Indicate by check
mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
¨
No
x
Indicate by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes
¨
No
x
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes
x
No
¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes
x
No
¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is
not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes
¨
No
x
Based on the last sales price of the registrant’s Common Stock as reported on the Pink Sheets OTC Market on December 31, 2013 (the last
business day of our most recently completed fiscal quarter), the aggregate market value of the shares of voting stock held by non-affiliates of the registrant was $304,000.
As of March 15, 2014, there were 30,635,720 shares of the registrant’s Common Stock issued and outstanding.
In this report, “we”, “us”, and “our” refer to Alseres Pharmaceuticals, Inc. The
following are trademarks of ours that are mentioned in this Annual Report on Form 10-K; Alseres™ and Altropane
®
. All other trade names, trademarks or service marks appearing in this
Annual Report on Form 10-K are the property of their respective owners and are not the property of Alseres Pharmaceuticals, Inc. or any of our subsidiaries.
PART I
Overview
We are a biotechnology company focused on diagnostic products primarily for disorders in the central nervous system, or CNS. Our clinical product candidate is
called Altropane and is a 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;
At December 31, 2013, we were considered a “development stage enterprise” and will continue to be so until the commencement of 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, 2013.
As of
December 31, 2013, we have experienced total net losses since inception of approximately $199,635,000, stockholders’ deficit of approximately $10,660,000 and a net working capital deficit of approximately $1,324,000. The cash and cash
equivalents available at December 31, 2013 will not provide sufficient working capital to meet our anticipated expenditures for the next twelve months. As of March 31, 2014, we owned 95,000 shares of Navidea Biopharmaceuticals, Inc. (Navidea or
NAVB) common stock which have, from January 2013 through December 2013, traded within the range of $1.11 – $3.59 a share.
Product Development
— Molecular Imaging Program
Altropane Molecular Imaging Agent
On July 31, 2012 we executed a License Agreement with Navidea under which we granted Navidea an exclusive, worldwide sublicense to research, develop, and
commercialize Altropane. In connection with the execution of this agreement, Navidea made a one-time sublicense execution payment to us equal to (i) One Hundred Seventy-Five Thousand Dollars ($175,000) and (ii) issued us 300,000 shares of
NAVB common stock.
The license agreement also provides for contingent milestone payments of up to $2.9 million, $2.5 million of which will principally
occur at the time of product registration or upon commercial sales, and the issuance of up to an additional 1.15 million shares of Navidea stock, 950,000 shares of which are issuable at the time of product registration or upon commercial sales.
In addition, the license terms anticipate royalties on yearly net sales of the approved product which are consistent with industry-standard terms and certain license extension fees, payable in cash and shares of common stock, in the event certain
milestones are not met.
We have licensed worldwide exclusive rights to develop Altropane from Harvard University and its affiliated hospitals, which we
refer to as “Harvard”, 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.
Central Nervous System Diagnostic Centers Opportunity
We
are presently conducting a preliminary feasibility assessment for a new business focused on organizing and operating a US network of Diagnostic Centers concentrating on neurodegenerative conditions. If the business is deemed to be feasible and moves
forward, we intend to operate it through our subsidiary, Alseres Neurodiagnostics, Inc. We have entered the decade of the brain. The cost of caring for people with degenerative brain disease, trauma induced brain dysfunction and psychiatric brain
disorders is projected to surpass that of cancer and heart disease combined by 2030. Today, progressive degenerative brain diseases like Alzheimer’s, Parkinson’s and Lewy Body Dementia are clinically diagnosed and therefore go undetected
for up to 20 years. Neither patients, nor physicians, nor scientists can benefit from early stage diagnosis and treatment.
1
The diagnostic and treatment landscape is changing. Multi-modal diagnostic tools that combine inexpensive,
convenient, predictive in-vitro diagnostic tests, in-vivo visualization tools and data interpretation algorithms are here, with more on the horizon. These advances coupled with new developments in disease modifying drugs and devices will fuel demand
for accurate, precise Central Nervous System (CNS) data to predict, diagnose and treat these devastating conditions.
The number of Americans living with
neurodegenerative movement disorders such as Parkinson’s disease (PD), and dementias like Alzheimer’s (AD) and Dementia with Lewy Bodies (DLB), is expected to grow from 20 million in 2010 to 30 million by 2030. By 2050, that
number is expected to grow to 40 million. Unchecked and without accounting for loss of productivity, the annual cost of care for patients with these diseases will grow from $200 billion today to $500 billion by 2030
.
Today, PD, AD and DLB are diagnosed post-symptomatically. By the time diagnosable clinical symptoms appear, the disease is in an advanced stage. The disease
has already progressed well beyond the point that current therapies have been shown to have disease modifying effects. Drugs in development are routinely tested in patients with advanced stage disease, where the drugs are least likely to have the
disease modifying or arresting affect desired. What is needed are:
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Early detection, definitive diagnostics and therapeutic drug monitoring tools; and
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Comprehensive, longitudinal data to enable disease modifying treatments for early stage degenerative brain diseases
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The new business would be tasked with taking full advantage of a proprietary multi-modal diagnostic toolkit to cost-effectively provide:
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Patients, physicians and caregivers with the information they need to predict, diagnose, monitor and manage CNS disease progression; and
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Scientists with information and access to the well-characterized, early stage patients they need to discover, develop and commercialize predictive, diagnostic, therapeutic and preventative products.
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The clinics will capture clinical samples and longitudinal patient data and analyses that will be retained in a central location. They will utilize
state-of-the-art imaging technology, clinical diagnostic equipment and in-vitro diagnostic tools. All clinics will operate under standard, network-wide screening, imaging, interpretation and data acquisition protocols ensuring quality control and
consistency of patient data and interpretation.
The clinics will provide screening, diagnosis and on-going monitoring of both pre-symptomatic and
symptomatic patients affected by neurodegenerative brain disorders. The clinics will take advantage of currently available in-vitro diagnostics as well as imaging diagnostics to identify patients who are “at risk” of developing
degenerative brain disorders. We are working, on a confidential basis, with industry participants to assess possible support for the development of the potential new business including capital and human resources.
At present our work on this opportunity is preliminary and is focused on identifying an initial location for a pilot site intended to demonstrate the proof of
concept for the centers and accessing potential sources of capital. We can provide no assurance that this business will ever be launched or that the capital and human resources necessary to launch and grow the new business will be available on
acceptable terms if at all.
Employees
As of
December 31, 2013 we employed 3 full-time employees.
Other Information
We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and, accordingly, file reports, proxy
statements and other information with the Securities and
2
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
As a result of our current lack of financial liquidity and negative stockholders’ equity we may not be able to raise additional capital on favorable
terms, if at all.
Since inception, we have primarily satisfied our working capital requirements from the sale of our securities through private
placements. These private placements have included the sale and issuance of preferred stock, common stock, promissory notes and convertible debentures.
