under the milestone method of revenue recognition, consideration that is contingent upon achievement of a milestone in its entirety can be recognized as revenue in the period in which the milestone is achieved only if the milestone meets all criteria to be considered substantive. This standard provides the criteria to be met for a milestone to be considered substantive which include that: a) performance consideration earned by achieving the milestone be commensurate with either performance to achieve the milestone or the enhancement of the value of the item delivered as a result of a specific outcome resulting from performance to achieve the milestone; and b) relate to past performance and be reasonable relative to all deliverables and payment terms in the arrangement. This standard is effective on a prospective basis for milestones in fiscal years beginning on or after June 15, 2010. The adoption of this new guidance did not have a material impact on our financial statements and is not expected to have a significant impact on the reporting of our financial condition or results of operations.

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In December 2010, the FASB issued ASU No. 2010-29, Business Combinations (Topic 805) (“ASU 2010-29”). ASC Topic 350 (Prior authoritative literature: FASB Staff Position (“FSP”) 142-3, Determination of the Useful Life of Intangible Assets) has required pro forma revenue and earnings disclosure requirements for business combinations. ASU 2010-29 clarifies the requirements for disclosure of supplementary pro forma information for business combinations. The amendments in this Update specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments in this Update also expand the supplemental pro forma disclosures under Topic 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The modifications to ASC Topic 805 resulting from the issuance of ASU 2010-28 are effective for fiscal years beginning after December 15, 2010 and interim periods within those years. Early adoption is permitted. The Company believes that the impact, if any, the application of the amendments in ASU 2010-29 may have on its financial statements will not be significant.

In June 2009, the FASB issued ASC Topic 810 (Prior authoritative literature: Statement of Financial Accounting Standards No. 167, “Amendments to FASB Interpretation No. 46(R),”), which improves financial reporting by enterprises involved with variable interest entities. ASC 810 addresses (1) the effects on certain provisions of FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, as a result of the elimination of the qualifying special-purpose entity concept in SFAS 166 and (2) concerns about the application of certain key provisions of FIN 46(R), including those in which the accounting and disclosures under the Interpretation do not always provide timely and useful information about an enterprise’s involvement in a variable interest entity. The Company adopted this topic as of January 1, 2010 and determined that the adoption did not have a material impact on its consolidated financial statements.

In June 2009, the FASB issued ASC Topic 860 (Prior authoritative literature: issued SFAS No. 166, “Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140”). ASC Topic 860 prescribes the information that a reporting entity must provide in its financial reports about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement in transferred financial assets. Specifically, among other aspects, ASC Topic 860 amends SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, or SFAS No. 140, by removing the concept of a qualifying special-purpose entity from SFAS No. 140 and removes the exception from applying FASB Interpretation No. 46, Consolidation of Variable Interest Entities (revised), or FIN 46(R), to variable interest entities that are qualifying special-purpose entities. It also modifies the financial-components approach used in SFAS No. 140. The Company adopted this topic as of January 1, 2010 and determined that the adoption did not have a material impact on its consolidated financial statements.

NOTE 3 — RECEIVABLES

Receivables consist of the following:

	December 31,
	2010		2009
	(In thousands)
Royalties receivable	$	6,428	$	5,206
Other		—		83
	$	6,428	$	5,289

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NOTE 4 — FIXED ASSETS

Fixed assets consist of the following:

	December 31,
	2010			2009
	(In thousands)
Land	$	787		$	787
Buildings and improvements		1,183			1,183
Equipment		1,531			2,151
Furniture and fixtures		256			248
		3,757			4,369
Less-accumulated depreciation		(1,574	)		(1,431	)
	$	2,183		$	2,938

During 2010, as a result of management’s decision not to proceed with the development of Nasulin, management identified certain equipment related to the manufacture of Nasulin that it does not expect to use in the future. In the second quarter of 2010, the Company determined that the plan of sale criteria as set forth in FASB ASC 360-10-45 (Prior authoritative literature: Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”), had been met. The carrying value of the manufacturing equipment, which the Company believes approximates fair value, is based upon the original acquisition cost of approximately $626,000 less continuing depreciation expense through the date that plan of sale criteria were met of approximately $109,000. The resulting carrying value of approximately $517,000 has been recorded separately within other current assets on the Company’s Consolidated Balance Sheets as of December 31, 2010. The Company intends to sell this equipment, however, if it is unable to sell it under terms the Company deems acceptable, it may seek to enter a fee for use, or similar arrangement, with another party. The Company has not recognized any gains or losses related to this equipment during the year ended December 31, 2010.

