ALSE Alseres Pharmaceuticals Inc (CE)

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2014

1. Nature of Operations and Basis of Presentation

Nature of Operations

Alseres Pharmaceuticals, Inc. and its subsidiaries (the “Company”) is a biotechnology company focused on therapeutic and 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. Through 2013 the Company was engaged in the development of its Altropane diagnostic imaging agent for the diagnosis of Parkinson’s disease and dementia with Lewy Bodies. In 2013 the Company began to receive revenues from milestone payments associated with the sublicensing of Altropane in July 2012. Since the Company has begun to receive revenues from its out licensed product and is no longer engaged in development activities; the Company no longer qualifies as a development-stage company for accounting purposes.

As of March 31, 2014, we had experienced total net losses since inception of approximately $199,967,000, stockholders’ deficit of approximately $11,018,000 and a net working capital deficit of approximately $1,385,000. For the foreseeable future, we expect to experience continuing operating losses and negative cash flows from operations. The cash and cash equivalents available at March 31, 2014 will not provide sufficient working capital to meet our anticipated expenditures for the next twelve months. We believe that the approximately $70,000 in cash and cash equivalents available as of May 22, 2014 may enable us to meet our anticipated cash expenditures through June 2014.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, these financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

The interim unaudited condensed consolidated financial statements contained herein include, in management’s opinion, all adjustments necessary for a fair statement of the financial position, results of operations, and cash flows for the periods presented. The results of operations for the interim period shown on this report are not necessarily indicative of results for a full year. These financial statements should be read in conjunction with the Company’s consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

The accompanying condensed 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.

2. Summary of Significant Accounting Policies

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 March 31, 2014 and December 31, 2013, cash equivalents consisted of money market funds.

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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 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 condensed 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 March 31, 2014 and December 31, 2013, the Company’s short-term investments include shares of common stock in Navidea Biopharmaceuticals, Inc. (“Navidea” or “NAVB”) These securities are now classified as freely tradeable short term investments. 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.

Revenue Recognition

The Company evaluates multiple element revenue arrangements under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 605-25, Multiple-Element Arrangements . 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 will periodically review our expected period of substantial involvement under the agreements that provide for non-refundable up-front payments and license fees. 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.

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 Income (Loss)

On January 1, 2012, the Company adopted the new presentation requirements under Accounting Standards Update (ASU) 2011-05, “ Presentation of Comprehensive Income ”. Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses, net of taxes, on our marketable securities which are also recognized as separate components of equity. ASU 2011-05 requires companies to present the components of net income (loss) and the components of other comprehensive income (loss) either as one continuous statement or as two consecutive statements. In February 2013, the FASB issued ASU 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassifed Out of Accumulated Other Comprehensive Income, which requires an entity to separately present the amount reclassified out of accumulated other comprehensive income (AOCI) for each component of AOCI and to disclose, for each affected line item in the income statement, the amount of AOCI that has been reclassified into that line item. This information must be provided either on the face of the financial statements by income statement line item, or in a footnote. For public companies the amendments in the update became effective for interim or annual periods beginning on or after December 15, 2012. As ASU 2013-02 and ASU 2011-05 impacted

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presentation only, netiher had an effect on the Company’s financial position nor results of operations as of and for the three months ended March 31, 2014 and the year ended December 31, 2013, respectively.

Convertible Redeemable Shares

In accordance with ASC 480, Distinguishing Liabilities from Equity the Company determined that since 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.

Restricted Marketable Securities

Pursuant to the terms of the Amended and Restated License Agreement with Harvard University and its affiliated hospitals (“Harvard”) entered into on July 31, 2012, the Company had an obligation to transfer 5,000 shares of the NAVB common stock to Harvard at March 31, 2014 and December 31, 2013. The market value of the 5,000 shares held on March 31, 2014 and December 31, 2013 was $9,250 and $10,350, respectively. The 5,000 shares of NAVB common stock held by the Company at March 31, 2014 and December 31, 2013 is classified as restricted securities in the consolidated balance sheet and the corresponding liability is reported in other current liabilities.

3. Accounts Payable and Accrued Expenses

The Company’s accounts payable and accrued expenses consisted of the following:

On February 15, 2013, 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 those individuals which, in aggregate, totaled $167,400 by issuing fully vest options to purchase a total of 167,400 shares of the common stock of Alseres Neurodiagnostics, Inc. ( a wholly owned subsidiary of the Company) 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, in whole or in part on or before February 28, 2018. The common stock issued pursuant to the exercise of the options will bear all appropriate restrictive legends on resale or disposition of the common stock. As of March 31, 2014 the options had not yet been issued. Therefore the associated liability of $167,400 remains outstanding and is recorded in accrued expenses on the balance sheet at March 31, 2014. While the fair value of the options will likely be lower than the value of the current liability, the Company has determined it is not appropriate to recognize a gain at this time given the uncertainty of these events and the variability associated with the value of the options.

4. 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 0.9 million shares of common stock were outstanding at March 31, 2014, but were not included in the computation of diluted net loss per common share because they were anti-dilutive. Stock options to purchase approximately 3.0 million shares of common stock were outstanding at March 31, 2013, 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 March 31, 2014 could potentially dilute earnings per share in the future.

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5. Accounting for Stock-Based Compensation

We have one stock option plan under which we can issue both nonqualified and incentive stock options to employees, officers, consultants and scientific advisors of the Company. At March 31, 2014, the 2005 Stock Incentive Plan (the “2005 Plan”) provided for the issuance of options, restricted stock, restricted stock units, stock appreciation rights or other stock-based awards to purchase 3,450,000 shares of our 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 increase in the number of shares available for issuance was made in January 2014.

