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ALSERES PHARMA INC 10-K 2010
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Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
 
Form 10-K
 
     
(Mark One)    
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended December 31, 2009
OR
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from          to
 
Commission file number 0-6533
 
 
ALSERES PHARMACEUTICALS, INC.
(Exact Name of Registrant as Specified in Its Charter)
 
     
DELAWARE   87-0277826
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
239 SOUTH STREET
HOPKINTON, MASSACHUSETTS
(Address of principal executive offices)
  01748
(Zip Code)
 
Registrant’s telephone number, including area code (508) 497-2360
Securities registered pursuant to Section 12(b) of the Act:
 
     
Title of Each Class
 
Name of Each Exchange on Which Registered
 
Common Stock, $.01 par value
(Excluding Rights to Purchase Preferred Stock)
   
 
Securities registered pursuant to Section 12(g) of the Act:
None
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ
 
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 o     No þ
 
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 þ     No o
 
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 o     No o
 
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.  o
 
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):
 
     
Large accelerated filer o
  Accelerated filer o
Non-accelerated filer o
  Smaller reporting company þ
(Do not check if a smaller reporting company)
   
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ
 
Based on the last sales price of the registrant’s Common Stock as reported on the NASDAQ Capital Market on June 30, 2009 (the last business day of our most recently completed second fiscal quarter), the aggregate market value of the shares of voting stock held by non-affiliates of the registrant was $4,587,530.
 
As of March 22, 2010, there were 25,555,645 shares of the registrant’s Common Stock issued and outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE:
 
Portions of the registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission relative to the registrant’s 2010 Annual Meeting of Stockholders are incorporated by reference into Items 10, 11, 12, 13 and 14 of Part III of this Annual Report on Form 10-K.
 


 

 
TABLE OF CONTENTS
 
                 
PART I
  ITEM 1.     BUSINESS     3  
  ITEM 1A.     RISK FACTORS     16  
  ITEM 1B.     UNRESOLVED STAFF COMMENTS     34  
  ITEM 2.     PROPERTIES     34  
  ITEM 3.     LEGAL PROCEEDINGS     34  
  ITEM 4.     NOT USED     34  
 
PART II
  ITEM 5.     MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES     35  
  ITEM 6.     SELECTED CONSOLIDATED FINANCIAL DATA     36  
  ITEM 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS     37  
  ITEM 7A.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK     50  
  ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA     51  
  ITEM 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE     82  
  ITEM 9A(T).     CONTROLS AND PROCEDURES     82  
  ITEM 9B.     OTHER INFORMATION     83  
 
PART III
  ITEM 10.     DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE     84  
  ITEM 11.     EXECUTIVE COMPENSATION     84  
  ITEM 12.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS     84  
  ITEM 13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE     84  
  ITEM 14.     PRINCIPAL ACCOUNTANT FEES AND SERVICES     84  
 
PART IV
  ITEM 15.     EXHIBITS AND FINANCIAL STATEMENT SCHEDULES     85  
 EX-10.19
 EX-10.25
 EX-10.33
 EX-10.42
 EX-10.49
 EX-10.51
 EX-10.52
 EX-10.53
 EX-10.54
 EX-21
 EX-23.1
 EX-23.2
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2


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PART I
 
Item 1.   Business.
 
Overview
 
We are a biotechnology company focused on the development of therapeutic and diagnostic products primarily for disorders in the central nervous system, or CNS. Our clinical and preclinical product candidates are based on three proprietary technology platforms:
 
  •  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;
 
  •  Regenerative therapeutics program, primarily focused on nerve repair and restoring movement and sensory function in patients who have had significant loss of CNS function resulting from trauma such as spinal cord injury, or SCI, stroke, and optic nerve damage utilizing technology referred to as axon regeneration.
 
As of December 31, 2009, we have experienced total net losses since inception of approximately $203,969,000 , stockholders’ deficit of approximately $47,509,000 and a net working capital deficit of approximately $4,536,000. The cash and cash equivalents available at December 31, 2009 will not provide sufficient working capital to meet our anticipated expenditures for the next twelve months. At March 22, 2010, we had cash and cash equivalents of approximately $130,000 which combined with our ability to control administrative expenses will enable us to meet our anticipated cash expenditures into April, 2010. We must immediately raise additional funds in order to continue operations and to fund the approximately $34 million of investment required to complete the Altropane clinical development program. This funding is not available at present and there can be no assurance that such funds will be available on acceptable terms if at all.
 
In order to continue as a going concern, we must immediately raise funds through one or more of the following: a debt financing, an equity offering, or a collaboration, merger, acquisition or other transaction with one or more pharmaceutical or biotechnology companies. We are currently engaged in fundraising efforts. There can be no assurance that we will be successful in our fundraising efforts or that additional funds will be available on acceptable terms, if at all. We also cannot be sure that we will be able to obtain additional credit from, or effect additional sales of debt or equity securities to certain of our existing investors described below in Liquidity and Capital Resources. If we are unable to raise additional or sufficient capital, we will need to cease operations or reduce, cease or delay one or more of our research or development programs, adjust our current business plan and may not be able to continue as a going concern. If we violate a debt covenant or default under the March 2008 Amended Purchase Agreement or the June 2008 Purchase Agreement (described below in Liquidity and Capital Resources) we may need to cease operations or reduce, cease or delay one or more of our research or development programs, adjust our current business plan and may not be able to continue as a going concern. Additionally, our common stock was delisted from trading on the NASDAQ Capital Market as a result of our failure to meet continued listing requirements of NASDAQ. On May 8, 2009 we began trading on the Pink Sheets OTC Market. This delisting could have an adverse affect on our ability to obtain future financing and could adversely impact our stock price and the liquidity of our common stock. See the risk factor entitled “Our common stock has been delisted from the NASDAQ Capital Market.”
 
In connection with the common stock financing completed by us in March 2005, or the March 2005 Financing, we agreed with the purchasers in such financing, including Robert Gipson, Thomas Gipson, and Arthur Koenig, or the March 2005 Investors, that, subject to certain exceptions, we would not issue any shares of our common stock at a per share price less than $2.50 without the prior consent of the March 2005 Investors holding at least a majority of the shares issued in the March 2005 Financing. On March 22, 2010, the closing price of our common stock was $.21. The failure to receive the requisite waiver or consent of the


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March 2005 Investors could have the effect of delaying or preventing the consummation of a financing by us should the price per share in such financing be set at less than $2.50.
 
Our ability to advance our clinical programs, including the development of Altropane, is affected by the availability of financial resources. Financial considerations have caused us to suspend planned development activities for our clinical and preclinical programs until we are able to secure additional working capital. If we are not able to raise additional capital, we will not have sufficient funds to complete the clinical trial programs for the Altropane molecular imaging agent.
 
In light of current conditions in the global financial markets and our severe cash constraints we have taken steps to reduce our on-going cash expenses. In January and September 2009, we terminated a total of ten employees, reduced the salary of most of the remaining employees and cut back certain employee benefits. The costs related to these actions consist primarily of one-time termination costs. The terminations and salary reductions are expected to reduce compensation costs by approximately $1,500,000 annually.
 
We were organized in 1992 and are incorporated in Delaware. Our principal executive offices are located at 239 South Street, Hopkinton, Massachusetts 01748, and our telephone number is (508) 497-2360. In this Annual Report on Form 10-K, the terms “Alseres Pharmaceuticals”, the “Company”, “we”, “us” and “our” include Alseres Pharmaceuticals, Inc. and its subsidiaries. The following are trademarks of ours that are mentioned in this Annual Report on Form 10-K: Alseres®, Altropane®, Cethrin®, and Fluoratectm. Other trademarks used in this Annual Report on Form 10-K are the property of their respective owners.
 
Product Development
 
Molecular Imaging Program
 
Altropane Molecular Imaging Agent
 
Background
 
The Altropane molecular imaging agent is being developed for the differential diagnosis of PS, including PD, and non-PS in patients with an upper extremity tremor. In July 2007, we completed enrollment in a study that optimized Altropane’s image acquisition protocol which we believe will enhance Altropane’s commercial use. After a series of discussions with the U.S. Food and Drug Administration, or FDA, and our expert advisors, the POET-2 program was designed as a two-part Phase III program using the optimized Altropane image acquisition protocol. The first part of the program enrolled 54 subjects in a multi-center clinical study to acquire a set of Altropane images which will be used to train the expert readers, as is the customary process for clinical trials of molecular imaging agents. Enrollment in the first part of POET-2 was completed in January 2009. In April, 2009 we reached agreement with the FDA under the Special Protocol Assessment, or SPA, process for the second part of the Phase III clinical trial program of Altropane. A SPA is a process by which sponsors and the FDA reach an agreement on the size, design and analysis of clinical trials that will form the primary basis of approval. The Phase III program is designed to confirm the diagnostic utility of the agent in anticipation of drug registration. The second portion of the Phase III, POET-2 program consists of two clinical trials in up to 480 subjects in total to be conducted in parallel at up to 40 medical facilities throughout the US. The subjects to be tested will be 40-80 years of age and have had a tremor in their hand(s) or arm(s) for less than three years. Each subject will be assessed by a general neurologist, an Altropane imaging procedure and a Movement Disorder Specialist considered the “gold standard”. The success of the trial will be determined by measuring the diagnostic efficacy of the neurologist diagnosis compared with the diagnosis determined by the Altropane scan versus the MDS gold standard diagnosis. Based on the trial design and scope covered by the Special Protocol Assessment Agreement for POET-2, we estimate that the total costs to complete the POET-2 program and prepare and submit an NDA for Altropane in the U.S. will be approximately $34 million. This funding is not available at present and there can be no assurance that such funds will be available on acceptable terms if at all.
 
We believe in the current environment that, due to their proximity to commercialization and return on investment, late stage development programs may continue to be of significant interest to potential partners and investors. To maximize the value of our molecular imaging program, we are focusing on obtaining the


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funding necessary to execute the Altropane Phase III registration program. We are pursuing the capital necessary to enable us to advance the Altropane program through our own means. In parallel, we are seeking to partner our molecular imaging program with a firm or firms with the resources necessary for the completion of the Phase III clinical program, for the manufacturing and supply of Altropane, and for the launch and commercialization of Altropane. We can provide no assurances that a partnership transaction will occur. We believe that the expansion of the program into other indications such as DLB and other countries including those in Europe could increase the value of the program for the partner and us. All of these activities require additional funding not presently available and as such have been suspended. There can be no assurance that the required funding to advance the Altropane program will be available on acceptable terms if at all.
 
The Altropane molecular imaging agent is a radiolabeled imaging agent that contains the radioactive element iodine isotope 123I and binds with extremely high affinity and specificity to the dopamine transporter, or DAT. The DAT is a protein that is on the surface membrane of specialized neurons in the brain that produce dopamine, a key neurotransmitter. We believe that the amount of Altropane taken up by the brain is directly proportional to the number of DATs that are present in any given area of the brain. Since DATs are on the membrane of dopamine-producing neurons, death of these neurons results in decreased numbers of DATs. Therefore, PD, which is caused by a decreased number of dopamine producing cells, is associated with a marked decrease in the number of DATs. As a result, when Altropane is administered to patients with PD, its binding is substantially diminished as compared to patients without PD. This decrease in Altropane binding in patients with PD is the theoretical basis for using Altropane imaging as a diagnostic test for PS, including PD.
 
Altropane is administered by intravenous injection. Since Altropane contains radioactive 123I, it can be used as a nuclear imaging agent that can be detected using a specialized nuclear medicine instrument known as a Single Photon Emission Computed Tomography, or SPECT, camera. The strength of the SPECT signal generated by Altropane is proportional to the number of DATs present and produces images that distinguish PS and non-PS patients. SPECT cameras are widely available in both community and academic medical centers. The scanning procedure using Altropane takes less than one hour to complete. Results of these tests are usually available the same day as the scanning procedure.
 
We have licensed worldwide exclusive rights to develop Altropane from Harvard University and its affiliated hospitals, which we refer to as Harvard and its Affiliates, including the Massachusetts General Hospital. The license agreement provides for milestone payments and royalties based on product sales that are consistent with industry averages for such products.
 
Altropane Diagnostic for Parkinsonian Syndromes (PS)
 
Background
 
PS is characterized by loss of dopamine-producing neurons resulting in a variety of movement disorders, especially tremors and gait problems. The most prevalent form of PS is PD which is a chronic, irreversible, neurodegenerative disease that generally affects people over 50 years old. PD is caused by a significant decrease in the number of dopamine producing neurons in specific areas of the brain. Inadequate production of dopamine causes, at least in part, the PD symptoms of tremor, muscle retardation and rigidity. PD can be difficult to diagnose using subjective analyses and can be confused with Essential Tremor, or ET. ET manifests with clinical symptoms very similar to those of PD. However, ET patients do not need the drugs routinely prescribed to PD patients.
 
Need for an Objective Diagnosis
 
To our knowledge, there is presently no approved objective test commercially available in the United States to diagnose PS and to differentiate it from other movement disorders. According to published data, clinical criteria used to diagnose PS is prone to high error rates, especially in early stages of PD. This highlights the critical need for an effective diagnostic. Presently, patients who have experienced tremors and other evidence of a movement disorder may pursue diagnosis and treatment with a number of medical professionals. These include an internist or general practitioner, also known as a primary care physician, or


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PCP, a neurologist, or a movement disorder specialist, or MDS, whose practice is focused on movement disorders.
 
Patients can exhibit symptoms and/or have clinical histories that are inconclusive. A primary tool utilized to diagnose PD or PS is a clinical history and a physical exam. However, studies in the literature have reported error rates in diagnosing PD or PS from a low of 10% for MDSs to as high as 40 to 50% for PCPs.
 
This high error rate is driving the need for a diagnostic test that provides physicians with additional clinical information to help them make a definitive diagnosis when clinical symptoms and the patient’s history are inconclusive. Further, while the accuracy of MDSs is reported to be higher, the number of MDSs in the United States is limited with current estimates between 300 and 500. The limited availability of MDSs underscores the potential utility of a widely available diagnostic tool such as Altropane.
 
There are a number of important and potentially harmful results associated with misdiagnosis. These include:
 
  •  Patients who are improperly diagnosed as having PD but actually do not (false positive) may be administered medications for PD. These drugs can have damaging effects on individuals who do not actually have PD.
 
  •  Patients who are improperly diagnosed as not having PD but actually do (false negative), may not benefit from available treatments, thereby suffering further worsening of symptoms and progression of their disease.
 
Phase I and Phase II Trials
 
Our Phase I trials for Altropane enrolled 39 patients. Our Phase II trial for Altropane enrolled 37 patients and the results showed that patients with early or mild PD were reliably differentiated from unaffected patients based on the Altropane molecular imaging agent scan. There were no Altropane-related serious adverse events reported in the studies.
 