For the year ended December 31, 2013, we obtained all of our funding from one key investor and our license transaction with Navidea. Our key investor,
Mr. Gipson, is a related party to the Company. He serves as a senior director of Ingalls & Snyder and served as a director of the Company in 2004. His activities with the Company are more fully described in the footnotes to the
consolidated financial statements contained herein. In the
3
event that Mr. Gipson cannot provide future funding or we cannot obtain any additional funding from sources other than Mr. Gipson, we may need to cease operations or modify our current
business plan and in any such event may not be able to continue as a going concern.
We have incurred losses from operations since inception and
anticipate losses for the foreseeable future.
We expect to incur operating losses for at least the next three years. The level of our operating
losses may increase in the future if Navidea fails to satisfy its contractual obligations to develop and commercialize Altropane. We will never generate revenues or achieve profitability unless Navidea or we obtain regulatory approval and market
acceptance of our Altropane product. This will require Navidea and/or us to be successful in a range of challenging activities, including clinical trial stages of development, obtaining regulatory approval for Altropane, and manufacturing, marketing
and selling it. We may never succeed in these activities, and may never generate revenues that are significant enough to achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a
quarterly or annual basis.
As of December 31, 2013, we have experienced total net losses since inception of approximately $199,635,000,
stockholders’ deficit of approximately $10,660,000 and a net working capital deficit of approximately $1,324,000. The cash and cash equivalents available at December 31, 2013 will not provide sufficient working capital to meet our
anticipated expenditures for the next twelve months. We believe that the cash available as of March 31, 2014 may cover our expenses through April 2014. Our independent registered accounting firm has added language to their opinion on the
financial statements contained in this annual report indicating substantial doubt about the Company’s ability to continue as a going concern.
We are a development stage company.
Biotechnology
companies that have no approved products or other sources of revenue are generally referred to as development stage companies. We have never generated revenues from product sales and we do not currently expect to generate revenues from product sales
for at least the next three years. Our future revenues are expected to be derived from royalties paid to us by Navidea if and when the Altropane product is approved and sold by them. There can be no assurances that Altropane will be approved or that
sales will result. If we do generate revenues and operating profits in the future, our ability to continue to do so in the long term could be affected by Navidea’s ability to invest in marketing of Altropane and by the introduction of
competitors’ products and other market factors.
Risks Related to Clinical Development of our Altropane Product Candidate
Navidea is obligated under the license agreement to complete the clinical development of Altropane and to seek its regulatory approval. However, our Altropane
product candidate is only one of a number of product candidates in the Navidea development pipeline. We can provide no assurances that development of our Altropane product candidate by Navidea will be or remain a high priority project for Navidea.
There can be no assurances that Navidea will have or be able to gain access to the capital and human resources necessary to satisfy its obligations under the license agreement. If Navidea is unable to meet its obligations under the license
agreement, we would be forced to terminate the license agreement and attempt to identify a new development partner for the Altropane product candidate.
Risks Related to Commercialization
Our success
depends on Navidea’s ability to successfully develop our Altropane product candidate into a commercial product.
To date, we have not
marketed, distributed or sold any products. The success of our business depends primarily upon Navidea’s ability to successfully develop and commercialize our Altropane product candidate. Successful research and product development in the
biotechnology industry is highly uncertain, and very few research and
4
development projects produce a commercial product. In the biotechnology industry, it has been estimated that less than five percent of the technologies for which research and development efforts
are initiated ultimately result in an approved product. If we are unable to successfully commercialize Altropane or any of our other product candidates, our business would be materially harmed and we would likely be forced to cease operations.
Risks Related to Regulation
Our Altropane product
candidate is subject to rigorous regulatory review and, even if approved, remains subject to extensive regulation.
Our out-licensed product
candidate 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 Food and Drug Administration (FDA) pursuant to the Federal Food, Drug, and Cosmetic Act. The clinical trial and regulatory approval process
usually requires many years and substantial cost. To date, neither the FDA nor any of its international equivalents has approved any of our product candidates for marketing.
Obtaining FDA approval to sell our product candidates is time-consuming and expensive. The FDA usually takes at least 12 to 18 months to review a New
Drug Application (NDA) which must be submitted before the FDA will consider granting approval to sell a product. If the FDA requests additional information, it may take even longer for the FDA to make a decision especially if the additional
information that they request requires us to complete additional studies. We may encounter similar delays in foreign countries. After reviewing any NDA we submit, the FDA or its foreign equivalents may decide not to approve our products. Failure to
obtain regulatory approval for a product candidate will prevent us from commercializing our product candidates.
Other risks associated with the
regulatory approval process include:
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Regulatory approvals may impose significant limitations on the uses for which any approved products may be marketed;
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Any marketed product and its manufacturer are subject to periodic reviews and audits, and any discovery of previously unrecognized problems with a product or manufacturer could result in suspension or limitation of
approvals;
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Changes in existing regulatory requirements, or the enactment of additional regulations or statutes, could prevent or affect the timing of our ability to achieve regulatory compliance. Federal and state laws,
regulations and policies may be changed with possible retroactive effect, and how these rules actually operate can depend heavily on administrative policies and interpretation over which we have no control, and we may possess inadequate experience
to assess their full impact upon our business; and
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The approval may impose significant restrictions on the indicated uses, conditions for use, labeling, advertising, promotion, marketing and/or production of such product, and may impose ongoing requirements for
post-approval studies, including additional research and development and clinical trials.
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Risks Related to our Intellectual Property
If we are unable to secure adequate patent protection for our technologies; then we may not be able to compete effectively.
At the present time, we do not have patent protection for all uses of our technologies. There is significant competition in the field of CNS diseases. Our
competitors may seek patent protection for their technologies, and such patent applications or rights might conflict with the patent protection that we are seeking for our technologies. If we do not obtain patent protection for our technologies, or
if others obtain patent rights that
5
block our ability to develop and market our technologies, our business prospects may be significantly and negatively affected. Further, even if patents can be obtained, these patents may not
provide us with any competitive advantage if our competitors have stronger patent positions or if their product candidates work better in clinical trials than our product candidates. Our patents may also be challenged, narrowed, invalidated or
circumvented, which could limit our ability to stop competitors from marketing similar products or limit the length of term of patent protection we may have for our products.
We in-license a significant portion of our intellectual property and if we fail to comply with our obligations under any of the related agreements, we
could lose license rights that are necessary to develop our product candidate.
We have entered into license agreements with Harvard, which give us
rights to intellectual property that is necessary for our business. These license arrangements impose various development and royalty obligations on us. If we breach these obligations and fail to cure such breach in a timely manner, these exclusive
licenses could be converted to non-exclusive licenses or the agreements could be terminated, which would result in our being unable to develop, manufacture and sell products that are covered by the licensed technology.
Risks Related to Competition
We are engaged in
highly competitive industries dominated by larger, more experienced and better capitalized companies.
The biotechnology and pharmaceutical
industries are highly competitive, rapidly changing, and are dominated by larger, more experienced and better capitalized companies. Such greater experience and financial strength may enable them to bring their products to market sooner than Navidea
or us, thereby gaining the competitive advantage of being the first to market. Research on the causes of, and possible treatments for, diseases for which we are trying to develop therapeutic or diagnostic products are developing rapidly and there is
a potential for extensive technological innovation in relatively short periods of time.