We also have 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. These plans have expired and no future issuance of awards is permissible.

Our Board of Directors determines the term, vesting provisions, price, and number of shares for each award that is granted. The term of each option cannot exceed ten years.

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 three months ended March 31, 2014 and 2013.

A summary of our outstanding stock options for the three months ended March 31, 2014 and 2013 is presented below.

The following table summarizes information about stock options outstanding and exercisable at March 31, 2014:

There was no intrinsic value of outstanding options and exercisable options as of March 31, 2014. As of March 31, 2014, 2,946,672 shares were available for grant under the 2005 Stock Incentive Plan.

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6. Notes Payable and Debt

Through 2013, a series of working capital loans (“Borrowings”) were made to the Company by its significant stockholder, Mr. Robert Gipson, evidenced by demand promissory notes and totaling $7,135,000 and bearing interest at 7% per annum. Interest on these notes was accrued and totaled approximately $1,365,000 at the execution date. On December 31, 2013, the Company executed a Loan Consolidation Agreement with its significant stockholder (“Lender”). The terms of the Borrowings were modified to reduce the interest to be paid and provide for a fixed due date, additional potential borrowings and a security interest in certain assets of the Company. Upon execution of the Loan Consolidation Agreement, all amounts outstanding under the Borrowings including accrued interest were cancelled and considered paid in full and the Company entered into a new Promissory Note (“Consolidated Note”).

The Consolidated Note bears interest at 3.2% per annum payable semi-annually in arrears and requires principal to be repaid on or before December 31, 2016. The Consolidated Note also includes semi-annual cash draws for the future working capital needs of the Company. The draws will be a minimum of $110,000 and are to be added to principal when drawn. Coincident with the execution of the Loan Consolidation Agreement, the Company and the Lender also executed a Security Agreement which provides the Lender with an undivided security interest in and to all personal and intellectual property of the Company subject to all existing liens, encumbrances and license rights previously granted by the Company. The Security Agreement also allows the Company to be free to dispose of or liquidate the collateral without any prior waiver or authorization from the Lender so long as the proceeds of any such disposition are used to pay down the principal on the Consolidated Note or the Lender affirmatively waives such obligation in writing. The Company considered whether the transaction was within the scope of ASC 470-60-55 Accounting for Troubled Debt Restructuring, which states that if a company is experiencing financial difficulties and a concession is granted, troubled debt restructuring accounting should be applied. The Company concluded that it was experiencing financial difficulties and the creditor had granted a concession as the effective borrowing rate for the restructured debt is less than the effective rate of the old debt prior to restructuring. In 2013 the Company recognized a gain of $682,670 equal to the difference between the carrying value of the old debt and the present value of the future cash flows under the new terms. Since the lender is a related party, the gain was considered in essence to be a capital transaction and therefore, the gain was recognized as an increase to additional paid in capital. Additionally, due to this restructuring, future payments made will be charged to the carrying value of the restructured debt balance and no interest expense will be recorded going forward.

During the three months ended March 31, 2014, the Company borrowed an additional $365,000 under the Consolidated Note. Interest expense of $1,115 was recognized for the 3 month period ended March 31, 2014. The accrued interest balance at March 31, 2014 represents the accrued interest of $1,115 associated with the additional borrowings and the current portion of the restructured debt balance, which is interest only.

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7. Convertible Preferred Stock

The Company’s Series F Convertible, Redeemable Preferred Stock (“Series F Stock”) can be 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. All shares of Series F Stock were sold to Robert Gipson in 2009 at $25 per share, yielding the Company aggregate proceeds of $4,600,000. As of March 31, 2014, 12,000 shares of Series F Stock were outstanding and held by Robert Gipson.

8. Commitments and Contingencies

We recognize and disclose commitments when we enter into executed contractual obligations with third parties. We accrue contingent liabilities when it is probable that future expenditures will be made and such expenditures can be reasonably estimated.

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.

In settlement of all claims by BCH and CMCC, the Company agreed to pay a lump sum of $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 upon the occurrence of the first milestone described in Section 4.2 of the sublicense agreement dated as of July 31, 2012 between Navidea and the Company. The milestone occurred in December, 2013 at which time the value of 20,000 shares of Navidea common stock was $40,000. The Company paid CMCC the sum of $40,000 in January 2014 in accordance with the terms of the Settlement Agreement and Release.

9. Income taxes

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, 2010 through December 31, 2013. The U.S. Internal Revenue Service (IRS) has completed an audit of tax years 2007 and 2008 and has informed us that no adjustments to the federal tax returns as filed will be proposed as a result of the audit. However, because we are carrying forward income tax attributes such as a net operating loss (“NOL”) from 2006, these attributes can still be audited when utilized on returns filed in the future.

10. 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

The following table summarizes the financial assets that we measured at fair value as of March 31, 2013 and December 31, 2012.

As of March 31, 2014 and December 31, 2013, the Company’s Level 1 short-term investments consist of 95,000 shares of Navidea common stock which are traded on the NYSE under the symbol NAVB.

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11. Related Party Transaction. During the first three months of 2014, Robert Gipson provided a total of $365,000 to the Company as an increase to the Consolidate Note referenced in Note 6 above.

12. Subsequent Events

The Company evaluated all events and transactions that occurred after the balance sheet date through the date of this filing. During this period the Company did not have any material recognizable or disclosable subsequent events.