Phase III Trial — Differentiate PS Movement Disorders from Non-PS Movement Disorders
 
Our initial Phase III study was designed to confirm the utility of imaging with Altropane to differentiate PS movement disorders (including PD) from other non-PS movement disorders. The study assessed SPECT scans using Altropane in a sample population representative of those individuals that consult with neurologists or internists for undiagnosed movement disorders. The trial’s endpoints for sensitivity and specificity were met on a statistically significant basis. The study enrolled 100 subjects having the clinical diagnosis of PS and 65 patients having non-PS movement disorders. The clinical diagnosis of patients in the trial was made by MDSs. Altropane SPECT scans were performed on each subject and reviewed by an independent three-member panel of nuclear medicine physicians specializing in neuroimaging who had no knowledge of the clinical diagnosis. The Altropane scans were read and categorized as being consistent with either PS or non-PS and were then compared to the expert clinical diagnosis. There were no Altropane-related serious adverse events reported in the study. Following completion of our initial Phase III trial, we had a series of meetings and discussions with the Food and Drug Administration, or the FDA, regarding the clinical trial data that we had accumulated to date. The purpose of these communications and conferences was to determine what additional clinical information would be required for a New Drug Application, or NDA.
 
Phase III Trial — Parkinson’s or Essential Tremor (POET-1)
 
We initiated a Phase III program of Altropane designed to distinguish PS from non-PS in patients with tremors. The Phase III program specified two sequential clinical protocols: 1) Parkinson’s or Essential Tremor-1, or POET-1, and 2) Parkinson’s or Essential Tremor-2, or POET-2. Under the SPA, interim analysis of the blinded data was not permitted and monitoring of un-blinded data was allowed. Publication of the detailed results of POET-1 prior to the completion of POET-2 was also prohibited to avoid biasing POET-2. A diagnosis of a MDS was utilized as the “gold standard.” The primary endpoint for POET-1 was the


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confirmation that the diagnostic accuracy of the Altropane molecular imaging agent is statistically superior to the diagnostic accuracy of a PCP.
 
Based on certain statistical and modeling assumptions, we initially estimated that POET-1 would require enrollment of approximately 332 patients to meet the endpoints and be statistically significant. These assumptions included published reports in scientific journals that indicated a 20 to 30 percent misdiagnosis rate in the early stages of PD. Our review of the un-blinded data from the initial patients enrolled in POET-1 indicated that the error rate of PCPs who participated in POET-1 was higher than anticipated. As such, statistical modeling indicated that, provided the performance of Altropane in POET-1 was consistent with its historical performance in earlier trials, statistical significance could be achieved with fewer patients than originally projected. After a series of discussions with the FDA and our expert advisors, we notified the FDA that we elected to terminate our SPA and end POET-1 enrollment so that we could analyze the complete set of clinical data for efficacy. The results of the 206 patients in POET-1 were statistically significant and with the exception of one “possibly-related” urinary tract infection that resolved after treatment, there were no drug-related serious adverse events.
 
Phase III Trial — Parkinson’s or Essential Tremor (POET-2)
 
In July 2007, our collaborators completed enrollment in a study that optimized Altropane’s image acquisition protocol which we believe will enhance Altropane’s commercial use. After a series of discussions with the FDA and our expert advisors, the POET-2 program was designed as a two-part Phase III program using the optimized Altropane image acquisition protocol. The first part of the program enrolled 54 subjects in a multi-center clinical study to acquire a set of Altropane images which will be used to train the expert readers, as is the customary process for clinical trials of molecular imaging agents. Enrollment in the first part of POET-2 was completed in January 2009. In April, 2009 we reached agreement with the FDA under the Special Protocol Assessment, or SPA, process for the second part of the Phase III clinical trial program of Altropane. A SPA is a process by which sponsors and the FDA reach an agreement on the size, design and analysis of clinical trials that will form the primary basis of approval. The Phase III program is designed to confirm the diagnostic utility of the agent in anticipation of drug registration. The second portion of the Phase III, POET-2 program consists of two clinical trials in up to 480 subjects in total to be conducted in parallel at up to 40 medical facilities throughout the US. The second portion of the POET-2 program is expected to cost $34 million and there can be no assurances that these funds will be available to the Company.
 
Market Opportunity
 
It has been estimated that approximately 180,000 individuals in the United States per year present to their physician with new, undiagnosed cases of PD and ET, and are therefore candidates for a scan using the Altropane molecular imaging agent to diagnose or rule out early PS. It has also been estimated by the National Institute of Neurological Disorders and Stroke and the National Parkinson’s Foundation, that the number of people in the United States with PD is between 500,000 and 1,500,000. It has been estimated by the Tremor Action Network that there are approximately 10,000,000 people in the United States with ET. In addition, a study done by the World Health Organization claims that approximately 2,000,000 individuals suffer from PD in Europe. We expect the number of individuals affected by PD to grow substantially as people continue to live longer and the overall population ages.
 
Altropane Diagnostic for Dementia with Lewy Bodies (DLB)
 
DLB is a progressive brain disease and the second most common cause of neurodegenerative dementia. The symptoms of DLB are caused by the build-up of Lewy bodies inside the section of the brain that controls particular aspects of memory and motor control. The similarity of symptoms between DLB and PD, and between DLB and Alzheimer’s disease, can make it difficult to accurately diagnose. As with PD, there is no objective diagnostic tool available in the United States. We believe that the underlying basis for DLB coupled with our existing preclinical and clinical data supports the potential development of Altropane as a diagnostic for DLB. We also believe the potential use of our molecular imaging agents for the diagnosis of DLB could be strategic in our partnering efforts for our molecular imaging program.


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It has been estimated by the Alzheimer’s Association that there are approximately 7,000,000 to 10,000,000 people in the United States with dementia of which the journal Age and Ageing estimates that up to approximately 3,000,000 people have DLB. According to Alzheimer Europe, there were approximately 1,800,000 people in Europe with DLB.
 
Technetium-Based Molecular Imaging Agent
 
We have licensed the rights to develop and commercialize a second generation compound that will selectively bind the same DAT protein recognized by Altropane. The new compound will incorporate the technetium-99m, or 99mTc, radiolabel, which is routinely available from a 99mTc generator in hospital radiopharmacies. The SPECT imaging agent will be prepared on site by a nuclear medicine department using our supplied kit rather than being centrally prepared and distributed as Altropane is today. This new agent will be designed to function in a SPECT scan in a very similar manner to that of Altropane. The imaging agent developed will be administered by intravenous injection and is expected to rapidly and selectively bind the DAT protein in the brain (striatum region) with high affinity. The unbound agent is intended to clear the brain rapidly to allow high contrast SPECT scans on the day of administration. Under the correct conditions, the SPECT scan data reflect the number of DAT proteins. This may be useful in the diagnoses and detection of diseases or conditions that reduce or increase the number of dopamine neurons or the concentration of DAT proteins on the neurons, such as in PD or Attention Deficit Hyperactivity Disorder. We believe that the ability to follow Altropane to market with a second-generation technetium-based molecular imaging agent could give us a long-term competitive advantage. The use of technetium could offer ease-of-use, cost, manufacturing and distribution advantages.
 
We licensed from Harvard and its Affiliates worldwide exclusive rights to develop 99mTc-based molecular imaging agents similar to Altropane. The license agreement provides for milestone payments and royalties based on product sales that are consistent with industry averages for such products.
 
Early primate studies using our two 99mTc-incorporated compounds previously developed, Technepine and Fluoratectm, have demonstrated that they are taken up by the DAT proteins in the normal brain in sufficient quantity to provide a readable image. In addition, primates with experimentally-induced PD had markedly decreased uptake of both imaging agents. In 2007, we devised a new radiolabeling procedure as a prelude to obtaining definitive images in non-human primates.
 
Resource constraints have forced us to cease all development efforts related to the Technetium-based imaging agent and we can provide no assurances when, if ever, development of these products will resume.
 
Regenerative Therapeutics Program — Nerve Repair
 
Background
 
Injuries to the brain and spinal cord can result in severe disability. In a limited way, backup or so-called accessory nerve pathways can partially compensate for those that have been destroyed, resulting in some recovery with rehabilitation. It has been widely believed that human beings are not capable of regenerating damaged or destroyed nerves in their CNS leading to the conclusion that recovery of function in severely injured patients is not possible or likely. Most research to date has focused on preventing further damage to nerves as a result of a stroke, spinal cord injury or traumatic brain injury; so-called “neuroprotection”. However, ongoing research by our scientific collaborators and others has indicated that axons, the portion of nerves that permit connections and signaling between nerve cells, can be induced to grow, potentially enabling function controlled by damaged nerves to return. Published studies have begun to describe and analyze biochemical pathways inside and outside of nerve cells that facilitate nerve repair, allowing molecular targets for product candidates to be identified and evaluated. These studies have identified certain factors that stimulate axon regeneration and others whose presence inhibits axon regeneration. Importantly, these studies have reduced the uncertainty around functional recovery based on axon regeneration and clearly distinguished it from neuroprotection. This research could potentially provide an avenue by which drug intervention could be utilized to support functional recovery in severe CNS injury.


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Our nerve repair program is focused on restoring movement and sensory function in patients who have had significant loss of CNS function resulting from traumas such as SCI, stroke, traumatic brain injury, or TBI, and optic nerve damage. Our efforts are aimed at the use of proprietary regenerative drugs and/or methods to induce nerve fibers to regenerate and form new connections that restore compromised abilities. Licensing or acquiring the rights to the technologies of complementary approaches for nerve repair is part of our strategy of creating competitive advantages by assembling a broad portfolio of related technologies and intellectual property.
 
Our lead product candidate for nerve repair during early 2009 was Cethrin. Cethrin contains a proprietary protein which studies indicate inactivates a key enzyme called Rho resulting in the promotion of nerve repair. Cethrin was being investigated to determine its effectiveness in facilitating the restoration of movement and sensory function following a major injury to the spinal cord.
 
In December 2006, we entered into a license agreement, or the Cethrin License, with BioAxone Therapeutic Inc., a Canadian corporation, or BioAxone, pursuant to which we were granted an exclusive, worldwide license to develop and commercialize specified compounds including, but not limited to, Cethrin, as further defined in the Cethrin License. The Cethrin License called for us to conduct development and commercialization activities of Cethrin and to pay certain pre-commercialization milestones and on-going royalties on sales of Cethrin when and if approved for marketing. The Cethrin License provided for a series of performance milestones any of which, if not achieved by us in the timeframes agreed in the Cethrin License, could form the basis of a claim for compensation to BioAxone and possibly the termination of some or all of our rights under the Cethrin License. The Cethrin License further provided us with relief from our performance obligations in the event that such performance is effectively rendered impossible due to safety or efficacy issues with Cethrin during its development. Additionally, the Cethrin License provided a warranty that all of the clinical materials provided to us by BioAxone in connection with the Cethrin License were manufactured in accordance with current Good Manufacturing Practices, or cGMP.
 
Cethrin License Dispute
 
In January 2009, the Company received notice from BioAxone alleging that we had failed to meet one of the performance milestones in the Cethrin License that was required to have been met on or before January 1, 2009. This notice purported to terminate the Cethrin License, sought payment of a $2,000,000 penalty from us to BioAxone for such purported failure and requested that we transfer to BioAxone our rights to the Master Cell Bank (as defined in the Cethrin License) and all licensed intellectual property under the Cethrin License.
 
We believed that the purported termination was without effect. Our performance obligations under the Cethrin License were specifically excused in the event that a safety issue renders such performance impossible. Our prior discovery that the Master Cell Bank from which Cethrin is manufactured may contain an unintended animal derived contaminant rendering it not in compliance with the requirements of cGMP, represented such a safety risk for Cethrin. We notified BioAxone of the contamination issue and our position that the purported termination and demand for payment is considered to be without effect.
 
In April 2009 we announced that we entered into an Amendment Agreement, or the Amendment, with BioAxone Therapeutic, Inc., pursuant to which the Cethrin License, was amended. The Amendment replaces all of the pre-commercial financial and performance-related milestones contained in the Cethrin License with a formula-based approach to sharing of any and all income under a sub-license. The Amendment establishes provisions under which we would use reasonable commercial efforts to enter into a Sub-license Agreement for the technology covered by the Cethrin License. The Amendment also provides for the mutual release of claims that each party had previously alleged against the other under the Cethrin License. During 2009 our efforts were focused on identifying and negotiating with appropriate sublicensing candidates. Under the terms of the Amendment Agreement, our right to sublicense Cethrin has expired and all rights granted to us in the Cethrin License have reverted to BioAxone. The Amendment provides that, in the event BioAxone is able to license or partner the Cethrin technology in the future, we are entitle to receive a 30% share of any and all proceeds received by BioAxone connected with such transaction. It is unclear if or when BioAxone will license the Cethrin technology to a third party, so we may not realize any revenue at all under the Amendment.


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Other Regenerative Factors
 
We have rights to other technologies and factors that may be involved in nerve repair and regenerative therapeutics, including INOSINE and Oncomodulin, two proprietary regenerative factors that promote axon outgrowth in CNS neurons. We entered into two license agreements, or the CMCC Licenses, with Children’s Medical Center Corporation (also known as Children’s Hospital Boston), or CMCC, to acquire the exclusive worldwide rights to new axon regeneration technologies. The CMCC Licenses provide us exclusive rights to develop INOSINE, Oncomodulin and other therapeutic approaches to stimulate nerve repair. The CMCC Licenses calls for us to pay milestone payments and royalties based on product sales that are consistent with industry averages for such products.
 
Our development efforts with these candidate compounds has been suspended due to resource constraints and it is unclear when, if ever, they will resume. We are pursuing partnership transactions for these assets but there can be no assurances that any such transactions will occur.
 
Inosine is a purine nucleoside that is a naturally-occurring compound. We refer to the manufactured drug product candidate formulated for human administration as INOSINE to differentiate it from the naturally-occurring compound which we refer to as inosine. Oncomodulin is a naturally-occurring protein that is reported by our scientific collaborators to enhance axon regeneration in animal models. Using recombinant Oncomodulin, our collaborating scientists have been able to stimulate regeneration of the optic nerve to a degree greater than had previously been documented in scientific literature and showed that the regenerated fibers passed through an optic nerve crush injury and extend for several millimeters along the degenerated optic nerve tract towards the brain. Oncomodulin is being evaluated as a therapeutic for potential ocular indications, including re-growth of axons after optic nerve injury or damage of retinal ganglion cells from intraocular pressure caused by glaucoma.
 
In September 2003, we entered into an agreement with Codman & Shurtleff, Inc., or Codman, a Johnson & Johnson subsidiary whereby Codman provided us with implantable pumps and intracerebroventricular catheters for our preclinical studies of INOSINE. In exchange for their support of our development program and regulatory submissions, Codman received a right of first refusal to exclusively license our intellectual property regarding INOSINE including, but not limited to, a right to co-develop INOSINE with Codman’s medical devices in the event that we offer similar rights to others. Codman’s rights are subject to specified terms and could extend from the date of certain completed pilot studies through the completion of Phase II clinical testing of INOSINE. However, we can provide no assurances that we will ever offer such rights to another party or that Codman will exercise its right of first refusal.
 
We believe that experiments and animal tests, including those conducted by our collaborating scientists, Dr. Larry Benowitz and Dr. Zhigang He and their colleagues at CMCC, demonstrate significant progress in the search for potentially important nerve repair agents for stroke and SCI. In published work, Dr. Benowitz and his colleagues showed that INOSINE stimulated axon growth in an animal model of SCI. Almost all of the treated animals showed signs of extensive axon regeneration from the uninjured to the injured side of the spinal cord, specifically the corticospinal tract. In related published work, INOSINE treatment was also shown to produce functional recovery in an experimental rat model of stroke. The improvement in forelimb and hindlimb function in the treated animals was statistically significant over the control group rats. Work in the laboratory of Dr. He has shown in vitro that inhibitors of the epidermal growth factor receptor can overcome the growth inhibition induced by myelin and stimulate nerve outgrowth.


