PART I
Overview
We are a biotechnology company focused on diagnostic products primarily for disorders in the central nervous system, or CNS. Our clinical product
candidate is called Altropane and based on the following proprietary technology platform:
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Molecular imaging program focused on the diagnosis of i) Parkinsonian Syndromes, or PS, including Parkinson’s Disease, or PD, and ii) Dementia
with Lewy Bodies, or DLB;
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During the second half of 2011 and throughout 2012, severe resource constraints forced us to
terminate all on-going pre-clinical research efforts and to focus our minimal resources on identifying a suitable development partner for our Altropane product candidate. All other development programs were terminated and, wherever possible,
in-licensed technology was returned to our licensing partners.
At December 31, 2012, we were considered a “development stage
enterprise” and will continue to be so until we realize royalty revenue from our outlicensed intellectual property. A development stage enterprise is one in which planned principal operations have not commenced or, if its operations have
commenced, there has been no significant revenue there from. Development stage companies report cumulative costs from the inception of the enterprise. Our development stage started on October 16, 1992 and continued through December 31,
2012.
As of December 31, 2012, we have experienced total net losses since inception of approximately $207,983,000, stockholders’
deficit of approximately $26,721,000 and a net working capital deficit of approximately $9,167,000. The cash and cash equivalents available at December 31, 2012 will not provide sufficient working capital to meet our anticipated expenditures
for the next twelve months. As of January 1, 2013 we have liquidated 235,000 shares of our Navidea Biopharmaceuticals, Inc. (“Navidea” AMEX: NAVB) common stock for total proceeds of $726,934. We have used the funds to settle our
lawsuit with Children’s Hospital and meet our day-to-day obligations and continue to comply with our regulatory reporting requirements. As of February 28, 2013, we have 50,000 shares of NAVB common stock which have from January 1, 2013
through March 28, 2013 traded within the range of $2.88—$3.35 a share.
Product Development — Molecular Imaging Program
Altropane Molecular Imaging Agent
The Altropane molecular imaging agent is intended to be used for the differential diagnosis of PS, including PD, and non-PS in patients with an upper extremity tremor. After a series of discussions with
the U.S. Food and Drug Administration, or FDA, and our expert advisors, the POET-2 program was designed as a two-part Phase III program. The first part of the program enrolled 54 subjects in a multi-center clinical study to acquire a set of
Altropane images which will be used to train the expert readers in the second part of the program, as is the customary process for clinical trials of molecular imaging agents. Enrollment in the first part of POET-2 was completed in January 2009. In
April, 2009 we reached agreement with the FDA under the Special Protocol Assessment, or SPA, process for the second part of the Phase III clinical trial program of Altropane. A SPA is a process by which sponsors and the FDA reach an agreement on the
size, design and analysis of clinical trials that will form the primary basis of approval. The Phase III program is designed to confirm the diagnostic utility of the agent in anticipation of drug registration. The second portion of the Phase III,
POET-2 program covered by the SPA consists of two clinical trials in up to 480 subjects in total to be conducted in parallel at up to 40 medical facilities throughout the US. The subjects to be tested will be 40-80 years of age and have had a
tremor in their hand(s) or arm(s) for less than three years. Each subject will be assessed by a general neurologist, an Altropane imaging procedure and a Movement Disorder Specialist considered the “gold standard”. The success of the trial
will be determined by measuring the diagnostic efficacy of the neurologist diagnosis compared with the diagnosis determined by the Altropane scan versus the MDS gold standard diagnosis.
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In January 2012, we executed an Option Agreement with Navidea pursuant to which Navidea paid Alseres the
non-refundable sum of $500,000 in exchange for the exclusive option to license the Altropane program, to conduct its final due diligence review of the program and to prepare the paperwork necessary for the execution of the license.
On July 31, 2012 we executed a License Agreement with Navidea under which we granted Navidea an exclusive, worldwide sublicense to research,
develop, and commercialize Altropane. In connection with the execution of this agreement, Navidea made a one-time sublicense execution payment to us equal to (i) One Hundred Seventy-Five Thousand Dollars ($175,000) and (ii) issued us
300,000 shares of NAVB common stock.
The license agreement also provides for contingent milestone payments of up to $2.9 million, $2.5
million of which will principally occur at the time of product registration or upon commercial sales, and the issuance of up to an additional 1.15 million shares of Navidea stock, 950,000 shares of which are issuable at the time of product
registration or upon commercial sales. In addition, the license terms anticipate royalties on yearly net sales of the approved product which are consistent with industry-standard terms and certain license extension fees, payable in cash and shares
of common stock, in the event certain milestones are not met.
We have licensed worldwide exclusive rights to develop Altropane from Harvard
University and its affiliated hospitals, which we refer to as Harvard and its Affiliates, including the Massachusetts General Hospital. The license agreement provides for milestone payments and royalties based on product sales that are consistent
with industry averages for such products.
Brain Diagnostic Centers Opportunity
We are presently conducting a preliminary feasibility assessment for a new business focused on organizing and operating a US network of Brain Diagnostic
Centers concentrating on neurodegenerative conditions. The centers will provide screening, diagnosis and on-going monitoring of both pre-symptomatic and symptomatic patients affected by neurodegenerative brain disorders. The centers will take
advantage of currently available in-vitro diagnostics as well as imaging diagnostics to identify patients who are “at risk” of developing degenerative brain disorders. We are working, on a confidential basis, with industry participants to
assess possible support for the development of the potential new business including capital and human resources.
The number of Americans
living with neurodegenerative movement disorders such as Parkinson’s disease (PD), and dementias like Alzheimer’s (AD) and Dementia with Lewy Bodies (DLB), is expected to grow from 20 million in 2010 to 30 million by 2030. By
2050, that number is expected to grow to 40 million. Unchecked and without accounting for loss of productivity, the annual cost of care for patients with these diseases will grow from $200 billion today to $500 billion by 2030
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Today, PD, AD and DLB are diagnosed post-symptomatically. By the time diagnosable clinical symptoms appear, the disease is in an advanced stage. The
disease has already progressed well beyond the point that current therapies have been shown to have disease modifying effects. Drugs in development are routinely tested in patients with advanced stage disease, where the drugs are least likely to
have the disease modifying or arresting affect desired. What is needed are:
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Early detection, definitive diagnostics and therapeutic drug monitoring tools; and
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Comprehensive, longitudinal data to enable disease modifying treatments for early stage degenerative brain diseases
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At present our work on this opportunity is preliminary and is focused on identifying an initial location for a pilot site intended to demonstrate the
proof of concept for the centers and accessing potential sources of capital. We can provide no assurance that this business will ever be launched or that the capital and human resources necessary to launch and grow the new business will be available
on acceptable terms if at all.
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Employees
As of December 31, 2012 we employed 3 full-time employees.
Other Information
We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and,
accordingly, file reports, proxy statements and other information with the Securities and Exchange Commission. Such reports, proxy statements and other information can be read and copied at the public reference facilities maintained by the
Securities and Exchange Commission at the Public Reference Room, 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Information regarding the operation of the Public Reference Room may be obtained by calling the Securities and Exchange
Commission at 1-800-SEC-0330. The Securities and Exchange Commission maintains a web site (http://www.sec.gov) that contains material regarding issuers that file electronically with the Securities and Exchange Commission.
Our Internet address is www.alseres.com. We are not including the information contained on our web site as a part of, or incorporating it by reference
into, this Annual Report on Form 10-K. We make available free of charge on our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.
Additional financial information is contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of Part II, and in Item 8 of
Part II of this Annual Report on Form 10-K.
Statements contained or
incorporated by reference in this Annual Report on Form 10-K that are not based on historical fact are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Exchange Act. These forward-looking statements regarding future events and our future results are based on current expectations, estimates, forecasts, and projections, and the beliefs
and assumptions of our management including, without limitation, our expectations regarding our product candidates, including the success and timing of our preclinical, clinical and development programs, the submission of regulatory filings and
proposed partnering arrangements, the outcome of any litigation, collaboration, merger, acquisition and fund raising efforts, results of operations, selling, general and administrative expenses, research and development expenses and the sufficiency
of our cash for future operations. Forward-looking statements may be identified by the use of forward-looking terminology such as “may,” “could,” “will,” “expect,” “estimate,” “anticipate,”
“continue,” or similar terms, variations of such terms or the negative of those terms.