To our knowledge, there is only one company, GE Healthcare
(formerly Nycomed/Amersham), that has marketed a diagnostic imaging agent for PD and DLB, DaTSCAN
®
. GE Healthcare has obtained marketing approval in Europe. In January, 2011, GE Healthcare
obtained approval to market DaTSCAN in the U.S. as well. GE Healthcare has significantly greater infrastructure and financial resources than us. Marketing approval s in the US and Europe combined with their established market presence, and greater
financial strength could position GE to make it difficult for Navidea or us to successfully market Altropane if it is approved for sale.
Risks Related
to our Stock
Our common stock is deemed to be “penny stock,” which may make it more difficult for investors to sell their shares due
to suitability requirements.
Our common stock is deemed to be “penny stock” as that term is defined in Rule 3a51-1 promulgated
under the Securities Exchange Act of 1934 (the “Exchange Act”). These requirements may reduce the potential market for our common stock by reducing the number of potential investors. This may make it more difficult for investors in our
common stock to sell shares to third parties or to otherwise dispose of them. This could cause our stock price to decline.
Broker/dealers dealing in
penny stocks are required to provide potential investors with a document disclosing the risks of penny stocks. Moreover, broker/dealers are required to determine whether an investment in a penny stock is a suitable investment for a prospective
investor.
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Item 1B.
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Unresolved Staff Comments
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Not applicable.
6
Our corporate office is located at 275 Grove Street, Suite 2-400 in Auburndale,
Massachusetts. We are currently a tenant at will occupying approximately 200 square feet of office space on a shared basis. We believe that our existing facility is adequate for our present and anticipated needs.
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Item 3.
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Legal Proceedings
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On March 13, 2012 the Company received notice that Boston Children’s
Hospital (BCH) and Children’s Medical Center Corporation (CMCC) had filed a lawsuit in Middlesex Superior Court, Middlesex County, Massachusetts seeking to recover amounts alleged to be owed by the Company to the plaintiffs.
On February 1, 2013 the Company entered into a Settlement Agreement and Release with CMCC in full settlement of the lawsuit filed by BCH and CMCC seeking
to recover amounts alleged to be owed by the Company to the plaintiffs. The amount of $642,906 was included in accrued expenses at December 31, 2012 but was incurred and expensed prior to January 1, 2011.
In settlement of all claims by BCH and CMCC, the Company agreed to pay a lump sum of $185,000 to the plaintiffs. In addition to the lump sum payment, the
Company agreed to pay to the plaintiffs an additional sum equal to the then cash value of 20,000 shares of the common stock of Navidea upon the occurrence of the first milestone described in Section 4.2 of the sublicense agreement dated as of
July 31, 2012 between Navidea and the Company. On December 12, 2013 the Company received payment of the above referenced first milestone from Navidea. The cash value of 20,000 Navidea shares on that date was $40,000. The Company paid CMCC
the sum of $40,000 in January 2014 in accordance with the terms of the Settlement Agreement and Release.
On May 2, 2012 the Company received notice
that Biostorage Technologies, Inc (Biostorage). had filed a lawsuit in Marion Superior/Circuit Court, Marion County, Indiana seeking to recover amounts alleged to be owed by the Company to the plaintiffs totaling $119,363. On July 27 , 2013,
the company entered into a settlement agreement with Biostorage Technologies, Inc. pursuant to which the Company agreed to pay a total of $75,000 to Biostorage in three installments as follows: $10,000 on July 31, 2013, $40,000
December 31, 2013 and $25,000 February 28, 2014. The Company also agreed to stipulate a judgment in the amount of $95,000 to be adjusted down by each payment actually made by the Company and so long as each required payment is made by the
Company on time, the judgment will be vacated on February 28, 2014. As of September 30, 2013 the Company maintained an accrual on its books of $85,000 reflecting the net amount of the stipulated judgment in the event that the Company is
unable to pay the agreed to amounts described above. In December 2013, the Company paid to BioStorage the total remaining liability of $65,000 and extinguished the remaining $20,000 accrual so that on December 31, 2013 no further obligation to
BioStorage was recorded on the books of the Company.
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Item 4.
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Mine Safety Disclosures
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Not applicable
7
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company and Summary of Significant Accounting Policies
Alseres Pharmaceuticals, Inc. and its subsidiaries (the “Company”) is a biotechnology company engaged in the development of
diagnostic products primarily for disorders in the central nervous system. The Company was founded in 1992 and merged with a publicly held company in 1995 (the “Merger”) whereby the Company changed its name to Boston Life Sciences, Inc.
Effective June 7, 2007, the Company changed its name to Alseres Pharmaceuticals, Inc. During the period from inception through December 31, 2013, 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 Accounting Standards Codification
(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, 2013.
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.
Basis of Presentation
The Company’s consolidated
financial statements include the accounts of its seven subsidiaries where all of the Company’s operations are conducted. During 2012 the Company organized its seventh subsidiary, Alseres Neurodiagnostics, Inc. as a Delaware corporation. As of
December 31, 2013 all of the subsidiaries were wholly-owned. All significant intercompany transactions and balances have been eliminated.
Use of
Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ significantly from those estimates. Changes in estimates are reflected in reported results in the period in which they become known.
Cash and Cash Equivalents
Cash equivalents are
short-term, highly liquid financial instruments that are readily convertible to cash and have maturities of 90 days or less from the date of purchase. As of December 31, 2013 and 2012, cash equivalents consisted of money market funds.
Short-term Investments
The Company has designated its
marketable securities as of each balance sheet date as available-for-sale securities and accounts for them at their respective fair values. Marketable securities are classified as short-term or long-term investments based on the nature of these
securities and the availability of these securities to meet current operating requirements. Marketable securities that are readily available for use in current operations are
28
ALSERES PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
classified as short-term available-for-sale securities and are reported as a component of current assets in the accompanying consolidated balance sheets. The Company reviews all
available-for-sale securities at each period end to determine if they remain available-for-sale based on the Company’s then current intent and ability to sell the security if it is required to do so. As of December 31, 2013, the
Company’s short-term investments included 95,000 shares of common stock in Navidea Biopharmaceuticals, Inc. (Navidea or NAVB). The unrealized gain associated with these marketable securities has been determined to be temporary and therefore has
been included in other comprehensive loss as a component of stockholders’ deficit.
Fair Value of Financial Instruments
The carrying amounts of the Company’s cash and cash equivalents, prepaid expenses, trade payables and accrued expenses approximate their fair value due to
the short-term nature of these instruments. Short-term investments consist of available-for-sale-securities as of December 31, 2013 and 2012 and are carried at fair value as disclosed in Note 11. The fair value of the Company’s long-term
debt and promissory note is estimated by discounting the future cash flow using the Company’s current borrowing rates for similar types and maturities of debt. The fair value of the long term promissory note approximates the carrying value as
it was issued in December of 2013.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets, ranging from three to
five years.
Revenue Recognition
The Company
evaluates multiple element revenue arrangements under Financial Accounting Standards Board (FASB) ASC 605-25,
Multiple-Element Arrangements
. In addition to the form of the arrangement, the substance of the arrangement is also considered
in determining whether separate agreements entered into, at or near the same time, that include elements that are interrelated or interdependent should be treated as one multiple-element arrangement. If the Company concludes that separate agreements
represent one arrangement, then all the elements in the separate agreements are combined into one multiple-element arrangement for accounting purposes.