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Scientific Collaborators
 
A summary of the key scientific, research and development professionals with whom we worked in 2009, and a composite of their professional backgrounds and affiliations is as follows:
 
Larry I. Benowitz, Ph.D., Director, Laboratories for Neuroscience Research in Neurosurgery, Children’s Hospital, Boston; Associate Professor of Neurosurgery, Harvard Medical School;
 
Zhigang He, Ph.D., BM, Research Associate, Department of Neurology, Children’s Hospital Boston; Associate Professor of Neurology, Department of Neurology, Harvard Medical School.
 
Robert S. Langer, Sc.D., Institute Professor of Chemical and Biomedical Engineering, Massachusetts Institute of Technology; and
 
Peter Meltzer, Ph.D., President, Organix, Inc., Woburn, MA.
 
Research and Development
 
We rely on licensing from third parties as our source for new technologies and product candidates, and we maintain only limited internal research and development personnel. Research and development expenses for the years ended December 31, 2009, 2008 and 2007 were approximately $3.7 million, $10.9 million and $10.5 million, respectively.
 
Licensing Agreements, Patents and Intellectual Property
 
We have obtained exclusive licenses to patent portfolios related to our product candidates in development. However, as to one or more of the patents and patent applications of the patent portfolios, which we have licensed from a university or academic institution, the United States government holds a nonexclusive, royalty-free, license in exchange for providing research funding.
 
Our intellectual property strategy is to vigorously pursue patent protection for our technologies in the United States and major developed countries. As of December 31, 2009, we owned or licensed 41 issued U.S. patents and 29 pending U.S. patent applications. International patent applications corresponding to certain of these U.S. patent applications have also been filed. Generally, each license agreement is effective until the last patent licensed relating to the technology expires or a fixed and determined date.. The patents for the Altropane molecular imaging agent expire beginning in 2013. The patents for the technetium-based molecular imaging agents expire beginning in 2017. The patents for Inosine expire in 2017.
 
The patent positions of pharmaceutical and biotechnology companies, including ours, are uncertain and involve complex and evolving legal and factual questions. We cannot guarantee that any patents will issue from any pending or future patent applications owned by, or licensed to us. Existing or future patents may be challenged, infringed upon, invalidated, found to be unenforceable or circumvented by others. We cannot guarantee that any of our rights under any issued patents will provide sufficient protection against competitive products or otherwise cover commercially valuable products or processes. We may not have identified all United States and foreign patents that pose a risk of infringement. In addition, even if we secure patent protection, our product candidates may still infringe on the patents or rights of other parties, and these patent holders may decide not to grant a license to us. We may be required to change our product candidates or processes, engage in legal challenges to the validity of third party patents that block our ability to market a product, pay licensing fees, or cease certain activities because of the patent rights of third parties. Any of these events could cause additional unexpected costs and delays.
 
In the event that a third party has a patent or patent application overlapping an invention claimed in one of our patents or patent applications, we may be required to participate in a patent interference proceeding declared by the United States Patent and Trademark Office, or USPTO, to determine priority of invention. A patent interference could result in substantial uncertainties and cost for us, even if the eventual outcome is favorable to us. We cannot provide assurance that our patents and patent applications, if issued, would be held valid by a court of competent jurisdiction.


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We also rely on trade secrets and proprietary know-how. We seek to protect this information through confidentiality agreements with our collaborators and consultants. There can be no guarantee that these procedures and agreements will not be breached or that we will have adequate remedies for such breach. In addition, if consultants, scientific advisors, or other third parties apply technological information which they have developed separate from us to our technologies, there may be disputes as to the ownership of such information which may not be resolved in our favor.
 
Competition
 
The biotechnology and pharmaceutical industries are highly competitive, rapidly changing and are dominated by larger, more experienced and better-capitalized companies. Thus, we compete with a number of pharmaceutical and biotechnology companies that have financial, technical and marketing resources and experience significantly greater than ours. Such greater experience and financial strength may enable them to bring their products to market sooner than us, thereby gaining a competitive advantage. In addition, research related to the causes of, and possible treatments for, diseases for which we are trying to develop products are developing rapidly, and there is a potential for extensive technological innovation in relatively short periods of time. Given that many of our competitors have greater financial resources, there can be no assurance that we will be able to effectively compete with any new technological developments. In addition, many of our competitors and potential competitors have significantly greater experience than we do in completing preclinical and clinical testing of new pharmaceutical products and obtaining FDA and other regulatory approvals of products. These advantages could enable them to bring products to market faster than us.
 
We expect that our products will compete with a variety of products currently offered and under development by a number of pharmaceutical and biotechnology companies that have greater financial and marketing resources than ours. We believe that our product candidates, if successfully developed, will compete with these products principally on the basis of improved and extended efficacy and safety, and the overall economic benefit to the health care system offered by such products. However, there can be no assurance that our product candidates, if developed, will achieve better efficacy and safety profiles than current drugs now offered or products under development by our competitors. Competition among pharmaceutical products approved for sale also may be based on, among other things, patent position, availability and price. In addition, we expect that our competitors will have greater marketing resources and experience than we do, which may enable them to market their products more successfully than we market ours.
 
A significant amount of research and development in the biotechnology industry is conducted by academic institutions, governmental agencies and other public and private research organizations. We rely on collaborations with these entities to acquire new technologies and product candidates. These entities often seek patent protection and enter into licensing arrangements to collect royalties for use of technology or for the sale of products they have discovered or developed. We face competition in our licensing or acquisition activities from pharmaceutical and biotechnology companies that also seek to collaborate with or acquire technologies or product candidates from these entities. Accordingly, we may have difficulty licensing or acquiring technologies or product candidates on acceptable terms.
 
To our knowledge, there is presently no approved diagnostic in the United States for PD and/or DLB. 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®. To date, GE Healthcare has obtained marketing approval in Europe. GE Healthcare has significantly greater infrastructure and financial resources than us, and if they obtained marketing approval in the United States they could significantly adversely affect our competitive position. Their established market presence, and greater financial strength in the European market may make it difficult for us to successfully market Altropane in Europe.
 
Regulatory Considerations
 
Our technologies must undergo a rigorous regulatory approval process, which includes extensive preclinical and clinical testing, to demonstrate safety and efficacy before any resulting product can be marketed. To date, neither the FDA nor any of its international equivalents has approved any of our technologies for


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marketing. In the biotechnology industry, it has been estimated that less than five percent of the technologies for which clinical efforts are initiated ultimately result in an approved product. The clinical trial and regulatory approval process can require many years and substantial cost, and there can be no guarantee that our efforts will result in an approved product.
 
Our activities are regulated by a number of government authorities in the United States and other countries, including the FDA pursuant to the Federal Food, Drug, and Cosmetic Act. The FDA regulates drugs, including their research, development, testing, manufacturing, labeling, packaging, storage, advertising and promotion, and distribution. Data obtained from testing is subject to varying interpretations which can delay, limit or prevent FDA approval. In addition, changes in existing regulatory requirements could prevent or affect the timing of our ability to achieve regulatory compliance. Federal and state laws, regulations and policies may be changed with possible retroactive effect, and how these rules actually operate can depend heavily on administrative policies and interpretations over which we have no control.
 
Obtaining FDA approvals is time-consuming and expensive. The steps required before any of our product candidates may be marketed in the United States include:
 
  •  Development of suitable manufacturing processes for preclinical, clinical and commercial drug supply;
 
  •  Preclinical laboratory tests, animal studies and formulation studies according to good laboratory practice regulations;
 
  •  Submission to the FDA of an IND application, which must become effective before United States human clinical trials may commence;
 
  •  Adequate and well-controlled human clinical trials according to good clinical practice regulations, or GCP, to establish the safety and efficacy of the product for its intended use;
 
  •  Submission to the FDA of an NDA;
 
  •  Satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the product is produced to assess compliance with cGMP to assure that the facilities, methods and controls are adequate to preserve the drug’s identity, strength, quality and purity; and
 
  •  FDA review and approval of the application(s) prior to any commercial sale or shipment of the drug.
 
Once a drug candidate is identified for development it enters the preclinical testing stage. Preclinical tests include laboratory evaluations of product chemistry, toxicity and formulation, as well as animal studies. An IND sponsor must submit the results of the preclinical tests, together with manufacturing information and analytical data, to the FDA as part of the IND. Some preclinical or non-clinical testing may continue even after the IND is submitted. In addition to including the results of the preclinical studies, the IND will also include a protocol detailing, among other things, the objectives of the first phase of the clinical trial, the parameters to be used in monitoring safety, and the effectiveness criteria to be evaluated if the first phase lends itself to an efficacy determination. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA places the clinical trial on clinical hold. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin.
 
All clinical trials must be conducted under the supervision of one or more qualified investigators in accordance with GCP. These regulations include the requirement that all research subjects provide informed consent. Further, an Institutional Review Board, or IRB, at each institution participating in the clinical trial must review and approve the protocol before a clinical trial commences at that institution. Each new clinical protocol must be submitted to the FDA as part of the IND. Progress reports detailing the results of the clinical trials must be submitted at least annually to the FDA and more frequently if serious adverse events occur.
 
Human clinical trials are typically conducted in three sequential phases that may overlap or be combined:
 
Phase I:  The drug is initially introduced into healthy human subjects or patients with the disease and tested for safety, dosage tolerance, pharmacokinetics, pharmacodynamics, absorption, metabolism, distribution and excretion.


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Phase II:  Involves studies in a limited patient population to identify possible adverse effects and safety risks, to preliminarily evaluate the efficacy of the product for specific targeted diseases and to determine dosage tolerance and optimal dosage.
 
Phase III:  Clinical trials are undertaken to further evaluate dosage, clinical efficacy and safety in an expanded patient population. These studies are intended to establish the overall risk-benefit ratio of the product and provide, if appropriate, an adequate basis for product labeling.
 
Phase I, Phase II, and Phase III testing may not be completed successfully within any specified period, if at all. The FDA or an IRB or the sponsor may suspend a clinical trial at any time on various grounds, including a finding that the research subjects or patients are being exposed to an unacceptable health risk. Success in early stage clinical trials does not assure success in later stage clinical trials.
 
Concurrent with clinical trials, companies usually complete additional animal studies and also must develop additional information about the chemistry and physical characteristics of the drug and finalize a process for manufacturing the product in accordance with cGMP requirements. The results of product development, preclinical studies and clinical studies, along with descriptions of the manufacturing process, analytical tests conducted on the chemistry of the drug, and other relevant information are submitted to the FDA as part of the NDA requesting approval to market the product. The submission of an NDA is subject to payment of user fees, but a waiver of such fees may be obtained under specified circumstances. The FDA reviews all NDAs submitted before it accepts them for filing. If a submission is accepted for filing, the FDA begins an in-depth review, including inspecting the manufacturing facilities. The FDA may refuse to approve an NDA if the applicable regulatory criteria are not satisfied or may require additional clinical or other data. Even if such data are submitted, the FDA may ultimately decide not to approve the NDA.
 
There is no guarantee that approvals will be granted for any of our product candidates, or that the FDA review process will not involve delays that significantly and negatively affect our product candidates. We also may encounter similar delays in foreign countries. In addition, even if we receive regulatory approvals, they may have significant limitations on the uses for which any approved products may be marketed. After approval, some types of changes to the approved product are subject to further FDA review and approval. Any marketed product and its manufacturer are subject to periodic review, and any discovery of previously unrecognized problems with a product or manufacturer could result in suspension or limitation of approvals. Failure to comply with the applicable FDA requirements at any time during the product development process, approval process, or after approval, may subject an applicant to administrative or judicial sanctions, including the FDA’s refusal to approve pending applications, withdrawal of approval, a clinical hold, warning letters, product recalls and seizures, total or partial suspension of production or distribution, or injunctions, fines, civil penalties or criminal prosecution.
 
Pharmaceutical Pricing and Reimbursement
 
In both domestic and foreign markets, sales of any products for which we receive regulatory approval for commercial sales will depend in part on the availability of reimbursement for third party payors. Third party payors include government health care program administrative authorities, managed care providers, private health insurers and other organizations. These third party payors are increasingly challenging the price and examining the cost-effectiveness of medical products and services. In addition, significant uncertainty exists as to the scope of coverage and payment amounts for newly approved heath care products. We may need to conduct expensive pharmacoeconomic studies in order to demonstrate the cost-effectiveness of our products. Our products may not be considered medically necessary or cost-effective. Adequate third party reimbursement may not be available to enable us to maintain price levels sufficient to realize an appropriate return on our investment in product development.
 
Manufacturing
 
We currently outsource manufacturing for all of our product candidates and expect to continue to outsource manufacturing in the future. We believe our current suppliers of Altropane will be able to manufacture our products efficiently in sufficient quantities and on a timely basis, while maintaining product


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quality. We seek to maintain quality control over manufacturing through ongoing inspections, rigorous review, control over documented operating procedures and thorough analytical testing by outside laboratories. We believe that our current strategy of primarily outsourcing manufacturing is cost-effective since we avoid the high fixed costs of plant, equipment and large manufacturing staffs. FDA regulations require that we establish manufacturing sources for each of our product candidates under the cGMP regulations established by the FDA.
 
MDS Nordion, Inc., or MDS Nordion, a Canadian corporation and well-recognized manufacturer of 123I and nuclear medicine labeled imaging agents, has supplied Altropane to us since 2001. We are highly dependent upon MDS Nordion. Under the terms of our agreement, which currently expires on December 31, 2010, MDS Nordion manufactures the Altropane molecular imaging agent for our clinical trials in exchange for minimum monthly cash payments. We do not presently have arrangements with any other suppliers in the event that MDS Nordion is unable or unwilling to manufacture Altropane for us. We could encounter a significant delay before another supplier could manufacture Altropane for us due to the time required to establish a cGMP manufacturing process for Altropane. We hope to sign an extension with MDS Nordion before December 31, 2010 but there can be no assurance that we will be able to or that the terms will be acceptable. We do not have a manufacturing agreement relating to the commercial production of Altropane with MDS Nordion or any other manufacturer. We can provide no assurances that such an agreement will be executed on acceptable terms or that if we are unable to satisfy our monthly minimum payment obligations to MDS Nordion that our existing agreement will remain in force.
 
Marketing and Sales
 
Although we currently sell no products, our strategy is to pursue partnering opportunities in order to accelerate and maximize commercialization of our clinical product candidates and strategic collaborations for development of our preclinical product candidates. These collaborators may provide financial and other resources, including capabilities in research, development, manufacturing, marketing and sales. There can be no assurances that we will be successful in our collaboration efforts.
 
Employees
 
As of December 31, 2009, we employed 5 full-time employees. None of our employees are covered by a collective bargaining agreement.
 
Other Information
 
We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and, accordingly, file reports, proxy statements and other information with the Securities and Exchange Commission. Such reports, proxy statements and other information can be read and copied at the public reference facilities maintained by the Securities and Exchange Commission at the Public Reference Room, 100 F Street, N.E., Room 1580, Washington, DC 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.


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Item 1A.   Risk Factors.
 
