Item 1. Business.
Overview
We are a biotechnology company focused on the development of diagnostic and therapeutic products primarily for disorders in the central nervous system, or CNS. Our clinical and preclinical product candidates are 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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Regenerative therapeutics program primarily focused on nerve repair in patients who have had significant loss of CNS function resulting from CNS trauma.
At December 31, 2010, we were considered a “development stage enterprise” as defined in Accounting Standards Codification (ASC) 915-10. “Development Stage Entities” and will continue to be so until we commence commercial operations. 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, 2010.
As of December 31, 2010, we have experienced total net losses since inception of approximately $203,456,000, stockholders’ deficit of approximately $47,286,000 and a net working capital deficit of approximately $42,079,000. The cash and cash equivalents available at December 31, 2010 will not provide sufficient working capital to meet our anticipated expenditures for the next twelve months. At March 21, 2011, we had cash and cash equivalents of approximately $100,000 which combined with our ability to control administrative expenses will enable us to meet our anticipated cash expenditures into April, 2011.
In order to continue as a going concern and fund the approximately $30 million of investment required to complete the Altropane U.S. clinical trial program, we will need to raise additional capital through one or more of the following: a debt financing, an equity offering, or a collaboration, merger, acquisition or other transaction with one or more pharmaceutical or biotechnology companies. We are currently engaged in fundraising efforts. There can be no assurance that we will be successful in our fundraising efforts or that additional funds will be available on acceptable terms, if at all. We also cannot be sure that we will be able to obtain additional credit from, or effect additional sales of debt or equity securities to certain of our existing investors described below in Liquidity and Capital Resources. If we are unable to raise additional or sufficient capital, we will need to cease operations or reduce, cease or delay one or more of our research or development programs, adjust our current business plan and may not be able to continue as a going concern. Additionally, our common stock was delisted from trading on the NASDAQ Capital Market as a result of our failure to meet continued listing requirements of NASDAQ. On May 8, 2009 we began trading on the Pink Sheets OTC Market. This delisting has had an adverse affect on our ability to obtain future financing and has adversely impacted our stock price and the liquidity of our common stock. Our ability to advance our clinical programs, including the development of Altropane, is affected by the availability of financial resources. Financial considerations have caused us to suspend planned development activities for our clinical and preclinical programs until we are able to secure additional working capital. If we are not able to raise additional capital, we will not have sufficient funds to complete the clinical trial programs for Altropane.
We were organized in 1992 and are incorporated in Delaware. Our principal executive offices are located at 239 South Street, Hopkinton, Massachusetts 01748, and our telephone number is (508) 497-2360. In this Annual Report on Form 10-K, the terms “Alseres Pharmaceuticals”, the “Company”, “we”, “us” and “our” include Alseres Pharmaceuticals, Inc. and its subsidiaries. The following are trademarks of ours that are mentioned in this Annual Report on Form 10-K: Alseres ® , Altropane ® , and Fluoratec tm . Other trademarks used in this Annual Report on Form 10-K are the property of their respective owners.
Product Development - Molecular Imaging Program
Altropane Molecular Imaging Agent
The Altropane molecular imaging agent is being developed for the differential diagnosis of PS, including PD, and non-PS in patients with an upper extremity tremor. In July 2007, we completed enrollment in a clinical study that optimized Altropane’s image acquisition protocol which we believe will enhance Altropane’s commercial use. 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 using the optimized Altropane image acquisition protocol. 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, 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 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. Based on the trial design and scope covered by the Special Protocol Assessment Agreement for POET-2, we estimate that the total costs to complete the POET-2 program and prepare and submit an NDA for Altropane in the U.S. will be approximately $30 million. This funding is not available at present and there can be no assurance that such funds will be available on acceptable terms if at all.
We believe in the current environment that, due to their proximity to commercialization and return on investment, late stage development programs may continue to be of significant interest to potential partners and investors. To maximize the value of our molecular imaging program, we are focusing on obtaining the funding necessary to execute the Altropane Phase III registration program. We are pursuing the capital necessary to enable us to advance the Altropane program through our own means. In parallel, we are seeking to partner our molecular imaging program with a firm or firms with the resources necessary for the completion of the Phase III clinical program, for the manufacturing and supply of Altropane, and for the launch and commercialization of Altropane. During 2010 we engaged in numerous discussions with potential development and commercialization partners for Altropane with no term sheets resulting from those discussions. Late in 2010 and early this year, a number of events occurred which have stimulated new interest in the Altropane program by potential partners. These included the purchase of Avid Radiopharmaceuticals by Eli Lilly for up to $800 million, the US approval of GE’s DaTscan product, a favorable FDA Advisory Panel review of Avid’s imaging product and EU guidance recommending imaging as first line diagnosis in dementias. We believe that these events could assist with our partnering efforts for Altropane. We can provide no assurances that a partnership transaction will occur. We believe that the expansion of the program into other indications such as DLB and other countries including those in Europe could increase the value of the program for the partner and us. All of these activities require additional funding not presently available and as such have been suspended. There can be no assurance that the required funding to advance the Altropane program will be available on acceptable terms if at all.
The Altropane molecular imaging agent is a radiolabeled imaging agent that contains the radioactive element iodine isotope 123 I and binds with extremely high affinity and specificity to the dopamine transporter, or DAT. The DAT is a protein that is on the surface membrane of specialized neurons in the brain that produce dopamine, a key neurotransmitter. We believe that the amount of Altropane taken up by the brain is directly proportional to the number of DATs that are present in any given area of the brain. Since DATs are on the membrane of dopamine-producing neurons, death of these neurons results in decreased numbers of DATs. Therefore, PD, which is caused by a decreased number of dopamine producing cells, is associated with a marked decrease in the number of DATs. As a result, when Altropane is administered to patients with PD, its binding is substantially diminished as compared to patients without PD. This decrease in Altropane binding in patients with PD is the theoretical basis for using Altropane imaging as a diagnostic test for PS, including PD.
Altropane is administered by intravenous injection. Since Altropane contains radioactive 123 I, it can be used as a nuclear imaging agent that can be detected using a specialized nuclear medicine instrument known as a Single Photon Emission Computed Tomography, or SPECT, camera. The strength of the SPECT signal generated by Altropane is proportional to the number of DATs present and produces images that distinguish PS and non-PS patients. SPECT cameras are widely available in both community and academic medical centers. The scanning procedure using Altropane takes less than one hour to complete. Results of these tests are usually available the same day as the scanning procedure.
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.
Altropane Diagnostic for Parkinsonian Syndromes (PS)
PS is characterized by loss of dopamine-producing neurons resulting in a variety of movement disorders, especially tremors and gait problems. The most prevalent form of PS is PD which is a chronic, irreversible, neurodegenerative disease that generally affects people over 50 years old. PD is caused by a significant decrease in the number of dopamine producing neurons in specific areas of the brain. Inadequate production of dopamine causes, at least in part, the PD symptoms of tremor, muscle retardation and rigidity. PD can be difficult to diagnose using subjective analyses and can be confused with Essential Tremor, or ET. ET manifests with clinical symptoms very similar to those of PD. However, ET patients do not need the drugs routinely prescribed to PD patients.
Need for an Objective Diagnosis
According to published data, clinical criteria used to diagnose PS is prone to high error rates, especially in early stages of PD. This highlights the critical need for an effective diagnostic. Presently, patients who have experienced tremors and other evidence of a movement disorder may pursue diagnosis and treatment with a number of medical professionals. These include an internist or general practitioner, also known as a primary care physician, or PCP, a neurologist, or a movement disorder specialist, or MDS, whose practice is focused on movement disorders.
Patients can exhibit symptoms and/or have clinical histories that are inconclusive. A primary tool utilized to diagnose PD or PS is a clinical history and a physical exam. However, studies in the literature have reported error rates in diagnosing PD or PS from a low of 10% for MDSs to as high as 40 to 50% for PCPs.
This high error rate is driving the need for a diagnostic test that provides physicians with additional clinical information to help them make a definitive diagnosis when clinical symptoms and the patient’s history are inconclusive. Further, while the accuracy of MDSs is reported to be higher, the number of MDSs in the United States is limited with current estimates between 300 and 500. The limited availability of MDSs underscores the potential utility of a widely available diagnostic tool such as Altropane.
There are a number of important and potentially harmful results associated with misdiagnosis. These include:
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Patients who are improperly diagnosed as having PD but actually do not (false positive) may be administered medications for PD. These drugs can have damaging effects on individuals who do not actually have PD.
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Patients who are improperly diagnosed as not having PD but actually do (false negative), may not benefit from available treatments, thereby suffering further worsening of symptoms and progression of their disease.
Market Opportunity
It has been estimated that approximately 180,000 individuals in the United States per year present to their physician with new, undiagnosed cases of PD and ET, and are therefore candidates for a scan using the Altropane molecular imaging agent to diagnose or rule out early PS. It has also been estimated by the National Institute of Neurological Disorders and Stroke and the National Parkinson’s Foundation that the number of people in the United States with PD is between 500,000 and 1,500,000. It has been estimated by the Tremor Action Network that there are approximately 10,000,000 people in the United States with ET. In addition, a study done by the World Health Organization claims that approximately 2,000,000 individuals suffer from PD in Europe. We expect the number of individuals affected by PD to grow substantially as people continue to live longer and the overall population ages.
Altropane Diagnostic for Dementia with Lewy Bodies (DLB)
DLB is a progressive brain disease and the second most common cause of neurodegenerative dementia. The symptoms of DLB are caused by the build-up of Lewy bodies inside the section of the brain that controls particular aspects of memory and motor control. The similarity of symptoms between DLB and PD, and between DLB and Alzheimer’s disease, can make it difficult to accurately diagnose. As with PD, there is no objective diagnostic tool available in the United States. We believe that the underlying basis for DLB coupled with our existing preclinical and clinical data supports the potential development of Altropane as a diagnostic for DLB. We also believe the potential use of our molecular imaging agents for the diagnosis of DLB could be strategic in our partnering efforts for our molecular imaging program.
It has been estimated by the Alzheimer’s Association that there are approximately 7,000,000 to 10,000,000 people in the United States with dementia of which the journal Age and Ageing estimates that up to approximately 3,000,000 people have DLB. According to Alzheimer Europe, there were approximately 1,800,000 people in Europe with DLB.
Regenerative Therapeutics Program - Nerve Repair
Our nerve repair program is focused on restoring movement and sensory function in patients who have had significant loss of CNS function resulting from traumas such as SCI, stroke, traumatic brain injury, or TBI, and optic nerve damage. Our efforts are aimed at the use of proprietary regenerative drugs and/or methods to induce nerve fibers to regenerate and form new connections that restore compromised abilities. Licensing or acquiring the rights to the technologies of complementary approaches for nerve repair is part of our strategy of creating competitive advantages by assembling a broad portfolio of related technologies and intellectual property.
Resource constraints have severely restricted our ability to progress our regenerative therapeutics program. On May 11, 2010, the Company was notified by CMCC of the termination of its license agreements with the Company as a result of the Company’s lack of resources and resulting inability to comply with the performance conditions of the licenses. At December 31, 2010 CMCC was owed a total of approximately $77,000 in license fees and legal costs associated with the licenses. Since we were unable to pay the overdue amounts within the cure periods specified in the CMCC licenses, we no longer have the rights to further develop and/or partner the axon regeneration technologies licensed from CMCC.
Research and Development
We rely on licensing from third parties as our source for new technologies and product candidates. Research and development expenses were approximately $465,000 and $3.7 million for the years ended December 31, 2010 and 2009, respectively.
Licensing Agreements, Patents and Intellectual Property
We have obtained exclusive licenses to patent portfolios related to our product candidates in development. However, as to one or more of the patents and patent applications of the patent portfolios, which we have licensed from a university or academic institution, the United States government holds a nonexclusive, royalty-free, license in exchange for providing research funding.