Revenues from non-refundable license fees are recognized upon receipt of the payment if the license has stand-alone value, we do not have ongoing involvement
or obligations, and we have determined the best estimate of the selling price for any undelivered items. When non-refundable license fees do not meet all of these criteria, the license revenues are recognized over the expected period of performance.
We will periodically review our expected period of substantial involvement under the agreements that provide for non-refundable up-front payments and
license fees. We will adjust the amortization periods when appropriate to reflect changes in assumptions relating to the duration of our expected involvement. We could accelerate revenue recognition for non-refundable upfront payments or license
fees in the event of an early termination of the agreements. Alternatively, we could decelerate such revenue recognition if our period of involvement is extended. While changes to such estimates have no impact on our reported cash flows, our
reported revenue is significantly influenced by our estimates of the period over which our obligations are expected to be performed and, therefore, over which revenue will be recognized.
29
ALSERES PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Revenues associated with substantive, at-risk milestones pursuant to our licensing agreements are recognized
upon achievement of the milestones. We consider a milestone to be substantive at the inception of the arrangement if it is commensurate with either our performance to achieve the milestone or the enhancement of the value of the delivered item as a
result of a specific outcome resulting from our performance to achieve the milestone, it relates solely to past performance and it is reasonable relative to all of the deliverables and payment terms within the arrangement. Non-refundable contingent
future amounts receivable in connection with future events specified in our licensing agreements that are not considered milestones will be recognized as revenue when payments are earned by our counterparties through completion of any underlying
performance obligations, the amounts are fixed or determinable and collectability is reasonably assured.
Comprehensive Income (Loss)
On January 1, 2012, the Company adopted the new presentation requirements under Accounting Standards Update (“ASU”) 2011-05, “
Presentation of
Comprehensive Income
”. Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses, net of taxes, on our marketable securities which are also recognized as
separate components of equity. ASU 2011-05 requires companies to present the components of net income and the components of other comprehensive income either as one continuous statement or as two consecutive statements. In February 2013, the FASB
issued ASU 2013-02,
Comprehensive Income
(Topic 220)
:
Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income
, which requires an entity to separately present the amount reclassified out of
accumulated other comprehensive income (AOCI) for each component of AOCI and to disclose, for each affected line item in the income statement, the amount of AOCI that has been reclassified into that line item. This information must be provided
either on the face of the financial statements by income statement line item, or in a footnote. For public companies, the amendments in the update became effective for interim and annual periods beginning on or after December 15, 2012. As ASU
2013-02 and ASU 2011-05 impacted presentation only, neither had an effect on the Company’s financial position nor results of operations as of and for the years ended December 31, 2013 and 2012, respectively.
Convertible Redeemable Shares
In accordance with
ASC 480,
Distinguishing Liabilities from Equity
the Company determined that since the Series F shares are mandatorily redeemable for cash or for a variable, uncapped, number of common shares, they do not qualify for equity
classification.
Income Taxes
The Company accounts
for income taxes under the liability method. Under the liability method, deferred income taxes are determined based on differences between the financial reporting and tax bases of assets and liabilities. They are measured using the enacted tax rates
and laws that will be in effect when the differences are expected to reverse. The Company is required to adjust its deferred tax liabilities in the period when tax rates or the provisions of the income tax laws change. Valuation allowances are
established to reduce deferred tax assets to the amounts expected to be realized.
2. Restricted Marketable Securities
Pursuant to the terms of the Amended and Restated License Agreement with Harvard University and its affiliated hospitals (Harvard) entered
into on July 31, 2012, at December 31, 2013 and 2012 respectively, the Company had an obligation to transfer 5,000 and 15,000 shares of the Navidea stock to Harvard. The market value of the
30
ALSERES PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
shares on December 31, 2013 and 2012 respectively was $10,350 and $42,450. The 5,000 shares of NAVB common stock held by the Company at December 31, 2013 is classified as restricted
securities in the consolidated balance sheet and the corresponding liability is reported in other current liabilities. The Company completed the transfer of the 15,000 shares of NAVB in January 2013.
3. Property and Equipment, net
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
Computer equipment
|
|
$
|
26,539
|
|
|
$
|
26,539
|
|
|
Office furniture and equipment
|
|
|
6,738
|
|
|
|
6,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,277
|
|
|
|
33,277
|
|
|
Less accumulated amortization and depreciation
|
|
|
33,277
|
|
|
|
33,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
1,186
|
|
|
|
|
|
|
|
|
|
|
|
Amortization and depreciation expense for the year ended December 31, 2013 was approximately $1,200. Amortization and
depreciation expense for the year ended December 31, 2012 was approximately $1,300. Amortization and depreciation expense for the period from inception through December 31, 2013 totaled approximately $1,655,000.
4. Accounts Payable and Accrued Expenses
The Company’s management is required to estimate accrued expenses as part of the process of preparing financial statements. Accrued
expenses include the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
|
Research and development expenses
|
|
$
|
470,824
|
|
|
$
|
1,339,851
|
|
|
Professional fees
|
|
|
201,146
|
|
|
|
735,990
|
|
|
General and administrative expenses
|
|
|
307,883
|
|
|
|
121,554
|
|
|
Compensation related expenses
|
|
|
75,885
|
|
|
|
81,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,055,738
|
|
|
$
|
2,278,398
|
|
|
|
|
|
|
|
|
|
|
|
On February 15, 2013, the Company entered into Settlement Agreements with Michael Mullen and William Guinness, both
members of the Board of Directors of the Company, pursuant to which the Company agreed to satisfy certain outstanding obligations to those individuals which, in aggregate, totaled $167,400 by issuing fully vest options to purchase a total of 167,400
shares of the common stock of Alseres Neurodiagnostics, Inc. (a wholly owned subsidiary of the Company) at a purchase price to be established by the Company coincident with the closing of an equity financing for Alseres Neurodiagnostics, Inc. The
options must be exercised, in whole or in part on or before February 28, 2018. The common stock issued pursuant to the exercise of the options will bear all appropriate restrictive legends on resale or disposition of the common stock. As of
December 31, 2013 the options had not yet been issued nor is the closing of an equity financing certain to occur therefore the associated liability of $167,400 remains outstanding and is recorded in accrued expenses on the balance sheet at
December 31, 2013. While the fair value of the options will likely be lower than the value of the current liability, the Company has determined it is not appropriate to recognize a gain at this time given the uncertainty of these events and the
variability associated with the value of the options.
31
ALSERES PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
5. Deferred charges
Under the terms of the Amended and Restated License Agreement with Harvard, the Company is obligated to pay Harvard 5% of the total cash and
equity considerations received as upfront sublicense payments pursuant to the sublicense agreement with Navidea. The Company recognized the $66,050 of license fees owed to Harvard as deferred charges and is amortizing these fees on a straight-line
basis over the estimated performance period commensurate with the recognition of the related revenue. The deferred charges balance at December 31, 2013 and 2012, represents the unamortized portion of costs of license fees to be recognized in the
future.