Statements contained or incorporated by reference in this Annual Report on Form 10-K that are not based on historical fact are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. These forward-looking statements regarding future events and our future results are based on current expectations, estimates, forecasts, and projections, and the beliefs and assumptions of our management including, without limitation, our expectations regarding our product candidates, including the success and timing of our preclinical, clinical and development programs, the submission of regulatory filings and proposed partnering arrangements, the outcome of any litigation, collaboration, merger, acquisition and fund raising efforts, results of operations, selling, general and administrative expenses, research and development expenses and the sufficiency of our cash for future operations. Forward-looking statements may be identified by the use of forward-looking terminology such as “may,” “could,” “will,” “expect,” “estimate,” “anticipate,” “continue,” or similar terms, variations of such terms or the negative of those terms.
 
We cannot assure investors that our assumptions and expectations will prove to have been correct. Important factors could cause our actual results to differ materially from those indicated or implied by forward-looking statements. Such factors that could cause or contribute to such differences include those factors discussed below. We undertake no intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. If any of the following risks actually occur, our business, financial condition or results of operations would likely suffer.
 
Risks Related to our Financial Results and Need for Additional Financing
 
WE ARE A DEVELOPMENT STAGE COMPANY. WE HAVE INCURRED LOSSES FROM OUR OPERATIONS SINCE INCEPTION AND ANTICIPATE LOSSES FOR THE FORESEEABLE FUTURE. WE WILL NOT BE ABLE TO ACHIEVE PROFITABILITY UNLESS WE OBTAIN REGULATORY APPROVAL AND MARKET ACCEPTANCE OF OUR PRODUCT CANDIDATES. WE WILL NEED SUBSTANTIAL ADDITIONAL FUNDING IN ORDER TO CONTINUE OUR BUSINESS AND OPERATIONS. IF WE ARE UNABLE TO SECURE SUCH FUNDING ON ACCEPTABLE TERMS, WE WILL NEED TO CEASE OPERATIONS, SIGNIFICANTLY REDUCE, DELAY OR CEASE ONE OR MORE OF OUR RESEARCH OR DEVELOPMENT PROGRAMS, OR SURRENDER RIGHTS TO SOME OR ALL OF OUR TECHNOLOGIES. IF WE VIOLATE A DEBT COVENANT OR DEFAULT UNDER OUR DEBT AGREEMENTS, WE MAY NEED TO CEASE OPERATIONS OR REDUCE, CEASE OR DELAY ONE OR MORE OF OUR RESEARCH OR DEVELOPMENT PROGRAMS, ADJUST OUR CURRENT BUSINESS PLAN AND MAY NOT BE ABLE TO CONTINUE AS A GOING CONCERN.
 
Biotechnology companies that have no approved products or other sources of revenue are generally referred to as development stage companies. We have never generated revenues from product sales and we do not currently expect to generate revenues from product sales for at least the next three years. If we do generate revenues and operating profits in the future, our ability to continue to do so in the long term could be affected by the introduction of competitors’ products and other market factors. We expect to incur significant operating losses for at least the next three years. The level of our operating losses may increase in the future if more of our product candidates begin human clinical trials. We will never generate revenues or achieve profitability unless we obtain regulatory approval and market acceptance of our product candidates. This will require us to be successful in a range of challenging activities, including clinical trial stages of development, obtaining regulatory approval for our product candidates, and manufacturing, marketing and selling them. We may never succeed in these activities, and may never generate revenues that are significant enough to achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis.
 
We require significant funds to conduct research and development activities, including preclinical studies and clinical trials of our technologies, and to commercialize our product candidates. Because the successful


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development of our product candidates is uncertain, we are unable to estimate the actual funds we will require to develop and commercialize them. Our funding requirements depend on many factors, including:
 
  •  The scope, rate of progress and cost of our clinical trials and other research and development activities;
 
  •  Future clinical trial results;
 
  •  The terms and timing of any collaborative, licensing and other arrangements that we may establish;
 
  •  The cost and timing of regulatory approvals and of establishing sales, marketing and distribution capabilities;
 
  •  The cost of establishing clinical and commercial supplies of our product candidates and any products that we may develop;
 
  •  The cost of obtaining and maintaining licenses to use patented technologies;
 
  •  The effect of competing technological and market developments; and
 
  •  The cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights and other patent-related costs, including litigation costs and the results of such litigation.
 
Until such time, if ever, as we can generate substantial revenue from product sales or through collaborative arrangements with third parties, we will need to raise additional capital. To date, we have experienced negative cash flows from operations and have funded our operations primarily from equity and debt financings.
 
As of December 31, 2009, we have experienced total net losses since inception of approximately $203,969,000 , stockholders’ deficit of approximately $47,509,000 and a net working capital deficit of approximately $4,536,000. The cash and cash equivalents available at December 31, 2009 will not provide sufficient working capital to meet our anticipated expenditures for the next twelve months. At March 22, 2010, we had cash and cash equivalents of approximately $130,000 which combined with our ability to control administrative expenses will enable us to meet our anticipated cash expenditures into April, 2010. We must immediately raise additional funds in order to continue operations.
 
In order to continue as a going concern, we must immediately raise additional funds through one or more of the following: a debt financing, an equity offering, or a collaboration, merger, acquisition or other transaction with one or more pharmaceutical or biotechnology companies. We are currently engaged in fundraising efforts. There can be no assurance that we will be successful in our fundraising efforts or that additional funds will be available on acceptable terms, if at all. We also cannot be sure that we will be able to obtain additional credit from, or effect additional sales of debt or equity securities to certain of our existing investors described below in Liquidity and Capital Resources. If we are unable to raise additional or sufficient capital, we will need to cease operations or reduce, cease or delay one or more of our research or development programs, adjust our current business plan and may not be able to continue as a going concern. If we violate a debt covenant or default under the March 2008 Amended Purchase Agreement or the June 2008 Purchase Agreement (described below in Liquidity and Capital Resources) we may need to cease operations or reduce, cease or delay one or more of our research or development programs, adjust our current business plan and may not be able to continue as a going concern. Additionally, our common stock was delisted from trading on the NASDAQ Capital Market as a result of our failure to meet continued listing requirements of NASDAQ. On May 8, 2009 we began trading on the Pink Sheets OTC Market. This delisting has had an adverse affect on our ability to obtain future financing and could continue to adversely impact our stock price and the liquidity of our common stock. See the risk factor entitled “Our common stock has been delisted from the NASDAQ Capital Market.”
 
In connection with the March 2005 Financing, we agreed with the March 2005 Investors, that, subject to certain exceptions, we would not issue any shares of our common stock at a per share price less than $2.50 without the prior consent of the March 2005 Investors holding at least a majority of the shares issued in the March 2005 Financing. On March 22, 2010, the closing price of our common stock was $.21. The failure to receive the requisite waiver or consent of the March 2005 Investors could have the effect of delaying or


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preventing the consummation of a financing by us should the price per share in such financing be set at less than $2.50.
 
Alternatively, to secure funds, we may be required to enter financing arrangements with others that may require us to surrender rights to some or all of our technologies or grant licenses on terms that are not favorable to us. If the results of our current or future clinical trials are not favorable, it may negatively affect our ability to raise additional funds. If we are successful in obtaining additional equity and/or debt financing, the terms of such financing will have the effect of diluting the holdings and the rights of our stockholders. Estimates about how much funding will be required are based on a number of assumptions, all of which are subject to change based on the results and progress of our research and development activities. If we are unable to raise additional capital we will need to reduce, cease or delay one or more of our research or development programs and adjust our current business plan.
 
Our ability to advance our clinical programs, including the development of Altropane, is affected by the availability of financial resources. Financial considerations have caused us to suspend planned development activities for our clinical and preclinical programs until we are able to secure additional working capital. If we are not able to raise additional capital, we will not have sufficient funds to complete the clinical trial programs for the Altropane molecular imaging agent.
 
In light of current conditions in the global financial markets and our severe cash constraints we have taken steps to reduce our on-going cash expenses. In January and September 2009, we terminated a total of ten employees, reduced the salary of most of the remaining employees and cut back certain employee benefits. The costs related to these actions consist primarily of one-time termination costs. The terminations and salary reductions are expected to reduce compensation costs by approximately $1,500,000 annually.
 
OUR ESTIMATES OF OUR LIABILITY UNDER OUR BOSTON, MASSACHUSETTS LEASE MAY CHANGE.
 
Our lease in Boston, Massachusetts expires in 2012. We have entered into two sublease agreements covering all 6,600 square feet under this lease through the date of expiration. In determining our obligations under the lease that we do not expect to occupy, we have made certain assumptions for the discounted estimated cash flows related to the rental payments that our subtenants have agreed to pay. We may be required to change our estimates in the future as a result of, among other things, the default of one or both of our subtenants with respect to their payment obligations. Any such adjustments to the estimate of liability could be material.
 
Risks Related to Commercialization
 
OUR SUCCESS DEPENDS ON OUR ABILITY TO SUCCESSFULLY DEVELOP OUR PRODUCT CANDIDATES INTO COMMERCIAL PRODUCTS.
 
To date, we have not marketed, distributed or sold any products and, with the exception of Altropane, all of our technologies and early-stage product candidates are in preclinical development. The success of our business depends primarily upon our ability to successfully develop and commercialize our product candidates. Successful research and product development in the biotechnology industry is highly uncertain, and very few research and development projects produce a commercial product. In the biotechnology industry, it has been estimated that less than five percent of the technologies for which research and development efforts are initiated ultimately result in an approved product. If we are unable to successfully commercialize Altropane or any of our other product candidates, our business would be materially harmed.


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EVEN IF WE RECEIVE APPROVAL TO MARKET OUR PRODUCT CANDIDATES, THE MARKET MAY NOT BE RECEPTIVE TO OUR PRODUCT CANDIDATES UPON THEIR COMMERCIAL INTRODUCTION, WHICH COULD PREVENT US FROM SUCCESSFULLY COMMERCIALIZING OUR PRODUCTS AND FROM BEING PROFITABLE.
 
Even if our drug candidates are successfully developed, our success and growth will also depend upon the acceptance of these product candidates by physicians and third-party payors. Acceptance of our product development candidates will be a function of our products being clinically useful, being cost effective and demonstrating superior diagnostic or therapeutic effect with an acceptable side effect profile as compared to existing or future treatments. In addition, even if our products achieve market acceptance, we may not be able to maintain that market acceptance over time. Factors that we believe will materially affect market acceptance of our product candidates under development include:
 
  •  The timing of our receipt of any marketing approvals, the terms of any approval and the countries in which approvals are obtained;
 
  •  The safety, efficacy and ease of administration of our products;
 
  •  The competitive pricing of our products;
 
  •  The success of our education and marketing programs;
 
  •  The sales and marketing efforts of competitors; and
 
  •  The availability and amount of government and third-party payor reimbursement.
 
If our products do not achieve market acceptance, we will not be able to generate sufficient revenues from product sales to maintain or grow our business.
 
BUSINESS COMBINATIONS, INCLUDING MERGERS, JOINT VENTURES AND ACQUISITIONS, PRESENT MANY RISKS, AND WE MAY NOT REALIZE THE ANTICIPATED FINANCIAL AND STRATEGIC GOALS FOR ANY SUCH TRANSACTIONS.
 
We may in the future engage in business combinations to gain access to complementary companies, products and technologies. Such transactions involve a number of risks, including:
 
  •  We may find that the target company or assets do not further our business strategy, or that we overpaid for the company or assets, or that economic conditions change, all of which may generate a future impairment charge;
 
  •  We may have difficulty integrating the operations and personnel of an acquired business, and may have difficulty retaining the key personnel of an acquired business;
 
  •  We may have difficulty incorporating acquired technologies;
 
  •  We may encounter technical difficulties or failures with the performance of any acquired technologies or drug products or may experience unfavorable results in the clinical studies related to such technologies or products;
 
  •  We or our business partner(s) may face product liability risks associated with the sale of the combined company’s products;
 
  •  Our ongoing business and management’s attention may be disrupted or diverted by transition or integration issues and the complexity of managing diverse locations;
 
  •  We may have difficulty maintaining uniform standards, internal controls, procedures and policies across locations;
 
  •  The transaction may result in litigation from terminated employees or third-parties; and
 
  •  We may experience significant problems or liabilities associated with product quality, technology and legal contingencies.


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These factors could have a material adverse effect on our business, results of operations and financial condition or cash flows, particularly in the case of a larger acquisition or multiple acquisitions in a short period of time. From time to time, we may enter into negotiations for acquisitions that are not ultimately consummated. Such negotiations could result in significant diversion of management time, as well as out-of-pocket costs.
 
The consideration paid in connection with an acquisition also affects our financial results. If we were to proceed with one or more significant acquisitions in which the consideration included cash, we could be required to use a substantial portion of our available cash to consummate any acquisition. To the extent we issue shares of stock or other rights to purchase stock, including options or other rights, existing stockholders may be diluted and earnings per share may decrease. In addition, acquisitions may result in the incurrence of debt, large one-time write-offs (such as acquired in-process research and development costs) and restructuring charges. They may also result in goodwill and other intangible assets that are subject to impairment tests, which could result in future impairment charges.
 
Risks Related to Regulation
 
IF OUR PRECLINICAL TESTING AND CLINICAL TRIALS ARE NOT SUCCESSFUL, WE WILL NOT OBTAIN REGULATORY APPROVAL FOR COMMERCIAL SALE OF OUR PRODUCT CANDIDATES.
 
We will be required to demonstrate, through preclinical testing and clinical trials, that our product candidates are safe and effective before we can obtain regulatory approval for the commercial sale of our product candidates. Preclinical testing and clinical trials are lengthy and expensive and the historical rate of failure for product candidates is high. Product candidates that appear promising in the early phases of development, such as in preclinical study or in early human clinical trials, may fail to demonstrate safety and efficacy in clinical trials.
 
Except for Altropane, we have not yet received IND authorization from the FDA for our other product candidates which will be required before we can begin clinical trials in the United States. We may not submit INDs for our product candidates if we are unable to accumulate the necessary preclinical data for the filing of an IND. The FDA may request additional preclinical data before allowing us to commence clinical trials. The FDA or other applicable regulatory authorities may suspend clinical trials of a drug candidate at any time if we or they believe the subjects or patients participating in such trials are being exposed to unacceptable health risks or for other reasons. Adverse side effects of a drug candidate on subjects or patients in a clinical trial could result in the FDA or foreign regulatory authorities refusing to approve a particular drug candidate for any or all indications of use.
 
There is no assurance that the results obtained to date and/or any further work completed in the future will be sufficient to achieve the approvability of Altropane.
 
Clinical trials require sufficient patient enrollment which is a function of many factors, including the size of the potential patient population, the nature of the protocol, the availability of existing treatments for the indicated disease and the eligibility criteria for enrolling in the clinical trial. Delays or difficulties in completing patient enrollment can result in increased costs and longer development times.
 