Our intellectual property strategy is to vigorously pursue patent protection for our technologies in the United States and major developed countries. Generally, each license agreement is effective until the last patent licensed relating to the technology expires or a fixed and determined date.. The patents for the Altropane molecular imaging agent expire beginning in 2013.
In the event that a third party has a patent or patent application overlapping an invention claimed in one of our patents or patent applications, we may be required to participate in a patent interference proceeding declared by the United States Patent and Trademark Office, or USPTO, to determine priority of invention. A patent interference could result in substantial uncertainties and cost for us, even if the eventual outcome is favorable to us. We cannot provide assurance that our patents and patent applications, if issued, would be held valid by a court of competent jurisdiction.
We also rely on trade secrets and proprietary know-how. We seek to protect this information through confidentiality agreements with our collaborators and consultants. There can be no guarantee that these procedures and agreements will not be breached or that we will have adequate remedies for such breach. In addition, if consultants, scientific advisors, or other third parties apply technological information which they have developed separate from us to our technologies, there may be disputes as to the ownership of such information which may not be resolved in our favor.
Competition
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 us to successfully market Altropane if it is approved for sale.
Regulatory Considerations
Our technologies 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. To date, neither the FDA nor any of its international equivalents has approved any of our technologies for marketing. In the biotechnology industry, it has been estimated that less than five percent of the technologies for which clinical efforts are initiated ultimately result in an approved product. The clinical trial and regulatory approval process can require many years and substantial cost, and there can be no guarantee that our efforts will result in an approved product.
Our 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 FDA regulates drugs, including their research, development, testing, manufacturing, labeling, packaging, storage, advertising and promotion, and distribution. Data obtained from testing is subject to varying interpretations which can delay, limit or prevent FDA approval. In addition, changes in existing regulatory requirements 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 interpretations over which we have no control.
Obtaining FDA approvals is time-consuming and expensive. The steps required before any of our product candidates may be marketed in the United States include:
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Development of suitable manufacturing processes for preclinical, clinical and commercial drug supply;
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Preclinical laboratory tests, animal studies and formulation studies according to good laboratory practice regulations;
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Submission to the FDA of an IND application, which must become effective before United States human clinical trials may commence;
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Adequate and well-controlled human clinical trials according to good clinical practice regulations, or GCP, to establish the safety and efficacy of the product for its intended use;
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Submission to the FDA of an NDA;
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Satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the product is produced to assess compliance with cGMP to assure that the facilities, methods and controls are adequate to preserve the drug’s identity, strength, quality and purity; and
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FDA review and approval of the application(s) prior to any commercial sale or shipment of the drug.
Once a drug candidate is identified for development it enters the preclinical testing stage. Preclinical tests include laboratory evaluations of product chemistry, toxicity and formulation, as well as animal studies. An IND sponsor must submit the results of the preclinical tests, together with manufacturing information and analytical data, to the FDA as part of the IND. Some preclinical or non-clinical testing may continue even after the IND is submitted. In addition to including the results of the preclinical studies, the IND will also include a protocol detailing, among other things, the objectives of the first phase of the clinical trial, the parameters to be used in monitoring safety, and the effectiveness criteria to be evaluated if the first phase lends itself to an efficacy determination. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA places the clinical trial on clinical hold. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin.
All clinical trials must be conducted under the supervision of one or more qualified investigators in accordance with GCP. These regulations include the requirement that all research subjects provide informed consent. Further, an Institutional Review Board, or IRB, at each institution participating in the clinical trial must review and approve the protocol before a clinical trial commences at that institution. Each new clinical protocol must be submitted to the FDA as part of the IND. Progress reports detailing the results of the clinical trials must be submitted at least annually to the FDA and more frequently if serious adverse events occur.
There is no guarantee that approvals will be granted for any of our product candidates, or that the FDA review process will not involve delays that significantly and negatively affect our product candidates. We also may encounter similar delays in foreign countries. In addition, even if we receive regulatory approvals, they may have significant limitations on the uses for which any approved products may be marketed. After approval, some types of changes to the approved product are subject to further FDA review and approval. Any marketed product and its manufacturer are subject to periodic review, and any discovery of previously unrecognized problems with a product or manufacturer could result in suspension or limitation of approvals. Failure to comply with the applicable FDA requirements at any time during the product development process, approval process, or after approval, may subject an applicant to administrative or judicial sanctions, including the FDA’s refusal to approve pending applications, withdrawal of approval, a clinical hold, warning letters, product recalls and seizures, total or partial suspension of production or distribution, or injunctions, fines, civil penalties or criminal prosecution.
Pharmaceutical Pricing and Reimbursement
In both domestic and foreign markets, sales of any products for which we receive regulatory approval for commercial sales will depend in part on the availability of reimbursement for third party payors. Third party payors include government health care program administrative authorities, managed care providers, private health insurers and other organizations. These third party payors are increasingly challenging the price and examining the cost-effectiveness of medical products and services. In addition, significant uncertainty exists as to the scope of coverage and payment amounts for newly approved heath care products. We may need to conduct expensive pharmacoeconomic studies in order to demonstrate the cost-effectiveness of our products. Our products may not be considered medically necessary or cost-effective. Adequate third party reimbursement may not be available to enable us to maintain price levels sufficient to realize an appropriate return on our investment in product development.
Manufacturing
We currently outsource manufacturing for all of our product candidates and expect to continue to outsource manufacturing in the future. We believe our current suppliers of Altropane will be able to manufacture our products efficiently in sufficient quantities and on a timely basis, while maintaining product quality. We seek to maintain quality control over manufacturing through ongoing inspections, rigorous review, control over documented operating procedures and thorough analytical testing by outside laboratories. We believe that our current strategy of primarily outsourcing manufacturing is cost-effective since we avoid the high fixed costs of plant, equipment and large manufacturing staffs. FDA regulations require that we establish manufacturing sources for each of our product candidates under the cGMP regulations established by the FDA.
MDS, Inc., (previously MDS Nordion, Inc.), a Canadian corporation and well-recognized manufacturer of 123 I and nuclear medicine labeled imaging agents, has supplied Altropane to us since 2001. We are highly dependent upon MDS Nordion. Under the terms of our agreement, which expired on December 31, 2010, MDS Nordion manufactured the Altropane molecular imaging agent for our clinical trials in exchange for minimum monthly cash payments. We do not presently have arrangements with any other suppliers in the event that MDS Nordion is unable or unwilling to manufacture Altropane for us. We could encounter a significant delay before another supplier could manufacture Altropane for us due to the time required to establish a cGMP manufacturing process for Altropane. We hope to enter into a new agreement with MDS but there can be no assurance that we will be able to or that the terms will be acceptable. We do not have a manufacturing agreement relating to the commercial production of Altropane with MDS or any other manufacturer. We can provide no assurances that such an agreement will be executed on acceptable terms or that if we are unable to satisfy our monthly minimum payment obligations to MDS that our existing agreement will remain in force.
Marketing and Sales
Although we currently sell no products, our strategy is to pursue partnering opportunities in order to accelerate and maximize commercialization of our clinical product candidates and strategic collaborations for development of our preclinical product candidates. These collaborators may provide financial and other resources, including capabilities in research, development, manufacturing, marketing and sales. There can be no assurances that we will be successful in our collaboration efforts.
Employees
As of December 31, 2010, we employed 4 full-time employees. None of our employees are covered by a collective bargaining agreement.
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. WE HAVE INCURRED LOSSES FROM OUR OPERATIONS SINCE INCEPTION AND ANTICIPATE LOSSES FOR THE FORESEEABLE FUTURE. WE WILL NOT BE ABLE TO ACHIEVE PROFITABILITY UNLESS WE OBTAIN REGULATORY APPROVAL AND MARKET ACCEPTANCE OF OUR PRODUCT CANDIDATES. WE WILL NEED SUBSTANTIAL ADDITIONAL FUNDING IN ORDER TO CONTINUE OUR BUSINESS AND OPERATIONS. IF WE ARE UNABLE TO SECURE SUCH FUNDING ON ACCEPTABLE TERMS, WE WILL NEED TO CEASE OPERATIONS, SIGNIFICANTLY REDUCE, DELAY OR CEASE ONE OR MORE OF OUR RESEARCH OR DEVELOPMENT PROGRAMS, OR SURRENDER RIGHTS TO SOME OR ALL OF OUR TECHNOLOGIES. IF WE VIOLATE A DEBT COVENANT OR DEFAULT UNDER OUR DEBT AGREEMENTS, WE MAY NEED TO CEASE OPERATIONS OR REDUCE, CEASE OR DELAY ONE ORMORE OF OUR RESEARCH OR DEVELOPMENT PROGRAMS, ADJUST OUR CURRENT BUSINESS PLAN AND MAY NOT BE ABLE TO CONTINUE AS A GOING CONCERN.
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. 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 the introduction of competitors’ products and other market factors. We expect to incur significant operating losses for at least the next three years. The level of our operating losses may increase in the future if more of our product candidates begin human clinical trials. We will never generate revenues or achieve profitability unless we obtain regulatory approval and market acceptance of our product candidates. This will require us to be successful in a range of challenging activities, including clinical trial stages of development, obtaining regulatory approval for our product candidates, and manufacturing, marketing and selling them. 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.
We require significant funds to conduct research and development activities, including preclinical studies and clinical trials of our technologies, and to commercialize our product candidates. Because the successful development of our product candidates is uncertain, we are unable to estimate the actual funds we will require to develop and commercialize them. Our funding requirements depend on many factors, including:
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The scope, rate of progress and cost of our clinical trials and other research and development activities;
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Future clinical trial results;
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The terms and timing of any collaborative, licensing and other arrangements that we may establish;
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The cost and timing of regulatory approvals and of establishing sales, marketing and distribution capabilities;
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The cost of establishing clinical and commercial supplies of our product candidates and any products that we may develop;
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The cost of obtaining and maintaining licenses to use patented technologies;
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The effect of competing technological and market developments; and
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The cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights and other patent-related costs, including litigation costs and the results of such litigation.
Until such time, if ever, as we can generate substantial revenue from product sales or through collaborative arrangements with third parties, we will need to raise additional capital. To date, we have experienced negative cash flows from operations and have funded our operations primarily from equity and debt financings.
As of December 31, 2010, we have experienced total net losses since inception of approximately $203,456,000, stockholders’ deficit of approximately $47,286,000 and a net working capital deficit of approximately $42,079,000. The cash and cash equivalents available at December 31, 2010 will not provide sufficient working capital to meet our anticipated expenditures for the next twelve months. At March 21, 2011, we had cash and cash equivalents of approximately $100,000 which combined with our ability to control administrative expenses will enable us to meet our anticipated cash expenditures into April, 2011.
In order to continue as a going concern and fund the approximately $30 million of investment required to complete the Altropane U.S. clinical trial program, we will need to raise additional capital through one or more of the following: a debt financing, an equity offering, or a collaboration, merger, acquisition or other transaction with one or more pharmaceutical or biotechnology companies. We are currently engaged in fundraising efforts. There can be no assurance that we will be successful in our fundraising efforts or that additional funds will be available on acceptable terms, if at all. We also cannot be sure that we will be able to obtain additional credit from, or effect additional sales of debt or equity securities to certain of our existing investors described below in Liquidity and Capital Resources. If we are unable to raise additional or sufficient capital, we will need to cease operations or reduce, cease or delay one or more of our research or development programs, adjust our current business plan and may not be able to continue as a going concern. Additionally, our common stock was delisted from trading on the NASDAQ Capital Market as a result of our failure to meet continued listing requirements of NASDAQ. On May 8, 2009 we began trading on the Pink Sheets OTC Market. This delisting has had an adverse affect on our ability to obtain future financing and has adversely impacted our stock price and the liquidity of our common stock. Our ability to advance our clinical programs, including the development of Altropane, is affected by the availability of financial resources. Financial considerations have caused us to suspend planned development activities for our clinical and preclinical programs until we are able to secure additional working capital. If we are not able to raise additional capital, we will not have sufficient funds to complete the clinical trial programs for Altropane.