6. Net Loss per share
Basic and diluted net loss per share attributable to common stockholders has been calculated by dividing net loss attributable to common
stockholders by the weighted average number of common shares outstanding during the period. All potentially dilutive common shares have been excluded from the calculation of weighted average common shares outstanding since their inclusion would be
anti-dilutive.
Stock options to purchase approximately 3.0 million shares of common stock were outstanding at December 31, 2013 and 2012, but were not
included in the computation of diluted net loss per common share because they were anti-dilutive. Common stock equivalents in the form of convertible redeemable preferred stock were not included in the calculation of net loss per share at December
31, 2013 and 2012 as their inclusion would be anti-dilutive. The exercise of stock options outstanding at December 31, 2013 could potentially dilute earnings per share in the future.
7. Notes Payable and Debt
Effective July 31, 2012, Robert Gipson, Thomas Gipson, Arthur Koenig and Ingalls & Snyder Value Partners LLP, all lenders to
the Company under a Convertible Note Purchase Agreement originally executed in 2007, elected to convert $16,000,000 of principal outstanding under the promissory notes to a royalty on future net sales of the Company’s Altropane product. All
other rights under the Convertible Note Purchase Agreement related to the $16,000,000 of principal were waived by the lenders.
The intent of the above
convertible debt conversions and modifications was to allow for continued product development by a licensee and was considered to be the most viable option for the debt holders to recoup any of their principal. Based on these factors , these
transactions were considered to be concessions and were accounted for as a troubled debt restructuring under the guidance of ASC-470-60-55. As prescribed therein, when estimates are used relating to the maximum future cash payments, as in this case,
no gain shall be recognized until the estimated maximum future cash payments fall below the carrying value of the debt before restructuring.
As of
December 31, 2012, the contingent royalty liability resulting from the conversion is classified as a Level 3 liability and was reflected in the consolidated balance sheet at its fair value as a long-term liability. As is further described in
Note 8, this liability was extinguished as of December 31, 2013.
32
ALSERES PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Promissory Notes — Unsecured
|
|
|
|
|
|
|
|
|
|
|
Notes Payable to Significant Stockholder
|
|
December 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
Unsecured demand note payable; interest rate of 7%: issued December 2009
|
|
$
|
—
|
|
|
$
|
350,000
|
|
|
Unsecured demand notes payable; interest rate of 7%: issued January 2010 — December 2010
|
|
|
—
|
|
|
|
3,310,000
|
|
|
Unsecured demand notes payable; interest rate of 7%: issued January 2011 — December 2011
|
|
|
—
|
|
|
|
2,240,000
|
|
|
Unsecured demand notes payable; interest rate of 7%: issued January 2012 — September 2012
|
|
|
—
|
|
|
|
510,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
6,410,000
|
|
|
Accrued interest
|
|
|
—
|
|
|
|
919,526
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate carrying value
|
|
$
|
—
|
|
|
$
|
7,329,526
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense totaling $446,104 and $432,835 was incurred related to the unsecured notes payable for the years ended
December 31, 2013 and 2012, respectively.
Through 2013, a series of working capital loans (“Borrowings”) were made to the Company by its
significant stockholder, Mr. Gipson, evidenced by demand promissory notes and totaling $7,135,000 and bearing interest at 7% per annum. Interest on these notes was accrued and totaled approximately $1,365,000 at the execution date. On
December 31, 2013, the Company executed a Loan Consolidation Agreement with its significant stockholder (“Lender”). The terms of the Borrowings were modified to reduce the interest to be paid and provide for a fixed due date,
additional potential borrowings and a security interest in certain assets of the Company. Upon execution of the Loan Consolidation Agreement, all amounts outstanding under the Borrowings including accrued interest were cancelled and considered paid
in full and the Company entered into a new Promissory Note (“Consolidated Note”).
The Consolidated Note bears interest at 3.2% per annum
payable semi-annually in arrears and requires principal to be repaid on or before December 31, 2016. The Consolidated Note also includes semi-annual cash draws for the future working capital needs of the Company. The draws will be a minimum of
$110,000 and are to be added to principal when drawn. Coincident with the execution of the Loan Consolidation Agreement, the Company and the Lender also executed a Security Agreement which provides the Lender with an undivided security interest in
and to all personal and intellectual property of the Company subject to all existing liens, encumbrances and license rights previously granted by the Company. The Security Agreement also allows the Company to be free to dispose of or liquidate the
collateral without any prior waiver or authorization from the Lender so long as the proceeds of any such disposition are used to pay down the principal on the Consolidated Note or the Lender affirmatively waives such obligation in writing.
The Company considered whether the transaction was within the scope of ASC 470-60-55
Accounting for Troubled Debt Restructuring
, which states that if a
Company is experiencing financial difficulties and a concession is granted, troubled debt restructuring accounting should be applied. The Company has concluded that it is experiencing financial difficulties and the creditor has granted a concession
as the effective borrowing rate for the restructured debt is less than the effective rate of told debt prior to restructuring. The Company has recognized a gain of $682,670 equal to the difference between the carrying value of the old debt and the
present value of the future cash flows under the new terms. Since the lender is a related party, the gain was considered to be in essence a capital
33
ALSERES PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
transaction and therefore, the gain was recognized as an addition to additional paid in capital. Additionally, due to this restructuring, future payments made will be charged to the carrying
value of the restructured debt balance and no interest expense will be recorded going forward.
8. Contingent Royalty Liability
Effective July 31, 2012, Robert Gipson, Thomas Gipson, Arthur Koenig and Ingalls & Snyder Value Partners LP, all lenders to
the Company under a Convertible Note Purchase Agreement originally executed in 2007 and herein referred to as the prior lenders, elected to convert $16,000,000 of principal outstanding under the promissory notes to a royalty on future net sales of
the Company’s Altropane product.
On December 31, 2013 the Company entered into a Release of Liability Agreement with the prior lenders
referenced above pursuant to which the prior lenders unconditionally released the Company from any and all liability to pay any royalties to them on future sales of Altropane.
Coincident with the execution of the Release of Liability Agreement with the prior lenders, the Company entered into a Purchase and Sale Agreement with
Royalty Realization IV, LLC, a related party, that was created for the purpose of collecting royalties and paying them to the prior lenders, also related parties. The sole member of Royalty Realization IV, LLC is one of the three general partners of
Ingalls & Snyder Value Partners LP. Ingalls & Snyder Value Partners LP is a related party as it is one of the prior lenders and the Company’s major shareholder and lender, Mr. Gipson, is also one of its three general partners.
Neither of these general partners own more than 10% of Ingalls & Snyder Value Partners LP. The agreement provides that, in exchange for $25,000 cash consideration to the Company, Royalty Realization IV, LLC agreed to pay 8% royalties on future
sales of Altropane to the prior lenders and the Company agreed to instruct Navidea to pay the 8% royalty due to the Company directly to Royalty Realization IV if and when such royalty is earned by the Company.