We cannot predict whether we will encounter problems with any of our completed, ongoing or planned clinical trials that will cause us or regulatory authorities to delay or suspend those trials, or delay the analysis of data from our completed or ongoing clinical trials. We have however encountered problems with the Cethrin License. See the risk factor entitled “We in-license a significant portion of our intellectual property and if we fail to comply with our obligations under any of the related agreements, we could lose license rights that are necessary to develop our product candidates.” Any of the following could delay the initiation or the completion of our ongoing and planned clinical trials:
 
  •  Ongoing discussions with the FDA or comparable foreign authorities regarding the scope or design of our clinical trials;
 
  •  Delays in enrolling patients and volunteers into clinical trials;


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  •  Lower than anticipated retention rate of patients and volunteers in clinical trials;
 
  •  Negative or inconclusive results of clinical trials or adverse medical events during a clinical trial could cause a clinical trial to be repeated or a program to be terminated, even if other studies or trials related to the program are successful;
 
  •  Insufficient supply or deficient quality of drug candidate materials or other materials necessary for the conduct of our clinical trials;
 
  •  Serious and unexpected drug-related side-effects experienced by participants in our clinical trials; or
 
  •  The placement of a clinical trial on hold.
 
OUR PRODUCT CANDIDATES ARE SUBJECT TO RIGOROUS REGULATORY REVIEW AND, EVEN IF APPROVED, REMAIN SUBJECT TO EXTENSIVE REGULATION.
 
Our technologies and product candidates must undergo a rigorous regulatory approval process which includes extensive preclinical and clinical testing to demonstrate safety and efficacy before any resulting product can be marketed. Our research and development activities are regulated by a number of government authorities in the United States and other countries, including the FDA pursuant to the Federal Food, Drug, and Cosmetic Act. The clinical trial and regulatory approval process usually requires many years and substantial cost. To date, neither the FDA nor any of its international equivalents has approved any of our product candidates for marketing.
 
The FDA regulates drugs in the United States, including their testing, manufacturing and marketing. Data obtained from testing is subject to varying interpretations which can delay, limit or prevent FDA approval. The FDA has stringent laboratory and manufacturing standards which must be complied with before we can test our product candidates in people or make them commercially available. Examples of these standards include Good Laboratory Practices and current Good Manufacturing Practices, or cGMP. Our compliance with these standards is subject to initial certification by independent inspectors and continuing audits thereafter. In addition, manufacturers of our product candidates are subject to the FDA’s cGMP regulations and similar foreign standards and we do not have control over compliance with these regulations by our manufacturers. If any third-party manufacturer fails to perform as required, this could impair our ability to deliver our products on a timely basis or cause delays in our clinical trials and applications for regulatory approval.
 
Obtaining FDA approval to sell our product candidates is time-consuming and expensive. The FDA usually takes at least 12 to 18 months to review an NDA which must be submitted before the FDA will consider granting approval to sell a product. If the FDA requests additional information, it may take even longer for the FDA to make a decision especially if the additional information that they request requires us to complete additional studies. We may encounter similar delays in foreign countries. After reviewing any NDA we submit, the FDA or its foreign equivalents may decide not to approve our products. Failure to obtain regulatory approval for a product candidate will prevent us from commercializing our product candidates.
 
Other risks associated with the regulatory approval process include:
 
  •  Regulatory approvals may impose significant limitations on the uses for which any approved products may be marketed;
 
  •  Any marketed product and its manufacturer are subject to periodic reviews and audits, and any discovery of previously unrecognized problems with a product or manufacturer could result in suspension or limitation of approvals;
 
  •  Changes in existing regulatory requirements, or the enactment of additional regulations or statutes, could prevent or affect the timing of our ability to achieve regulatory compliance. Federal and state laws, regulations and policies may be changed with possible retroactive effect, and how these rules actually operate can depend heavily on administrative policies and interpretation over which we have no control, and we may possess inadequate experience to assess their full impact upon our business; and


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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.
 
OUR PRODUCTS COULD BE SUBJECT TO RESTRICTIONS OR WITHDRAWAL FROM THE MARKET AND WE MAY BE SUBJECT TO PENALTIES IF WE FAIL TO COMPLY WITH REGULATORY REQUIREMENTS, OR IF WE EXPERIENCE UNANTICIPATED PROBLEMS WITH OUR PRODUCTS, WHEN AND IF ANY OF THEM ARE APPROVED.
 
Any product for which we obtain marketing approval, along with the manufacturing processes, post-approval clinical data, labeling, advertising and promotional activities for such product, will be subject to continual requirements of and review by the FDA and other regulatory bodies. These requirements include submissions of safety and other post-marketing information and reports, registration requirements, quality assurance and corresponding maintenance of records and documents, requirements regarding the distribution of samples to physicians and recordkeeping. The manufacturer and the manufacturing facilities we use to make any of our product candidates will also be subject to periodic review and inspection by the FDA. The subsequent discovery of previously unknown problems with a product, manufacturer or facility may result in restrictions on the product or manufacturer or facility, including withdrawal of the product from the market. Even if regulatory approval of a product is granted, the approval may be subject to limitations on the indicated uses for which the product may be marketed or to the conditions of approval, or contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product. Later discovery of previously unknown problems with our products, manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may result in:
 
  •  Restrictions on such products, manufacturers or manufacturing processes;
 
  •  Warning letters;
 
  •  Withdrawal of the products from the market;
 
  •  Refusal to approve pending applications or supplements to approved applications that we submit;
 
  •  Recall;
 
  •  Fines;
 
  •  Suspension or withdrawal of regulatory approvals;
 
  •  Refusal to permit the import or export of our products;
 
  •  Product seizure; and
 
  •  Injunctions or the imposition of civil or criminal penalties.
 
FAILURE TO OBTAIN REGULATORY APPROVAL IN FOREIGN JURISDICTIONS WOULD PREVENT US FROM MARKETING OUR PRODUCTS ABROAD.
 
Although we have not initiated any marketing efforts in foreign jurisdictions, we intend in the future to market our products outside the United States. In order to market our products in the European Union and many other foreign jurisdictions, we must obtain separate regulatory approvals and comply with numerous and varying regulatory requirements. The approval procedure varies among countries and can involve additional testing. The time required to obtain approval abroad may differ from that required to obtain FDA approval. The foreign regulatory approval process may include all of the risks associated with obtaining FDA approval and we may not obtain foreign regulatory approvals on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or approval by the FDA. We may not be able to file for regulatory approvals and may not receive necessary approvals to commercialize our


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products in any market outside the United States. The failure to obtain these approvals could materially adversely affect our business, financial condition and results of operations.
 
FOREIGN GOVERNMENTS TEND TO IMPOSE STRICT PRICE CONTROLS WHICH MAY ADVERSELY AFFECT OUR REVENUES, IF ANY.
 
The pricing of prescription pharmaceuticals is subject to governmental control in some foreign countries. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our product candidate to other available therapies. If reimbursement of our products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, our business could be adversely affected.
 
Risks Related to our Intellectual Property
 
IF WE ARE UNABLE TO SECURE ADEQUATE PATENT PROTECTION FOR OUR TECHNOLOGIES, THEN WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY AS A BIOTECHNOLOGY COMPANY.
 
At the present time, we do not have patent protection for all uses of our technologies. There is significant competition in the field of CNS diseases, our primary scientific area of research and development. Our competitors may seek patent protection for their technologies, and such patent applications or rights might conflict with the patent protection that we are seeking for our technologies. If we do not obtain patent protection for our technologies, or if others obtain patent rights that block our ability to develop and market our technologies, our business prospects may be significantly and negatively affected. Further, even if patents can be obtained, these patents may not provide us with any competitive advantage if our competitors have stronger patent positions or if their product candidates work better in clinical trials than our product candidates. Our patents may also be challenged, narrowed, invalidated or circumvented, which could limit our ability to stop competitors from marketing similar products or limit the length of term of patent protection we may have for our products.
 
Our patent strategy is to obtain broad patent protection, in the United States and in major developed countries, for our technologies and their related medical indications. Risks associated with protecting our patent and proprietary rights include the following:
 
  •  Our ability to protect our technologies could be delayed or negatively affected if the United States Patent and Trademark Office, or USPTO, requires additional experimental evidence that our technologies work;
 
  •  Our competitors may develop similar technologies or products, or duplicate any technology developed by us;
 
  •  Our competitors may develop products which are similar to ours but which do not infringe our patents or products;
 
  •  Our competitors may successfully challenge one or more of our patents in an interference or litigation proceeding;
 
  •  Our technologies may infringe the patents or rights of other parties who may decide not to grant a license to us. We may have to change our products or processes, pay licensing fees or stop certain activities because of the patent rights of third parties which could cause additional unexpected costs and delays;
 
  •  Patent law in the fields of healthcare and biotechnology is still evolving and future changes in such laws might conflict with our existing and future patent rights, or the rights of others;
 
  •  Our collaborators, employees and consultants may breach the confidentiality agreements that we enter into to protect our trade secrets and proprietary know-how. We may not have adequate remedies for such breach; and


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  •  There may be disputes as to the ownership of technological information developed by consultants, scientific advisors or other third parties which may not be resolved in our favor.
 
WE IN-LICENSE A SIGNIFICANT PORTION OF OUR INTELLECTUAL PROPERTY AND IF WE FAIL TO COMPLY WITH OUR OBLIGATIONS UNDER ANY OF THE RELATED AGREEMENTS, WE COULD LOSE LICENSE RIGHTS THAT ARE NECESSARY TO DEVELOP OUR PRODUCT CANDIDATES.
 
We have entered into license agreements with Harvard University and its affiliated hospitals, or Harvard and its Affiliates, and Children’s Medical Center Corporation, or CMCC, that give us rights to intellectual property that is necessary for our business. These license arrangements impose various development, royalty and other obligations on us. If we breach these obligations and fail to cure such breach in a timely manner, these exclusive licenses could be converted to non-exclusive licenses or the agreements could be terminated, which would result in our being unable to develop, manufacture and sell products that are covered by the licensed technology.
 
In order to continue to expand our business we may need to acquire additional product candidates including those in clinical development through in-licensing that we believe will be a strategic fit with us. We may not be able to in-license suitable product candidates at an acceptable price or at all. Engaging in any in-license will incur a variety of costs, and we may never realize the anticipated benefits of any such in-license.
 
IF WE BECOME INVOLVED IN PATENT LITIGATION OR OTHER PROCEEDINGS RELATED TO A DETERMINATION OF RIGHTS, WE COULD INCUR SUBSTANTIAL COSTS AND EXPENSES, SUBSTANTIAL LIABILITY FOR DAMAGES OR BE REQUIRED TO STOP OUR PRODUCT DEVELOPMENT AND COMMERCIALIZATION EFFORTS.
 
A third party may sue us for infringing its patent rights. Likewise, we may need to resort to litigation to enforce a patent issued or licensed to us or to determine the scope and validity of third-party proprietary rights. In addition, a third party may claim that we have improperly obtained or used its confidential or proprietary information. There has been substantial litigation and other proceedings regarding patent and other intellectual property rights in the pharmaceutical and biotechnology industries. In addition to infringement claims against us, we may become a party to other patent litigation and other proceedings, including interference proceedings declared against us by the USPTO, regarding intellectual property rights with respect to our products and technology. The cost to us of any litigation or other proceeding relating to intellectual property rights, even if resolved in our favor, could be substantial, and the litigation would divert our management’s efforts. Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. Uncertainties resulting from the initiation and continuation of any litigation could limit our ability to continue our operations.
 
If any parties successfully claim that our creation or use of proprietary technologies infringes upon their intellectual property rights, we might be forced to pay damages, potentially including treble damages, if we are found to have willfully infringed on such parties’ patent rights. In addition to any damages we might have to pay, a court could require us to stop the infringing activity or obtain a license. Any license required under any patent may not be made available on commercially acceptable terms, if at all. In addition, such licenses are likely to be non-exclusive and, therefore, our competitors may have access to the same technology licensed to us. If we fail to obtain a required license and are unable to design around a patent, we may be unable to effectively market some of our technology and products, which could limit our ability to generate revenues or achieve profitability and possibly prevent us from generating revenue sufficient to sustain our operations. We might be required to redesign the formulation of a product candidate so that it does not infringe, which may not be possible or could require substantial funds and time. Ultimately, we could be prevented from commercializing a product or be forced to cease some aspect of our business operations if we are unable to enter into license agreements that are acceptable to us.
 
Moreover, we expect that a number of our collaborations will provide that royalties payable to us for licenses to our intellectual property may be offset by amounts paid by our collaborators to third parties who


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have competing or superior intellectual property positions in the relevant fields, which could result in significant reductions in our revenues from products developed through collaborations.
 
CONFIDENTIALITY AGREEMENTS WITH EMPLOYEES AND OTHERS MAY NOT ADEQUATELY PREVENT DISCLOSURE OF TRADE SECRETS AND OTHER PROPRIETARY INFORMATION.
 
In order to protect our proprietary technology and processes, we rely in part on confidentiality agreements with our collaborators, employees, consultants, outside scientific collaborators and sponsored researchers, and other advisors. These agreements may be breached, may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover trade secrets and proprietary information, and in such cases we could not assert any trade secret rights against such party. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.
 
Risks Related to our Dependence on Third Parties
 
IF ANY COLLABORATOR TERMINATES OR FAILS TO PERFORM ITS OR THEIR OBLIGATIONS UNDER AGREEMENTS WITH US, THE DEVELOPMENT AND COMMERCIALIZATION OF OUR PRODUCT CANDIDATES COULD BE DELAYED OR TERMINATED.
 
We are dependent on expert advisors and our collaborations with research and development service providers. Our business could be adversely affected if any collaborator terminates its collaboration agreement with us or fails to perform its obligations under that agreement. Most biotechnology and pharmaceutical companies have established internal research and development programs, including their own facilities and employees which are under their direct control. By contrast, we have limited internal research capability and have elected to outsource substantially all of our research and development, preclinical and clinical activities. As a result, we are dependent upon our network of expert advisors and our collaborations with other research and development service providers for the development of our technologies and product candidates. These expert advisors are not our employees but provide us with important information and knowledge that may enhance our product development strategies and plans. Our collaborations with research and development service providers are important for the testing and evaluation of our technologies, in both the preclinical and clinical stages.
 
Many of our expert advisors are employed by, or have their own collaborative relationship with Harvard and its Affiliates or CMCC. A summary of the key scientific, research and development professionals with whom we work, and a composite of their professional background and affiliations is as follows:
 
  •  Larry I. Benowitz, Ph.D., Director, Laboratories for Neuroscience Research in Neurosurgery, Children’s Hospital, Boston; Associate Professor of Neurosurgery, Harvard Medical School.
 
  •  Zhigang He, Ph.D., BM, Research Associate, Department of Neurology, Children’s Hospital Boston; Associate Professor of Neurology, Department of Neurology, Harvard Medical School.
 
  •  Robert S. Langer, Jr., Sc.D., Institute Professor of Chemical and Biomedical Engineering, Massachusetts Institute of Technology.
 
  •  Peter Meltzer, Ph.D., President, Organix, Inc., Woburn, MA.
 
Dr. Benowitz, Dr. Bianchine, Dr. He, and Dr. Langer provided scientific consultative services resulting in total obligations of approximately $100,000 for 2009. Dr. Benowitz and Dr. He provided scientific consultative services primarily related to our nerve repair program. Dr. Langer provided consultative services primarily related to scientific and business services. Resource constraints forced us to terminate these relationships in 2009 and there can be no assurances that, should the services of these collaborators be required in the future, they will be available to us.
 
At December 31, 2009 and March 31, 2010 Drs. Benowitz, He and Langer were owed a total of $116,000 by the company for past services.