Depreciation expense of approximately $253,000 and $292,000 has been charged to operations as a component of Depreciation and amortization expense in the Consolidated Statements of Operations for the years ended December 31, 2010 and 2009, respectively.

NOTE 5 — INTANGIBLE ASSETS

	December 31,
	2010			2009
	(In thousands)
Patents and related patent costs	$	5,105		$	5,204
Less-accumulated amortization		(3,442	)		(2,993	)
	$	1,663		$	2,211

Amortization expense for drug licenses was approximately $449,000 and $407,000 for the years ended December 31, 2010 and 2009, respectively, and has been recorded in Depreciation and amortization expense in the accompanying Consolidated Statements of Operations. The carrying value of approximately $1.7 million as of December 31, 2010 will be amortized over a weighted average period of 4.3 years.

Amortization expense for existing drug licenses and patents and related costs for each of the next five years and for all remaining years thereafter is estimated to be as follows:

Year Ending December 31,	Future Amortization Expense
	(In thousands)
2011	$	449
2012		449

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2013		449
2014		81
2015		68
2016 and beyond		167
	$	1,663

NOTE 6 — ACCRUED EXPENSES

Accrued expenses consist of the following:

	December 31,
	2010		2009
	(In thousands)
Accrued payroll and related taxes	$	772	$	828
Accrued clinical costs		—		183
Accrued professional fees		307		400
Other accrued expenses		366		222
	$	1,445	$	1,633

NOTE 7 — EQUITY AND SHARE-BASED COMPENSATION

As previously stated, as of December 31, 2010, the Company’s one share-based compensation plan, which is stockholder approved, permits awards of unrestricted common stock, restricted stock, restricted stock units, options to purchase CPEX common stock, stock appreciation rights and stock equivalents for the Company’s employees, directors and consultants. On June 18, 2009, the Company’s stockholders approved, among other things, the addition of 100,000 shares of common stock to the reserve of shares available for issuance under the Plan. At December 31, 2010, approximately 519,000 shares of common stock were reserved for issuance under the Plan. Approximately 330,000 of these shares were subject to outstanding stock options and approximately 37,000 shares were subject to outstanding restricted stock units including approximately 18,000 restricted stock units that have vested but have not been settled. The balance of approximately 152,000 shares were available for future issuance of awards under the Plan. The table below presents the Company’s option activity for the year ended December 31, 2010:

	Number of Options (in 000’s)			Weighted Average Exercise Price		Weighted Aggregate Remaining Contractual Term (Years)		Average Intrinsic Value (in 000’s)
Options outstanding, January 1, 2010		466		$	14.78
Granted		17			15.60
Exercised		(84	)		15.12
Forfeited and expired		(69	)		16.60
Options outstanding, December 31, 2010		330		$	14.36		7.40	$	3,363
Vested and expected to vest, December 31, 2010		326		$	14.36		7.39	$	3,323
Options exercisable, December 31, 2010		212		$	14.66		7.09	$	2,097

Through December 31, 2010, options to purchase 83,748 shares of CPEX common stock were exercised. Of this amount, 46,553 options were exercised on a net exercise basis resulting in the issuance of 22,436 shares of the Company’s common stock. The remaining options to purchase 37,195 shares of common stock were exercised for cash resulting in proceeds to the Company of approximately $636,000. The total intrinsic value of those option exercises in 2010 was approximately $946,000. During the year ended December 31 2009, options to purchase approximately 2,000 shares of CPEX common stock were exercised for net cash proceeds to the Company of approximately $4,000, while the total intrinsic value of those option exercises was approximately $14,000. The total fair value of stock options that vested during the year ended December 31, 2010 was approximately $1.1 million.