At December 31, 2013 the Company no longer carried any long-term contingent liability on its balance sheet and eliminated any requirement to estimate the
value of such contingent liability. Since the prior lenders and Royalty Realization IV, LLC are considered related parties, the associated gain and consideration received were considered to be in essence capital transactions and therefore, were
recognized as increases to additional paid in capital.
9. Revenue Recognition
Our revenues have been generated primarily through sublicense and option agreements related to our Altropane product. The terms of these
agreements generally contain multiple elements, or deliverables, which have included (i) licenses or options to obtain licenses to our technology; (ii) technology transfer obligations related to the licenses and (iii) research,
development, regulatory and commercialization activities to be performed on our behalf. Payments to the Company under these arrangements typically include one or more of the following: non-refundable, up-front license fees; option exercise fees;
milestone payments; and royalties on future product sales.
The Company evaluates multiple element revenue arrangements under FASB ASC 605-25,
Multiple-Element Arrangements
as described in Note 1.
Option Agreement with Navidea
On January 19, 2012 the Company entered into an Option Agreement with Navidea, to license [123I]-E-IAFCT Injection (also referred to as Altropane), an
Iodine-123 radio labeled imaging agent being developed as an aid in the diagnosis of Parkinson’s disease and movement disorders. Under the terms of the option agreement, Navidea paid the Company a non-refundable option fee of $500,000 upon
signing the exclusive right to negotiate a
34
ALSERES PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
definitive license agreement by June 30, 2012 with a no-fee extension of the diligence period through July 31, 2012 available to Navidea. The option agreement provided Navidea with
exclusive rights to license the asset and complete further diligence and prepare the documentation necessary to enter into a definitive license agreement for Altropane. Our deliverables through June 30, 2012 were to provide assistance to
Navidea with regards to meetings and communications with the Food and Drug Administration (FDA) to allow Navidea to evaluate a path to commercialization and the feasibility of exercising the license option. As such we determined that the $500,000
non-refundable option fee received from Navidea represented a unit of accounting separate from scheduled milestone payments that would be receivable should the license option be exercised. Therefore the Company recognized the non-refundable option
fee received from Navidea ratably over the option period which ended June 30, 2012 as the Company had continuing performance obligations through that date. Regulatory feedback received in June caused Navidea to extend their diligence review
through July 31, 2012 which they elected to do ahead of executing a license on July 31, 2012. The extension of diligence into July created no additional obligations on Alseres beyond those completed by June 30, so no adjustment to
revenue was required as a result of the extension by Navidea.
Sublicense Agreement with Navidea
Effective July 31, 2012 the Company entered into an exclusive, worldwide sublicense agreement with Navidea for the research, development and
commercialization of Altropane. Altropane is an iodine-123 radiolabeled imaging agent which is being developed as an aid in the diagnosis of Parkinson’s disease and movement disorders.
The Company concluded that the Sublicense Agreement entered into with Navidea effective July 31, 2012, should be accounted for as a single unit of
accounting in accordance with the rules set forth in FASB ASC 605-25. These transactions are described in greater detail in Note 13 of these Consolidated Financial Statements.
The Company’s deliverables under the Sublicense Agreement with Navidea include granting a license of rights and transferring technology
(“know-how”) related to Altropane. The Company determined that pursuant to the accounting guidance governing revenue recognition on multiple element arrangements, the granting of a license of rights and the transfer of technology
(“know-how”) related to Altropane were not separable and, accordingly, are being treated as a single unit of accounting. The Company applied the guidance in ASC 605
Revenue Recognition,
to determine the appropriate revenue
recognition period for the upfront sublicense execution payment received from Navidea. Advance payments received in excess of amounts earned are classified as deferred revenue until earned. The upfront sublicense execution payment of $175,000 in
cash and the market value of $1,146,000 for the 300,000 shares of Navidea common stock as of July 31, 2012 were recorded as deferred revenue. Revenue will be recognized ratably from the date the sublicense agreement became effective on
July 31, 2012, through the expected life of the last to expire issued and sublicensed U.S. patent for Altropane in June 2030.
35
ALSERES PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As of December 31, 2013 and 2012, unearned revenue of $73,731 and $73,730 is reflected as a current liability
and $1,142,816 and $1,216,547 is classified as a long-term liability in the consolidated balance sheet respectively.
The sublicense agreement also
provides for contingent milestone payments to the Company of up to $2.9 million and the issuance of up to an additional 1.15 million shares of Navidea common stock. Milestone payments of $2.5 million and the issuance of 550,000 shares of
Navidea common stock will occur at the time of product registration. The Company will be issued an additional 400,000 shares of Navidea common stock when certain cumulative net sales of the approved product are achieved. In addition, the license
terms anticipate royalties on yearly net sales of the approved product, ranging from 10% to 14% of commercial net sales based on the sales price per dose, which are consistent with industry-standard terms and certain license extension fees, payable
in cash and shares of common stock, in the event certain milestones are not met. Per the Amended and Restated License Agreement with Harvard, the Company is obligated to pay Harvard 5% of Milestone payments and 2% of royalties, if earned.
10. Stockholders’ Deficit
Common Stock
On December 31, 2012
the Company agreed to purchase 537,931 shares of common stock held by Arthur Koenig and 1,793,104 shares of common stock held by Ingalls and Snyder Value Partners, LP at a purchase price per share of $0.0008 for total payment of $1,864. The closing
price for the Company’s stock on December 27th was $0.08 per share.
For the year ended December 31, 2012, the Company had repurchased a
total of 2,331,035 shares of its common stock and applied the constructive retirement method to these shares. The constructive retirement method was applied to these shares as management does not intend to reissue the shares within a reasonable
period of time. The aggregate value of the shares reacquired in 2012 was $23,310. This amount has been charged to the common stock account.
Preferred
Stock
The Company authorized 1,000,000 shares of preferred stock of which 25,000 shares have been designated as Series A Convertible Preferred
Stock, 500,000 shares have been designated as Series D Convertible Preferred Stock, and 800 shares have been designated as Series E Cumulative Convertible Preferred Stock (the “Series E Stock”). In March 2009, the Company
designated 200,000 shares as Series F Convertible Preferred Stock (“Series F Stock”). The remaining authorized shares have not been designated.
Convertible Preferred Stock
In 2009 the Company issued a
total of 196,000 shares of Series F convertible preferred stock to Mr. Gipson and received gross proceeds of $4,900,000. On June 1, 2011 the Company issued to Mr. Gipson 4,600,000 shares of its common stock in exchange for the conversion
by Mr. Gipson of 184,000 shares of the Company’s Series F Convertible, Redeemable Preferred Stock (“Series F Stock”). Each share of the Series F Stock was converted into 25 shares of common stock pursuant to the
conversion terms of the Series F Stock contained in the Certificate of Designation for the Series F Stock. The cumulative accrued interest at the date of conversion of $640,874 was reclassified to additional paid-in capital since the
shares were no longer redeemable. As of December 31, 2013 there remained 12,000 shares of Series F Stock outstanding and held by Mr. Gipson.
36
ALSERES PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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. No redemption demand has been made as of
December 31, 2013.
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. For the year ended December 31, 2013, the Company recorded approximately $20,942 in accretion on the outstanding Series F Stock.