We cannot assure investors that our
assumptions and expectations will prove to have been correct. Important factors could cause our actual results to differ materially from those indicated or implied by forward-looking statements. Such factors that could cause or contribute to such
differences include those factors discussed below. We undertake no intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. If any of the following risks actually
occur, our business, financial condition or results of operations would likely suffer.
Risks Related to our Financial Results and Need for
Additional Financing
We are a development stage company.
Biotechnology companies that have no approved products or other sources of revenue are generally referred to as development stage companies. We have never generated revenues from product sales and we do
not currently expect to generate revenues from product sales for at least the next three years. Our future revenues are expected to be derived from royalties paid to us by Navidea if and when the Altropane product is approved and sold by
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them. There can be no assurances that Altropane will be approved or that sales will result. If we do generate revenues and operating profits in the future, our ability to continue to do so in the
long term could be affected by Navidea’s ability to invest in marketing of Altropane and by the introduction of competitors’ products and other market factors.
We have incurred losses from operations since inception and anticipate losses for the foreseeable future.
We expect to incur operating losses for at least the next three years. The level of our operating losses may increase in the future if Navidea fails to satisfy its contractual obligations to develop and
commercialize Altropane. We will never generate revenues or achieve profitability unless Navidea or we obtain regulatory approval and market acceptance of our Altropane product. This will require Navidea and/or us to be successful in a range of
challenging activities, including clinical trial stages of development, obtaining regulatory approval for Altropane, and manufacturing, marketing and selling it. We may never succeed in these activities, and may never generate revenues that are
significant enough to achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis.
As of December 31, 2012, we have experienced total net losses since inception of approximately $207,983,000, stockholders’ deficit of approximately $26,721,000 and a net working capital deficit
of approximately $9,167,000. The cash and cash equivalents available at December 31, 2012 will not provide sufficient working capital to meet our anticipated expenditures for the next twelve months. We believe that the cash available as of
March 15, 2013 may cover our expenses through April 2013.
As a result of our current lack of financial liquidity and negative
stockholders’ equity we may not be able to raise additional capital on favorable terms, if at all.
Since inception, we have
primarily satisfied our working capital requirements from the sale of our securities through private placements. These private placements have included the sale and issuance of preferred stock, common stock, promissory notes and convertible
debentures.
For the year ended December 31, 2012, we obtained all of our funding from one key investor and our license transaction with
Navidea. Our key investor, Mr. Robert Gipson, is a related party to the Company. He serves as a senior director of Ingalls & Snyder and served as a director of the Company in 2004. His activities with the Company are more fully
described in the footnotes to the consolidated financial statements contained herein. In the event that Mr. Gipson cannot provide future funding or we cannot obtain any additional funding from sources other than Mr. Gipson, we may need to
cease operations or modify our current business plan and in any such event may not be able to continue as a going concern. The financial statements have been prepared assuming that the Company will continue as a going concern basis; however, the
report of the independent registered public accounting firm indicates substantial doubt about the Company’s ability to continue as a going concern.
Risks Related to Clinical Development of our Altropane Product Candidate
Navidea is
obligated under the license agreement to complete the clinical development of Altropane and to seek its regulatory approval. However, our Altropane product candidate is only one of a number of product candidates in the Navidea development pipeline.
We can provide no assurances that development of our Altropane product candidate by Navidea will be or remain a high priority project for Navidea. There can be no assurances that Navidea will have or be able to gain access to the capital and human
resources necessary to satisfy its obligations under the license agreement. If Navidea is unable to meet its obligations under the license agreement, we would be forced to terminate the license agreement and attempt to identify a new development
partner for the Altropane product candidate.
Risks Related to Commercialization
Our success depends on Navidea’s ability to successfully develop our Altropane product candidate into a commercial product.
To date, we have not marketed, distributed or sold any products. The success of our business depends primarily upon Navidea’s ability to successfully
develop and commercialize our Altropane product candidate. Successful
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research and product development in the biotechnology industry is highly uncertain, and very few research and development projects produce a commercial product. In the biotechnology industry, it
has been estimated that less than five percent of the technologies for which research and development efforts are initiated ultimately result in an approved product. If we are unable to successfully commercialize Altropane or any of our other
product candidates, our business would be materially harmed and we would likely be forced to cease operations.
Risks Related to Regulation
Our Altropane product candidate is subject to rigorous regulatory review and, even if approved, remains subject to extensive
regulation.
Our technologies and product candidates must undergo a rigorous regulatory approval process which includes extensive
preclinical and clinical testing to demonstrate safety and efficacy before any resulting product can be marketed. Our research and development activities are regulated by a number of government authorities in the United States and other countries,
including the FDA pursuant to the Federal Food, Drug, and Cosmetic Act. The clinical trial and regulatory approval process usually requires many years and substantial cost. To date, neither the FDA nor any of its international equivalents has
approved any of our product candidates for marketing.
Obtaining FDA approval to sell our product candidates is time-consuming and expensive.
The FDA usually takes at least 12 to 18 months to review an NDA which must be submitted before the FDA will consider granting approval to sell a product. If the FDA requests additional information, it may take even longer for the FDA to make a
decision especially if the additional information that they request requires us to complete additional studies. We may encounter similar delays in foreign countries. After reviewing any NDA we submit, the FDA or its foreign equivalents may decide
not to approve our products. Failure to obtain regulatory approval for a product candidate will prevent us from commercializing our product candidates.
Other risks associated with the regulatory approval process include:
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Regulatory approvals may impose significant limitations on the uses for which any approved products may be marketed;
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Any marketed product and its manufacturer are subject to periodic reviews and audits, and any discovery of previously unrecognized problems with a
product or manufacturer could result in suspension or limitation of approvals;
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Changes in existing regulatory requirements, or the enactment of additional regulations or statutes, could prevent or affect the timing of our ability
to achieve regulatory compliance. Federal and state laws, regulations and policies may be changed with possible retroactive effect, and how these rules actually operate can depend heavily on administrative policies and interpretation over which we
have no control, and we may possess inadequate experience to assess their full impact upon our business; and
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The approval may impose significant restrictions on the indicated uses, conditions for use, labeling, advertising, promotion, marketing and/or
production of such product, and may impose ongoing requirements for post-approval studies, including additional research and development and clinical trials.
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Risks Related to our Intellectual Property
If we are unable to secure adequate
patent protection for our technologies; then we may not be able to compete effectively.
At the present time, we do not have patent
protection for all uses of our technologies. There is significant competition in the field of CNS diseases. Our competitors may seek patent protection for their technologies, and such patent applications or rights might conflict with the patent
protection that we are seeking for our technologies. If we do not obtain patent protection for our technologies, or if others obtain patent rights that
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block our ability to develop and market our technologies, our business prospects may be significantly and negatively affected. Further, even if patents can be obtained, these patents may not
provide us with any competitive advantage if our competitors have stronger patent positions or if their product candidates work better in clinical trials than our product candidates. Our patents may also be challenged, narrowed, invalidated or
circumvented, which could limit our ability to stop competitors from marketing similar products or limit the length of term of patent protection we may have for our products.
We in-license a significant portion of our intellectual property and if we fail to comply with our obligations under any of the related agreements, we could lose license rights that are necessary to
develop our product candidate.
We have entered into license agreements with Harvard University and its affiliated hospitals, or
Harvard and its Affiliates, which give us rights to intellectual property that is necessary for our business. These license arrangements impose various development and royalty obligations on us. If we breach these obligations and fail to cure such
breach in a timely manner, these exclusive licenses could be converted to non-exclusive licenses or the agreements could be terminated, which would result in our being unable to develop, manufacture and sell products that are covered by the licensed
technology.
Risks Related to Competition
We are engaged in highly competitive industries dominated by larger, more experienced and better capitalized companies.