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As of December 31, 2010, unrecognized compensation expense related to the unvested portion of the Company’s stock options granted to CPEX employees was approximately $635,000 and is expected to be recognized primarily in 2011.

The fair value of each option award granted to employees is estimated on the date of grant using the Black-Scholes option valuation model. Assumptions and the resulting fair value for option awards granted by CPEX during the years ended December 31, 2010 and 2009 are provided below:

	For the Year December 31, 2010			For the Year December 31, 2009
Weighted average risk free interest rate		3.12	%		2.45	%
Dividend yield		0	%		0	%
Expected life (years)		7			7
Volatility		87.55	%		85%-88	%
Weighted average grant-date fair value of options granted	$	12.16		$	5.98

The risk-free interest rate is based on the yield curve of U.S. Treasury securities in effect at the date of the grant, having a duration commensurate with the estimated life of the award. CPEX does not expect to declare dividends in the future. Therefore, an annual dividend rate of 0% is used when calculating the grant date fair value of equity awards. The expected life (estimated period of time outstanding) of options granted is estimated based on historical exercise behaviors of CPEX employees and Bentley’s U.S. employees prior to the Separation. Shares of CPEX common stock began trading on the NASDAQ Capital Market on July 1, 2008. Since this period of time is shorter than the expected term of the options granted, the volatility applied is the average volatility of CPEX and a peer group of comparable life science companies using daily price observations for each company over a period of time commensurate with the expected life of the respective award. CPEX share-based awards generally vest over three years and the maximum contractual term of the awards is 10 years.

	Number of Restricted Stock Units (in 000’s)			Weighted Average Grant Date Fair Value		Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value (in 000’s)
Restricted stock units outstanding, January 1, 2010		32		$	9.64
Granted		9			18.21
Vested(1)		(19	)		11.02
Forfeited		(3	)		10.31
Restricted stock units outstanding, December 31, 2010		19		$	12.21		1.33	$	457
Vested and expected to vest, December 31, 2009		18		$	12.20		1.34	$	442

(1)	Includes approximately 9,000 restricted stock units that have vested but for which the underlying common shares are not settled or issued.

As of December 31, 2010, unrecognized compensation expense related to the unvested portion of the Company’s restricted stock units granted to CPEX employees was approximately $142,000 and is expected to be recognized over a weighted average period of approximately 1.33 years.

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Share-based compensation expense relative to grants of stock options and restricted stock units for the years ended December 31, 2010 and 2009 totaled approximately $1.1 million and $1.8 million, respectively. The expenses were recorded in the Consolidated Statements of Operations as follows:

	For Year Ended December 31,
	2010		2009
	(In thousands)
General and administrative expenses	$	1,018	$	1,351
Research and development expenses		78		413
	$	1,096	$	1,764

The Company sponsors a 401(k) Plan for eligible employees (the “401k Plan”) and through the quarter ended September 30, 2010, matched eligible contributions with shares of the Company’s common stock. Beginning in the fourth quarter of 2010, the Company began matching eligible contributions with cash rather than in stock. In July 2008, the Company’s Board of Directors authorized and reserved 50,000 shares of common stock for the Company’s contribution to the 401(k) Plan. As of December 31, 2010 approximately 20,000 of these shares were available for contribution to the 401(k) Plan.

Share-based compensation expense includes matching contributions to the 401(k) Plan by the Company. For the years ended December 31, 2010 and 2009, the related expenses were recorded in the Consolidated Statements of Operations as follows:

	For Year Ended December 31,
	2010		2009
	(In thousands)
General and administrative expenses	$	68	$	76
Research and development expenses		74		96
	$	142	$	172

Stockholder Rights Plan

Pursuant to the Rights Agreement that was adopted by the Board of Directors of the Company on June 12, 2008, the Board of Directors declared a dividend of one Right for each outstanding share of common stock payable to stockholders of record at the close of business on June 23, 2008. Each Right, when exercisable, entitles the registered holder to purchase one one-thousandth of a share of Series A preferred stock, par value $0.01 per share, at a purchase price of $100 per share, subject to adjustment. The Rights Agreement is designed to prevent a potential acquirer from gaining control of the Company without fairly compensating all of the Company’s stockholders and to protect the Company from coercive takeover attempts. The Rights will become exercisable only if a person or group of affiliated persons beneficially acquires 15% or more of the Company’s common stock (subject to certain exceptions).

