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ALSE > SEC Filings for ALSE > Form 10-K on 1-Apr-2013All Recent SEC Filings

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Form 10-K for ALSERES PHARMACEUTICALS INC /DE


1-Apr-2013

Annual Report


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".

Results of Operations

Years Ended December 31, 2012 and 2011

Our net loss was $1,645,476 for the year ended December 31, 2012 compared to a net loss of $2,882,214 for the year ended December 31, 2011. The net loss for the year ended December 31, 2012 resulted from operating expenses of approximately $1,743,000 and interest expense of approximately $435,000 partially offset by the recognition of $531,000 in revenue. The net loss for the year ended December 31, 2011 resulted from operating expenses of approximately $2,126,000 and interest expense of approximately $1,838,000. These expenses were partially offset by a gain recognized on forgiveness of debt of $477,000, a gain of $59,000 recognized on the change in method for valuing our FluoroPharma Medical, Inc. stock previously accounted for under the cost method and the reversal of a prior year accrual of $561,000 related to a potential dispute with a contract manufacturer.

For the year ended December 31, 2012, the Company recognized revenue of $530,723. Revenue was comprised of a non-refundable option fee of $500,000 the Company received from Navidea Biopharmaceuticals in January 2012 and $30,723 in revenue recognized from the upfront sublicense fee received from Navidea Biopharmaceuticals in July 2012. Under the terms of the sublicense agreement, Navidea made a one-time sublicense execution payment of $175,000 and issued the Company 300,000 shares of Navidea common stock ("NAVB") which had a market value of $1,146,000 as of July 31, 2012. Revenue from the $1,321,000 upfront sublicense fee will be recognized ratably from the date the sublicense agreement became effective in July 2012 through the expected life of the last to expire issued and sublicensed U.S. patent for Altropane in June 2030.

Research and development expenses were $50,705 for the year ended December 31, 2012 compared to $93,319 for the year ended December 31, 2011. Under the terms of the sublicense agreement entered into with Navidea in July 2012, the Company has no further cost obligations related to Altropane. Navidea is responsible for funding and conducting the development plan, completing all necessary regulatory filings and managing the manufacturing and global commercialization efforts for Altropane.

Sublicense and option fees were $26,536 for the year ended December 31, 2012. This expense reflects the $25,000 option fee due to Harvard under the terms of the Amended and Restated License Agreement related to the non-refundable option fee the Company received from Navidea in January 2012. The remaining expense reflects the amortization of fees due to Harvard related to the cash and stock consideration received from Navidea in July 2012 under the terms of the sublicense agreement. As of December 31, 2012, total cash payments of $33,750 are due to Harvard related to these two agreements.

General and administrative expenses were $1,665,605 for the year ended December 31, 2012 compared to $2,032,946 for the year ended December 31, 2011. The decrease of $367,341 or 18% for the year ended December 31, 2012 was attributable to (i) a reduction in employee payroll and related tax and benefit costs of approximately $110,000 resulting from reduced headcount; (ii) a reduction in consulting fees of approximately $12,000; (iii) a reduction in patent expense of approximately $24,000 resulting from the sublicense agreement which transferred all future responsibility for such expense to Navidea;
(iv) reduction in outside directors fees of approximately $66,000 offset by increases in insurance premiums of approximately $10,000 and outside valuation services of $30,000 and (v) a reduction in overhead costs of approximately $240,000 related to the expiration and reorganization of our office lease in September 2011. The overhead reductions are attributable to lower rent expense and common area maintenance charges of approximately $163,000, the elimination of approximately $32,000 in non-cash charges for the amortization of leasehold improvements, a reduction in non-cash depreciation expense of approximately $7,000 and the reduction of approximately $24,000 in utility expenses. In addition, office expenses


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attributable to equipment rental and supplies decreased by approximately $10,000. The savings realized from these reductions were partially offset by an increase of approximately $20,000 attributable to complying with additional regulatory reporting requirements and investor relations expense.

On February 15, 2013, Alseres Pharmaceuticals, Inc. (the "Company"), entered into Settlement Agreements with Michael Mullen and William Guinness, both members of the Board of Directors of the Company pursuant to which the Company agreed to satisfy certain outstanding obligations to these individuals which, in aggregate, totaled $220,734 by issuing fully vested options to purchase a total of 167,400 shares of the common stock of Alseres Neurodiagnostics, Inc. (a subsidiary of the Company) out at a purchase price to be established by the Company coincident with the closing of an equity financing for Alseres Neurodiagnostics, Inc. The options must be exercised, if at all, in whole or in part, on or before February 28, 2018. The common stock of Alseres Neurodiagnostics, Inc. to be issued pursuant to the options will bear all appropriate restrictive legends regarding disposition or resale of the common stock. Prior to entering into the Settlement Agreements, Mr. Mullen and Mr. Guinness had not received payment for board fees since 2010. As of December 31, 2012 the Company had a liability of $167,400 to Messrs. Mullen and Guinness which was settled in 2013 as described above.