Risks Related to Commercialization
OUR SUCCESS DEPENDS ON OUR ABILITY TO SUCCESSFULLY DEVELOP OUR PRODUCT CANDIDATES INTO COMMERCIAL PRODUCTS.
To date, we have not marketed, distributed or sold any products and, with the exception of Altropane, all of our technologies and early-stage product candidates are in preclinical development. The success of our business depends primarily upon our ability to successfully develop and commercialize our product candidates. Successful 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.
EVEN IF WE RECEIVE APPROVAL TO MARKET OUR PRODUCT CANDIDATES, THE MARKET MAY NOT BE RECEPTIVE TO OUR PRODUCT CANDIDATES UPON THEIR COMMERCIAL INTRODUCTION, WHICH COULD PREVENT US FROM SUCCESSFULLY COMMERCIALIZING OUR PRODUCTS AND FROM BEING PROFITABLE.
Even if our drug candidates are successfully developed, our success and growth will also depend upon the acceptance of these product candidates by physicians and third-party payors. Acceptance of our product development candidates will be a function of our products being clinically useful, being cost effective and demonstrating superior diagnostic or therapeutic effect with an acceptable side effect profile as compared to existing or future treatments. In addition, even if our products achieve market acceptance, we may not be able to maintain that market acceptance over time. Factors that we believe will materially affect market acceptance of our product candidates under development include:
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The timing of our receipt of any marketing approvals, the terms of any approval and the countries in which approvals are obtained;
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The safety, efficacy and ease of administration of our products;
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The competitive pricing of our products;
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The success of our education and marketing programs;
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The sales and marketing efforts of competitors; and
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The availability and amount of government and third-party reimbursement.
If our products do not achieve market acceptance, we will not be able to generate sufficient revenues from product sales to maintain or grow our business.
Risks Related to Regulation
IF OUR PRECLINICAL TESTING AND CLINICAL TRIALS ARE NOT SUCCESSFUL, WE WILL NOT OBTAIN REGULATORY APPROVAL FOR COMMERCIAL SALE OF OUR PRODUCT CANDIDATES.
We will be required to demonstrate, through preclinical testing and clinical trials, that our product candidates are safe and effective before we can obtain regulatory approval for the commercial sale of our product candidates. Preclinical testing and clinical trials are lengthy and expensive and the historical rate of failure for product candidates is high. Product candidates that appear promising in the early phases of development, such as in preclinical study or in early human clinical trials, may fail to demonstrate safety and efficacy in clinical trials.
There is no assurance that the results obtained to date and/or any further work completed in the future will be sufficient to achieve the approvability of Altropane.
Clinical trials require sufficient patient enrollment which is a function of many factors, including the size of the potential patient population, the nature of the protocol, the availability of existing treatments for the indicated disease and the eligibility criteria for enrolling in the clinical trial. Delays or difficulties in completing patient enrollment can result in increased costs and longer development times.
OUR PRODUCT CANDIDATES ARE SUBJECT TO RIGOROUS REGULATORY REVIEW AND, EVEN IF APPROVED, REMAIN 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.
The FDA regulates drugs in the United States, including their testing, manufacturing and marketing. Data obtained from testing is subject to varying interpretations which can delay, limit or prevent FDA approval. The FDA has stringent laboratory and manufacturing standards which must be complied with before we can test our product candidates in people or make them commercially available. Examples of these standards include Good Laboratory Practices and current Good Manufacturing Practices, or cGMP. Our compliance with these standards is subject to initial certification by independent inspectors and continuing audits thereafter. In addition, manufacturers of our product candidates are subject to the FDA’s cGMP regulations and similar foreign standards and we do not have control over compliance with these regulations by our manufacturers. If any third-party manufacturer fails to perform as required, this could impair our ability to deliver our products on a timely basis or cause delays in our clinical trials and applications for regulatory approval.
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:
•
Regulatory approvals may impose significant limitations on the uses for which any approved products may be marketed;
•
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;
•
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
•
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.
OUR PRODUCTS COULD BE SUBJECT TO RESTRICTIONS OR WITHDRAWAL FROM THE MARKET AND WE MAY BE SUBJECT TO PENALTIES IF WE FAIL TO COMPLY WITH REGULATORY REQUIREMENTS, OR IF WE EXPERIENCE UNANTICIPATED PROBLEMS WITH OUR PRODUCTS, WHEN AND IF ANY OF THEM ARE APPROVED.
Any product for which we obtain marketing approval, along with the manufacturing processes, post-approval clinical data, labeling, advertising and promotional activities for such product, will be subject to continual requirements of and review by the FDA and other regulatory bodies. These requirements include submissions of safety and other post-marketing information and reports, registration requirements, quality assurance and corresponding maintenance of records and documents, requirements regarding the distribution of samples to physicians and recordkeeping. The manufacturer and the manufacturing facilities we use to make any of our product candidates will also be subject to periodic review and inspection by the FDA. The subsequent discovery of previously unknown problems with a product, manufacturer or facility may result in restrictions on the product or manufacturer or facility, including withdrawal of the product from the market. Even if regulatory approval of a product is granted, the approval may be subject to limitations on the indicated uses for which the product may be marketed or to the conditions of approval, or contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product. Later discovery of previously unknown problems with our products, manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may result in:
•
Restrictions on such products, manufacturers or manufacturing processes;
•
Warning letters;
•
Withdrawal of the products from the market;
•
Refusal to approve pending applications or supplements to approved applications that we submit;
•
Recall;
•
Fines;
•
Suspension or withdrawal of regulatory approvals;
•
Refusal to permit the import or export of our products;
•
Product seizure; and
•
Injunctions or the imposition of civil or criminal penalties.
FAILURE TO OBTAIN REGULATORY APPROVAL IN FOREIGN JURISDICTIONS WOULD PREVENT US FROM MARKETING OUR PRODUCTS ABROAD.
Although we have not initiated any marketing efforts in foreign jurisdictions, we intend in the future to market our products outside the United States. In order to market our products in the European Union and many other foreign jurisdictions, we must obtain separate regulatory approvals and comply with numerous and varying regulatory requirements. The approval procedure varies among countries and can involve additional testing. The time required to obtain approval abroad may differ from that required to obtain FDA approval. The foreign regulatory approval process may include all of the risks associated with obtaining FDA approval and we may not obtain foreign regulatory approvals on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or approval by the FDA. We may not be able to file for regulatory approvals and may not receive necessary approvals to commercialize our products in any market outside the United States. The failure to obtain these approvals could materially adversely affect our business, financial condition and results of operations.
FOREIGN GOVERNMENTS TEND TO IMPOSE STRICT PRICE CONTROLS WHICH MAY ADVERSELY AFFECT OUR REVENUES, IF ANY.
The pricing of prescription pharmaceuticals is subject to governmental control in some foreign countries. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our product candidate to other available therapies. If reimbursement of our products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, our business could be adversely affected.
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 AS A BIOTECHNOLOGY COMPANY.
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 primary scientific area of research and development. 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 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.
Our patent strategy is to obtain broad patent protection, in the United States and in major developed countries, for our technologies and their related medical indications. Risks associated with protecting our patent and proprietary rights include the following:
•
Our ability to protect our technologies could be delayed or negatively affected if the United States Patent and Trademark Office, or USPTO, requires additional experimental evidence that our technologies work;
•
Our competitors may develop similar technologies or products, or duplicate any technology developed by us;
•
Our competitors may develop products which are similar to ours but which do not infringe our patents or products;
•
Our competitors may successfully challenge one or more of our patents in an interference or litigation proceeding;
•
Our technologies may infringe the patents or rights of other parties who may decide not to grant a license to us. We may have to change our products or processes, pay licensing fees or stop certain activities because of the patent rights of third parties which could cause additional unexpected costs and delays;
•
Patent law in the fields of healthcare and biotechnology is still evolving and future changes in such laws might conflict with our existing and future patent rights, or the rights of others;
•
Our collaborators, employees and consultants may breach the confidentiality agreements that we enter into to protect our trade secrets and proprietary know-how. We may not have adequate remedies for such breach; and
•
There may be disputes as to the ownership of technological information developed by consultants, scientific advisors or other third parties which may not be resolved in our favor.
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 CANDIDATES.
We have entered into license agreements with Harvard University and its affiliated hospitals, or Harvard and its Affiliates, that give us rights to intellectual property that is necessary for our business. These license arrangements impose various development, royalty and other 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.
In order to continue to expand our business we may need to acquire additional product candidates including those in clinical development through in-licensing that we believe will be a strategic fit with us. We may not be able to in-license suitable product candidates at an acceptable price or at all. Engaging in any in-license will incur a variety of costs, and we may never realize the anticipated benefits of any such in-license.
IF WE BECOME INVOLVED IN PATENT LITIGATION OR OTHER PROCEEDINGS RELATED TO A DETERMINATION OF RIGHTS, WE COULD INCUR SUBSTANTIAL COSTS AND EXPENSES, SUBSTANTIAL LIABILITY FOR DAMAGES OR BE REQUIRED TO STOP OUR PRODUCT DEVELOPMENT AND COMMERCIALIZATION EFFORTS.
A third party may sue us for infringing its patent rights. Likewise, we may need to resort to litigation to enforce a patent issued or licensed to us or to determine the scope and validity of third-party proprietary rights. In addition, a third party may claim that we have improperly obtained or used its confidential or proprietary information. There has been substantial litigation and other proceedings regarding patent and other intellectual property rights in the pharmaceutical and biotechnology industries. In addition to infringement claims against us, we may become a party to other patent litigation and other proceedings, including interference proceedings declared against us by the USPTO, regarding intellectual property rights with respect to our products and technology. The cost to us of any litigation or other proceeding relating to intellectual property rights, even if resolved in our favor, could be substantial, and the litigation would divert our management’s efforts. Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. Uncertainties resulting from the initiation and continuation of any litigation could limit our ability to continue our operations.
If any parties successfully claim that our creation or use of proprietary technologies infringes upon their intellectual property rights, we might be forced to pay damages, potentially including treble damages, if we are found to have willfully infringed on such parties’ patent rights. In addition to any damages we might have to pay, a court could require us to stop the infringing activity or obtain a license. Any license required under any patent may not be made available on commercially acceptable terms, if at all. In addition, such licenses are likely to be non-exclusive and, therefore, our competitors may have access to the same technology licensed to us. If we fail to obtain a required license and are unable to design around a patent, we may be unable to effectively market some of our technology and products, which could limit our ability to generate revenues or achieve profitability and possibly prevent us from generating revenue sufficient to sustain our operations. We might be required to redesign the formulation of a product candidate so that it does not infringe, which may not be possible or could require substantial funds and time. Ultimately, we could be prevented from commercializing a product or be forced to cease some aspect of our business operations if we are unable to enter into license agreements that are acceptable to us.
Moreover, we expect that a number of our collaborations will provide that royalties payable to us for licenses to our intellectual property may be offset by amounts paid by our collaborators to third parties who have competing or superior intellectual property positions in the relevant fields, which could result in significant reductions in our revenues from products developed through collaborations.