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We do not have a consulting agreement with Dr. Meltzer but do enter into research and development contracts from time to time with Organix, Inc., of which Dr. Meltzer is president.
 
Our significant collaborations include:
 
  •  Children’s Hospital in Boston, Massachusetts where certain of our collaborating scientists perform their research efforts. We terminated our research agreement with Children’s Hospital in March 2009;
 
  •  Harvard Medical School in Boston, Massachusetts where certain of our collaborating scientists perform their research efforts;
 
  •  MDS Nordion in Vancouver, British Colombia which manufactures the Altropane molecular imaging agent; and
 
  •  Organix, Inc. in Woburn, Massachusetts which provides non-radioactive Altropane for FDA mandated studies and synthesizes our compounds for the treatment of PD and for axon regeneration.
 
We generally have a number of collaborations with research and development service providers ongoing at any point in time. These agreements generally cover a specific project or study, are usually for a duration between one month to one year, and expire upon completion of the project. Under these agreements, we are sometimes required to make an initial payment upon execution of the agreement with the remaining payments based upon the completion of certain specified milestones such as completion of a study or delivery of a report.
 
We cannot control the amount and timing of resources our advisors and collaborators devote to our programs or technologies. Our advisors and collaborators may have employment commitments to, or consulting or advisory contracts with, other entities that may limit their availability to us. If any of our advisors or collaborators were to breach or terminate their agreement with us or otherwise fail to conduct their activities successfully and in a timely manner, the preclinical or clinical development or commercialization of our technologies and product candidates or our research programs could be delayed or terminated. Any such delay or termination could have a material adverse effect on our business, financial condition or results of operations.
 
Disputes may arise in the future with respect to the ownership of rights to any technology developed with our advisors or collaborators. These and other possible disagreements could lead to delays in the collaborative research, development or commercialization of our technologies, or could require or result in litigation to resolve. Any such event could have a material adverse effect on our business, financial condition or results of operations.
 
Our advisors and collaborators sign agreements that provide for confidentiality of our proprietary information. Nonetheless, they may not maintain the confidentiality of our technology and other confidential information in connection with every advisory or collaboration arrangement, and any unauthorized dissemination of our confidential information could have a material adverse effect on our business, financial condition or results of operations.
 
MDS Nordion, Inc., or MDS Nordion, a Canadian corporation and well-recognized manufacturer of 123I and nuclear medicine labeled imaging agents, has supplied Altropane to us since 2001. We are highly dependent upon MDS Nordion. Under the terms of our agreement, which currently expires on December 31, 2010, MDS Nordion manufactures the Altropane molecular imaging agent for our clinical trials in exchange for minimum monthly cash payments. We do not presently have arrangements with any other suppliers in the event that MDS Nordion is unable or unwilling to manufacture Altropane for us. We could encounter a significant delay before another supplier could manufacture Altropane for us due to the time required to establish a cGMP manufacturing process for Altropane. We hope to sign an extension with MDS Nordion before December 31, 2010 but there can be no assurance that we will be able to or that the terms will be acceptable. We do not have a manufacturing agreement relating to the commercial production of Altropane with MDS Nordion or any other manufacturer. We can provide no assurances that such an agreement will be executed on acceptable terms or that if we are unable to satisfy our monthly minimum payment obligations to MDS Nordion that our existing agreement will remain in force.


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IF WE ARE UNABLE TO MAINTAIN OUR KEY WORKING RELATIONSHIPS WITH OUR LICENSORS, INCLUDING HARVARD AND ITS AFFILIATES AND CMCC, WE MAY NOT BE SUCCESSFUL SINCE SUBSTANTIALLY ALL OF OUR CURRENT TECHNOLOGIES WERE LICENSED FROM SUCH LICENSORS.
 
We maintain relationships with our licensors, Harvard and its Affiliates, and CMCC. Substantially all of our technologies are licensed from these licensors. Under the terms of our license agreements with Harvard and its Affiliates and CMCC, we acquired the exclusive, worldwide license to make, use, and sell the technology covered by each respective agreement. Among other things, the technologies licensed under these agreements include:
 
  •  Altropane molecular imaging agent compositions and methods of use;
 
  •  Technetium-based molecular imaging agent compositions and methods of use;
 
  •  Inosine methods of use; and
 
  •  DAT blocker compositions and methods of use.
 
Generally, each of these license agreements is effective until the last patent licensed relating to the technology expires or a fixed and determined date. The patents on the Altropane molecular imaging agent expire beginning in 2013. The patents on the technetium-based molecular imaging agents expire beginning in 2017. The patents for Inosine expire beginning in 2017. The patents for our DAT blockers expire beginning in 2012.
 
We are required to make certain payments under our license agreements with our licensors which generally include:
 
  •  An initial licensing fee payment upon the execution of the agreement and annual license maintenance fee;
 
  •  Reimbursement payments for all patent related costs incurred by the licensor, including fees associated with the filing of continuation-in-part patent applications;
 
  •  Milestone payments as licensed technology progresses through each stage of development (filing of IND, completion of one or more clinical stages and submission and approval of an NDA); and
 
  •  Royalty payments on the sales of any products based on the licensed technology.
 
We have entered into license agreements, or the CMCC Licenses, with CMCC to acquire the exclusive worldwide rights to certain axon regeneration technologies. The CMCC Licenses provide for future milestone payments of up to an aggregate of approximately $425,000 for each product candidate upon achievement of certain regulatory milestones.
 
We have entered into license agreements, or the Harvard License Agreements, with Harvard and its Affiliates to acquire the exclusive worldwide rights to certain technologies within our molecular imaging and neurodegenerative disease programs. The Harvard License Agreements obligate us to pay up to an aggregate of approximately $2,520,000 in milestone payments in the future. The future milestone payments are generally payable only upon achievement of certain regulatory milestones.
 
Our license agreements with Harvard and its Affiliates and CMCC generally provide for royalty payments equal to specified percentages of product sales, annual license maintenance fees and continuing patent prosecution costs.
 
Universities and other not-for-profit research institutions are becoming increasingly aware of the commercial value of their findings and are becoming more active in seeking patent protection and licensing arrangements to collect royalties for the use of technology that they have developed. The loss of our relationship with one or more of our key licensors could adversely affect our ongoing development programs and could make it more costly and difficult for us to obtain the licensing rights to new scientific discoveries.


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IF WE ARE UNABLE TO ESTABLISH, MAINTAIN AND RELY ON NEW COLLABORATIVE RELATIONSHIPS, THEN WE MAY NOT BE ABLE TO SUCCESSFULLY DEVELOP AND COMMERCIALIZE OUR TECHNOLOGIES.
 
To date, our operations have primarily focused on the preclinical development of most of our technologies, as well as conducting clinical trials for certain of our technologies. We currently expect that the continued development of our technologies will result in the initiation of additional clinical trials. We expect that these developments will require us to establish, maintain and rely on new collaborative relationships in order to successfully develop and commercialize our technologies. We face significant competition in seeking appropriate collaborators. Collaboration arrangements are complex to negotiate and time consuming to document. We may not be successful in our efforts to establish additional collaborations or other alternative arrangements, and the terms of any such collaboration or alternative arrangement may not be favorable to us. There is no certainty that:
 
  •  We will be able to enter into such collaborations on economically feasible and otherwise acceptable terms and conditions;
 
  •  Such collaborations will not require us to undertake substantial additional obligations or require us to devote additional resources beyond those we have identified at present;
 
  •  Any of our collaborators will not breach or terminate their agreements with us or otherwise fail to conduct their activities on time, thereby delaying the development or commercialization of the technology for which the parties are collaborating; and
 
  •  The parties will not dispute the ownership rights to any technologies developed under such collaborations.
 
IF ONE OF OUR COLLABORATORS WERE TO CHANGE ITS STRATEGY OR THE FOCUS OF ITS DEVELOPMENT AND COMMERCIALIZATION EFFORTS WITH RESPECT TO OUR RELATIONSHIP, THE SUCCESS OF OUR PRODUCT CANDIDATES AND OUR OPERATIONS COULD BE ADVERSELY AFFECTED.
 
There are a number of factors external to us that may change our collaborators’ strategy or focus with respect to our relationship with them, including:
 
  •  The amount and timing of resources that our collaborators may devote to the product candidates;
 
  •  Our collaborators may experience financial difficulties;
 
  •  We may be required to relinquish important rights such as marketing and distribution rights;
 
  •  Should a collaborator fail to develop or commercialize one of our product candidates, we may not receive any future milestone payments and will not receive any royalties for the product candidate;
 
  •  Business combinations or significant changes in a collaborator’s business strategy may also adversely affect a collaborator’s willingness or ability to complete its obligations under any arrangement;
 
  •  A collaborator may not devote sufficient time and resources to any collaboration with us, which could prevent us from realizing the potential commercial benefits of that collaboration;
 
  •  A collaborator may terminate their collaborations with us, which could make it difficult for us to attract new collaborators or adversely affect how we are perceived in the business and financial communities; and
 
  •  A collaborator could move forward with a competing product candidate developed either independently or in collaboration with others, including our competitors.
 
If any of these occur, the development and commercialization of one or more drug candidates could be delayed, curtailed or terminated because we may not have sufficient financial resources or capabilities to continue such development and commercialization on our own.


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Risks Related to Competition
 
WE ARE ENGAGED IN HIGHLY COMPETITIVE INDUSTRIES DOMINATED BY LARGER, MORE EXPERIENCED AND BETTER CAPITALIZED COMPANIES.
 
The biotechnology and pharmaceutical industries are highly competitive, rapidly changing, and are dominated by larger, more experienced and better capitalized companies. Such greater experience and financial strength may enable them to bring their products to market sooner than us, thereby gaining the competitive advantage of being the first to market. Research on the causes of, and possible treatments for, diseases for which we are trying to develop therapeutic or diagnostic products are developing rapidly and there is a potential for extensive technological innovation in relatively short periods of time. Factors affecting our ability to successfully manage the technological changes occurring in the biotechnology and pharmaceutical industries, as well as our ability to successfully compete, include:
 
  •  Many of our potential competitors in the field of CNS research have significantly greater experience than we do in completing preclinical and clinical testing of new pharmaceutical products, the manufacturing and commercialization process, and obtaining FDA and other regulatory approvals of products;
 
  •  Many of our potential competitors have products that have been approved or are in late stages of development;
 
  •  Many of our potential competitors may develop products or other novel technologies that are more effective, safer or less costly than any that we are developing;
 
  •  Many of our potential competitors have collaborative arrangements in our target markets with leading companies and research institutions;
 
  •  The timing and scope of regulatory approvals for these products;
 
  •  The availability and amount of third-party reimbursement;
 
  •  The strength of our patent position;
 
  •  Many of our potential competitors are in a stronger financial position than us, and are thus better able to finance the significant cost of developing, manufacturing and selling new products; and
 
  •  Companies with established positions and prior experience in the pharmaceutical industry may be better able to develop and market products for the treatment of those diseases for which we are trying to develop products.
 
To our knowledge, there is presently no approved diagnostic in the United States for PD and/or DLB. 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®. To date, GE Healthcare has obtained marketing approval in Europe. GE Healthcare has significantly greater infrastructure and financial resources than us, and if they obtained marketing approval in the United States they could significantly adversely affect our competitive position. Their established market presence, and greater financial strength in the European market may make it difficult for us to successfully market Altropane in Europe.
 
To our knowledge, there is presently no approved therapeutic focused on the nerve repair of CNS disorders resulting from traumas, such as SCI. We are aware of other companies who are developing therapeutics to treat the CNS disorders resulting from SCI. These companies have significantly greater infrastructure and financial resources than us and if they were to able to obtain marketing approval for their products it could significantly adversely affect our competitive position. Given the challenges of achieving functional recovery in severe CNS disorders, we believe some of these competitors are developing devices or drugs that could potentially be used in conjunction with the therapeutics we are developing.


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IF WE ARE UNABLE TO COMPETE EFFECTIVELY, OUR PRODUCT CANDIDATES MAY BE RENDERED NONCOMPETITIVE OR OBSOLETE.
 
Our competitors may develop or commercialize more effective, safer or more affordable products, or obtain more effective patent protection, than we are able to. Accordingly, our competitors may commercialize products more rapidly or effectively than we are able to, which would adversely affect our competitive position, the likelihood that our product candidates will achieve initial market acceptance, and our ability to generate meaningful revenues from our product candidates. Even if our product candidates achieve initial market acceptance, competitive products may render our products obsolete, noncompetitive or uneconomical. If our product candidates are rendered obsolete, we may not be able to recover the expenses of developing and commercializing those product candidates.
 
IF THIRD-PARTY PAYORS DO NOT ADEQUATELY REIMBURSE OUR CUSTOMERS FOR ANY OF OUR PRODUCTS THAT ARE APPROVED FOR MARKETING, THEY MIGHT NOT BE ACCEPTED BY PHYSICIANS AND PATIENTS OR PURCHASED OR USED, AND OUR REVENUES AND PROFITS WILL NOT DEVELOP OR INCREASE.
 
Substantially all biotechnology products are distributed to patients by physicians and hospitals, and in most cases, such patients rely on insurance coverage and reimbursement to pay for some or all of the cost of the product. In recent years, the continuing efforts of government and third party payors to contain or reduce health care costs have limited, and in certain cases prevented, physicians and patients from receiving insurance coverage and reimbursement for medical products, especially newer technologies. We believe that the efforts of governments and third-party payors to contain or reduce the cost of healthcare will continue to affect the business and financial condition of pharmaceutical and biopharmaceutical companies. Obtaining reimbursement approval for a product from each governmental or other third-party payor is a time-consuming and costly process that could require us to provide to each prospective payor scientific, clinical and cost-effectiveness data for the use of our products. If we succeed in bringing any of our product candidates to market and third-party payors determine that the product is eligible for coverage; the third-party payors may nonetheless establish and maintain price levels insufficient for us to realize a sufficient return on our investment in product development. Moreover, eligibility for coverage does not imply that any product will be reimbursed in all cases.
 
Our ability to generate adequate revenues and operating profits could be adversely affected if such limitations or restrictions are placed on the sale of our products. Specific risks associated with medical insurance coverage and reimbursement include:
 
  •  Significant uncertainty exists as to the reimbursement status of newly approved health care products;
 
  •  Third-party payors are increasingly challenging the prices charged for medical products and services;
 
  •  Adequate insurance coverage and reimbursement may not be available to allow us to charge prices for products which are adequate for us to realize an appropriate return on our development costs. If adequate coverage and reimbursement are not provided for use of our products, the market acceptance of these products will be negatively affected;
 
  •  Health maintenance organizations and other managed care companies may seek to negotiate substantial volume discounts for the sale of our products to their members thereby reducing our profit margins; and
 
  •  In recent years, bills proposing comprehensive health care reform have been introduced in Congress that would potentially limit pharmaceutical prices and establish mandatory or voluntary refunds. It is uncertain if any legislative proposals will be adopted and how federal, state or private payors for health care goods and services will respond to any health care reforms.
 
U.S. drug prices may be further constrained by possible Congressional action regarding drug reimportation into the United States. Some proposed legislation would allow the reimportation of approved drugs originally manufactured in the United States back into the United States from other countries where the drugs are sold at a lower price. Some governmental authorities in the U.S. are pursuing lawsuits to obtain expanded


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reimportation authority. Such legislation, regulations, or judicial decisions could reduce the prices we receive for any products that we may develop, negatively affecting our revenues and prospects for profitability. Even without legislation authorizing reimportation, increasing numbers of patients have been purchasing prescription drugs from Canadian and other non-United States sources, which has reduced the price received by pharmaceutical companies for their products.
 
