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
 
 
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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.
 
 
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.
 
 
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.
 
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.
 
 
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.
 
 
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.
 
 
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.
 
 
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.
 
 
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:
 
 
 
·
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.
 
 
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.
 
 
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.
 
 
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.
 
 
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.
 
 
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.
 
 
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.
 
 
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.
 
 
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:
 
 
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the expectation that our business and operations will continue following the distribution as presently conducted;
 
 
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competition from existing products or new products that may emerge;
 
 
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regulatory difficulties relating to products that have already received regulatory approval;
 
 
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potential product liability claims;
 
 
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our dependency on third-party manufacturers to supply or manufacture our products;
 
 
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our ability to establish or maintain collaborations, licensing or other arrangements;
 
 
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our ability and third parties’ abilities to protect intellectual property rights;
 
 
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compliance with obligations under intellectual property licenses with third parties;
 
 
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our ability to attract and retain key personnel to manage our business effectively; and
 
 
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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.
 
 
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.
 
 
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.
 
 
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.
 
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, 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.
 
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.
 
 
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.
 
 
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 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.
 
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 of Reorganization.
 
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.
 
 
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:
 
 
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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;
 
 
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Application to injectable peptides that could be administered intranasally with CPE-215;
 
 
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Application to therapeutic molecules that are degraded by passage through the liver or would benefit from intra-nasal administration to eliminate first-pass metabolism;
 
 
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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;
 
 
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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.
 
 
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.
 
 
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.
 
 
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.
 
 
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.
 
 
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.
 
 
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.
 
 
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.
 
 
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.
 
 
 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.
 
 
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.
 
 
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.
 
 
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.
 
 
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.
 
b.
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.
 
c.
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.
 
d.
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.
 
e.
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.
 
 
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
 
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.
 
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.
 
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.
 
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.
 
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 of Reorganization.
 
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.
 
 
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.
 
 
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.
 
 
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.
 
 
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.
 
 
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.
 
 
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.
 
 
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®.
 
 
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.
 
 
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.
 
 
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.
 
 
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
 
 
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.
 
 
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.
 
 
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.
 
 
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.
 
 
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.
 
 
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:
 
 
 
·
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.
 
 
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.
 
 
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
   

 
 
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.
 
 
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.
 
 
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.
 
 
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 )