IF WE ARE UNABLE TO MAINTAIN OUR KEY WORKING RELATIONSHIPS WITH OUR LICENSORS, INCLUDING HARVARD AND ITS AFFILIATES, WE MAY NOT BE SUCCESSFUL SINCE SUBSTANTIALLY ALL OF OUR CURRENT TECHNOLOGIES WERE LICENSED FROM SUCH LICENSORS.
We maintain relationships with our licensors, Harvard and its Affiliates. Substantially all of our technologies are licensed from these licensors. Under the terms of our license agreements with Harvard and its Affiliates, we acquired the exclusive, worldwide license to make, use, and sell the technology covered by each respective agreement
Generally, each of these license agreements is effective until the last patent licensed relating to the technology expires or a fixed and determined date. The patents on the Altropane molecular imaging agent expire beginning in 2013.
Our license agreements with Harvard and its Affiliates generally provide for royalty payments equal to specified percentages of product sales, annual license maintenance fees and continuing patent prosecution costs. Universities and other not-for-profit research institutions are becoming increasingly aware of the commercial value of their findings and are becoming more active in seeking patent protection and licensing arrangements to collect royalties for the use of technology that they have developed. The loss of our relationship with our key licensor could adversely affect our ongoing development programs and could make it more costly and difficult for us to obtain the licensing rights to new scientific discoveries.
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 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 us to successfully market Altropane if it is approved for sale.
IF THIRD-PARTY PAYORS DO NOT ADEQUATELY REIMBURSE OUR CUSTOMERS FOR ANY OF OUR PRODUCTS THAT ARE APPROVED FOR MARKETING, THEY MIGHT NOT BE ACCEPTED BY PHYSICIANS AND PATIENTS OR PURCHASED OR USED, AND OUR REVENUES AND PROFITS WILL NOT DEVELOP OR INCREASE.
Substantially all biotechnology products are distributed to patients by physicians and hospitals, and in most cases, such patients rely on insurance coverage and reimbursement to pay for some or all of the cost of the product. In recent years, the continuing efforts of government and third party payors to contain or reduce health care costs have limited, and in certain cases prevented, physicians and patients from receiving insurance coverage and reimbursement for medical products, especially newer technologies. We believe that the efforts of governments and third-party payors to contain or reduce the cost of healthcare will continue to affect the business and financial condition of pharmaceutical and biopharmaceutical companies. Obtaining reimbursement approval for a product from each governmental or other third-party payor is a time-consuming and costly process that could require us to provide to each prospective payor scientific, clinical and cost-effectiveness data for the use of our products. If we succeed in bringing any of our product candidates to market and third-party payors determine that the product is eligible for coverage; the third-party payors may nonetheless establish and maintain price levels insufficient for us to realize a sufficient return on our investment in product development. Moreover, eligibility for coverage does not imply that any product will be reimbursed in all cases.
MEDICARE PRESCRIPTION DRUG COVERAGE LEGISLATION AND FUTURE LEGISLATIVE OR REGULATORY REFORM OF THE HEALTH CARE SYSTEM MAY AFFECT OUR ABILITY TO SELL OUR PRODUCT CANDIDATES PROFITABLY.
A number of legislative and regulatory proposals to change the healthcare system in the United States and other major healthcare markets have been passed or proposed in recent years including but not limited to the major reform of the US healthcare system passed by the United States congress in 2010. It is unclear today what effect the rules and regulations anticipated as a result of this new legislation will have on our business, our ability to promote and sell Altropane and our ability to obtain appropriate reimbursement for our product candidates. In addition, ongoing initiatives in the United States have exerted and will continue to exert pressure on drug pricing. In some foreign countries, particularly countries of the European Union, the pricing of prescription pharmaceuticals is subject to governmental control. Significant changes in the healthcare system in the United States or elsewhere, including changes resulting from the implementation of the Medicare prescription drug coverage legislation and adverse trends in third-party reimbursement programs, could limit our ability to raise capital and successfully commercialize our product candidates.
Further federal, state and foreign healthcare proposals and reforms are likely. While we cannot predict the legislative or regulatory proposals that will be adopted or what effect those proposals may have on our business, including the future reimbursement status of any of our product candidates, the announcement or adoption of such proposals could have an adverse effect on potential revenues from product candidates that we may successfully develop.
WE HAVE NO MANUFACTURING CAPACITY AND LIMITED MARKETING INFRASTRUCTURE AND EXPECT TO BE HEAVILY DEPENDENT UPON THIRD PARTIES TO MANUFACTURE AND MARKET APPROVED PRODUCTS.
We currently have no manufacturing facilities for either clinical trial or commercial quantities of any of our product candidates and currently have no plans to obtain additional facilities. To date, we have obtained the limited quantities of drug product required for preclinical and clinical trials from contract manufacturing companies. We intend to continue using contract manufacturing arrangements with experienced firms for the supply of material for both clinical trials and any eventual commercial sale.
We will depend upon third parties to produce and deliver products in accordance with all FDA and other governmental regulations. We may not be able to contract with manufacturers who can fulfill our requirements for quality, quantity and timeliness, or be able to find substitute manufacturers, if necessary. The failure by any third party to perform their obligations in a timely fashion and in accordance with the applicable regulations may delay clinical trials, the commercialization of products, and the ability to supply product for sale. In addition, any change in manufacturers could be costly because the commercial terms of any new arrangement could be less favorable and because the expenses relating to the transfer of necessary technology and processes could be significant.
Risks Related to our Stock
OUR STOCK PRICE MAY CONTINUE TO BE VOLATILE AND CAN BE AFFECTED BY FACTORS UNRELATED TO OUR BUSINESS AND OPERATING PERFORMANCE.
The market price of our common stock has in the past, and may continue to fluctuate significantly in response to factors that are beyond our control. The stock market in general periodically experiences significant price and volume fluctuations. The market prices of securities of pharmaceutical and biotechnology companies have been volatile, and have experienced fluctuations that often have been unrelated or disproportionate to the operating performance of these companies. These broad market fluctuations could result in significant fluctuations in the price of our common stock, which could cause a decline in the value of your investment.
Item 1B.
Item 1B.
Unresolved Staff Comments.
Not applicable.
Our corporate office is located in Hopkinton, Massachusetts. We lease approximately 16,000 square feet of office space which expires in 2011. We also lease office space in Boston, Massachusetts pursuant to a lease that expires in 2012. We do not occupy this space. We have entered into two sublease agreements covering all 6,600 square feet under our lease through the expiration of such lease. We believe that our existing facilities are adequate for their present and anticipated purposes, except that additional facilities will be needed if we elect to expand our space to include laboratory and/or manufacturing activities.
We are subject to legal proceedings in the normal course of business. We are not currently a party to any material legal proceedings.
PART II
Item 5.
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities.
Market Information
Our common stock trades on the Pink Sheets OTC Market under the symbol ALSE.PK. Prior to May 8, 2009, our common stock was traded on the NASDAQ Capital Market under the symbol ALSE.
The following table sets forth the high and low per share sales prices for our common stock for each of the quarters in the period beginning January 1, 2009 through December 31, 2010 as reported on the Pink Sheets OTC Market or the NASDAQ Capital Market.
As of March 21, 2011, there were approximately 2,800 holders of record of our common stock. As of March 21, 2011, there were approximately 8,100 beneficial holders of our common stock.
We have not paid or declared any cash dividends on our common stock and do not expect to pay cash dividends on our common stock in the foreseeable future.
Item 6.
Item 6.
Selected Financial Data.
Not required.
Item 7.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Our management’s discussion and analysis of our financial condition and results of operations include the identification of certain trends and other statements that may predict or anticipate future business or financial results that are subject to important factors that could cause our actual results to differ materially from those indicated. See Item 1A, “Risk Factors.”
Overview
We are a biotechnology company focused on the development of therapeutic and diagnostic products primarily for disorders in the central nervous system, or CNS. Our clinical and preclinical product candidate is based on a proprietary technology platform:
•
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.
As of December 31, 2010, we have experienced total net losses since inception of approximately $203,456,000, stockholders’ deficit of approximately $47,286,000 and a net working capital deficit of approximately $42,079,000. The cash and cash equivalents available at December 31, 2010 will not provide sufficient working capital to meet our anticipated expenditures for the next twelve months. At March 21, 2011, we had cash and cash equivalents of approximately $100,000 which combined with our ability to control certain costs, including those related to clinical trial programs, preclinical activities, and certain general and administrative expenses will enable us to meet our anticipated cash expenditures into April, 2011. We must immediately raise additional funds in order to continue operations and to fund the estimated $30 million of development costs related to the Altropane POET-2 program. This funding is not available at present and there can be no assurance that such funds will be available on acceptable terms if at all.
Product Development-Molecular Imaging Program
The Altropane molecular imaging agent is being developed for the differential diagnosis of PS, including PD, and non-PS in patients with an upper extremity tremor.
We believe in the current environment that, due to their proximity to commercialization and return on investment, late stage development programs may continue to be of significant interest to potential partners and investors. To maximize the value of our molecular imaging program, we are focusing on obtaining the funding necessary to execute the Altropane Phase III registration program. We are pursuing financing necessary to enable us to advance the Altropane program through our own means. In parallel, we are seeking to partner our molecular imaging program with a firm or firms with the resources necessary for the completion of the Phase III clinical program, for the manufacturing and supply of Altropane, and for the launch and commercialization of Altropane. We can provide no assurances that a partnership transaction will occur. We believe that the expansion of the program into other indications such as DLB and other countries including those in Europe could increase the value of the program for the partner and us. All of these activities require additional funding and as such are proceeding, if at all, only as rapidly as available resources permit. There can be no assurance that the required funding to advance the Altropane program will be available on acceptable terms if at all.
Results of Operations
Years Ended December 31, 2010 and 2009
Our net income was $512,419 during the year ended December 31, 2010 as compared with a net loss of $10,776,937 during the year ended December 31, 2009. Net income totaled $0.01 per share during 2010 as compared with a net loss of $0.46 per share during 2009. The decrease in net loss in 2010 was primarily attributable to the transaction covered by the Note Purchase Agreement dated September 10, 2010 which resulted in the recording of a gain on the early extinguishment of debt of $6,277,100 (Note 6).
Research and development expenses were $465,449 during the year ended December 31, 2010 as compared with $3,702,781 during the year ended December 31, 2009. The decrease of $3,237,332, or 87% in 2010 was attributable to our decision in 2009 to scale back operations which resulted in lower compensation and related costs of approximately $2,482,000 and a reduction of $448,000 in stock compensation expense.
General and administrative expenses were $2,657,488 during the year ended December 31, 2010 as compared with $4,623,201 during the year ended December 31, 2009. The decrease of $1,965,713 or 43% in 2010 was primarily related to lower compensation and related costs of approximately $608,000 which resulted from additional reductions in headcount, lower stock-compensation expense of $764,000, lower legal costs of approximately $666,000 and a reduction of $220,000 in directors’ fees as a result of the January 2010 restructuring of our board of directors resulting in the elimination of four board seats. The decrease was partially offset due to an increase of $282,000 in occupancy expenses now being allocated to general and administrative expense and a net increase in temporary and consulting services of $70,000.
Interest expense totaled $2,643,630 during the year ended December 31, 2010 as compared to $2,523,095 during the year ended December 31, 2009. The net increase of $120,535 in the 2010 period was primarily attributable to the issuance of a $350,000 promissory note in December 2009 and the issuance of $3,310,000 in promissory notes during the twelve months ended December 31, 2010. The notes all bear interest at the rate of 7% per annum.
Investment income was $1,886 during the year ended December 31, 2010 as compared with investment income of $7,140 during the year ended December 31, 2009. The decrease in 2010 was attributable to lower cash and cash equivalent balances in 2010 than in 2009.