In the event that an acquiring person became the beneficial owner of 15% or more of the then outstanding shares of common stock (except pursuant to a qualifying offer), each holder of a Right will thereafter have a right to receive, upon payment of the purchase price, shares of common stock or, in certain circumstances, cash, property, or other securities of the Company having a value (based on a formula set forth in the Rights Agreement) equal to two times the purchase price of the Right. The Rights are not exercisable until the distribution date and will expire at the close of business on June 12, 2018, unless earlier redeemed or exchanged by the Company.

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As explained in Note 1 — Description of Business, on January 4, 2011 the Company announced that it had entered into a definitive agreement with FCB under which FCB will acquire all of the Company’s outstanding common stock. Accordingly, the Company’s Board of Directors amended the Rights Agreement, making it inapplicable to, among other things, the planned merger.

NOTE 8 — PROVISION FOR INCOME TAXES

The provisions for income taxes in 2010 and 2009 for CPEX are as follows:

	For The Year Ended December 31,
	2010			2009
Currently payable:
State	$	466		$	—
Federal		1,192			—
	$	1,658			—

Deferred:
State		77			(158	)
Federal		1,002			(1,505	)
	$	1,079			(1,663	)
Change in valuation allowance		(2,967	)		1,663
Total provision (benefit) for income taxes	$	(230	)	$	—

A reconciliation of the income tax provision using the federal statutory rate to the CPEX effective income tax rate is as follows:

	For The Year Ended December 31,
	2010			2009
Income tax provision (benefits) at federal statutory rates	$	2,179		$	(1,034	)
State income taxes (net of federal benefit)		384			(158	)
Tax credits		(330	)		(496	)
Permanent differences		697			—
Other		(193	)		25
Change in valuation allowance		(2,967	)		1,663
Total tax benefit	$	(230	)	$	—

Permanent differences arise from legal and consulting expenses of $1.7 million, included in general and administrative expense in the Consolidated Statement of Operations, capitalized for tax purposes, incurred in connection with the Company entering into a definitive agreement with FCB I Holdings Inc. (“FCB”), a newly formed company which is controlled by Footstar Corporation, under which FCB, through a wholly-owned subsidiary, will acquire all of the outstanding common stock of CPEX for $27.25 per share in cash. See Note 9 — Subsequent Events for additional information. These legal and consulting expenses are not considered to be deductible for tax purposes.

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The components of the CPEX deferred taxes are as follows:

	December 31,
	2010		2009
	(In thousands)
Deferred tax assets:
Share-based compensation	$	1,074	$	1,024
Book/tax basis difference in assets		341		309
General business credit carryforwards		167		652
Net operating loss carryforwards		—		656
Other timing differences, net		306		326
Total deferred tax assets		1,888		2,967
Valuation allowance		—		(2,967	)
Deferred tax asset, net	$	1,888	$	—

In 2010, the Company’s reported operating profits that utilized all previously reported Federal and state net operating loss (“NOL”) carryforwards. In addition, as CPEX management believes that it is more likely than not that it will realize its net deferred assets for which it has previously recorded a valuation allowance, the Company has eliminated its valuation allowance. Previous to 2010, as future operating profits could not be reasonably assured, no tax benefit was recorded for net deferred taxes. Accordingly, CPEX had established a valuation allowance equal to the full amount of the deferred tax assets. The valuation allowance for CPEX decreased by $2,967,000 in 2010 and increased by $1,663,000 in 2009.

In 2010, net deferred tax assets of $1,888,000 consist principally of $1,074,000 attributable to stock options, $341,000 due to book/tax difference in assets and $167,000 in general business credits. Net deferred tax assets in 2010 decreased by $1,079,000 principally to the utilization of $656,000 of net operating loss carryforwards and $427,000 of general business credits. The 2009 increase in net deferred tax assets consists of $680,000 attributable to stock options, $496,000 in general business credits and $442,000 to NOL carryforwards. The general business credits are attributed to the Company’s research and development activities.