The biotechnology and pharmaceutical industries are highly competitive, rapidly changing, and are dominated by larger, more experienced and better capitalized companies. Such greater experience and
financial strength may enable them to bring their products to market sooner than Navidea or us, thereby gaining the competitive advantage of being the first to market. Research on the causes of, and possible treatments for, diseases for which we are
trying to develop therapeutic or diagnostic products are developing rapidly and there is a potential for extensive technological innovation in relatively short periods of time.
To our knowledge, there is only one company, GE Healthcare (formerly Nycomed/Amersham), that has marketed a diagnostic imaging agent
for PD and DLB, DaTSCAN
®
. GE Healthcare has obtained marketing approval in Europe. In January, 2011, GE
Healthcare obtained approval to market DaTSCAN in the U.S. as well. GE Healthcare has significantly greater infrastructure and financial resources than us. Marketing approval s in the US and Europe combined with their established market presence,
and greater financial strength could position GE to make it difficult for Navidea or us to successfully market Altropane if it is approved for sale.
Risks Related to our Stock
Our common stock is deemed to be “penny stock,”
which may make it more difficult for investors to sell their shares due to suitability requirements.
Our common stock is deemed to be
“penny stock” as that term is defined in Rule 3a51-1 promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”). These requirements may reduce the potential market for our common stock by reducing the number
of potential investors. This may make it more difficult for investors in our common stock to sell shares to third parties or to otherwise dispose of them. This could cause our stock price to decline.
Broker/dealers dealing in penny stocks are required to provide potential investors with a document disclosing the risks of penny stocks. Moreover,
broker/dealers are required to determine whether an investment in a penny stock is a suitable investment for a prospective investor.
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Item 1B.
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Unresolved Staff Comments
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Not
applicable.
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Our corporate office is
located at 239 South Street in Hopkinton, Massachusetts. We are currently a tenant at will occupying approximately 4,500 square feet of office space. We believe that our existing facility is adequate for our present and anticipated needs.
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Item 3.
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Legal Proceedings
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On March 13, 2012
the Company received notice that Children’s Hospital Boston and Children’s Medical Center Corporation had filed a lawsuit in Middlesex Superior Court, Middlesex County, Massachusetts seeking to recover amounts alleged to be owed by the
Company to the plaintiffs in the amount of $642,906 plus costs.
On February 1, 2013 the Company entered into a Settlement Agreement and
Release with Boston Children’s Hospital (BCH) and Children’s Medical Center Corporation (CMCC) in full settlement of the lawsuit filed by BCH and CMCC seeking to recover amounts alleged to be owed by the Company to the plaintiffs totaling
$642,906 plus costs.
In settlement of all claims by BCH and CMCC, the Company agreed to pay a lump sum of One Hundred Eighty five Thousand
dollars ($185,000) to the plaintiffs. In addition to the lump sum payment, the Company agreed to pay to the plaintiffs an additional sum equal to the then cash value of 20,000 shares of the common stock of Navidea BioPharmaceuticals, Inc. upon the
occurrence of the first milestone described in Section 4.2 of the sublicense agreement dated as of July 31, 2012 between Navidea BioPharmaceuticals, Inc. and the Company. This second payment is only due upon the occurrence of the first
milestone unless the Company declares bankruptcy or alters its agreement with Navidea in a manner that results in the delay or cancellation of said milestone payment.
On May 2, 2012 the Company received notice that Biostorage Technologies, Inc. had filed a lawsuit in Marion Superior/Circuit Court, Marion County, Indiana seeking to recover amounts alleged to be
owed by the Company to the plaintiffs totaling $119,363. The Company believes that the total amounts claimed in the Biostorage lawsuit are overstated by at least 100%. The Company believes that a high level of uncertainty regarding the outcome,
disposition and ultimate liability to the Company related to this lawsuit exists thus we have retained an accrual of $133,000 on our books which reflects the amount of the alleged claim plus additional legal fees. The discovery process in the case
is on-going The Company intends to vigorously pursue all available legal and equitable remedies to defend this claim with a goal of settling it at or below the level of liability we believe is actually owed and without a trial.
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Item 4.
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Mine Safety Disclosures
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Not applicable
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
1. The Company and Summary of Significant Accounting Policies
Alseres Pharmaceuticals, Inc. and its subsidiaries (the “Company”) is a biotechnology company engaged in the development of
diagnostic products primarily for disorders in the central nervous system. The Company was founded in 1992 and merged with a publicly held company in 1995 (the “Merger”) whereby the Company changed its name to Boston Life Sciences, Inc.
Effective June 7, 2007, the Company changed its name to Alseres Pharmaceuticals, Inc. During the period from inception through December 31, 2012, the Company has devoted substantially all of its efforts to business planning, raising
financing, furthering the research and development of its technologies, and corporate partnering efforts. Accordingly, the Company is considered to be a “development stage enterprise” as defined in ASC 915,
Development Stage
Entities
and will continue to be so until the commencement of commercial operations. The development stage is from October 16, 1992 (inception) through December 31, 2012.
The accompanying consolidated financial statements have been prepared on a basis which assumes that the Company will continue as a going concern which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The uncertainty inherent in the need to raise additional capital and the Company’s recurring losses from operations raise substantial doubt about the Company’s ability to
continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Company is taking a number of steps to address the issues regarding our ability to continue
as a going concern until such time as routine royalty income from the Navidea transaction is realized by the Company. We are continuing to tightly control our monthly expenses through further staff reductions and elimination of discretionary
spending. We are engaged in fundraising efforts that could include one or more of the following: a debt financing or equity offering, or a collaboration, merger, acquisition or other transaction with one or more pharmaceutical or biotechnology
companies. There can be no assurances that any of these efforts will be successful and we may still be forced to curtail operations in such event.
Basis of Presentation
The Company’s consolidated financial statements include the accounts of its seven subsidiaries where all of the Company’s operations are conducted. During 2012 the Company organized its seventh
subsidiary, Alseres Neurodiagnostics, Inc. as a Delaware corporation. As of December 31, 2012 all of the subsidiaries were wholly-owned. All significant intercompany transactions and balances have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those
estimates. Changes in estimates are reflected in reported results in the period in which they become known.
Cash and Cash Equivalents
Cash equivalents are short-term, highly liquid financial instruments that are readily convertible to cash and have maturities of 90 days or less from the date of purchase. As of December 31, 2012 and
2011, cash equivalents consisted of overnight sweep account balances.
Short-term Investments
The Company has designated its marketable securities as of each balance sheet date as available-for-sale securities and accounts for them at their respective fair values. Marketable securities are
classified as short-term
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ALSERES PHARMACEUTICALS, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
or long-term investments based on the nature of these securities and the availability of these securities to meet current operating requirements. Marketable securities that are readily available
for use in current operations are classified as short-term available-for-sale securities and are reported as a component of current assets in the accompanying consolidated balance sheets. The Company reviews all available-for-sale securities at each
period end to determine if they remain available-for-sale based on the Company’s then current intent and ability to sell the security if it is required to do so. As of December 31, 2012, the Company’s short-term investments included
285,000 shares of common stock in Navidea Biopharmaceutical, Inc. (“NAVB”) and 39,209 shares of FluoroPharma Medical, Inc. common stock (“FPMI”). The unrealized loss associated with these marketable securities has been determined
to be temporary and therefore has been included in other comprehensive loss as a component of stockholders’ deficit.
As of
February 15, 2013, the Company had completed the sale of 235,000 shares of NAVB common stock for total proceeds of $726,934. The resulting loss of $170,766 from these sales will be recognized in the condensed consolidated comprehensive loss
statement in the first quarter of 2013.
Fair Value of Financial Instruments
The carrying amounts of the Company’s cash and cash equivalents, prepaid expenses, trade payables, accrued expenses and notes payable approximate
their fair value due to the short-term nature of these instruments. Short-term investments consist of available-for-sale-securities as of December 31, 2012 and 2011 and are carried at fair value as disclosed in Note 10.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets, ranging from three to five years.