Liquidity and Capital Resources
Net cash used for operating activities totaled $2,950,667 in 2010 as compared to $8,060,298 in 2009. The decrease in cash used during the 2010 period reflects our continued efforts to lower overall spending on staff and related overhead costs. Net cash provided by investing activities totaled $35,017 in 2010 as compared to cash provided by investing activities of $76,476 in 2009. The change in investing activities reflects the scheduled refund of security deposits held by our landlord on the Boston leased property. Net cash provided by financing activities totaled $2,699,200 in 2010 as compared to $8,224,812 in 2009. The decrease in 2010 primarily reflects the lack of funding from the issuance of additional common or preferred stock and our continued reliance for funding from one lead investor in 2010.
To date, we have dedicated most of our financial resources to the research and development of our product candidates, general and administrative expenses (including costs related to obtaining and protecting patents). 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.
A summary of financings completed through December 31, 2010 can be found in Note 5 of these Consolidated Financial Statements. A summary of financing activities through March 21, 2011 can be found in Item 9B Other Information.
In the future, our working capital and capital requirements will depend on numerous factors, including the progress of our research and development activities, the level of resources that we devote to the developmental, clinical, and regulatory aspects of our technologies, and the extent to which we enter into collaborative relationships with pharmaceutical and biotechnology companies. At March 21, 2011, we had cash and cash equivalents of approximately $100,000 which combined with our ability to control administrative expenses will enable us to meet our anticipated cash expenditures into April, 2011.
Impact of Recently Issued Accounting Pronouncements
See Note 1 to the Notes to Consolidated Financial Statements - “Recent Accounting Pronouncements.
Off-Balance Sheet Arrangements
We had no “off balance sheet arrangements” (as defined in Item 303(a)(4) of Regulation S-K) during the year ended December 31, 2010.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements which have been prepared by us in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Our estimates include those related to marketable securities, research contracts, the fair value and classification of financial instruments, our lease accrual and stock-based compensation. We base our estimates on historical experience and on various other assumptions that we believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
Item 7A.
Item 7A.
Quantitative Qualitative Disclosures About Market Risk
Not required.
Item 8.
Item 8.
Financial Statements and Supplementary Data.
The information required by Item 8 is included on pages 31 - 49.
Item 9.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None
Item 9A.
Item 9A.
Controls and Procedures.
As of the end of the period covered by this annual report on Form 10-K, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)). That evaluation was performed under the supervision and with the participation of its management, including its Chief Executive Officer and its Chief Financial Officer. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC rules and forms, and that such information is accumulated and communicated to our management, including our certifying officer, to allow timely decisions regarding the required disclosure.
Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control - Integrated Framework, our management concluded that our internal control over financial reporting was effective for the year ended December 31, 2010.
This annual report does not include an attestation report of the Company’s independent public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent public accounting firm pursuant to rules of the Securities and Exchange Commission that call for the Company to provide only management’s report in this annual report.
Changes in internal controls over financial reporting
There were no changes in our internal control over financial reporting that occurred during the period covered by this Annual Report on Form 10-K that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
In each of January, February and March 2011 the Company issued Promissory Notes to Mr. Robert Gipson totaling $600,000. The Notes bear interest at 7% per annum and are due and payable on demand.
PART III
Item 10.
Item 10.
Directors, Executive Officers and Corporate Governance
At December 31, 2010 our Board of Directors (the “Board”) consisted of three directors.
Peter G. Savas . Mr. Savas has been the Chairman of the Board and our Chief Executive Officer since September 2004. From March 2004 to September 2004, Mr. Savas was the Managing Partner of Tughill Partners, a life sciences consulting firm. From September 2000 to March 2004, Mr. Savas served as Chief Executive Officer and President and, from April 2001 to March 2004, as Chairman, of Aderis Pharmaceuticals, Inc., a privately-held biopharmaceutical company. From 1992 to 2000, Mr. Savas served as President of Unisyn, Inc., a contract manufacturer of biologics, and was also Unisyn’s Chief Executive Officer from 1995 to 2000. Mr. Savas serves on the board of directors of pSivida Corp., a leading drug delivery company.
Michael J. Mullen, C.P.A. Mr. Mullen has been a member of our Board since June 2004. Mr. Mullen is currently an independent consultant. From December 2009 to June 2010, Mr Mullen was Interim Chief Financial Officer of Valeritas, Inc., a medical technology company. From July 2006 to October 2009, Mr. Mullen was the Chief Financial Officer of Magellan Biosciences, Inc., a clinical diagnostics company From March 2006 to July 2006, Mr. Mullen was an independent consultant. From February 2003 to March 2006, Mr. Mullen was the Chief Financial Officer of JMH Capital, a private equity firm..
William Guinness. Mr. Guinness has been a member of our Board since July 2006. Mr. Guinness has been Chairman of Sibir Energy plc, a UK independent oil and gas production company, since March 1999, having previously been a Non-Executive Director of Pentex Energy plc and Pentex Oil plc. Since 1988, Mr. Guinness has been involved with various private venture capital operations, which cover areas as diverse as metal manufacturing, general aviation and fine art consultancy. Mr. Guinness is also a director of a number of private companies involved in a wide range of commercial activities. Mr. Guinness previously served on our Board of Directors from June 30, 2003 to September 20, 2003.
Code of Business Conduct and Ethics
We have adopted a written Code of Business Conduct and Ethics that applies to our directors, officers and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions.
Executive Officers
Position
In Current Position Since
Peter G. Savas
Chairman of the Board of Directors and Chief Executive Officer
September 2004
Kenneth L. Rice, Jr., JD, LLM, MBA
Executive Vice President, Finance and Administration, Chief Financial Officer and Secretary
September 2005 (Executive Vice President, Finance and Administration and Chief Financial Officer since July 2005)
Kenneth L. Rice, Jr., J.D., LL.M., MBA. Mr. Rice was appointed Executive Vice President, Finance and Administration and Chief Financial Officer in July 2005. Mr. Rice was appointed Secretary in September 2005. In June 2005, Mr. Rice served as a part-time consultant to the Company. From April 2001 to June 2005, Mr. Rice served as Vice President, Chief Financial Officer, Chief Commercial Officer and Secretary of Aderis Pharmaceuticals, Inc., a privately-held biopharmaceutical company. From August 1999 through March 2001, Mr. Rice served as Vice President and Chief Financial Officer of MacroChem Corporation, a publicly-traded drug delivery company.
No family relationships exist between any of our executive officers and our directors. Our executive officers are elected annually by the board of directors and serve until their successors are duly elected and qualified.
Audit Committee
Our Board has a standing Audit Committee that currently consists of Messrs. Mullen and Guinness. Our Board has determined that each of the members of the Audit Committee are independent as defined under the independence requirements contemplated by Rule 10A-3 under the Exchange Act. The Board has determined that Mr. Mullen is an “audit committee financial expert” as defined in Item 407(d)(5) of Regulation S-K.
(1)
Valuation based on the dollar amount recognized for financial statement reporting purposes pursuant to FASB ASC Topic 820 with respect to fiscal 2009, except that (i) such amounts do not reflect an estimate of forfeitures related to service-based vesting conditions and (ii) the amounts reported in these columns reflect additional expense, if any, resulting from the requirements of the SEC to report option grants made prior to 2009 using the modified prospective transition method pursuant to FASB ASC Topic 820. The assumptions used by us with respect to the valuation of option grants are set forth in Note 8.
(2)
Other Compensation includes disability insurance for 2010 and 2009.
(3)
Mr. Savas is also a member of our board of directors, but does not receive any additional compensation in his capacity as a director.
Outstanding Equity Awards
Outstanding option awards held by our Named Executive Officers as of December 31, 2010:
(1)
The options are 33% exercisable initially; and thereafter vest in 36 equal installments
(2)
The options are fully vested and exercisable at any time.
Potential Payments Upon Termination or Change-in-Control
On March 31, 2006, we entered into employment agreements with each of Messrs. Savas and Rice effective January 1, 2006 for a term of one year. These agreements are collectively referred to as the Employment Agreements. Each Employment Agreement automatically renews for an additional 12 month period, unless either party notifies the other party in writing not less than 90 days prior to expiration.
In general, in the event of termination without “cause” (as defined in the Employment Agreements) or voluntarily by an executive within one year following a “change in control” (as defined below), the Employment Agreements provide for (i) a cash severance payment equal to the sum of 75% - 100% of the sum of an executive’s highest base salary in effect during the preceding 12 month period and the average annual cash bonus paid during the preceding twenty-four month period, (ii) the continuation of health care benefits for a period of 9 to 12 months following termination of employment, and (iii) full acceleration of the vesting of all of the executive’s unvested equity awards. In the event of termination of employment by us for “disability” (as defined in the Employment Agreements), the Employment Agreements provide for a cash severance payment equal to the sum of 75% - 100% of the sum of an executive’s highest base salary in effect during the preceding 12 month period and the average annual cash bonus paid during the preceding twenty-four month period.
A “change in control” means:
(1)
an acquisition of any of our voting securities by any person immediately after which such person has beneficial ownership of 45% or more of the combined voting power of our then outstanding voting securities; or
(2)
approval by our stockholders of:
(a) our merger, consolidation, share exchange or reorganization, unless our stockholders, immediately before such merger, consolidation, share exchange or reorganization, own, directly or indirectly immediately following such merger, consolidation, share exchange or reorganization, at least 51% of the combined voting power of the outstanding voting securities of the corporation that is the successor in such merger, consolidation, share exchange or in substantially the same proportion as their ownership of the voting securities immediately before such merger, consolidation, share exchange or reorganization; or
(b) our complete liquidation or dissolution; or
(c) an agreement for the sale or other disposition of all or substantially all of our assets.
If the employment of any Named Executive Officer is terminated, unless employment is terminated without cause or after the occurrence of a change in control, such Named Executive Officer will remain subject to certain conditions regarding non-competition, non-solicitation and confidentiality, for a period of one year following the date of termination of employment.
Compensation of Directors
In 2010, our non-employee directors consisted of Michael J. Mullen and William Guinness. Their compensation included an annual retainer of $25,000 and a $2,500 fee per meeting attended. Fees earned in 2010 but unpaid for these two directors totaled $75,000. Fees earned for 2009 and a portion of 2008 for these two directors and 4 former directors totaled approximately $445,000 and have not been paid as of March 31, 2011.
As of December 31, 2010, the number of shares underlying options held by Michael J. Mullen and William Guinness was 125,417 and 80,000, respectively.
Item 12.
Item 12.
Security ownership of certain beneficial owners and management and related stockholder matters
Security Ownership
The following table sets forth information, as of December 31, 2010, regarding the beneficial ownership of our common stock by:
•
each person or “group,” as that term is defined in Section 13(d)(3) of the Exchange Act, that beneficially owns more than 5% of our outstanding common stock based on currently available Schedules 13D and 13G filed with the Securities and Exchange Commission;
•
each of our directors;
•
each of the Named Executive Officers; and
•
all of our directors and executive officers as a group.
Unless otherwise indicated below, the address for each listed director and executive officer is c/o Alseres Pharmaceuticals, Inc., 239 South Street, Hopkinton, Massachusetts 01748. Beneficial ownership shown is determined in accordance with the rules of the Securities and Exchange Commission and, as a result, includes voting and investment power with respect to shares.
Item 13.
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Certain Relationships and Related Transactions
We have entered into indemnity agreements with each of our directors and executive officers containing provisions that may require us, among other things, to indemnify those directors and officers against liabilities that may arise by reason of their status or service as directors and officers. The agreements also provide for us to advance to the directors and officers expenses that they expect to incur as a result of any proceeding against them related to their service as directors and officers.
For information regarding related party transactions see Note 12 of these Consolidated Financial Statements. For information relating to our employment and severance arrangements with our Named Executive Officers, see “Executive Compensation - Potential Payments Upon Termination or Change-in-Control.”