As a result of the taxable income reported for the year ended December 31, 2010, the Company utilized all of its federal and state net operating loss carryforwards. Accordingly, the Company has recorded a current tax provision of $1,658,000. The Company did not record a tax provision for the year ended December 31, 2009 because of the taxable losses reported for the period.

For the year ended December 31, 2010, the Company realized an excess tax deduction relative to exercised stock options which reduced its current tax payable. The impact of this excess tax deduction resulted in a net credit to additional paid in capital of $122,000. In addition, in accordance with FASB ASC Topic 718-740-25-10, the Company has not recognized a tax benefit and a credit to paid-in capital of $58,000 related to research and development credits until these credits can reduce taxes payable. As of December 31, 2010, the CPEX U.S. Federal general business credit carryforwards were approximately $167,000. If not offset against future federal taxes, these general business credit carryforwards will expire in the tax years 2029 and 2030. The Company did not experience any ownership changes during 2010 under Internal Revenue Code Section 382 that would further limit their NOLs or general business credit carryforwards.

CPEX recognizes interest and penalties related to uncertain tax positions as a component of the provision for income taxes. There were no unrecognized tax positions relating to CPEX at the date of adoption or December 31, 2010 or 2009. As of December 31, 2010, the tax years 2009 and 2008 are the years that are open to examination.

NOTE 9 — SUBSEQUENT EVENTS

On January 4, 2011 the Company announced that it had entered into a definitive agreement with FCB I Holdings Inc. (“FCB”), a newly formed company which is controlled by Footstar Corporation, under which FCB, through a wholly-owned subsidiary, will acquire all of the outstanding common stock of CPEX for $27.25 per share in cash. The transaction price represents a premium of 11% over the Company’s closing stock price on January 3, 2011 and a 142% premium over the price of CPEX shares on January 7, 2010, the day prior to the date a third party publicly stated its intention to make an unsolicited offer for the Company. The transaction was initially unanimously approved by the Company’s Board of Directors, and subsequently was approved by CPEX stockholders on March 24, 2011.

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The transaction is subject to the satisfaction of customary closing conditions, provided, the closing of the transaction may not occur prior to April 4, 2011. We expect that the transaction will be completed shortly after April 4, 2011, but there can be no assurance that the closing will occur on this timeframe or at all. Upon closing of the transaction, we will become a wholly-owned subsidiary of FCB and our common stock will cease to trade on the NASDAQ Capital Market.

Footstar Corporation, a wholly-owned subsidiary of Footstar, Inc., a public company, holds an 80.5% equity interest in FCB.

NOTE 10 — COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS

The Company is obligated to pay certain royalty payments upon commercialization of products using its CPE-215 technology acquired in 1999 and its intellectual property acquired in 2003. The royalties are primarily calculated based upon net sales of certain products generated by the intellectual property. As of December 31, 2010, no royalties are due under the agreements.

Legal Proceedings

On December 4, 2008, CPEX and Auxilium filed a Hatch-Waxman patent infringement lawsuit in the United States District Court for the District of Delaware (“the Court”) against Upsher-Smith, seeking injunctive and declaratory relief. The Court docketed this case as Civil Action No. 08-908-SLR. In June 2009, Upsher-Smith amended its answer to the complaint to include a defense and counterclaim of invalidity of the ‘968 Patent, which CPEX and Auxilium have denied. A patent issued by the U.S. Patent and Trademark Office (USPTO), such as the ‘968 Patent, is presumed valid. As of March 2011, the lawsuit remains pending; however, the trial date has been removed from the Court’s calendar. Any final FDA approval of Upsher-Smith’s proposed generic product will be stayed until the earlier of thirty months from the date of our receipt of the paragraph IV certification (April 2011) or an adverse decision in our patent infringement lawsuit.

CPEX has filed continuation and divisional applications with the USPTO relating to the ‘968 patent. Six patents issued from these applications on October 27, 2009, namely U.S. Patent Nos. 7,608,605; 7,608,606; 7,608,607; 7,608,608; 7,608,609; and 7,608,610, which may provide us with further market protection. Each of these six patents has been listed in the Orange Book with respect to Testim®.