Other income of $905 was recorded for the year ended December 31, 2012 compared to $43,814 for the year ended December 31, 2011. Other income of $43,814 was primarily attributable to the issuance to the Company of 39,209 restricted shares of FluoroPharma Medical, Inc. common stock with a closing price of $1.88 on September 30, 2011. Although the shares were restricted under Rule 144 and had very light trading volume, they were trading on a public exchange and could no longer be accounted for under the cost method. Taking into consideration the shares trading restrictions and light trading volume, the shares were recorded in the Condensed Consolidated Balance Sheet as of September 30, 2011 at a 20% discount or $1.50 per share. The change in method for valuing these shares from the cost method to the fair value method resulted in the recognition of a gain of $58,814.

Forgiveness of debt totaling $476,837 was recognized for the year ended December 31, 2011. In July 2011, John Preston, Henry Brem, Gary Frashier and Robert Langer signed settlement agreements to resolve unpaid fees due to them for services rendered during the period of July 2008 through January 2010. As of the settlement date a total of $358,500 had been accrued for director and consulting fees. Per the agreements, each former board member was issued one share of stock for each dollar owed. The Company stock closed at $.08 per share on the effective date of the agreements. As a result of these transactions $327,570 was recognized as forgiveness of debt. In July 2011, Michael Mullen and William Guinness our current board members, signed settlement agreements to resolve unpaid fees due to them for services rendered during the period of July 2008 through January 31, 2010. As of the settlement date, approximately $172,000 had been accrued for directors fees owed to the two board members who agreed to a reduced payment totaling $22,400. As a result of these transactions approximately $149,000 was recognized as forgiveness of debt.

Interest expense of $434,551 was incurred for the year ended December 31, 2012 compared to $1,838,484 for the year ended December 31, 2011. The decrease of $1,403,932 or 76% for the year ended December 31, 2012 was attributable to the debt reduction agreements signed in the fourth quarter of 2011. In December 2011, Robert Gipson and Thomas Gipson converted $7,172,412 of their convertible notes payable into common stock of the Company. The debt reduction agreement provided that all future interest related to these promissory notes would be waived. In November 2011, the Company further reduced its debt obligations by purchasing from Robert Gipson (the "Holder") an unsecured promissory note, pursuant to which the Company's wholly owned subsidiary, Neurobiologics Inc., had borrowed an aggregate principal amount of $1,000,000 ("the Note") dated February 11, 2009. The savings associated with the debt reduction agreements were partially offset by $2,240,000 of new debt obligations entered into with Robert Gipson during 2011 and an additional $510,000 in new debt obligations entered into during 2012.

Liquidity and Capital Resources

As of December 31, 2012, we have experienced total net losses since inception of approximately $207,983,000, stockholders' deficit of approximately $26,721,000 and a net working capital deficit of approximately


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$9,167,000. The cash and cash equivalents available at December 31, 2012 will not provide sufficient working capital to meet our anticipated expenditures for the next twelve months. We believe that the cash available as of March 15, 2013. As of January 1, 2013 we have liquidated 235,000 shares of our NAVB common stock for total proceeds of $726,934. We have used the funds to settlement our lawsuit with Children's Hospital and meet our day-to-day operation needs including the cost to comply with regulatory reporting requirements. As of February 28, 2013, we had 50,000 shares remaining of NAVB common stock which has a trading range for the previous 90 days of between $2.88 - $3.35 per share. We believe that the cash available as of March 15, 2013 may cover our expenses through April 2013.

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.

For the year ended December 31, 2012, the Company generated $675,000 in cash receipts and was issued 300,000 shares of Navidea ("NAVB") common stock attributable to option and sublicense agreements for Altropane. The Company used the cash to cover its current operating expenses. The Company plans to fund future working capital requirements through the orderly sale of its shares in Navidea common stock and from potential future consideration due to the Company pursuant to its sublicense agreement.

Our future working capital requirements have been reduced substantially due to the terms of the sublicense agreement with Navidea. Per the agreement, Navidea will be responsible for conducting and funding all future development, regulatory filings, manufacturing and global commercialization of Altropane. The Company will have no further cost obligations related to Altropane. Our future working capital requirements will be determined by our ability to control certain necessary expenditures in connection with operating as a public company.

Our major source of future working capital will come in the form of additional shares of Navidea common stock as Navidea attains certain milestones. The sublicense agreement 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 are due to the Company at the time of product registration. The Company will be issued an additional 400,000 shares of Navidea common stock if certain cumulative net sales of the approved product are achieved. In addition, the license terms anticipate royalties on yearly net sales of the approved product which are consistent with industry-standard terms and certain license extension fees, payable in cash and shares of common stock, in the event certain milestones are not met.