Item 14.
Item 14.
Principal Accountant Fees and Services
Independent Registered Public Accounting Firm’s Fees and Other Matters
The following table summarizes the fees billed to us for professional services rendered by McGladrey & Pullen, LLP and PricewaterhouseCoopers LLP, our prior independent registered public accounting firm, for each of the last two years:
Audit Fees
Audit fees consist of fees for the audit of our consolidated annual financial statements, the review of the interim consolidated financial statements included in our quarterly reports on Form 10-Q and other professional services provided in connection with statutory and regulatory filings or engagements.
Audit-Related Fees
Audit-related fees consist of fees for assurance and related services that are reasonably related to the performance of the audit or review of our consolidated financial statements and are not reported under “Audit Fees.” These services include consultations concerning financial accounting and reporting matters not classified as audits.
Tax Fees
Tax fees consist of fees for tax compliance, tax advice and tax planning services.
All Other Fees
All other fees for 2009 consisted of fees relating to an accounting research tool.
Policy on Audit Committee Pre-approval of Audit and Permissible Non-audit Services of Independent Registered Public Accounting Firm
Consistent with policies of the SEC regarding independent registered public accounting firm independence and our Audit Committee Charter, our Audit Committee has the responsibility for appointing, retaining, setting compensation and overseeing the work of the independent registered public accounting firm. Our Audit Committee’s policy is to pre-approve all audit and permissible non-audit services provided by the independent registered public accounting firm. Our Audit Committee presently pre-approves particular services on a case-by-case basis. In assessing requests for services by the independent registered public accounting firm, our Audit Committee considers whether such services are consistent with the independent registered public accounting firm’s independence, whether the independent registered public accounting firm is likely to provide the most effective and efficient service based upon their familiarity with us, and whether the service could enhance our ability to manage or control risk or improve audit quality.
All of the audit-related, tax and other services provided by McGladrey & Pullen, LLP in fiscal year 2010 and related fees were approved in advance by our Audit Committee. None of the services and fees were approved using the “de-minimis” exception under SEC rules.
Our Audit Committee believes that the provision of the non-audit services above is compatible with maintaining the independent registered public accounting firm’s independence.
PART IV
Item 15.
Item 15.
Exhibits and Financial Statement Schedules.
The following documents are included as part of this Annual Report on Form 10-K.
1.
Financial Statements:
Consolidated Financial Statements of the Company:
Consolidated Balance Sheets at December 31, 2010 and 2009
Consolidated Statements of Operations for the fiscal years ended December 31, 2010 and 2009 and for the period from inception (October 16, 1992) through December 31, 2010
Consolidated Statements of Comprehensive Loss and Stockholders’ (Deficit) Equity for the fiscal years ended December 31, 2010 and 2009 and for the period from inception (October 16, 1992) through December 31, 2010
Consolidated Statements of Cash Flows for the fiscal years ended December 31, 2010 and 2009 and for the period from inception (October 16, 1992) through December 31, 2010
Notes to Consolidated Financial Statements
2. Financial Statement Schedules:
Schedules are omitted since the required information is not applicable or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the Consolidated Financial Statements or Notes thereto.
3. Exhibits:
The Exhibits listed in the Exhibit Index immediately preceding the Exhibits are filed as a part of this Annual Report on Form 10-K.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholder
Alseres Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheets of Alseres Pharmaceuticals, Inc. and Subsidiaries (the “Company”) as of December 31, 2010 and 2009, and the related consolidated statements of operations, comprehensive loss and stockholders’ (deficit) equity and cash flows for the years then ended and for the period from October 16, 1992 (Inception) to December 31, 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. The financial statements for the period from October 16, 1992 (Inception) to December 31, 2006 were audited by other auditors and our opinion, insofar as it relates to cumulative amounts include for such prior periods, is based solely on the reports of such other auditors.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Alseres Pharmaceuticals, Inc. and Subsidiaries as of December 31, 2010 and 2009, and the results of their operations and their cash flows for the years then ended and for the period from October 16, 1992 (Inception) to December 31, 2010, in conformity with U.S. generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations, its total liabilities exceed its total assets, and it has determined that it will need to raise additional capital. This raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
As discussed in Note 1 to the financial statements, the 2009 consolidated financial statement have been restated to correct a misstatement.
/s/ McGladrey & Pullen, LLP
Boston, Massachusetts
March 31, 2011
ALSERES PHARMACEUTICALS, INC.
(A Development Stage Enterprise)
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of the consolidated financial statements.
ALSERES PHARMACEUTICALS, INC.
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of the consolidated financial statements.
ALSERES PHARMACEUTICALS, INC.
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS AND STOCKHOLDERS’ (DEFICIT) EQUITY
For the Period from inception (October 16, 1992) to December 31, 2010
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS AND STOCKHOLDERS’ (DEFICIT) EQUITY-
(Continued)
For the Period from inception (October 16, 1992) to December 31, 2010
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS AND STOCKHOLDERS’ (DEFICIT) EQUITY-
(Continued)
For the Period from inception (October 16, 1992) to December 31, 2010
ALSERES PHARMACEUTICALS, INC.
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of the consolidated financial statements.
ALSERES PHARMACEUTICALS, INC.
(A Development Stage Enterprise)
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 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. During the period from inception through December 31, 2010, 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, 2010.
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.
As of December 31, 2010, the Company has experienced total net losses since inception of approximately $203,456,000, stockholders’ deficit of approximately $47,286,000 and a net working capital deficit of approximately $42,079,000. For the foreseeable future, the Company expects to experience continuing operating losses and negative cash flows. The cash and cash equivalents available at December 31, 2010 will not provide sufficient working capital to meet our anticipated expenditures for the next twelve months. At March 21, 2011, we had cash and cash equivalents of approximately $100,000 which combined with our ability to control certain costs, including those related to clinical trial programs, preclinical activities, and certain general and administrative expenses will enable us to meet our anticipated cash expenditures into April 2011. Should we fail to raise additional capital we may have to suspend or cease our operations.
Basis of Presentation
The Company’s consolidated financial statements include the accounts of its six subsidiaries where all of the Company’s operations are conducted. At December 31, 2010, all of the subsidiaries were wholly-owned. All significant intercompany transactions and balances have been eliminated.
Restatement
The Convertible Notes Payable at December 31, 2009 of $34.1million and the related accrued interest of $4.0 million have been Restated as current liabilities as of December 31, 2009 in the consolidated Balance Sheets.
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 from those estimates. Changes in estimates are reflected in reported results in the period in which they become known.
Cash and Cash Equivalents
The Company considers all highly liquid marketable securities purchased with an original maturity of three months or less to be cash equivalents. As of December 31, 2010 and 2009, cash equivalents consisted of money market funds.
Fair Value Measurements
The carrying amounts of the Company’s financial instruments, which include cash and cash equivalents, accounts payable and accrued expenses approximate their fair values as of December 31, 2010 and 2009 due to their short-term maturity. It is not practicable to estimate the fair value of the Company’s convertible debt. However, it is likely that the fair value of the debt would be materially less than the carrying value of the debt because the conversion price of $2.50 is higher than the Company’s stock price of $0.12 as of December 31, 2010.
ALSERES PHARMACEUTICALS, INC.
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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. Leasehold improvements are recorded at cost and amortized using the straight-line method over the term of the lease or the estimated useful lives of the assets, whichever is shorter.
Impairment of Long Lived Assets
The Company periodically assesses the impairment of long-lived assets in accordance with ASC Topic 360, Property, Plant, and Equipment. The Company reviews long-lived assets, including property and equipment, for impairment whenever changes in business circumstances indicate that the carrying amount of the asset may not be fully recoverable. During the years ended December 31, 2010 and 2009 the Company did not record any impairment losses.
Reporting Comprehensive Income (loss)
Accounting Standards Codification 220, Comprehensive Income (ASC 220), establishes standards for the reporting and display of comprehensive income (loss) and its components in the financial statements. Comprehensive income (loss) is the total of net income (loss) and all other non-owner changes in equity including such items as unrealized holding gains/losses on securities, foreign currency translation adjustments and minimum pension liability adjustments. The Company had no such items for the years ended December 31, 2010 and 2009 and as a result, comprehensive income (loss) is the same as reported net income (loss) for all periods presented.
Research and Development Expenses
Research and development expenses are expensed as incurred. Research and development expenses include costs incurred in performing research and development activities such as salary and benefits, stock-based compensation expense, facility costs, license fees, contractual services, sponsored research and development, and clinical trial costs.
Stock-Based Compensation Expense
The Company measures share based compensation at grant date, based on the fair value of the award using the Black-Scholes Option Pricing Model, and recognizes such compensation as an expense over the employee’s requisite service period (generally the vesting period of the equity grant).
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.
Beneficial Conversion Feature
The Company issued preferred stock and notes which are convertible into common stock at a discount from the common stock market price at the date of issuance. The amount of the discount associated with such conversion rights represents an incremental yield, i.e. a “beneficial conversion feature”, that is recorded when the consideration allocated to the convertible security, divided by the number of common shares into which the security converts, is below the fair value of the common stock at the date of issuance of the convertible instrument.
A beneficial conversion feature associated with preferred stock is recognized as a return to the preferred stockholders and represents a non-cash charge in the determination of net loss attributable to common stockholders. The beneficial conversion feature is recognized in full immediately if there is no redemption date for the preferred stock, or over the period of issuance through the redemption date, if applicable. A beneficial conversion feature associated with debentures, notes or other debt instruments is recognized as discount to the debt and is amortized as additional interest expense using the effective interest method over the remaining term of the debt instrument.
Convertible Redeemable Shares
In accordance with ASC 480-10-S99 the Company determined that due to the fact that the Series F shares are mandatorily redeemable for cash or for a variable, uncapped, number of common shares, they are more akin to a liability and as such are classified outside of permanent equity.
ALSERES PHARMACEUTICALS, INC.
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Recent Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-06, Improving Disclosures about Fair Value Measurements, which amends Accounting Standards Topic 820 Fair Value Measurements and Disclosures (ASC 820) by adding required disclosures about items transferring into and out of levels 1 and 2 in the fair value hierarchy; adding separate disclosures about purchase, sales, issuances, and settlements relative to level 3 measurements; and clarifying the existing fair value disclosures about the level of disaggregation. The amendments in ASU 2010-6 were effective for fiscal years beginning after December 15, 2009. The adoption of this ASU has not had an impact on our consolidated financial statements.
2. Property and Equipment, net
Amortization and depreciation expense for the years ended December 31, 2010 and 2009 was approximately $59,000 and $72,000, respectively, and $1,612,000 for the period from inception through December 31, 2010.
3. Net Income (loss) per share
The Company reports earnings per share in accordance with Accounting Standards Codification 260, Earnings Per Share (ASC 260), which establishes standards for computing and presenting earnings per share. Basic and diluted net income (loss) per share is presented in conformity with the two-class method required for participating securities. Under the two-class method, basic net income (loss) per share is computed by dividing the net income (loss) attributable to common stockholders by the weighted-average number of common shares outstanding during the period. Net income (loss) attributable to common stockholders is determined by allocating undistributed earnings between holders of common and convertible preferred stock, based on the contractual dividend rights contained in our preferred stock agreement. No preferred dividends have been declared and, as such, preferred dividends have not affected our computation of net income available to common stockholders. Diluted net income (loss) per share is computed by dividing net income (loss) by the sum of the weighted average number of common shares and the number of dilutive potential common share equivalents outstanding during the period. Dilutive common share equivalents consist of the incremental common shares issuable upon the conversion of the Series F convertible preferred stock to common shares.