Revenue Recognition
The Company evaluates multiple element revenue arrangements under FASB ASC 605-25,
Multiple-Element Arrangements
(as amended by ASU No. 2009-13). In addition to the form of the arrangement,
the substance of the arrangement is also considered in determining whether separate agreements entered into, at or near the same time, that include elements that are interrelated or interdependent should be treated as one multiple-element
arrangement. If the Company concludes that separate agreements represent one arrangement, then all the elements in the separate agreements are combined into one multiple-element arrangement for accounting purposes.
Revenues from non-refundable license fees are recognized upon receipt of the payment if the license has stand-alone value, we do not have ongoing
involvement or obligations, and we have determined the best estimate of the selling price for any undelivered items. When non-refundable license fees do not meet all of these criteria, the license revenues are recognized over the expected period of
performance.
We periodically review our expected period of substantial involvement under the agreements that provide for non-refundable
up-front payments and license fees. When applicable, we will adjust the amortization periods when appropriate to reflect changes in assumptions relating to the duration of our expected involvement. We could accelerate revenue recognition for
non-refundable upfront payments or license fees in the event of an early termination of the agreements. Alternatively, we could decelerate such revenue recognition if our period of involvement is extended. While changes to such estimates have no
impact on our reported cash flows, our reported revenue is significantly influenced by our estimates of the period over which our obligations are expected to be performed and, therefore, over which revenue will be recognized.
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ALSERES PHARMACEUTICALS, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Revenues associated with substantive, at-risk milestones pursuant to our licensing agreements are
recognized upon achievement of the milestones. We consider a milestone to be substantive at the inception of the arrangement if it is commensurate with either our performance to achieve the milestone or the enhancement of the value of the delivered
item as a result of a specific outcome resulting from our performance to achieve the milestone, it relates solely to past performance and it is reasonable relative to all of the deliverables and payment terms within the arrangement. Non-refundable
contingent future amounts receivable in connection with future events specified in our licensing agreements that are not considered milestones will be recognized as revenue when payments are earned by our counterparties through completion of any
underlying performance obligations, the amounts are fixed or determinable and collectability is reasonably assured.
Comprehensive Loss
On January 1, 2012, the Company adopted the new presentation requirements under ASU 2011-05, “
Presentation of Comprehensive Income
”. ASU 2011-05 requires companies to present the
components of net income and the components of other comprehensive income either as one continuous statement or as two consecutive statements. Other than a change in presentation, the implementation of ASU 2011-05 did not have a material impact on
our financial statements.
Convertible Redeemable Shares
In accordance with Accounting Standards Codification 480,
Distinguishing Liabilities from Equity (
ASC 480-10-S99) the Company determined that since the Series F shares are mandatorily
redeemable for cash or for a variable, uncapped, number of common shares, they do not qualify for equity classification.
Income Taxes
The Company accounts for income taxes under the liability method. Under the liability method, deferred income taxes are determined based on differences between the financial reporting and tax bases of
assets and liabilities. They are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company is required to adjust its deferred tax liabilities in the period when tax rates or the
provisions of the income tax laws change. Valuation allowances are established to reduce deferred tax assets to the amounts expected to be realized.
2. Restricted Marketable Securities
Under the terms of the Amended and Restated License Agreement with the President and Fellows of Harvard College (“Harvard”)
entered into on July 31, 2012, the Company had an obligation to transfer 15,000 shares of the Navidea stock received from the Navidea sublicense agreement to Harvard. The market value of the shares on December 31, 2012 was $42,450. The
Company completed the transfer of the 15,000 shares of NAVB common stock to Harvard during January 2013.
3. Property and Equipment, net
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December 31,
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2012
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2011
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Computer equipment
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$
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26,539
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$
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26,539
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Office furniture and equipment
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|
|
6,738
|
|
|
|
6,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,277
|
|
|
|
33,277
|
|
|
Less accumulated amortization and depreciation
|
|
|
32,091
|
|
|
|
30,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,186
|
|
|
$
|
2,475
|
|
|
|
|
|
|
|
|
|
|
|
32
ALSERES PHARMACEUTICALS, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Depreciation expense for the year ended December 31, 2012 was approximately $1,300. Amortization
and depreciation expense for the year ended December 31, 2011 was approximately $41,000. Amortization and depreciation expense for the period from inception through December 31, 2012 totaled approximately $2,891,955.
4. Accounts Payable and Accrued Expenses
The Company’s management is required to estimate accrued expenses as part of the process of preparing financial statements.
Accrued expenses include professional service fees for legal services, accounting and tax services and regulatory reporting services.
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
|
Research and development expenses
|
|
$
|
1,339,851
|
|
|
$
|
1,316,095
|
|
|
Professional fees
|
|
|
735,990
|
|
|
|
715,672
|
|
|
General and administrative expenses
|
|
|
121,554
|
|
|
|
99,746
|
|
|
Compensation related expenses
|
|
|
81,003
|
|
|
|
78,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,278,398
|
|
|
$
|
2,210,229
|
|
|
|
|
|
|
|
|
|
|
|
5. Deferred charges
Under the terms of the Amended and Restated License Agreement with Harvard, total license fees of $66,050 are due to Harvard related to
the cash and stock consideration received from the sublicense agreement with Navidea The Company is amortizing those license fees on a straight-line basis over the estimated performance period which is the effective date of the agreements on
July 31, 2012 through the patent expiration date in June 2030.
6. Net Loss per share
Basic and diluted net loss per share attributable to common stockholders has been calculated by dividing net loss attributable to
common stockholders by the weighted average number of common shares outstanding during the period. All potentially dilutive common shares have been excluded from the calculation of weighted average common shares outstanding since their inclusion
would be anti-dilutive.
Stock options to purchase approximately 3.0 million shares of common stock were outstanding at December 31,
2012, but were not included in the computation of diluted net loss per common share because they were anti-dilutive. Stock options and warrants to purchase approximately 3.6 million shares of common stock were outstanding at December 31,
2011, but were not included in the computation of diluted net loss per common share because they were anti-dilutive. In computing diluted earnings per share, common stock equivalents in the
form of convertible redeemable preferred stock were not included in the calculation of net loss per share as their inclusion would be anti-dilutive. The exercise of stock options outstanding at
December 31, 2012 could potentially dilute earnings per share in the future.
33
ALSERES PHARMACEUTICALS, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
7. Notes Payable and Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Convertible Notes Payable to Significant Stockholders
|
|
2012
|
|
|
2011
|
|
|
Unsecured convertible promissory note; interest rate of 5%; due December 31, 2010
|
|
$
|
—
|
|
|
$
|
4,655,173
|
|
|
Unsecured convertible promissory note; interest rate of 5%; due December 31, 2010
|
|
|
—
|
|
|
|
10,000,000
|
|
|
Unsecured convertible promissory note; interest rate of 5%; due December 31, 2010
|
|
|
—
|
|
|
|
2,172,415
|
|
|
Unsecured convertible promissory note; interest rate of 5%; due December 31, 2010
|
|
|
—
|
|
|
|
5,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate carrying value
|
|
$
|
—
|
|
|
$
|
21,827,588
|
|
|
|
|
|
|
|
|
|
|
|
No interest expense was incurred related to the convertible notes payable for the year ended December 31, 2012. Interest expense
totaling $1,417,776 was incurred related to the convertible notes payable for the year ended December 31, 2011. In December 2011 the Company entered into the Fifth Amendment to Convertible Note Purchase Agreement (“Amendment”) with
the Purchasers of convertible promissory notes of the Company purchased pursuant to a Promissory Note Purchase Agreement executed in March, 2007. The Amendment provided that each Purchaser would waive their respective right to be paid any and all
interest accrued or to be accrued pursuant to the promissory notes issued under the Note Purchase Agreement. This transaction resulted in a reduction of $6,132,499 in accrued interest expense. The Amendment related to convertible promissory notes
held by the Company’s majority shareholder, therefore the reversal of this accrual was recorded as a contribution to capital.