The Centers for Medicare and Medicaid Services, or CMS, the agency within the Department of Health and Human Services that administers Medicare and that is responsible for setting Medicare reimbursement payment rates and coverage policies for any product candidates that we commercialize, has authority to decline to cover particular drugs if it determines that they are not “reasonable and necessary” for Medicare beneficiaries or to cover them at lower rates to reflect budgetary constraints or to match previously approved reimbursement rates for products that CMS considers to be therapeutically comparable. Third-party payors often follow Medicare coverage policy and payment limitations in setting their own reimbursement rates, and both Medicare and other third-party payors may have sufficient market power to demand significant price reductions.
 
Moreover, marketing and promotion arrangements in the pharmaceutical industry are heavily regulated by CMS, and many marketing and promotional practices that are common in other industries are prohibited or restricted. These restrictions are often ambiguous and subject to conflicting interpretations, but carry severe administrative, civil, and criminal penalties for noncompliance. It may be costly for us to implement internal controls to facilitate compliance by our sales and marketing personnel.
 
As a result of the trend towards managed healthcare in the United States, as well as legislative proposals to constrain the growth of federal healthcare program expenditures, third-party payors are increasingly attempting to contain healthcare costs by demanding price discounts or rebates and limiting both coverage and the level of reimbursement of new drug products. Consequently, significant uncertainty exists as to the reimbursement status of newly approved healthcare products.
 
MEDICARE PRESCRIPTION DRUG COVERAGE LEGISLATION AND FUTURE LEGISLATIVE OR REGULATORY REFORM OF THE HEALTH CARE SYSTEM MAY AFFECT OUR ABILITY TO SELL OUR PRODUCT CANDIDATES PROFITABLY.
 
A number of legislative and regulatory proposals to change the healthcare system in the United States and other major healthcare markets have been proposed in recent years. In addition, ongoing initiatives in the United States have exerted and will continue to exert pressure on drug pricing. In some foreign countries, particularly countries of the European Union, the pricing of prescription pharmaceuticals is subject to governmental control. Significant changes in the healthcare system in the United States or elsewhere, including changes resulting from the implementation of the Medicare prescription drug coverage legislation and adverse trends in third-party reimbursement programs, could limit our ability to raise capital and successfully commercialize our product candidates.
 
In particular, the Medicare Prescription Drug Improvement and Modernization Act of 2003 established a new Medicare prescription drug benefit. The prescription drug program and future amendments or regulatory interpretations of the legislation could affect the prices we are able to charge for any products we develop and sell for use by Medicare beneficiaries and could also cause third-party payors other than the federal government, including the states under the Medicaid program, to discontinue coverage for any products we develop or to lower reimbursement amounts that they pay. The legislation changed the methodology used to calculate reimbursement for drugs that are administered in physicians’ offices in a manner intended to reduce the amount that is subject to reimbursement. In addition, the Medicare prescription drug benefit program that took effect in January 2006 directed the Secretary of Health and Human Services to contract with procurement organizations to purchase physician- administered drugs from manufacturers and provided physicians with the option to obtain drugs through these organizations as an alternative to purchasing from manufacturers, which some physicians may find advantageous. Because we have not received marketing approval or established a price for any product, it is difficult to predict how this new legislation will affect us, but the legislation generally is expected to constrain or reduce reimbursement for certain types of drugs.


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Further federal, state and foreign healthcare proposals and reforms are likely. While we cannot predict the legislative or regulatory proposals that will be adopted or what effect those proposals may have on our business, including the future reimbursement status of any of our product candidates, the announcement or adoption of such proposals could have an adverse effect on potential revenues from product candidates that we may successfully develop.
 
WE HAVE NO MANUFACTURING CAPACITY AND LIMITED MARKETING INFRASTRUCTURE AND EXPECT TO BE HEAVILY DEPENDENT UPON THIRD PARTIES TO MANUFACTURE AND MARKET APPROVED PRODUCTS.
 
We currently have no manufacturing facilities for either clinical trial or commercial quantities of any of our product candidates and currently have no plans to obtain additional facilities. To date, we have obtained the limited quantities of drug product required for preclinical and clinical trials from contract manufacturing companies. We intend to continue using contract manufacturing arrangements with experienced firms for the supply of material for both clinical trials and any eventual commercial sale.
 
We will depend upon third parties to produce and deliver products in accordance with all FDA and other governmental regulations. We may not be able to contract with manufacturers who can fulfill our requirements for quality, quantity and timeliness, or be able to find substitute manufacturers, if necessary. The failure by any third party to perform their obligations in a timely fashion and in accordance with the applicable regulations may delay clinical trials, the commercialization of products, and the ability to supply product for sale. In addition, any change in manufacturers could be costly because the commercial terms of any new arrangement could be less favorable and because the expenses relating to the transfer of necessary technology and processes could be significant.
 
MDS Nordion has supplied Altropane to us since 2001. We are highly dependent upon MDS Nordion. Under the terms of our agreement, which currently expires on December 31, 2009, MDS Nordion manufactures the Altropane molecular imaging agent for our clinical trials. We do not presently have arrangements with any other suppliers in the event that MDS Nordion is unable or unwilling to manufacture Altropane for us. We could encounter a significant delay before another supplier could manufacture Altropane for us due to the time required to establish a cGMP manufacturing process for Altropane. We hope to sign an extension with MDS Nordion before December 31, 2009 but there can be no assurance that we will be able to or that the terms will be acceptable. We do not have a manufacturing agreement relating to the commercial production of Altropane with MDS Nordion or any other manufacturer. We can provide no assurances that such an agreement will be executed on acceptable terms.
 
We currently have a limited marketing infrastructure. In order to earn a profit on any future product, we will be required to invest in the necessary sales and marketing infrastructure or enter into collaborations with third parties with respect to executing sales and marketing activities. We may encounter difficulty in negotiating sales and marketing collaborations with third parties on favorable terms for us. Most of the companies who can provide such services are financially stronger and more experienced in selling pharmaceutical products than we are. As a result, they may be in a position to negotiate an arrangement that is more favorable to them. We could experience significant delays in marketing any of our products if we are required to internally develop a sales and marketing organization or establish collaborations with a partner. There are risks involved with establishing our own sales and marketing capabilities. We have no experience in performing such activities and could incur significant costs in developing such a capability.
 
USE OF THIRD PARTY MANUFACTURERS MAY INCREASE THE RISK THAT WE WILL NOT HAVE ADEQUATE SUPPLIES OF OUR PRODUCT CANDIDATES.
 
Reliance on third party manufacturers entails risks to which we would not be subject if we manufactured product candidates or products ourselves, including:
 
  •  Reliance on the third party for regulatory compliance and quality assurance;
 
  •  The possible breach of the manufacturing agreement by the third party; and


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  •  The possible termination or nonrenewal of the agreement by the third party, based on its own business priorities, at a time that is costly or inconvenient for us.
 
If we are not able to obtain adequate supplies of our product candidates and any approved products, it will be more difficult for us to develop our product candidates and compete effectively. Our product candidates and any products that we successfully develop may compete with product candidates and products of third parties for access to manufacturing facilities. Our contract manufacturers are subject to ongoing, periodic, unannounced inspection by the FDA and corresponding state and foreign agencies or their designees to ensure strict compliance with cGMP regulations and other governmental regulations and corresponding foreign standards. We cannot be certain that our present or future manufacturers will be able to comply with cGMP regulations and other FDA regulatory requirements or similar regulatory requirements outside the United States. We do not control compliance by our contract manufacturers with these regulations and standards. Failure of our third party manufacturers or us to comply with applicable regulations could result in sanctions being imposed on us, including fines, injunctions, civil penalties, failure of regulatory authorities to grant marketing approval of our product candidates, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of product candidates or products, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect supplies of our product candidates and products.
 
Risks Related to Employees and Growth
 
IF WE ARE UNABLE TO RETAIN OUR KEY PERSONNEL AND/OR RECRUIT ADDITIONAL KEY PERSONNEL IN THE FUTURE, THEN WE MAY NOT BE ABLE TO OPERATE EFFECTIVELY.
 
Our success depends significantly upon our ability to attract, retain and motivate highly qualified scientific and management personnel who are able to formulate, implement and maintain the operations of a biotechnology company such as ours. We consider retaining Peter Savas, our Chairman and Chief Executive Officer and Kenneth L. Rice, Jr., our Executive Vice President Finance and Administration and Chief Financial Officer to be key to our efforts to develop and commercialize our product candidates. The loss of the service of these key executives may significantly delay or prevent the achievement of product development and other business objectives. We do not presently carry key person life insurance on any of our scientific or management personnel.
 
We currently outsource most of our research and development, preclinical and clinical activities. If we decide to increase our internal research and development capabilities for any of our technologies, we may need to hire additional key management and scientific personnel to assist the limited number of employees that we currently employ. There is significant competition for such personnel from other companies, research and academic institutions, government entities and other organizations. If we fail to attract such personnel, it could have a significant negative effect on our ability to develop our technologies.
 
Risks Related to our Stock
 
OUR STOCK PRICE MAY CONTINUE TO BE VOLATILE AND CAN BE AFFECTED BY FACTORS UNRELATED TO OUR BUSINESS AND OPERATING PERFORMANCE.
 
The market price of our common stock has in the past, and may continue to fluctuate significantly in response to factors that are beyond our control. The stock market in general periodically experiences significant price and volume fluctuations. The market prices of securities of pharmaceutical and biotechnology companies have been volatile, and have experienced fluctuations that often have been unrelated or disproportionate to the operating performance of these companies. These broad market fluctuations could result in significant fluctuations in the price of our common stock, which could cause a decline in the value of your investment. The market price of our common stock may be influenced by many factors, including:
 
  •  Announcements of technological innovations or new commercial products by our competitors or us;
 
  •  Announcements in the scientific and research community;
 
  •  Developments concerning proprietary rights, including patents;


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  •  Delay or failure in initiating, conducting, completing or analyzing clinical trials or problems relating to the design, conduct or results of these trials;
 
  •  Announcement of FDA approval or non-approval of our product candidates or delays in the FDA review process;
 
  •  Developments concerning our collaborations;
 
  •  Publicity regarding actual or potential medical results relating to products under development by our competitors or us;
 
  •  Failure of any of our product candidates to achieve commercial success;
 
  •  Our ability to manufacture products to commercial standards;
 
  •  Conditions and publicity regarding the life sciences industry generally;
 
  •  Regulatory developments in the United States and foreign countries;
 
  •  Changes in the structure of health care payment systems;
 
  •  Period-to-period fluctuations in our financial results or those of companies that are perceived to be similar to us;
 
  •  Departure of our key personnel;
 
  •  Future sales of our common stock;
 
  •  Investors’ perceptions of us, our products, the economy and general market conditions;
 
  •  Differences in actual financial results versus financial estimates by securities analysts and changes in those estimates; and
 
  •  Litigation.
 
ITEM 1B.   Unresolved Staff Comments.
 
Not applicable.
 
ITEM 2.   Properties.
 
Our corporate office is located in Hopkinton, Massachusetts. We lease approximately 16,000 square feet of office space which expires in 2011.
 
We also lease office space in Boston, Massachusetts pursuant to a lease that expires in 2012. We do not occupy this space. We have entered into two sublease agreements covering all 6,600 square feet under our lease through the expiration of such lease.
 
We believe that our existing facilities are adequate for their present and anticipated purposes, except that additional facilities will be needed if we elect to expand our space to include laboratory and/or manufacturing activities.
 
ITEM 3.   Legal Proceedings.
 
We are subject to legal proceedings in the normal course of business. We are not currently a party to any material legal proceedings.
 
ITEM 4.   Submission of Matters to a Vote of Security Holders.
 
Not Used.


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Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities.
 
Market Information
 
Our common stock trades on the Pink Sheets OTC Market under the symbol ALSE.PK. Prior to May 8, 2009, our common stock was traded on the NASDAQ Capital Market under the symbol ALSE. Prior to June 7, 2007, our common stock was traded on the NASDAQ Capital Market under the symbol BLSI.
 
(CHART)
 
The following table sets forth the high and low per share sales prices for our common stock for each of the quarters in the period beginning January 1, 2008 through December 31, 2009 as reported on the NASDAQ Capital Market and/or the Pink Sheets OTC Market.
 
                 
Quarter Ended
  High     Low  
 
March 31, 2008
  $ 3.09     $ 2.15  
June 30, 2008
  $ 2.94     $ 1.95  
September 30, 2008
  $ 3.00     $ 2.05  
December 31, 2008
  $ 2.50     $ 0.92  
March 31, 2009
  $ 1.88     $ 0.49  
June 30, 2009
  $ 1.18     $ 0.55  
September 30, 2009
  $ 1.01     $ 0.51  
December 31, 2009
  $ 0.75     $ 0.19  
 
Holders
 
As of March 22, 2010, there were approximately 2,800 holders of record of our common stock. As of March 22, 2010, there were approximately 8,100 beneficial holders of our common stock.
 
Dividends
 
We have not paid or declared any cash dividends on our common stock and do not expect to pay cash dividends on our common stock in the foreseeable future.


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Item 6.   Selected Consolidated Financial Data.
 
The selected consolidated financial data set forth below with respect to our consolidated statement of operations for each of the years in the three-year period ended December 31, 2009 and our consolidated balance sheets as of December 31, 2009 and 2008 are derived from and qualified by reference to our audited consolidated financial statements and the related notes thereto found at “Item 8. Financial Statements and Supplementary Data” herein. The consolidated statement of operations data for each of the years ended December 31, 2006 and 2005 and the consolidated balance sheet data as of December 31, 2007, 2006 and 2005 are derived from our audited consolidated financial statements not included in this Annual Report on Form 10-K. The selected consolidated financial data set forth below should be read in conjunction with and is qualified in its entirety by our audited consolidated financial statements and related notes thereto found at “Item 8. Financial Statements and Supplementary Data” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” which are included elsewhere in this Annual Report on Form 10-K.
 
                                         
    Year Ended December 31,  
    2009     2008     2007     2006     2005  
 
Statement of Operations Data
                                       
Revenues
  $     $     $     $     $  
Operating expenses
    8,325,982       18,710,812       18,881,125       26,434,736       11,647,984  
Net loss
    (10,776,937 )     (20,847,459 )     (19,548,348 )     (26,355,243 )     (11,501,442 )
Accrual of preferred stock dividends and modification of warrants held by preferred stock stockholders
                            (715,515 )
Net loss attributable to common stockholders
    (10,776,937 )     (20,847,459 )     (19,548,348 )     (26,355,243 )     (12,216,957 )
Basic and diluted net loss per share attributable to common stockholders
  $ (0.46 )   $ (1.00 )   $ (1.04 )   $ (1.59 )   $ (1.03 )
Weighted average number of common shares outstanding
    23,361,458       20,883,066       18,874,070       16,525,154       11,806,153  
Balance Sheet Data
                                       
Cash and cash equivalents
  $ 314,964     $ 73,974     $ 2,933,292     $ 1,508,665     $ 578,505  
Marketable securities
                1,240,543             8,750,832  
Total assets
    790,815       845,250       5,623,677       2,368,887       10,515,488  
Working capital (deficit) (excludes restricted cash and restricted marketable securities)
    (4,535,951 )     (4,623,816 )     1,421,887       (16,853,334 )     7,466,080  
Long-term debt and accrued interest payable
    38,212,718       35,769,464       24,075,527              
Stockholders’(deficit) equity
  $ (47,509,322 )   $ (40,013,361 )   $ (22,414,471 )   $ (16,571,907 )   $ 7,891,306  


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Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
Our management’s discussion and analysis of our financial condition and results of operations include the identification of certain trends and other statements that may predict or anticipate future business or financial results that are subject to important factors that could cause our actual results to differ materially from those indicated. See Item 1A, “Risk Factors.”
 