In computing diluted earnings per share, common stock equivalents are not considered in periods in which a net loss is reported, as the inclusion of the common stock equivalents would be anti-dilutive. As a result, there is no difference between the Company’s basic and diluted loss per share for the year ended December 31, 2009.
ALSERES PHARMACEUTICALS, INC.
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Stock options and warrants to purchase 3,652,443 and 3,697,745 shares of common stock were outstanding at December 31, 2010 and 2009, respectively, but were not included in the computation of diluted net income (loss) per common share because the exercise prices were greater than the average market price for the period, making them anti-dilutive. The exercise of those stock options and warrants outstanding at December 31, 2010 could potentially dilute earnings per share in the future
Shares of common stock reserved for issuance upon conversion of the 5% Convertible Promissory Notes were 13,485,889 and 15,285,088 at December 31, 2010 and 2009, respectively, but were not included in the computation of diluted net income (loss) per share because they would have been anti-dilutive. The conversion of the 5% Convertible Promissory Notes outstanding at December 31, 2010 could potentially dilute earnings per share in the future.
4. Accounts Payable and Accrued Expenses
5. Notes Payable and Debt
Interest expense of $1,657,432 and $1,743,999 was recorded related to the convertible notes payable for the years ended December 31, 2010 and 2009, respectively.
The above unsecured convertible promissory notes may be converted, at the option of the Purchasers, into (i) shares of the Company’s common stock at a conversion price per share of $2.50, (ii) the right to receive future payments related to the Company’s molecular imaging products (including Altropane and FLUORATEC) in amounts equal to 2% of the Company’s pre-commercial revenue related to such products plus 0.5% of future net sales of such products for each $1,000,000 of outstanding principal and interest that a Purchaser elects to convert into future payments, or (iii) a combination of (i) and (ii). Any outstanding notes that are not converted into the Company’s common stock or into the right to receive future payments became due and payable on December 31, 2010. However, each Purchaser is prohibited from effecting a conversion into common stock if at the time of such conversion the common stock issuable to such Purchaser, when taken together with all shares of common stock then held or otherwise beneficially owned by such Purchaser exceeds 19.9%, or 9.99% ISVP, of the total number of issued and outstanding shares of the Company’s common stock immediately prior to such conversion unless and until the Company’s stockholders approve the conversion of all of the shares of common stock issuable there under.
The Company is subject to certain debt covenants pursuant to the March 2008 Amended Purchase Agreement and the June 2008 Purchase Agreement (the “Purchase Agreements”). If the Company (i) fails to pay the principal or interest due under the Purchase Agreements, (ii) files a petition for action for relief under any bankruptcy or similar law or (iii) an involuntary petition is filed against the Company, all amounts borrowed under the Purchase Agreements may become immediately due and payable by the Company. In addition, without the consent of the Purchasers, the Company may not (i) create, incur or otherwise, permit to be outstanding any indebtedness for money borrowed, (ii) declare or pay any cash dividend, or make a
ALSERES PHARMACEUTICALS, INC.
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
distribution on, repurchase, or redeem, any class of the Company’s stock, subject to certain exceptions or sell, lease, transfer or otherwise dispose of any of the Company’s material assets or property or (iii) dissolve or liquidate.
Beneficial Conversion Feature (BCF)
Three of the unsecured promissory notes were issued with a conversion price of $2.50 which was below the market price of the Company’s common stock on the dates the agreements were entered into and resulted in the recording of a beneficial conversion feature. The Company recorded a BCF of $1,400,000 on (the “ISVP”) note and a BCF of $380,000 on (the “2008 RG”) note which was recognized as a decrease in the carrying value and an increase to additional paid-in capital. The BCF is being recognized as interest expense using the effective interest method through December 31, 2010. The Company recorded interest expense related to the BCF of approximately $724,000 and $699,000 for the years ended December 31, 2010 and 2009, respectively.
Promissory Notes
Interest expense of $208,018 and $62,741 was recorded related to the demand notes payable for the years ended December 31, 2010 and 2009, respectively
6. Gain on early extinguishment of debt
On September 10, 2010, we entered into a Note Purchase Agreement (the “Agreement”) with Highbridge International LLC (the “Seller”) and Robert Gipson pursuant to which we agreed to purchase from the Seller, effective September 14, 2010, a Convertible Promissory Note issued on May 2, 2007 to the Seller in the principal amount of $5,880,000. The purchase price of $602,700 was payable in immediately available federal funds by us to the Seller. A gain on early extinguishment of debt was $6,277,100 was recorded. There was no intrinsic value of the conversion feature at the extinguishment date, therefore, we recorded additional interest expense of approximately $48,300 related to the unamortized portion of the Highbridge beneficial conversion feature (“BCF”). The gain from the early extinguishment of debt is the difference between the reacquisition (purchase) price of the debt of $602,700 and the carrying value of the debt of $5,880,000 along with accrued interest of $999,800.
In a related transaction, on September 13, 2010 we issued to Robert L. Gipson (the “Holder”) an unsecured promissory note, pursuant to which we borrowed an aggregate principal amount of $700,000 (the “Note”). Interest on the Note shall accrue at the rate of 7% per annum and all principal and accrued interest shall be due and payable on demand of the Holder.
ALSERES PHARMACEUTICALS, INC.
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
7. Exit Activities
In September 2005, the Company relocated its headquarters from Boston to Hopkinton, Massachusetts. The Company amended its lease dated January 28, 2002 with Brentwood Properties, Inc. (the “Landlord”) for the property located in Boston. At December 31, 2010, the security deposit under the Lease Agreement was approximately $88,600 and not refundable to the Company until the termination of the lease in May 2012.
As a result of the Company’s relocation, an expense was recorded for the cost associated with the exit activity at its fair value in the period in which the liability was incurred. The liability recorded was calculated by discounting the estimated cash flows for the two sublease agreements and the Lease Agreement using an estimated credit-adjusted risk-free rate of 15%.
For the years ended December 31, 2010 and 2009 the Company recorded approximately $19,000 and $26,000, respectively of expense related to the imputed cost of the lease expense accrual included in general and administrative expense in the accompanying Consolidated Statements of Operations.
8. Stockholders’ Deficit
Common Stock
In November 2008, the Company completed a private placement with Robert Gipson of 543,478 shares of its common stock which raised $1,000,000 in gross proceeds. In connection with the November 2008 private placement, the Company also issued warrants (the “November 2008 Warrants”) to purchase 543,478 additional shares of common stock that were exercisable at $1.84 per share between six months and two years after the closing. In connection with the private placement, the Company agreed with Mr. Gipson (the “Letter Agreement”) that if the Company sold shares of its common stock at a price below $1.84, subject to certain exceptions, prior to December 31, 2009, Mr. Gipson would be entitled to receive, for no additional consideration, additional shares of common stock and warrants in accordance with a pre-determined formula. In addition, Dawson James Securities, Inc., (“Dawson James”) in its capacity as agent for the private placement, was entitled to a warrant to purchase 38,043 shares of common stock (the “Agent Warrant”). The Agent Warrant had a term of five years and was exercisable at a price equal to $1.84. In February 2009, Dawson James gave up its right to the Agent Warrant.
In January 2009, the Company completed a private placement with Robert Gipson of 1,000,000 shares of its common stock which raised $1,000,000 in gross proceeds. In addition, the Company issued an additional 456,522 shares of its common stock to Mr. Gipson pursuant to a Letter Agreement. In connection with the January 2009 private placement, Mr. Gipson agreed to the cancellation of the November 2008 Warrants.
In February 2009, the Company entered into a private placement with Cato Holding Company (“Cato”) of 200,000 shares of its common stock at a purchase price of $1.00 per share. In connection with the February 2009 private placement, the Company agreed with Cato that if the Company sells shares of its common stock, or securities convertible into common stock, prior to September 30, 2009, and the purchaser of such securities receives warrants to purchase additional shares of common stock (a “Qualified Financing”), subject to certain exceptions, Cato shall be entitled to receive, for no additional consideration, a warrant to purchase shares of common stock with the same terms and conditions as those provided to a purchaser in a Qualified Financing. No such additional warrants were issued pursuant to this agreement.
In November 2009, the Company entered into a private placement with Robert Gipson of 2,500,000 shares of its common stock which raised $1,000,000 in gross proceeds. In addition, in March 2010 the Company issued an additional 1,500,000 shares of its common stock to Mr. Gipson pursuant to a Letter Agreement.
In December 2010, the Company purchased 270,000 common shares from Robert Gipson at $.03 per share for a total of $8,125. The closing price for the Company’s stock on December 28 was $0.15 per share. The price per share paid by the Company to Mr. Gipson represented an 80% discount to the market price for the shares.
ALSERES PHARMACEUTICALS, INC.
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Preferred Stock
The Company has 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. 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.
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.
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, 2010, the Company recorded approximately $343,000 in accretion on the Series F Stock.
Stock Options and Warrants
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, 2010.
ALSERES PHARMACEUTICALS, INC.
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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. Both of these plans have expired and no future issuance of awards is permissible.
Stock-based employee compensation expense recorded during the years ended December 31, 2010 and 2009 are as follows:
The Company uses the Black-Scholes option-pricing model to calculate the fair value of each option grant on the date of grant. The fair value of stock options granted during the years ended December 31, 2010 and 2009 was calculated using the following estimated weighted-average assumptions:
Expected term - The Company determined the weighted-average expected term assumption for “plain vanilla” and performance-based option grants based on historical data on exercise behavior.
Risk-free interest rate - The risk-free interest rate used for each grant is equal to the U.S. Treasury yield curve in effect at the time of grant for instruments with a similar expected term.
Expected volatility - The Company’s expected stock-price volatility assumption is based on historical volatilities of the underlying stock which is obtained from public data sources.
Expected dividend yield - The Company has never declared or paid any cash dividends on its common stock and does not expect to do so in the foreseeable future. Accordingly, the Company uses an expected dividend yield of zero to calculate the grant-date fair value of a stock option.
Stock Options
Outstanding stock options for the year ended December 31, 2010:
Summary information regarding stock options outstanding at December 31, 2010:
ALSERES PHARMACEUTICALS, INC.
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
There was no intrinsic value for the outstanding and exercisable options as of December 31, 2010. There was no intrinsic value for the options vested during the year ended December 31, 2010. No options were exercised during the years ended December 31, 2010 and 2009. There were no options granted during 2010 and 2009.
As of December 31, 2010, 384,172 shares are available for grant under the Company’s option plans.
As of December 31, 2010, there remained approximately $1,000 of compensation costs related to non-vested stock options to be recognized as expense over a weighted-average period of approximately .08 years.
Warrants
As of December 31, 2010, the Company had 2,000 warrants outstanding to purchase common stock at an exercise price of $9.50, with an expiration date of October 2011. Each warrant is exercisable into one share of common stock. At December 31, 2010, the Company has reserved 4,036,615 shares of common stock to meet its option and warrant obligations.
Rights Agreement
On September 11, 2001, the Company entered into a Rights Agreement (the “Rights Plan”) dated as of September 11, 2001, with Continental Stock Transfer & Trust Company, as rights agent (the “Rights Agent”), and declared a dividend of one right (a “Right”) to purchase from the Company one-thousandth of a share of its Series D Preferred Stock at an exercise price of $25 for each outstanding share of the Company’s common stock at the close of business on September 13, 2001. The Rights will expire on September 11, 2011.
In general, the Rights will be exercisable only if a person or group acquires 15% or more of the Company’s common stock or announces a tender offer, the consummation of which would result in ownership by a person or group of 15% or more of the Company’s common stock. If, after the Rights become exercisable, the Company is acquired in a merger or other business combination transaction, or sells 25% or more of its assets or earning power, each unexercised Right will entitle its holder to purchase a number of the acquiring company’s common shares as defined in the Rights Plan. At any time after any person or group has acquired beneficial ownership of 15% or more of the Company’s common stock, the Board, in its sole discretion, may exchange all or part of the then outstanding and exercisable Rights for shares of the Company’s common stock at an exchange ratio of one share of common stock per Right.