As of February 15, 2013, the Company had completed the sale of 235,000 shares of NAVB common stock for total proceeds of $726,934. The resulting loss of $170,766 from these sales will be recognized in the condensed consolidated comprehensive loss statement in the first quarter of 2013.

Operating Activities

Net cash used for operating activities was $1,261,466 year ended December 31, 2012 compared to $2,484,803 for the year ended December 31, 2011. Net cash used for operating activities for the year ended December 31, 2012 reflects our curtailment of operations pending additional funding, the reduction in accrued interest expense associated with the debt reduction agreements signed in the fourth quarter of 2011 and the receipt of $675,000 from Navidea Biopharmaceuticals related to our Altropane product.

Forgiveness of accrued directors and consulting fees totaling $476,837 was recognized for the year ended December 31, 2011.


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Investing Activities

Investing activities provided cash of $0 for the year ended December 31, 2012 compared to $301,388 of cash provided by investing activities for the year ended December 31, 2011.

Cash provided by investing activities for the year ended December 31, 2011 reflects the refund of $184,763 in security deposits which were used to satisfy the remaining lease obligation on the Newbury Street property and pay outstanding rent and common area maintenance obligations on the South Street property. In December 2011 we received a blanket release for our indemnity trust funds totaling $115,568. As such, those funds were reclassified to cash and cash equivalents in the Consolidated Balance Sheet.

Financing Activities

Financing activities provided cash of $833,000 for the year ended December 31, 2012 compared to $2,220,744 for the year ended December 31, 2011.

Cash provided by financing activities for the year ended December 31, 2012 reflects $510,000 in proceeds from the issuance of demand notes payable issued to Robert Gipson. All notes bear interest at the rate of 7% per annum. The Company used $1,866 to repurchase 2,331,035 shares @ $.0008 per share.

Cash provided by financing activities for the year ended December 31, 2011 reflects $2,240,000 in proceeds from the issuance of demand notes payable issued to Robert Gipson. All notes bear interest at the rate of 7% per annum. Proceeds of $18,256 were used to repurchase 3,977,390 shares of our common stock.

A summary of financings completed through December 31, 2012 can be found in Note 7 of these Consolidated Financial Statements.

Off-Balance Sheet Arrangements

We had no "off balance sheet arrangements" (as defined in Item 303(a) (4) of Regulation S-K) for the year ended December 31, 2012.

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. We base our estimates on authoritative literature and pronouncements, historical experience and on various other assumptions that we believe are reasonable under the circumstances. Although we regularly assess these estimates, actual results could differ materially from these estimates under different assumptions or conditions. Changes in estimates are recorded in the period in which they become known.

While all of our significant accounting policies are described in Note 1 to our consolidated financial statements, we believe that our accounting policies relating to revenue recognition are especially important to aiding you in fully understanding and evaluating our reported financial results.

Revenue Recognition

The Company evaluates multiple element revenue arrangements under FASB ASC 605-25, Multiple-Element Arrangements (as amended by ASU No. 2009-13). In addition to the form of the arrangement, the substance of the arrangement is also considered in determining whether separate agreements entered into, at or near the same time,


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that include elements that are interrelated or interdependent should be treated as one multiple-element arrangement. If the Company concludes that separate agreements represent one arrangement, then all the elements in the separate agreements are combined into one multiple-element arrangement for accounting purposes.

Revenues from non-refundable license fees are recognized upon receipt of the payment if the license has stand-alone value, we do not have ongoing involvement or obligations, and we have determined the best estimate of the selling price for any undelivered items. When non-refundable license fees do not meet all of these criteria, the license revenues are recognized over the expected period of performance.

We will periodically review our expected period of substantial involvement under the agreements that provide for non-refundable up-front payments and license fees. We will adjust the amortization periods when appropriate to reflect changes in assumptions relating to the duration of our expected involvement. We could accelerate revenue recognition for non-refundable upfront payments or license fees in the event of an early termination of the agreements. Alternatively, we could decelerate such revenue recognition if our period of involvement is extended. While changes to such estimates have no impact on our reported cash flows, our reported revenue is significantly influenced by our estimates of the period over which our obligations are expected to be performed and, therefore, over which revenue will be recognized.

Revenues associated with substantive, at-risk milestones pursuant to our licensing agreements are recognized upon achievement of the milestones. We consider a milestone to be substantive at the inception of the arrangement if it is commensurate with either our performance to achieve the milestone or the enhancement of the value of the delivered item as a result of a specific outcome resulting from our performance to achieve the milestone, it relates solely to past performance and it is reasonable relative to all of the deliverables and payment terms within the arrangement. Non-refundable contingent future amounts receivable in connection with future events specified in our licensing agreements that are not considered milestones will be recognized as revenue when payments are earned by our counterparties through completion of any underlying performance obligations, the amounts are fixed or determinable and collectability is reasonably assured.

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