In
December 2012, Arthur Koenig and Ingalls & Snyder Value Partners LLP elected to convert the remaining $5,827,588 of their convertible notes payable into common stock of the Company. Effective July 31, 2012, Arthur Koenig and
Ingalls & Snyder Value Partners LLP had executed the Sixth Amendment to Convertible Note Purchase Agreement. The sixth amendment provides that the two lenders waive any and all rights to convert the $5,827,588 of principal still outstanding
under the promissory notes into royalty on future sales of the Company’s Altropane product, while retaining their right to convert all or any portion of the remaining convertible debt to common stock of the Company at $2.50 per share.
Effective July 31, 2012, Robert Gipson, Thomas Gipson, Arthur Koenig and Ingalls & Snyder Value Partners LLP, all lenders to
the Company under a Convertible Note Purchase Agreement originally executed in 2007, elected to convert $16,000,000 of principal outstanding under the promissory notes to a royalty on future net sales of the Company’s Altropane product (see
Note 8). All other rights under the Convertible Note Purchase Agreement related to the $16,000,000 of principal were waived by the lenders. As of December 31, 2012, the contingent royalty liability resulting from the conversion is classified as
a Level 3 liability and is reflected in the consolidated balance sheet at its fair value as a long-term liability.
The Company has
demonstrated financial difficulties. Further, the intent of the above convertible debt conversion and modifications was to allow for continued product development and was considered to be the most viable option for the Company. Based on these
factors, these transactions were considered to be concessions and were accounted for as a troubled debt restructuring under the guidance of ASC 470-60-55. As prescribed in ASC 470-60-35-11, when estimates are used relating to the maximum future cash
payments as is this case, no gain shall be recognized until the estimated maximum future cash payments fall below the carrying value of the debt before restructuring. As a result of applying this guidance the company has determined that the carrying
value of the obligation remains $16,000,000 at December 31, 2012.
34
ALSERES PHARMACEUTICALS, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Promissory Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Notes Payable to Significant Stockholder
|
|
2012
|
|
|
2011
|
|
|
Unsecured demand note payable; interest rate of 7%: issued December 2009
|
|
$
|
350,000
|
|
|
$
|
350,000
|
|
|
Unsecured demand notes payable; interest rate of 7%: issued January 2010 — December 2010
|
|
|
3,310,000
|
|
|
|
3,310,000
|
|
|
Unsecured demand notes payable; interest rate of 7%: issued January 2011 — December 2011
|
|
|
2,240,000
|
|
|
|
2,240,000
|
|
|
Unsecured demand notes payable; interest rate of 7%: issued January 2012 — September 2012
|
|
|
510,000
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,410,000
|
|
|
|
5,900,000
|
|
|
Accrued interest
|
|
|
919,526
|
|
|
|
486,691
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate carrying value
|
|
$
|
7,329,526
|
|
|
$
|
6,386,691
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense totaling $432,835 and $411,741 was incurred related to the notes payable for the years ended December 31, 2012
and 2011, respectively.
According to a Schedule D/A filed with the SEC on December 27, 2011 Robert Gipson beneficially owned
approximately 50.1% of the outstanding common stock of the Company as of that date. Robert Gipson, who serves as a Senior Director of Ingalls & Snyder and a General Partner of ISVP, served as a director of the Company from June 15,
2004 until October 28, 2004. According to a Schedule D/A filed with the SEC on December 27, 2011, Thomas Gipson beneficially owned approximately 15.2% of the outstanding common stock of the Company as of that date. According to a
Schedule 13G/A filed with the SEC on June 7, 2011, Arthur Koenig beneficially owned approximately 7% of the outstanding common stock of the Company on June 1, 2011. According to a Schedule 13G/A filed with the SEC on
February 2, 2012, ISVP owned approximately 9.99% of the outstanding common stock of the Company as of December 31, 2011. According to a Schedule 13G/A filed with the SEC on February 7, 2012, Ingalls & Snyder LLC
beneficially owned approximately 9.99% of the outstanding common stock of the Company on December 31, 2011.
8. Contingent Royalty Liability
Effective July 31, 2012, Robert Gipson, Thomas Gipson, Arthur Koenig and Ingalls & Snyder Value Partners LLP, all lenders
to the Company under a Convertible Note Purchase Agreement originally executed in 2007, elected to convert $16,000,000 of principal outstanding under the promissory notes to a royalty on future net sales of the Company’s Altropane
product. See Note 7 for full disclosure of this transaction.
9. Revenue Recognition
Our revenues have been generated primarily through sublicense and option agreements related to our Altropane product. The terms of
these agreements generally contain multiple elements, or deliverables, which have included (i) licenses or options to obtain licenses to our technology; (ii) technology transfer obligations related to the licenses and (iii) research,
development, regulatory and commercialization activities to be performed on our behalf. Payments to the Company under these arrangements typically include one or more of the following: non-refundable, up-front license fees; option exercise fees;
milestone payments; and royalties on future product sales.
The Company evaluates multiple element revenue arrangements under FASB ASC 605-25,
Multiple-Element Arrangements
(as amended by ASU No. 2009-13) as described in Note 1.
35
ALSERES PHARMACEUTICALS, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
We considered a variety of factors in determining the appropriate method of accounting for our licensing
agreements, including whether the various elements had fair value on a standalone basis and could be separated and accounted for individually as separate units of accounting. Where there are multiple deliverables identified within the licensing
agreement that are combined into a single unit of accounting, revenues are deferred and recognized over the expected period of performance. The specific methodology for the recognition of the revenue is determined on a case-by-case basis according
to the facts and circumstances of the applicable agreement.
Option Agreement with Navidea
On January 19, 2012 the Company entered into an Option Agreement with Navidea to license [123I]-E-IAFCT Injection (also referred to as Altropane), an
Iodine-123 radio labeled imaging agent being developed as an aid in the diagnosis of Parkinson’s disease and movement disorders. Under the terms of the option agreement, Navidea paid the Company a non-refundable option fee of $500,000 upon
signing the exclusive right to negotiate a definitive license agreement by June 30, 2012 with a no-fee extension of the diligence period through July 31, 2012 available to Navidea. The option agreement provided Navidea with exclusive
rights to license the asset and complete further diligence and prepare the documentation necessary to enter into a definitive license agreement for Altropane. Our deliverables through June 30, 2012 were to provide assistance to Navidea with
regards to meetings and communications with the Food and Drug Administration (“FDA”) to allow Navidea to evaluate a path to commercialization and the feasibility of exercising the license option. As such we determined that the $500,000
non-refundable option fee received from Navidea represented a unit of accounting separate from scheduled milestone payments that would be receivable should the license option be exercised. Therefore the Company recognized the non-refundable option
fee received from Navidea ratably over the option period which ended June 30, 2012 as the Company had continuing performance obligations through that date. Regulatory feedback received in June caused Navidea to extend their diligence review
through July 31, 2012 which they elected to do ahead of executing a license on July 31, 2012. The extension of diligence in to July created no additional obligations on Alseres beyond those completed by June 30, so no adjustment to
revenue was required as a result of the extension by Navidea.
Sublicense Agreement with Navidea
Effective July 31, 2012 the Company entered into an exclusive, worldwide sublicense agreement with Navidea Biopharmaceuticals, Inc.
(“Navidea”) for the research, development and commercialization of Altropane. Altropane is an iodine-123 radiolabeled imaging agent which is being developed as an aid in the diagnosis of Parkinson’s disease and movement disorders.
The Company concluded that the Sublicense Agreement entered into with Navidea and the Amended and Restated License Agreement entered into
with Harvard effective July 31, 2012, should be accounted for as a single unit of accounting in accordance with the rules set forth in FASB ASC 605-25. These transactions are described in greater detail in Note 13 of these Consolidated
Financial Statements.