Stock Option Plans
The Company can issue both
nonqualified and incentive stock options to employees, officers, consultants and scientific advisors of the Company under the Amended and Restated 2005 Stock Incentive Plan (the “2005 Plan”). At December 31, 2009, the 2005 Plan
provided for the issuance of options, restricted stock, restricted stock units, stock appreciation rights or other stock-based awards to purchase 3,050,000 shares of the Company’s common stock. The 2005 Plan contains a provision that allows for
an annual increase in the number of shares available for issuance under the 2005 Plan on the first day of each of the Company’s fiscal years during the period beginning in fiscal year 2006 and ending on the second day of fiscal year 2014. The
annual increase in the
37
ALSERES PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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, 2013.
The Company also has outstanding stock options in three other stock option
plans, the 1998 Omnibus Plan, the Amended and Restated Omnibus Stock Option Plan and the Amended and Restated 1990 Non-Employee Directors’ Non-Qualified Stock Option Plan. All plans have expired and no future issuance of awards is permissible.
We use the Black-Scholes option-pricing model to calculate the fair value of each option grant on the date of grant. No stock options were granted during
the years ended December 31, 2013 and 2012. All stock options outstanding at December 3, 2013 and 2012 were fully vested, therefore no unrecognized stock compensation expense was recorded at either date.
Stock Options
The following table summarizes the options
issued and outstanding as of December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted-Average
Exercise Price
|
|
|
Outstanding stock options at the beginning of year
|
|
|
3,010,980
|
|
|
$
|
1.51
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
Forfeited and expired
|
|
|
(8,500
|
)
|
|
|
5.00
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable stock options at year end
|
|
|
3,002,480
|
|
|
$
|
1.50
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about the stock options outstanding and exercisable as of December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of Exercise Prices
|
|
Number Outstanding
|
|
|
Weighted Average remaining
Contractual Life
|
|
|
Weighted Average
Exercise Price
|
|
|
$1.15 — $1.36
|
|
|
2,287,500
|
|
|
|
.4 years
|
|
|
$
|
1.15
|
|
|
$2.00 — $3.00
|
|
|
539,980
|
|
|
|
1.7 years
|
|
|
|
2.33
|
|
|
$3.10 — $4.65
|
|
|
155,000
|
|
|
|
3.8 years
|
|
|
|
3.17
|
|
|
$4.99 — $6.96
|
|
|
20,000
|
|
|
|
.3 years
|
|
|
|
5.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,002,480
|
|
|
|
0.8 years
|
|
|
$
|
1.50
|
|
As of December 31, 2013, 809,172 shares were available for grant under the 2005 Plan. As of December 31, 2013, the
Company had reserved 3,811,652 shares of common stock to meet its option obligation.
38
ALSERES PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
11. Fair Value Measurements
The fair value hierarchy prioritizes observable and unobservable inputs used to measure fair value into three broad levels:
Level 1 — unadjusted quoted prices in active markets for identical securities;
Level 2 — unadjusted quoted prices in markets that are not active,
Level 3 — significant unobservable inputs, including our own assumptions in determining fair value
The following table summarizes the financial assets that we measured at fair value as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Available for sale securities
|
|
$
|
196,650
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
196,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
196,650
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
196,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Available for sale securities
|
|
$
|
838,309
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
838,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
838,309
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
838,309
|
|
|
|
|
|
|
|
|
Contingent royalty
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
16,000,000
|
|
|
$
|
16,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
16,000,000
|
|
|
$
|
16,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2013, the Company’s Level 1 short term investments consisted of 95,000 shares of Navidea common
stock which are traded on the NYSE under the symbol NAVB.
As of December 31, 2012, the Company’s Level 1 short-term investments consisted of
285,000 shares of Navidea common stock which are traded on the NYSE under the symbol NAVB and 39,209 shares of FluoroPharma Medical, Inc. common stock which are traded on the OTX Bulletin Board (“OTCBB”) under the symbol FPMI.
A contingent royalty liability which resulted from the election by certain purchasers of the Company’s Convertible Promissory Note Purchase Agreement
(the “Note Purchase Agreement”) to convert a total of $16,000,000 in debt obligation into a right to receive future royalties on net sales of the Company’s molecular imaging products. The Company obtained a third party fair value
valuation for its contingent royalty liability as of December 31, 2012. The fair value measurement is based on significant inputs not observable in the market, which require it to be reported as a Level 3 asset within the fair value hierarchy.
The valuation uses assumptions that the Company believes would be made by a market participant. In particular, the valuation analysis employed the income approach based on the sum of the economic income that an asset is anticipated to produce in the
future. In this case that asset is the potential royalty income to be paid to the Company by Navidea as a result of the license agreement for Altropane. The discounted cash flow method of the income approach was chosen as the method best suited to
valuing the contingent royalty liability. Changes in the fair value of the contingent royalty liability will be reflected in the consolidated statements of comprehensive income in the period they become known. As further detailed in Note 8, this
liability was extinguished as of December 31, 2013.
39
ALSERES PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
12. Income Taxes
As of December 31, 2013, the Company had federal and state net operating loss (“NOL”) carryforwards of approximately
$61,516,000 and $27,325,000, respectively and federal and Massachusetts state research and development (“R&D”) credit carryforwards of approximately $1,578,000 and $1,110,000, respectively subject to limitation, may be available to
offset future federal and state income tax liabilities through 2031.
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets consisted of the following as of December 31:
|
|
2013
|
|
|
2012
|
|
|
Net operating loss carryforward
|
|
$
|
22,952,000
|
|
|
$
|
31,338,000
|
|
|
Capitalized research and development expenses
|
|
|
6,055,000
|
|
|
|
10,402,000
|
|
|
License fees
|
|
|
277,000
|
|
|
|
325,000
|
|
|
Stock-based compensation expense
|
|
|
2,264,000
|
|
|
|
2,264,000
|
|
|
Other
|
|
|
547,000
|
|
|
|
737,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
32,095,000
|
|
|
|
45,066,000
|
|
|
Valuation allowance
|
|
|
(32,095,000
|
)
|
|
|
(45,066,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the amount of reported tax benefit and the amount computed using the U.S. federal statutory rate of 35%
for the years ended December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
Tax provision (benefit) at statutory rate
|
|
$
|
(321,000
|
)
|
|
$
|
(1,009,000
|
)
|
|
State taxes, net of federal benefit
|
|
|
985,000
|
|
|
|
267,000
|
|
|
Expiring state net operating loss carryforward
|
|
|
—
|
|
|
|
455,000
|
|
|
Gain on forgiven interest and cancellation of debt and other
|
|
|
2,567,000
|
|
|
|
2,567,000
|
|
|
Decrease in valuation allowance
|
|
|
(6,731,000
|
)
|
|
|
(5,080,000
|
)
|
|
Permanent items
|
|
|
6,069,000
|
|
|
|
2,800,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2013 and 2012, the Company did not record any federal or state tax expense given its
continued net operating loss position. The Company has evaluated the positive and negative evidence bearing upon its ability to realize the deferred tax assets, which are comprised principally of net operating losses (“NOL”) and
capitalized research and development expenditures. Management has determined that it is more likely than not that the Company will not recognize the benefits of federal and state deferred tax assets and, as a result, a full valuation allowance has
been recorded.