CPEX is committed to protecting its intellectual property rights and will vigorously pursue the Hatch-Waxman patent infringement lawsuit against Upsher-Smith. However, if CPEX is unsuccessful in obtaining an injunction to keep Upsher-Smith’s proposed version of Testim® off the market until the patent protection expires, or in defending the ‘968 Patent covering Testim®, sales of Testim® and CPEX’s royalties relating to Testim® sales will be materially reduced.

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Agreement for a Potential Joint Venture

As previously disclosed, on March 17, 2009, the Company signed an agreement with Heights Partners, LLC (“Heights”) to evaluate the desirability for the Company to enter into a joint venture arrangement with Heights for the development of specified product candidates. Under the agreement, the parties evaluated several product candidates and on October 15, 2009, the Company advised Heights that it had selected two products for the collaboration. Under the terms of the agreement, the parties had to execute a joint venture or other contractual arrangement within 90 days, or by January 13, 2010, to conduct such collaboration. This deadline was later extended by the parties, most recently until November 30, 2010. Under the agreement, the Company paid $300,000 to Heights as an advance against its initial contribution to the potential joint venture. This payment was evidenced by a promissory note payable by Heights to CPEX and secured by a first priority security interest in Height’s intellectual property, including, without limitation, patents, patent applications and know-how relating to any of several specified product development projects, all licenses and other agreements with respect to the foregoing and all proceeds received by Heights from the sale or license of any of such intellectual property or products covered by any such intellectual property. Under the terms of the agreement as amended, the promissory note, which is included in non-current assets in the accompanying Consolidated Balance Sheets as of December 31, 2010, together with interest, was originally due in October 2009. The due date of the promissory note was later extended, most recently until November 30, 2010, the same deadline as for the execution of a joint venture agreement, if any. Under the terms of the agreement as amended, upon execution of a joint venture or other contractual arrangement, Heights would contribute the amounts payable under the note to the joint venture as the Company’s initial investment in the joint venture or other arrangement. The agreement, as amended, provides that if the parties were unable to execute a joint venture agreement by November 30, 2010, all amounts advanced by the Company would become payable by Heights to the Company and either party would have the right to seek to terminate the obligation to form the joint venture. This deadline passed without both parties agreeing to an extension. As a result, the initial contribution of $300,000, which is included in Non-current assets in the accompanying Consolidated Balance Sheets as of December 31, 2010, together with interest, became due. Notwithstanding the terms of the promissory note, Heights is disputing the amount due and has declined to make payment of the principal or interest relating to such note. The Company intends to vigorously pursue collection of the promissory note and believes it is collectible under the original arrangement.

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PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution.

The following table sets forth the various fees and expenses which will be paid by the Registrant in connection with the issuance and distribution of the securities being registered. With the exception of the SEC registration fee and the FINRA filing fee, all amounts shown are estimates.

SEC registration fee	$	1,832.79
FINRA filing fee		*
Printing and engraving expenses		*
Legal fees and expenses		*
Accounting fees and expenses		*
Transfer Agent and Registrar fees and expenses		*
Miscellaneous		*
Total	$	*

__________

* To be provided by amendment.

Item 14. Indemnification of Directors and Officers.

The certificate of incorporation of the Registrant to be effective upon the completion of the distribution described in the prospectus filed herewith will provide that the Registrant will indemnify, to the extent permitted by the Delaware General Corporation Law (“DGCL”), any person whom it may indemnify thereunder, including directors, officers, employees and agents of the Registrant. In addition, the Registrant’s certificate of incorporation will eliminate, to the extent permitted by the DGCL, personal liability of directors to the Registrant and its stockholders for monetary damages for breach of fiduciary duty.

The Registrant’s authority to indemnify its directors and officers is governed by the provisions of Section 145 of the DGCL, as follows:

A corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with such action, suit or proceeding if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the person’s conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that the person’s conduct was unlawful.

A corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys’ fees) actually and reasonably incurred by the person in connection with the defense or settlement of such action or suit if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper.

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To the extent that a present or former director or officer of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections (a) and (b) of this section, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection therewith.