The Company’s deliverables under the Sublicense Agreement with Navidea include granting a license of rights and
transferring technology (“know-how”) related to Altropane and an affirmative obligation to ensure that the Harvard agreement remains in full force and effect. Under the terms of the Amended and Restated License Agreement with Harvard, the
Company’s deliverables included (i) the use of reasonable efforts to effect introduction of the licensed products into the commercial market as soon as practicable, consistent with sound and reasonable business practices and judgment and
(ii) until expiration of the agreement, the Company shall endeavor to keep licensed product reasonably available to the public. The Company determined that pursuant to the accounting guidance governing revenue recognition on multiple element
arrangements, the granting of a license of rights, the transfer of technology
36
ALSERES PHARMACEUTICALS, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(“know-how”) related to Altropane and our continuing obligations to Harvard set forth in the Amended and Restated License Agreement were not separable and, accordingly, are being
treated as a single unit of accounting. The Company applied the guidance in ASC 605
Revenue Recognition,
to determine the appropriate revenue recognition period for the upfront sublicense execution payment received from Navidea. Advance
payments received in excess of amounts earned are classified as deferred revenue until earned. The upfront sublicense execution payment of $175,000 in cash and the market value of $1,146,000 for the 300,000 shares of Navidea common stock as of
July 31, 2012 were recorded as deferred revenue. Revenue will be recognized ratably from the date the sublicense agreement became effective on July 31, 2012, through the expected life of the last to expire issued and sublicensed U.S.
patent for Altropane in June 2030.
The sublicense agreement also provides for contingent milestone payments to the Company of up to $2.9
million and the issuance of up to an additional 1.15 million shares of Navidea common stock. Milestone payments of $2.5 million and the issuance of 550,000 shares of Navidea common stock will occur at the time of product registration. The
Company will be issued an additional 400,000 shares of Navidea common stock when certain cumulative net sales of the approved product are achieved. In addition, the license terms anticipate royalties on yearly net sales of the approved product which
are consistent with industry-standard terms and certain license extension fees, payable in cash and shares of common stock, in the event certain milestones are not met.
The following summarizes the Company’s revenue generating transactions for the year ended December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Revenue
Generated
|
|
|
Revenue
Recognized
|
|
|
Deferred
Revenue
|
|
|
Option agreement
|
|
$
|
500,000
|
|
|
$
|
500,000
|
|
|
$
|
—
|
|
|
Sublicense agreement
|
|
|
1,320,997
|
|
|
|
30,720
|
|
|
|
1,290,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,820,997
|
|
|
$
|
530,720
|
|
|
$
|
1,290,277
|
|
Unearned revenue of $73,730 is reflected as a current liability and $1,216,547 is classified as a long-term liability in the
consolidated balance sheet.
10. Stockholders’ Deficit
Common Stock
On
December 31, 2012 the Company agreed to purchase 537,931 shares of common stock held by Arthur Koenig and 1,793,104 shares of common stock held by ISVP Partners at a purchase price per share of $0.0008 for total proceeds of $1,864. The closing
price for the Company’s stock on December 27th was $0.08 per share.
For the year ended December 31, 2012, the Company had
repurchased a total of 2,331,035 shares of its common stock and applied the constructive retirement method to these shares. The constructive retirement method was applied to these shares as management does not intend to reissue the shares within a
reasonable period of time. The aggregate value of the shares reacquired in 2012 was $23,310. This amount has been charged to the common stock account.
In July 2011, John Preston, Henry Brem, Gary Frashier and Robert Langer signed settlement agreements to resolve unpaid fees due to them for services rendered during the period of July 2008 through January
2010. At the time of the agreements, a total of $358,500 had been accrued for director and consulting fees. Per the
37
ALSERES PHARMACEUTICALS, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
agreements, each former board member was issued one share of stock for each dollar owed. The Company stock closed at $.08 per share on the effective date of the agreements. As a result of these
transactions a total of 358,500 shares of Company stock were issued.
On December 16, 2011 the Company purchased a total of 1,108,425
shares of the Company’s common stock held by certain shareholders of the Company at $0.01 per share or a total of $11,084. The Company purchased 60,000 shares from Robert Gipson, 530,000 shares from Thomas Gipson, 100,000 shares from Ingalls
and Snyder Value Partners, 50,000 shares from Arthur Koenig and 218,425 shares from Nikos Monoyios. An additional 150,000 shares were purchased from other holders. The closing price for the Company’s stock on December 16th was $0.14 per
share. The price per share paid by the Company to the sellers represented a 93% discount to the market price for the shares.
On
December 27, 2011 the Company agreed to purchase 2,331,034 shares of common stock held by Robert Gipson and 537,931 shares of common stock held by Thomas Gipson at a purchase price per share of $0.0025 for a total of $7,172. The closing price
for the Company’s stock on December 27th was $0.20 per share. The price per share paid by the Company to the sellers represented a 99% discount to the market price for the shares.
For the year ended December 31, 2011, the Company had repurchased a total of 3,977,390 shares of its common stock and applied the constructive retirement method to these shares. The constructive
retirement method was applied to these shares as management does not intend to reissue the shares within a reasonable period of time. The aggregate value of the shares reacquired in 2011 was $18,256. This amount has been charged to the common stock
account.
Preferred Stock
The Company authorized 1,000,000 shares of preferred stock of which 25,000 shares have been designated as Series A Convertible Preferred Stock,
500,000 shares have been designated as Series D Convertible Preferred Stock, and 800 shares have been designated as Series E Cumulative Convertible Preferred Stock (the “Series E Stock”). In March 2009, the Company
designated 200,000 shares as Series F Convertible Preferred Stock (“Series F Stock”). The remaining authorized shares have not been designated.
Convertible Preferred Stock
In 2009 the Company issued a total of 196,000 shares of
Series F convertible preferred stock to Robert Gipson and received gross proceeds of $4,900,000. On June 1, 2011 the Company issued to Robert L. Gipson 4,600,000 shares of its common stock in exchange for the conversion by Mr. Gipson
of 184,000 shares of the Company’s Series F Convertible, Redeemable Preferred Stock (“Series F Stock”). Each share of the Series F Stock was converted into 25 shares of common stock pursuant to the conversion terms of
the Series F Stock contained in the Certificate of Designation for the Series F Stock. The cumulative accrued interest at the date of conversion of $640,874 was reclassified to additional paid-in capital since the shares were no longer
redeemable. As of December 31, 2012 there remained 12,000 shares of Series F Stock outstanding and held by Mr. Gipson.
The
key terms of the Series F Stock are summarized below
:
Dividend:
The Series F Stock is entitled to receive any dividend
that is paid to holders of our common stock. Any subdivisions, combinations, consolidations or reclassifications to the common stock must also be made accordingly to Series F Stock, respectively.
38
ALSERES PHARMACEUTICALS, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Liquidation Preference:
In the event of our liquidation, dissolution or winding up, before any
payments are made to holders of our common stock or any other class or series of our capital stock ranking junior as to liquidation rights to the Series F Stock, the holders of the Series F Stock will be entitled to receive the greater of
(i) $25.00 per share (subject to adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization affecting such shares) plus any outstanding and unpaid dividends thereon and (ii) such amount per
share as would have been payable had each share been converted into common stock. After such payment to the holders of Series F Stock and the holders of shares of any other series of our preferred stock ranking senior to the common stock as to
distributions upon liquidation, the remaining our assets will be distributed pro rata to the holders of our common stock.
Voting
Rights:
Each share of Series F Stock shall entitle its holder to a number of votes equal to the number of shares of our common stock into which such share of Series F Stock is convertible.
Conversion:
Each share of Series F Stock is convertible at the option of the holder thereof at any time. Each share of Series F Stock is
initially convertible into 25 shares of common stock, subject to adjustment in the event of certain dividends, stock splits or stock combinations affecting the Series F Stock or the common stock, and subject to adjustment on a weighted-average
basis in the event of certain issuances by us of securities for a price less than the then-current price at which the Series F Stock converts into common stock.
Redemption:
At any time after September 1, 2011, any holder of Series F Stock may elect to have some or all of such shares redeemed by us at a price equal to the aggregate of (i) $25 per
share (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization affecting such shares), or the Original Issue Price, plus (ii) all declared but unpaid dividends thereon,
plus (iii) an amount computed at a rate per annum of 7% of the Original Issue Price from March 19, 2009 until the redemption date. No redemption demand has been made as of December 31, 2012.