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit for the years ended December 31:
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
3,574,000
|
|
|
$
|
(2,737,000
|
)
|
|
State
|
|
|
817,000
|
|
|
|
(645,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,391,000
|
|
|
|
(3,382,000
|
)
|
|
Valuation allowance
|
|
|
(4,391,000
|
)
|
|
|
3,382,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
40
ALSERES PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A reconciliation of the unrecognized tax benefits recorded for the years ended December 31 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
Balance at January 1
|
|
$
|
2,822,531
|
|
|
$
|
2,822,531
|
|
|
Additions based on tax positions related to the current year
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
$
|
2,822,531
|
|
|
$
|
2,822,531
|
|
|
|
|
|
|
|
|
|
|
|
The balance of unrecognized tax benefits as of December 31, 2013 of approximately $2,822,531 are tax benefits that, if
recognized, would not affect the Company’s effective tax rate since they are subject to a full valuation allowance.
The Company recognizes interest
and penalties related to income tax matters in income tax expense. The Company has no accrual for interest and penalties as of December 31, 2013.
The Company is subject to both federal and state income tax for the jurisdiction within which it operates. Within these jurisdictions, the Company is open to
examination for tax years ended December 31, 2010 through December 31, 2013. The U.S. Internal Revenue Service (IRS) had completed an audit of tax years 2007 and 2008 and had informed us that no adjustments to the federal tax returns as
filed would be proposed as a result of the audit. However, because we are carrying forward income tax attributes such as the NOL from 2006, these attributes can still be audited when utilized on returns filed in the future.
13. Commitments and Contingencies
In August 2013 the Company vacated its offices in Hopkinton, MA and is currently occupying approximately 200 square feet of office space in
Auburndale, MA as a tenant at will on a shared basis at $500 per month. Total rent expense was approximately $25,800, $2,500 of which is for the Auburndale space and $71,500 for the years ended December 31, 2013 and 2012, respectively and
approximately $4,141,300 for the period from inception (October 16, 1992) through December 31, 2013.
On March 13, 2012 the Company
received notice that Boston Children’s Hospital and Children’s Medical Center Corporation had filed a lawsuit in Middlesex Superior Court, Middlesex County, Massachusetts seeking to recover amounts alleged to be owed by the Company to the
plaintiffs.
On February 1, 2013 the Company entered into a Settlement Agreement and Release with Boston Children’s Hospital (BCH) and
Children’s Medical Center Corporation (CMCC) in full settlement of the lawsuit filed by BCH and CMCC seeking to recover amounts alleged to be owed by the Company to the plaintiffs totaling $642,906 plus costs.
In settlement of all claims by BCH and CMCC, the Company agreed to pay a lump sum of One Hundred Eighty five Thousand dollars ($185,000) to the plaintiffs. In
addition to the lump sum payment, the Company agreed to pay to the plaintiffs an additional sum equal to the then cash value of 20,000 shares of the common stock of Navidea upon the occurrence of the first milestone described in Section 4.2 of
the sublicense agreement dated as of July 31, 2012 between Navidea and the Company. The milestone occurred in December, 2013 at which time the value of 20,000 shares of Navidea common stock was $40,000. The Company paid CMCC the sum of $40,000
in January 2014 in accordance with the terms of the Settlement Agreement and Release.
41
ALSERES PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
On May 2, 2012 the Company received notice that Biostorage Technologies, Inc (Biostorage) had filed a
lawsuit in Marion Superior/Circuit Court, Marion County, Indiana seeking to recover amounts alleged to be owed by the Company to the plaintiffs totaling $119,363. On July 27 , 2013, the Company entered into a settlement agreement with
Biostorage pursuant to which the Company agreed to pay a total of $75,000 to Biostorage in three installments as follows: $10,000 on July 31, 2013, $40,000 December 31, 2013 and $25,000 February 28, 2014. The Company also agreed to
stipulate a judgment in the amount of $95,000 to be adjusted down by each payment actually made by the Company and so long as each required payment is made by the Company on time, the judgment will be vacated on February 28, 2014. As of
December 31, 2013 the Company had paid the entire $75,000 settlement amount in full and therefore recognized the remaining $20,000 as a gain which is reported in other income.
Sublicense Agreement with Navidea
Effective
July 31, 2012, the Company entered into an exclusive, worldwide sublicense agreement with Navidea for the research, development and commercialization of Altropane. Altropane is an Iodine-123 radiolabeled imaging agent which is being developed
as an aid in the diagnosis of Parkinson’s disease and movement disorders as described in Note 9.
Either party may terminate the agreement if the
other party materially breaches the agreement and such breach remains uncured for 60 days after the date of notice of such breach. Navidea has the right to terminate the agreement at any time for any or no reason, in part or in its entirety, upon
providing sixty day notice to the Company. If neither party terminates the agreement, then the agreement will remain in effect until the occurrence of the last royalty expiration date as such term is defined in the sublicense agreement.
Amended and Restated License Agreement with Harvard
Simultaneous with the signing of the Navidea Sublicense Agreement in July 2012, the Company entered into an Amended and Restated License Agreement with Harvard
which resulted in the revision of certain financial terms regarding the royalty payable to Harvard, the percentage of non-royalty income payable to Harvard by the Company and the timing of said payments. Pursuant to the agreement, the Company is
obligated to make a cash payment of $8,750 to Harvard in connection with the receipt of the cash consideration of $175,000 received from Navidea upon execution of the sublicense agreement. This payment is due to Harvard within 30 days following the
first commercial sale of the Altropane product. The Company was also obligated to transfer to Harvard 15,000 shares of the Navidea common stock received as part of the sublicense agreement to Harvard. The shares were transferred during January 2013.
As result of the receipt by the Company of the first milestone payment from Navidea in December 2013, the Company is obligated to transfer 5,000 shares of the Navidea common stock received by the Company. These shares will be transferred upon the
effectiveness of an S-3 registration statement to be filed by Navidea covering the shares issued. In addition, the Company is obligated to make a cash payment of $10,000 to Harvard in connection with the receipt of the cash milestone of $200,000
received from Navidea. This payment is due to Harvard within 30 days following the first commercial sale of the Altropane product.
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;
42
ALSERES PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
however, the Company has a director and officer insurance policy that limits the Company’s exposure and enables the Company to recover a portion of any future amounts paid. As a result of
the Company’s insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal.
14. Related Party Transactions
From September 2012 through December 2013, Mr. Gipson provided a total of $500,000 to the Company as an advance against his planned purchase
of stock in Alseres Neurodiagnostics, Inc. These funds were available to the Company for use during 2012 and 2013 and the advance is reflected as advances from related parties on the consolidated balance sheet.
Additional Related Party Transactions during 2013 are disclosed in footnotes 7, 8 and 10.
15. Subsequent Events
The Company evaluated all events and transactions that occurred after the balance sheet date through the date of this filing. During this
period, the Company did not identify any material events that require accounting or disclosure in these financial statements.
43