Any indemnification under subsections (a) and (b) of this section (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the present or former director, officer, employee or agent is proper in the circumstances because the person has met the applicable standard of conduct set forth in subsections (a) and (b) of this section. Such determination shall be made, with respect to a person who is a director or officer at the time of such determination, (1) by a majority vote of the directors who are not parties to such action, suit or proceeding, even though less than a quorum, or (2) by a committee of such directors designated by majority vote of such directors, even though less than a quorum, or (3) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion, or (4) by the stockholders.

Expenses (including attorneys’ fees) incurred by an officer or director in defending any civil, criminal, administrative or investigative action, suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the corporation as authorized in this section. Such expenses (including attorneys’ fees) incurred by former directors and officers or other employees and agents may be so paid upon such terms and conditions, if any, as the corporation deems appropriate.

The indemnification and advancement of expenses provided by, or granted pursuant to, the other subsections of this section shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in such person’s official capacity and as to action in another capacity while holding such office. A right to indemnification or to advancement of expenses arising under a provision of the certificate of incorporation or a bylaw shall not be eliminated or impaired by an amendment to such provision after the occurrence of the act or omission that is the subject of the civil, criminal, administrative or investigative action, suit or proceeding for which indemnification or advancement of expenses is sought, unless the provision in effect at the time of such act or omission explicitly authorizes such elimination or impairment after such action or omission has occurred.

A corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person’s status as such, whether or not the corporation would have the power to indemnify such person against such liability under this section.

For purposes of this section, references to “the corporation” shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under this section with respect to the resulting or surviving corporation as such person would have with respect to such constituent corporation if its separate existence had continued.

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For purposes of this section, references to “other enterprises” shall include employee benefit plans; references to “fines” shall include any excise taxes assessed on a person with respect to any employee benefit plan; and references to “serving at the request of the corporation” shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by such director, officer, employee, or agent with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner such person reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner “not opposed to the best interests of the corporation” as referred to in this section.

The indemnification and advancement of expenses provided by, or granted pursuant to, this section shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person.

The Court of Chancery is hereby vested with exclusive jurisdiction to hear and determine all actions for advancement of expenses or indemnification brought under this section or under any bylaw, agreement, vote of stockholders or disinterested directors, or otherwise. The Court of Chancery may summarily determine a corporation’s obligation to advance expenses (including attorneys’ fees).

The Registrant will enter into indemnification agreements with each of its directors after the completion of the distribution, whereby it will agree to indemnify each director and officer from and against any and all judgments, fines, penalties, excise taxes and amounts paid in settlement or incurred by such director or officer for or as a result of action taken or not taken while such director was acting in his capacity as a director or executive officer of the Registrant.

Item 15. Recent Sales of Unregistered Securities.

On January 23, 2012, pursuant to the Plan of Reorganization, Footstar contributed all of its assets to Xstelos in exchange for the assumption of liabilities of Footstar and issuance of all of the shares of Xstelos to Footstar. As described in the prospectus of Xstelos dated [●], 2012, Footstar will make a pro rata distribution of Xstelos’s shares to Footstar stockholders, which will be registered under the Securities Act of 1933, as amended (the “Act”). The issuance of shares to Footstar was exempt from registration pursuant to Section 4(2) of the Act.

Item 16. Exhibits and Financial Statements.

(a)Exhibits:

Number		Description of Exhibit
2.1		Agreement and Plan of Merger, dated as of January 3, 2011, by and among CPEX Pharmaceuticals, Inc., FCB I Holdings, Inc. and FCB I Acquisition Corp. (incorporated by reference to Exhibit 2.1 to Footstar, Inc.’s Current Report on Form 8-K filed on January 6, 2011).
3.1		Certificate of Incorporation.
3.2		By-laws.
4.1		Specimen common stock certificate.*
5.1		Opinion of Olshan Grundman Frome Rosenzweig & Wolosky LLP.*
10.1		Plan of Reorganization dated January 20, 2012 by and between Xstelos Holdings, Inc. and Footstar, Inc.
10.2		License Agreement between Bentley Pharmaceuticals, Inc. and Auxilium A2, Inc. dated May 31, 2000, including thereto Amendment No. 1 dated October 2000, Amendment No. 2 dated May 31, 2001, Amendment No. 3 dated September 6, 2002 and Amendment No. 4 dated March 25, 2004 (incorporated by reference to Exhibit 10.5 to CPEX Pharmaceuticals, Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008).