Accretion:
The terms of the Series F Stock contain provisions that may require redemption in circumstances that are beyond the Company’s
control. Therefore, the shares have been recorded, net of issuance costs of approximately $25,000, as convertible, redeemable stock outside of permanent equity. The Series F Stock was recorded at fair value on the date of issuance. As of
December 31, 2012, the Company recorded approximately $21,057 in accretion on the outstanding Series F Stock.
Stock Option Plans
The Company can issue both nonqualified and incentive stock options to employees, officers, consultants and scientific advisors of the
Company under the Amended and Restated 2005 Stock Incentive Plan (the “2005 Plan”).
At December 31, 2009, the 2005 Plan
provided for the issuance of options, restricted stock, restricted stock units, stock appreciation rights or other stock-based awards to purchase 3,050,000 shares of the Company’s common stock. The 2005 Plan contains a provision that allows for
an annual increase in the number of shares available for issuance under the 2005 Plan on the first day of each of the Company’s fiscal years during the period beginning in fiscal year 2006 and ending on the second day of fiscal year 2014. The
annual increase in the number of shares shall be equal to the lowest of 400,000 shares; 4% of the Company’s outstanding shares on the first day of the fiscal year; and an amount determined by the Board of Directors. No adjustment to the 2005
Plan was made on January 1, 2012.
The Company also has outstanding stock options in three other stock option plans, the 1998 Omnibus
Plan, the Amended and Restated Omnibus Stock Option Plan and the Amended and Restated 1990 Non-Employee Directors’ Non-Qualified Stock Option Plan. All plans have expired and no future issuance of awards is permissible.
39
ALSERES PHARMACEUTICALS, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Stock-based employee compensation expense recorded for the years ended December 31, 2012 and 2011
was $0 and $834, respectively. The $834 in stock-based compensation expense recognized during 2011 represented the remaining costs related to non-vested stock options.
We use the Black-Scholes option-pricing model to calculate the fair value of each option grant on the date of grant. No stock options were granted during the years ended December 31, 2012 and 2011.
Stock Options
The following
table summarizes the options issued and outstanding as of December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Outstanding stock options at the beginning of year
|
|
|
3,636,480
|
|
|
$
|
1.55
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
Forfeited and expired
|
|
|
(625,500
|
)
|
|
|
1.75
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable stock options at year end
|
|
|
3,010,980
|
|
|
$
|
1.51
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about the stock options outstanding and exercisable as of December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of Exercise Prices
|
|
Number Outstanding
|
|
|
Weighted Average remaining
Contractual Life
|
|
|
Weighted Average
Exercise Price
|
|
|
$1.15 – $1.36
|
|
|
2,287,500
|
|
|
|
1.4 years
|
|
|
$
|
1.15
|
|
|
$2.00 – $3.00
|
|
|
539,980
|
|
|
|
2.7 years
|
|
|
|
2.33
|
|
|
$3.10 – $4.65
|
|
|
155,000
|
|
|
|
4.8 years
|
|
|
|
3.17
|
|
|
$4.99 – $6.96
|
|
|
28,500
|
|
|
|
1.0 years
|
|
|
|
5.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,010,980
|
|
|
|
1.8 years
|
|
|
$
|
1.51
|
|
There was no intrinsic value of outstanding options and exercisable options as of December 31, 2012. As of December 31, 2012,
809,172 shares were available for grant under the 2005 Plan. As of December 31, 2012, the Company had reserved 3,820,152 shares of common stock to meet its option obligation.
11. Fair Value Measurements
The fair value hierarchy prioritizes observable and unobservable inputs used to measure fair value into three broad levels:
|
|
Level
|
1 — unadjusted quoted prices in active markets for identical securities;
|
|
|
Level
|
2 — unadjusted quoted prices in markets that are not active,
|
|
|
Level
|
3 — significant unobservable inputs, including our own assumptions in determining fair value
|
40
ALSERES PHARMACEUTICALS, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes the financial assets that we measured at fair value as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Available for sale securities
|
|
$
|
838,309
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
838,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
838,309
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
838,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent royalty
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
16,000,000
|
|
|
$
|
16,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
16,000,000
|
|
|
$
|
16,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Available for sale securities
|
|
$
|
—
|
|
|
$
|
27,446
|
|
|
$
|
—
|
|
|
$
|
27,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
—
|
|
|
$
|
27,446
|
|
|
$
|
—
|
|
|
$
|
27,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2012, the Company’s Level 1 assets are comprised of 285,000 shares of Navidea Biopharmaceuticals, Inc.
common stock. These shares are traded on the NYSE under the symbol NAVB. Also included in Level 1 assets as of December 31, 2012 are 39,209 shares of FluoroPharma Medical, Inc. common stock which are traded on the OTC Bulletin Board
(“OTCBB”) under the symbol FPMI.
As of December 31, 2011, the Company’s Level 2 available for sale securities consisted
of 39,209 shares of FluoroPharma Medical, Inc. stock. These shares were subject to Rule 144 restrictions and traded on very thin volume in the open market. Based on those two factors the Company previously classified the shares as a Level 2 asset.
As of September 30, 2012, the Company determined that the FluoroPharma Medical, Inc. common stock should be reclassified to Level 1 based on the increased liquidity of the shares due to more stable trading volume in the open market.
A contingent royalty liability which resulted from the election by certain purchasers of the Company’s Convertible Promissory Note Purchase
Agreement (the “Note Purchase Agreement”) to convert a total of $16,000,000 in debt obligation into a right to receive future royalties on net sales of the Company’s Molecular Imaging Products. The Company obtained a third party fair
value valuation for its contingent royalty liability as of December 31, 2012. The fair value measurement is based on significant inputs not observable in the market, which require it to be reported as a Level 3 asset within the fair value
hierarchy. The valuation uses assumptions that the Company believes would be made by a market participant. In particular, the valuation analysis employed the Income Approach based on the sum of the economic income that an asset is anticipated to
produce in the future. In this case that asset is the potential royalty income to be paid to the Company by Navidea as a result of the license agreement for Altropane. The Discounted Cash Flow method of the Income Approach was chosen
as the method best suited to valuing the contingent royalty liability. Changes in the fair value of the contingent royalty liability will be reflected in
the consolidated statements of comprehensive income in the period they become known. The actual calculated fair value of the liability was $16.6 million, however, as described in Note 7 the accounting guidance does not provide for an increase
in the liability in a troubled debt restructuring.
12. Income Taxes
As of December 31, 2012, the Company had federal and state net operating loss (“NOL”) carryforwards of approximately
$71,662,000 and $40,373,000, respectively and federal and Massachusetts state research and
41
ALSERES PHARMACEUTICALS, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
development (“R&D”) credit carryforwards of approximately $1,578,000 and $1,110,000, respectively subject to limitation, may be available to offset future federal and state income
tax liabilities through 2031.
|
|
|
|
|
|
|
|
|
|
Deferred tax assets consisted of the following as of
December 31:
|
|
2012
|
|
|
2011
|
|
|
Net operating loss carryforward
|
|
$
|
27,181,000
|
|
|
$
|
31,338,000
|
|
|
Capitalized research and development expenses
|
|
|
8,115,000
|
|
|
|
10,402,000
|
|
|
License fees
|
|
|
349,000
|
|
|
|
325,000
|
|
|
Stock-based compensation expense
|
|
|
2,264,000
|
|
|
|
2,264,000
|
|
|
Other
|
|
|
917,000
|
|
|
|
737,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
38,826,000
|
|
|
|
45,066,000
|
|
|
Valuation allowance
|
|
|
(38,826,000
|
)
|
|
|
(45,066,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the amount of reported tax benefit and the amount computed using the U.S. federal statutory rate of 35% for the
years ended December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
Tax benefit at statutory rate
|
|
$
|
(576,000
|
)
|
|
$
|
(1,009,000
|
)
|
|
State taxes, net of federal benefit
|
|
|
251,000
|
|
|
|
267,000
|
|
|
Expiring state net operating loss carryforward
|
|
|
978,454
|
|
|
|
455,000
|
|
|
Gain on forgiven interest and cancellation of debt and other
|
|
|
2,042,000
|
|
|
|
2,567,000
|
|
|
Decrease in valuation allowance
|
|
|
(6,240,000
|
)
|
|
|
(5,080,000
|
)
|
|
NOL attribute reduction on debt cancellation
|
|
|
3,544,545
|
|
|
|
2,800,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2012 and 2011, the Company did not record any federal or state tax expense given its continued
net operating loss position. The Company has evaluated the positive and negative evidence bearing upon its ability to realize the deferred tax assets, which are comprised principally of net operating losses (“NOL”) and capitalized research
and development expenditures. Management has determined that it is more likely than not that the Company will not recognize the benefits of federal and state deferred tax assets and, as a result, a full valuation allowance has been recorded.