In November 2001, the Company and the Rights Agent amended the Rights Plan to provide that the Rights Plan will be governed by the laws of the State of Delaware.
In November 2002, the Company and the Rights Agent amended the Rights Plan to provide that, for purposes of any calculation under the Rights Plan of the percentage of outstanding shares of the Company’s common stock beneficially owned by a person, any shares of the Company’s common stock such person beneficially owns that are not outstanding (such as shares underlying options, warrants, rights or convertible securities) shall be deemed to be outstanding. The amendment also exempted each of I&S, ISVP and Robert Gipson (the “Ingalls Parties”) from being an “Acquiring Person” under the Rights Plan so long as such persons, collectively, together with all affiliates of such persons, shall beneficially own less than 20% of the shares of the Company’s common stock then outstanding.
On March 12, 2003, the Company and the Rights Agent amended the Rights Plan to provide that prior to June 1, 2005, the Ingalls Parties and their affiliates will be deemed not to beneficially own certain convertible notes and warrants of the Company and any common stock issued or issuable upon their conversion or exercise for purposes of determining whether such person is an “Exempt Person” under the Rights Plan.
On December 23, 2003, the Company and the Rights Agent amended the Rights Plan to add Boucher to the list of persons included in the definition of Ingalls Parties who are exempt from being an “Acquiring Person” so long as such persons, collectively, together with all affiliates of such persons, shall beneficially own less than 20% of the shares of the Company’s common stock then outstanding. In addition, the amendment provides that a person shall not be deemed to beneficially own securities held by another person solely by reason of an agreement, arrangement or understanding among such persons to vote such securities, if such agreement, arrangement or understanding is for the purpose of (i) soliciting revocable proxies or consents to elect or remove directors of the Company pursuant to a proxy or consent solicitation made or to be made pursuant to, and in accordance with, the applicable proxy solicitation rules and regulations promulgated under the Securities Exchange Act of 1934, as amended, and/or (ii) nominating one or more individuals (or being nominated) for election to the Company’s Board of Directors or serving as a director of the Company.
ALSERES PHARMACEUTICALS, INC.
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
On March 14, 2005, the Company and the Rights Agent amended the Rights Plan to amend the definition of Exempt Person to include all purchasers of shares of the Company’s common stock in connection with the Company’s private placement completed in March 2005.
9. Fair Value Measurements
The fair value hierarchy prioritizes observable and unobservable inputs used to measure fair value into three broad levels:
Level 1 - quoted prices in active markets for identical securities;
Level 2 - other significant observable inputs, including quoted prices for similar securities, interest rates and credit risk,
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 at December 31, 2010 and 2009. We did not have any non-financial assets or liabilities that were measured or disclosed at fair value for the years ended December 31, 2010 and 2009. No transfers occurred between Level 1and Level 2 assets for the years ended December 31, 2010 and 2009.
10. Income Taxes
Income tax provision (benefit) consists of the following for the years ended December 31:
Deferred tax assets consist of the following at December 31:
A reconciliation between the amount of reported tax benefit and the amount computed using the U.S. federal statutory rate of 35% for the year ended December 31 is as follows:
ALSERES PHARMACEUTICALS, INC.
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the years ended December 31, 2010 and 2009, 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 was established at December 31, 2010.
A reconciliation of the unrecognized tax benefits recorded for the year ended December 31 is as follows:
The balance of unrecognized tax benefits at December 31, 2010 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.
As of December 31, 2010, the Company had federal and state NOL carryforwards of approximately $82,362,000 and $52,071,000 respectively and federal and state research and development (“R&D”) credit carryforwards of approximately $1,578,000 and $1,110,000, respectively, which may be available to offset future federal and state income tax liabilities which expire at various dates starting in 2011 and going through 2031. Utilization of the NOL and R&D credit carryforwards may be subject to a substantial annual limitation due to ownership change limitations that have occurred previously or that could occur in the future provided by Section 382 of the Internal Revenue Code of 1986, as well as similar state and foreign provisions. These ownership changes may limit the amount of NOL and R&D credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively. In fiscal year 1995 and in fiscal year 2005, the Company experienced a change in ownership as defined by Section 382 of the Internal Revenue Code. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain stockholders or public groups in the stock of a corporation by more than 50 percentage points over a three-year period. Since the Company’s formation, it has raised capital through the issuance of capital stock on several occasions which, combined with stockholders’ subsequent disposition of those shares, has resulted in two changes of control, as defined by Section 382. As a result of the 2005 ownership change, utilization of the Company’s NOLs is subject to an annual limitation under Section 382 determined by multiplying the value of our stock at the time of the ownership change by the applicable long-term tax-exempt rate resulting in an annual limitation amount of approximately $1,000,000. Any unused annual limitation may be carried over to later years, and the amount of the limitation may, under certain circumstances, be subject to adjustment if the fair value of the Company’s net assets are determined to be below or in excess of the tax basis of such assets at the time of the ownership change, and such unrealized loss or gain is recognized during the five-year period after the ownership change. Federal research and development tax credits were also impaired by the ownership change and were reduced accordingly. The Company does not expect to have any taxable income for the foreseeable future. Subsequent ownership changes, as defined in Section 382, could further limit the amount of net operating loss carryforwards and research and development credits that can be utilized annually to offset future taxable income.
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, 2010.
The Company is subject to both federal and state income tax for the jurisdiction within which it operates, which are primarily focused in Massachusetts. Within these jurisdictions, the Company is open to examination for tax years ended December 31, 2006 through December 31, 2009. However, because we are carrying forward income tax attributes such as NOLs from 2005 and earlier tax years, these attributes can still be audited when utilized on returns filed in the future. 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.
11. Commitments and Contingencies
The Company leases office space under non-cancelable operating leases. The Company’s corporate office lease expires in September 2011. The Company’s former corporate headquarters expires in May 2012 and has been amended for two sublease agreements. (Note 7)
ALSERES PHARMACEUTICALS, INC.
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The approximate future minimum commitments related to the above lease obligations are as follows:
Total rent expense was approximately $270,000 and $277,000 for the years ended December 31, 2010 and 2009, respectively, and approximately $3,824,000 for the period from inception (October 16, 1992) through December 31, 2010. The Company received approximately $244,000 and $211,000 for the years ended December 31, 2010 and 2009, respectively, related to the sublease of the premises.
License Agreements
The Company has entered into license agreements (the “Harvard License Agreements”) with Harvard University and its affiliated hospitals (“Harvard and its Affiliates”) to acquire the exclusive worldwide rights to certain technologies within its molecular imaging and neurodegenerative disease programs. The Harvard License Agreements obligate the Company to pay up to an aggregate of approximately $2,520,000 in milestone payments in the future. The future milestone payments are generally payable only upon achievement of certain regulatory milestones.
The Company’s license agreements with Harvard and its Affiliates generally provide for royalty payments equal to specified percentages of product sales, annual license maintenance fees and continuing patent prosecution costs.
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.
S. David Hillson, our former Chairman of the Board and Chief Executive Officer, requested that the Company create an indemnity trust for his benefit and fund the trust in the amount of $100,000. On June 15, 2004, the Company entered into a directors and officers indemnity trust agreement with Mr. Hillson and Boston Private Bank & Trust Company, as trustee (the “Indemnity Trust Agreement”), and funded the trust with $100,000. Mr. Hillson may request withdrawals of funds in the event that he becomes entitled to receive indemnification payments or advances from the Company. Amounts not disbursed from the trust will become unrestricted at such time as the Company and Mr. Hillson agree that the indemnity trust is no longer required. The Company has evaluated its obligations under this Indemnity Trust Agreement and has determined that the fair value of this obligation is immaterial at December 31, 2010.
The Company enters into arrangements with service providers to perform research, development, and clinical services. The Company enters into standard indemnification agreements with those service providers, whereby the Company indemnifies them for any liability associated with their use of the Company’s technologies. The maximum potential amount of future payments the Company would be required to make under these indemnification agreements is unlimited; however, the Company has product liability and general liability policies that enable the Company to recover a portion of any 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.
12. Related Party Transactions
In September 2006, the Company entered into a consulting agreement with Dr. Langer, a member of the Company’s board of directors, for scientific and business consulting services. This Agreement terminated in December 2009. The Company recorded consulting fees totaling approximately $159,000 under the consulting agreement, of which approximately $80,000 remains unpaid as of December 31, 2010.
ALSERES PHARMACEUTICALS, INC.
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Robert L. Gipson, Thomas L. Gipson & Arthur Koenig
Robert Gipson was a director of the Company from June 2004 through October 2004. Robert Gipson is a Senior Director of I&S. Boucher is a Managing Director of I&S. ISVP is an investment partnership managed under an investment advisory contract with I&S. Robert Gipson and Boucher are the general partners of ISVP and share the power to vote securities of the Company held by ISVP.
The Company amended its Rights Plan in connection with agreements with Robert Gipson, Boucher, I&S and ISVP (Note 5).
In March 2007, the Company issued the Amended Notes to Robert Gipson and Thomas Gipson (Note 5).
In March 2008, the Company entered into the March 2008 Amended Purchase Agreement with Robert Gipson, Thomas Gipson, Arthur Koenig, Highbridge and ISVP (Note 5).
In June 2008, the Company entered into the June 2008 Purchase Agreement with Robert Gipson (Note 5).
In November 2008, the Company issued and sold an aggregate of 543,478 shares of its common stock at a purchase price of $1.84 per share in a private placement (Note 6) to Robert Gipson.
In January 2009, the Company sold an aggregate of 1,000,000 shares of its common stock at a purchase price of $1.00 per share in a private placement (Note 8) to Robert Gipson.
In February 2009, the Subsidiary issued to Robert Gipson the Subsidiary Note (Note 5).
In March through September 2009, the Company sold Series F Stock to Robert Gipson (Note 8).
In November 2009, the Company entered into a private placement with Robert Gipson of 2,500,000 shares of its common stock which raised $1,000,000 in gross proceeds. In addition, in March 2010 the Company issued an additional 1,500,000 shares of its common stock to Mr. Gipson pursuant to a Letter Agreement (Note 8).
In December 2010, the Company purchased 270,000 common shares from Robert Gipson at $.03 per share for a total of $8,125. The closing price for the Company’s stock on December 28 was $0.15 per share. The price per share paid by the Company to Mr. Gipson represented an 80% discount to the market price for the shares (Note 8).
From December 2009 through December 2010, Company issued promissory notes to Robert Gipson in the aggregate of $3,660,000, payable on demand. The Notes bear interest at the rate of 7% per annum. (Note 5)
13. Employee Benefit Plan
The company maintains a 401(k) savings plan (the “Plan”) but discontinued the employer matching provision in the first quarter of 2009. Our matching contribution for the savings plan was $25,000 in 2009.
14. Subsequent Events
In each of January, February and March 2011 the Company issued Promissory Notes to Mr. Robert Gipson totaling $600,000. The Notes bear interest at 7% per annum and are due and payable on demand.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized this 31st day of March, 2011.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
EXHIBIT INDEX
Additional Exhibits
Subsidiaries of the Registrant
*
23.1
Consent of McGladrey & Pullen, LLP
*
31.1
Certification of Chief Executive Officer pursuant to Rule 13a- 14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended
*
*
Filed herewith
(#)
Management contract or compensatory plan or arrangement filed as an exhibit to this Form pursuant to Item 15(b) of Form 10-K.
(+)
Confidential treatment has been requested as to certain portions, which portions have been filed separately with the Securities and Exchange Commission.