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10.3		Loan Agreement, dated as of January 3, 2011, by and among FCB I LLC, The Bank of New York Mellon, as Agent, and the Lenders from time to time party thereto (incorporated by reference to Exhibit 10.1 to Footstar, Inc.’s Current Report on Form 8-K filed on April 6, 2011).
10.4		Lease Agreement relating lease by Footstar Corp for office space.*
21.1		Subsidiaries of Xstelos Holdings, Inc.
23.1		Consent of EisnerAmper LLP.
23.2		Consent of BDO USA, LLP.
23.3		Consent of Olshan Grundman Frome Rosenzweig & Wolosky LLP (included in Exhibit 5.1).*
24.1		Powers of Attorney (included on the signature page hereto).

__________________

* To be filed by amendment

Item 17. Undertakings.

(a) Insofar as indemnification for liabilities arising under the Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

(1) For purposes of determining any liability under the Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to be part of this registration statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

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SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York on the 24th day of January, 2012.

XSTELOS HOLDINGS, INC.


By:	/s/ Jonathan M. Couchman
	Name:	Jonathan M. Couchman
	Title:	President and Chief Executive Officer

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below does hereby constitute and appoint Jonathan M. Couchman with full power of substitution, his true and lawful attorney-in-fact and agent to act for him in his name, place and stead, in any and all capacities, to sign any or all amendments thereto (including without limitation any post-effective amendments hereto), and any Registration Statement for the same offering that is to be effective under Rule 462(b) of the Securities Act of 1933, as amended, and to file each of the same, with all exhibits thereto, and other documents in connection therewith or herewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same as fully, to all intents and purposes, as they or he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.

Signature	Title	Date

/s/ Jonathan M. Couchman	President, Chief Executive Officer	January 24, 2012
Jonathan M. Couchman	and Director (Principal Executive Officer, Principal Financial Officer, Principal Accounting Officer)

/s/ Eugene I. Davis	Director	January 24, 2012
Eugene I. Davis

/s/ Adam W. Finerman	Director	January 24, 2012
Adam W. Finerman

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EXHIBIT INDEX

Number		Description of Exhibit
2.1		Agreement and Plan of Merger, dated as of January 3, 2011, by and among CPEX Pharmaceuticals, Inc., FCB I Holdings, Inc. and FCB I Acquisition Corp. (incorporated by reference to Exhibit 2.1 to Footstar, Inc.’s Current Report on Form 8-K filed on January 6, 2011).
3.1		Certificate of Incorporation.
3.2		By-laws.
4.1		Specimen common stock certificate.*
5.1		Opinion of Olshan Grundman Frome Rosenzweig & Wolosky LLP.*
10.1		Plan of Reorganization dated January 20, 2012 by and between Xstelos Holdings, Inc. and Footstar, Inc.
10.2		License Agreement between Bentley Pharmaceuticals, Inc. and Auxilium A2, Inc. dated May 31, 2000, including thereto Amendment No. 1 dated October 2000, Amendment No. 2 dated May 31, 2001, Amendment No. 3 dated September 6, 2002 and Amendment No. 4 dated March 25, 2004 (incorporated by reference to Exhibit 10.5 to CPEX Pharmaceuticals, Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008).
10.3		Loan Agreement, dated as of January 3, 2011, by and among FCB I LLC, The Bank of New York Mellon, as Agent, and the Lenders from time to time party thereto (incorporated by reference to Exhibit 10.1 to Footstar, Inc.’s Current Report on Form 8-K filed on April 6, 2011).
10.4		Lease Agreement relating lease by Footstar Corp for office space.*
21.1		Subsidiaries of Xstelos Holdings, Inc.
23.1		Consent of EisnerAmper LLP.
23.2		Consent of BDO USA, LLP.
23.3		Consent of Olshan Grundman Frome Rosenzweig & Wolosky LLP (included in Exhibit 5.1).*
24.1		Powers of Attorney (included on the signature page hereto).

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Attached files

Xstelos Holdings, Inc. Reports

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