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit for the years ended December 31:
|
|
2012
|
|
|
2011
|
|
|
Federal
|
|
$
|
(348,366
|
)
|
|
$
|
(2,737,000
|
)
|
|
State
|
|
|
(82,115
|
)
|
|
|
(645,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(430,481
|
)
|
|
|
(1,949,000
|
)
|
|
Valuation allowance
|
|
|
430,481
|
|
|
|
1,949,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
42
ALSERES PHARMACEUTICALS, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A reconciliation of the unrecognized tax benefits recorded for the years ended December 31 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
Balance at January 1
|
|
$
|
2,822,531
|
|
|
$
|
2,822,531
|
|
|
Additions based on tax positions related to the current year
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
$
|
2,822,531
|
|
|
$
|
2,822,531
|
|
|
|
|
|
|
|
|
|
|
|
The balance of unrecognized tax benefits as of December 31, 2012 of approximately $2,822,531 are tax benefits that, if recognized,
would not affect the Company’s effective tax rate since they are subject to a full valuation allowance.
The Company recognizes interest
and penalties related to income tax matters in income tax expense. The Company has no accrual for interest and penalties as of December 31, 2012.
The Company is subject to both federal and state income tax for the jurisdiction within which it operates. Within these jurisdictions, the Company is open to examination for tax years ended
December 31, 2009 through December 31, 2012. The U.S. Internal Revenue Service (IRS) had completed an audit of tax years 2007 and 2008 and had informed us that no adjustments to the federal tax returns as filed would be proposed as a
result of the audit. However, because we are carrying forward income tax attributes such as the NOL from 2006, these attributes can still be audited when utilized on returns filed in the future.
13. Commitments and Contingencies
The Company is currently a tenant at will occupying approximately 4,500 square feet of office space. Total rent expense was
approximately $71,500 and $220,000 for the years ended December 31, 2012 and 2011, respectively and approximately $4115,500 for the period from inception (October 16, 1992) through December 31, 2012. The Company received
approximately $102,000 for the year ended December 31, 2011, related to the sublease of the premises and no income from subleasing in 2012.
On March 13, 2012 the Company received notice that Children’s Hospital Boston and Children’s Medical Center Corporation had filed a lawsuit in Middlesex Superior Court, Middlesex County,
Massachusetts seeking to recover amounts alleged to be owed by the Company to the plaintiffs.
On February 1, 2013 the Company entered
into a Settlement Agreement and Release with Boston Children’s Hospital (BCH) and Children’s Medical Center Corporation (CMCC) in full settlement of the lawsuit filed by BCH and CMCC seeking to recover amounts alleged to be owed by the
Company to the plaintiffs totaling $642,906 plus costs. The amount of $642,906 is included in accrued expenses at December 31, 2012 and 2011, but was incurred and expensed prior to January 1, 2011.
In settlement of all claims by BCH and CMCC, the Company agreed to pay a lump sum of One Hundred Eighty five Thousand dollars ($185,000) to the
plaintiffs. In addition to the lump sum payment, the Company agreed to pay to the plaintiffs an additional sum equal to the then cash value of 20,000 shares of the common stock of Navidea BioPharmaceuticals, Inc. upon the occurrence of the first
milestone described in Section 4.2 of the sublicense agreement dated as of July 31, 2012 between Navidea BioPharmaceuticals, Inc. and the Company. This second payment is only due upon the occurrence of the first milestone unless the
Company declares bankruptcy or alters its agreement with Navidea in a manner that results in the delay or cancellation of said milestone payment.
43
ALSERES PHARMACEUTICALS, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
On May 2, 2012 the Company received notice that Biostorage Technologies, Inc. had filed a lawsuit
in Marion Superior/Circuit Court, Marion County, Indiana seeking to recover amounts alleged to be owed by the Company to the plaintiffs totaling $119,363. The Company believes that the total amounts claimed in the Biostorage lawsuit are overstated
by at least 100%. The Company believes that a high level of uncertainty regarding the outcome, disposition and ultimate liability to the Company related to this lawsuit exists thus we have retained an accrual of $133,000 on our books which reflects
the amount of the alleged claim plus additional legal fees. The discovery process in the case is on-going The Company intends to vigorously pursue all available legal and equitable remedies to defend this claim with a goal of settling it at or below
the level of liability we believe is actually owed and without a trial.
Guarantor Arrangements
The Company has entered into agreements to indemnify its executive officers and directors for certain events or occurrences while the officer or director
is, or was serving, at the Company’s request in such capacity. The indemnification period is for the officer’s or director’s lifetime. The maximum potential amount of future payments the Company could be required to make under these
indemnification agreements is unlimited; however, the Company has a director and officer insurance policy that limits the Company’s exposure and enables the Company to recover a portion of any future amounts paid. As a result of the
Company’s insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal.
14. Related Party Transactions
During the last 4 months of 2012, Robert Gipson provided a total of $325,000 to the Company as an advance against his planned purchase
of stock in Alseres Neurodiagnostics, Inc. to occur in 2013. These funds were available to the Company for use during 2012 and the advance is reflected as advances from related parties on the consolidated balance sheet.
Additional Related Party Transactions during 2012 are disclosed in footnotes 8 and 10.
15. Subsequent Events
Settlement Agreement and Release with Boston Children’s Hospital (BCH) and Children’s Medical Center Corporation (CMCC)
On February 1, 2013 the Company entered into a Settlement Agreement and Release with Boston Children’s Hospital (BCH) and
Children’s Medical Center Corporation (CMCC) in full settlement of the lawsuit filed by BCH and CMCC seeking to recover amounts alleged to be owed by the Company to the plaintiffs totaling $642,906 plus costs.
In settlement of all claims by BCH and CMCC, the Company agreed to pay a lump sum of One Hundred Eighty five Thousand dollars $185,000 to the plaintiffs.
In addition to the lump sum payment, the Company agreed to pay to the plaintiffs an additional sum equal to the then cash value of 20,000 shares of the common stock of Navidea BioPharmaceuticals, Inc. upon the occurrence of the first milestone
described in Section 4.2 of the sublicense agreement dated as of July 31, 2012 between Navidea BioPharmaceuticals, Inc. and the Company. This second payment is only due upon the occurrence of the first milestone unless the Company declares
bankruptcy or alters its agreement with Navidea in a manner that results in the delay or cancellation of said milestone payment in which case CMCC and BCH could bring additional claims against the Company for additional consideration.
44
ALSERES PHARMACEUTICALS, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Settlement with Board of Directors
On February 15, 2013, Alseres Pharmaceuticals, Inc. (the “Company”), entered into Settlement Agreements with Michael Mullen and William Guinness, both members of the Board of Directors of
the Company pursuant to which the Company agreed to satisfy certain outstanding obligations to these individuals which, in aggregate, totaled $220,734 by issuing fully vested options to purchase a total of 167,400 shares of the common stock of
Alseres Neurodiagnostics, Inc. (a subsidiary of the Company) out at a purchase price to be established by the Company coincident with the closing of an equity financing for Alseres Neurodiagnostics, Inc. The options must be exercised, if at all, in
whole or in part, on or before February 28, 2018. The common stock of Alseres Neurodiagnostics, Inc. to be issued pursuant to the options will bear all appropriate restrictive legends regarding disposition or resale of the common stock.
45