Overview
 
Description of Company
 
We are a biotechnology company focused on the development of therapeutic and diagnostic products primarily for disorders in the central nervous system, or CNS. Our clinical and preclinical product candidates are based on three proprietary technology platforms:
 
  •  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;
 
  •  Regenerative therapeutics program, primarily focused on nerve repair and restoring movement and sensory function in patients who have had significant loss of CNS function resulting from trauma such as spinal cord injury, or SCI, stroke, and optic nerve damage utilizing technology referred to as axon regeneration.
 
At December 31, 2009, we were considered a “development stage enterprise” as defined in ASC 915, Development Stage Entities (“ASC 915”) (formerly SFAS No. 7, Accounting and Reporting by Development Stage Enterprises), and will continue to be so until we commence commercial operations. The development stage is from October 16, 1992 (inception) through December 31, 2009.
 
As of December 31, 2009, we have experienced total net losses since inception of approximately $203,969,000, stockholders’ deficit of approximately $47,509,000 and a net working capital deficit of approximately $4,536,000. The cash and cash equivalents available at December 31, 2009 will not provide sufficient working capital to meet our anticipated expenditures for the next twelve months. At March 22, 2010, we had cash and cash equivalents of approximately $130,000 which combined with our ability to control certain costs, including those related to clinical trial programs, preclinical activities, and certain general and administrative expenses will enable us to meet our anticipated cash expenditures into April, 2010. We must immediately raise additional funds in order to continue operations and to fund the estimated $34 million of development costs related to the Altropane POET-2 program. This funding is not available at present and there can be no assurance that such funds will be available on acceptable terms if at all.
 
In order to continue as a going concern, we must immediately raise additional funds through one or more of the following: a debt financing, an equity offering or a collaboration, merger, acquisition or other transaction with one or more pharmaceutical or biotechnology companies. We are currently engaged in fundraising efforts. There can be no assurance that we will be successful in our fundraising efforts or that additional funds will be available on acceptable terms, if at all. We also cannot be sure that we will be able to obtain additional credit from, or effect additional sales of debt or equity securities to the Purchasers as described in Note 4 to our consolidated financial statements. If we are unable to raise additional or sufficient capital, or if we violate a debt covenant or default under the March 2008 Amended Purchase Agreement of convertible promissory notes, or the June 2008 Purchase Agreement as described in Note 4 to our consolidated financial statements we will need to cease operations or reduce, cease or delay one or more of our research or development programs and/or adjust its current business plan and in any such event may not be able to continue as a going concern. Additionally, our common stock was delisted from trading on the NASDAQ Capital Market as a result of our failure to meet continued listing requirements of NASDAQ. On May 8, 2009 we began trading on the Pink Sheets OTC Market. This delisting has had an adverse affect on our ability to


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obtain future financing and could continue to adversely impact our stock price and the liquidity of our common stock.
 
In connection with the common stock financing completed by us in March 2005, or the March 2005 Financing, we agreed with the purchasers in such financing, including Robert Gipson, Thomas Gipson, and Arthur Koenig, or the March 2005 Investors, that, subject to certain exceptions, we would not issue any shares of our common stock at a per share price less than $2.50 without the prior consent of the March 2005 Investors holding at least a majority of the shares issued in the March 2005 Financing. On March 22, 2010, the closing price of our common stock was $.21. The failure to receive the requisite waiver or consent of the March 2005 Investors could have the effect of delaying or preventing the consummation of a financing by us should the price per share in such financing be set at less than $2.50.
 
Our ability to continue to advance our clinical programs, including the development of Altropane and Cethrin, is affected by the availability of financial resources to fund each program. Financial considerations have caused us to modify planned development activities for our clinical programs and we have decided to suspend development of our preclinical programs until we are able to secure additional working capital. If we are not able to raise additional capital, we will not have sufficient funds to complete the clinical trial programs for the Altropane molecular imaging agent or Cethrin.
 
In order to effect an acquisition, we may need additional financing. We cannot be certain that any such financing will be available on terms favorable or acceptable to us, or at all. If we raise additional funds through the issuance of equity, equity-related or debt securities, these securities may have rights, preferences or privileges senior to those of the rights of our common stockholders, who would then experience dilution. There can be no assurance that we will be able to identify or successfully complete any acquisitions.
 
Product Development
 
Molecular Imaging Program
 
The Altropane molecular imaging agent is being developed for the differential diagnosis of PS, including PD, and non-PS in patients with an upper extremity tremor. In July 2007, we completed enrollment in a study that optimized Altropane’s image acquisition protocol which we believe will enhance Altropane’s commercial use. After a series of discussions with the U.S. Food and Drug Administration, or FDA, and our expert advisors, the POET-2 program was designed as a two-part Phase III program using the optimized Altropane image acquisition protocol. The first part of the program enrolled 54 subjects in a multi-center clinical study to acquire a set of Altropane images which will be used to train the expert readers, as is the customary process for clinical trials of molecular imaging agents. Enrollment in the first part of POET-2 was completed in January 2009. In April, 2009 we reached agreement with the FDA under the Special Protocol Assessment, or SPA, process for the second part of the Phase III clinical trial program of Altropane. A SPA is a process by which sponsors and the FDA reach an agreement on the size, design and analysis of clinical trials that will form the primary basis of approval. The Phase III program is designed to confirm the diagnostic utility of the agent in anticipation of drug registration. The second portion of the Phase III, POET-2 program consists of two clinical trials in up to 480 subjects in total to be conducted in parallel at up to 40 medical facilities throughout the US. The subjects to be tested will be 40-80 years of age and have had a tremor in their hand(s) or arm(s) for less than three years. Each subject will be assessed by a general neurologist, an Altropane imaging procedure and a Movement Disorder Specialist, or MDS considered the “gold standard”. The success of the trial will be determined by measuring the diagnostic efficacy of the neurologist diagnosis compared with the diagnosis determined by the Altropane scan versus the MDS gold standard diagnosis. Based on the trial design and scope covered by the Special Protocol Assessment Agreement for POET-2, we estimate that the total costs to complete the POET-2 program and prepare and submit a New Drug Application, or NDA for Altropane in the U.S. will be approximately $34 million. This funding is not available at present and there can be no assurance that such funds will be available on acceptable terms if at all.
 
We believe in the current environment that, due to their proximity to commercialization and return on investment, late stage development programs may continue to be of significant interest to potential partners and investors. To maximize the value of our molecular imaging program, we are focusing on obtaining the


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funding necessary to execute the Altropane Phase III registration program. We are pursuing the capital necessary to enable us to advance the Altropane program through our own means. In parallel, we are seeking to partner our molecular imaging program with a firm or firms with the resources necessary for the completion of the Phase III clinical program, for the manufacturing and supply of Altropane, and for the launch and commercialization of Altropane. We can provide no assurances that a partnership transaction will occur. We believe that the expansion of the program into other indications such as DLB and other countries including those in Europe could increase the value of the program for the partner and us. All of these activities require additional funding and as such are proceeding, if at all, only as available resources permit. There can be no assurance that the required funding to advance the Altropane program will be available on acceptable terms if at all.
 
Regenerative Therapeutics Program — Nerve Repair
 
Our nerve repair program is focused on restoring movement and sensory function in patients who have had significant loss of CNS function resulting from traumas such as SCI, stroke, traumatic brain injury, or TBI, and optic nerve damage. Our efforts are aimed at the use of proprietary regenerative drugs and/or methods to induce nerve fibers to regenerate and form new connections that restore compromised abilities. Licensing or acquiring the rights to the technologies of complementary approaches for nerve repair is part of our strategy of creating competitive advantages by assembling a broad portfolio of related technologies and intellectual property.
 
Our lead product candidate for nerve repair during early 2009 was Cethrin. Cethrin contains a proprietary protein which studies indicate inactivates a key enzyme called Rho resulting in the promotion of nerve repair. Cethrin was being investigated to determine its effectiveness in facilitating the restoration of movement and sensory function following a major injury to the spinal cord. After an SCI, approximately two-thirds of patients undergo decompression/stabilization surgery. During surgery, Cethrin is delivered in a single application to the injured region of the spinal cord using a fibrin sealant as a carrier.
 
In December 2006, we entered into a license agreement, or the Cethrin License, with BioAxone Therapeutic Inc., a Canadian corporation, or BioAxone, pursuant to which we were granted an exclusive, worldwide license to develop and commercialize specified compounds including, but not limited to, Cethrin, as further defined in the Cethrin License. The Cethrin License called for us to conduct development and commercialization activities of Cethrin and to pay certain pre-commercialization milestones and on-going royalties on sales of Cethrin when and if approved for marketing. The Cethrin License provided for a series of performance milestones any of which, if not achieved by us in the timeframes agreed in the Cethrin License, could form the basis of a claim for compensation to BioAxone and possibly the termination of some or all of our rights under the Cethrin License. The Cethrin License further provided us with relief from our performance obligations in the event that such performance is effectively rendered impossible due to safety or efficacy issues with Cethrin during its development. Additionally, the Cethrin License provided a warranty that all of the clinical materials provided to us by BioAxone in connection with the Cethrin License were manufactured in accordance with current Good Manufacturing Practices, or cGMP.
 
Cethrin License Dispute
 
In January 2009, the Company received notice from BioAxone alleging that we had failed to meet one of the performance milestones in the Cethrin License that was required to have been met on or before January 1, 2009. This notice purported to terminate the Cethrin License, sought payment of a $2,000,000 penalty from us to BioAxone for such purported failure and requested that we transfer to BioAxone our rights to the Master Cell Bank (as defined in the Cethrin License) and all licensed intellectual property under the Cethrin License.
 
We believed that the purported termination was without effect. Our performance obligations under the Cethrin License were specifically excused in the event that a safety issue renders such performance impossible. Our prior discovery that the Master Cell Bank from which Cethrin is manufactured may contain an unintended animal derived contaminant rendering it not in compliance with the requirements of cGMP, represented such a


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safety risk for Cethrin. We notified BioAxone of the contamination issue and our position that the purported termination and demand for payment is considered to be without effect.
 
In April 2009 we announced that we entered into an Amendment Agreement, or the Amendment, with BioAxone Therapeutic, Inc., pursuant to which the Cethrin License, was amended. The Amendment replaces all of the pre-commercial financial and performance-related milestones contained in the Cethrin License with a formula-based approach to sharing of any and all income under a sub-license. The Amendment establishes provisions under which we would use reasonable commercial efforts to enter into a Sub-license Agreement for the technology covered by the Cethrin License. The Amendment also provides for the mutual release of claims that each party had previously alleged against the other under the Cethrin License. During 2009 our efforts were focused on identifying and negotiating with appropriate sublicensing candidates. Under the terms of the Amendment Agreement, our right to sublicense Cethrin has expired and all rights granted to us in the License Agreement have reverted to BioAxone. The Amendment Agreement provides that, in the event BioAxone is able to license or partner the Cethrin technology in the future, we are entitle to receive a 30% share of any and all proceeds received by BioAxone connected with such transaction. It is unclear if or when BioAxone will license the Cethrin technology to a third party, so we may not realize any revenue at all under the Amendment Agreement.
 
Sales and Marketing and Government Regulation
 
To date, we have not marketed, distributed or sold any products and, with the exception of Altropane and Cethrin, all of our other product candidates are in preclinical development. Our product candidates must undergo a rigorous regulatory approval process which includes extensive preclinical and clinical testing to demonstrate safety and efficacy before any resulting product can be marketed. The FDA has stringent standards with which we must comply before we can test our product candidates in humans or make them commercially available. Preclinical testing and clinical trials are lengthy and expensive and the historical rate of failure for product candidates is high. Clinical trials require sufficient patient enrollment which is a function of many factors. Delays and difficulties in completing patient enrollment can result in increased costs and longer development times. The foregoing uncertainties and risks limit our ability to estimate the timing and amount of future costs that will be required to complete the clinical development of each program. In addition, we are unable to estimate when material net cash inflows are expected to commence as a result of the successful completion of one or more of our programs.
 
Research and Development
 
Following is information on the direct research and development costs incurred on our principal scientific technology programs currently under development. These amounts do not include research and development employee and related overhead costs which total approximately $30,549,000 on a cumulative basis.
 
                         
    For the Three
    For the Year
    From Inception
 
    Months Ended
    Ended
    (October 16, 1992) to
 
Program
  December 31, 2009     December 31, 2009     December 31, 2009  
 
Molecular imaging
  $ (147,000 )   $ 480,000     $ 27,131,000  
Regenerative therapeutics
  $ 28,000     $ 334,000     $ 28,920,000  
Neurodegenerative disease
  $     $ 20,000     $ 1,131,000  
 
Estimating costs and time to complete development of a specific program or technology is difficult due to the uncertainties of the development process and the requirements of the FDA which could require additional clinical trials or other development and testing. Results of any testing could lead to a decision to change or terminate development of a technology, in which case estimated future costs could change substantially. In the event we were to enter into a licensing or other collaborative agreement with a corporate partner involving sharing or funding by such corporate partner of development costs, the estimated development costs incurred by us could be substantially less than estimated. Additionally, research and development costs are extremely difficult to estimate for early-stage technologies due to the fact that there are generally less comprehensive data available for such technologies to determine the development activities that would be required prior to the filing of a New Drug Application, or NDA. As a result, we cannot reasonably estimate the cost and the date of


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completion for any technology that is not at least in Phase III clinical development due to the uncertainty regarding the number of required trials, the size of such trials and the duration of development. Even in Phase III clinical development, estimating the cost and the filing date for an NDA can be challenging due to the uncertainty regarding the number and size of the required Phase III trials. Based on the trial design and scope covered by the Special Protocol Assessment Agreement for POET-2, we estimate that the total costs to complete the POET-2 program and prepare and submit an NDA for Altropane in the U.S. will be approximately $34 million.
 
Critical Accounting Policies and Estimates
 
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements which have been prepared by us in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Our estimates include those related to marketable securities, research contracts, the fair value and classification of financial instruments, our lease accrual and stock-based compensation. We base our estimates on historical experience and on various other assumptions that we believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
 
Going Concern Basis of Accounting
 
The consolidated financial statements have been prepared on the basis that we will continue as a going concern. We have incurred significant operating losses and negative cash flows from operating activities since our inception. As of December 31, 2009, these conditions raised substantial doubt as to our ability to continue as a going concern. There can be no assurance that we will be successful in our efforts to raise additional capital or that we will be able to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability of the carrying amount of the recorded assets or the amount of liabilities that might result from the outcome of this uncertainty. In the event that we concluded that we would not be able to continue as a going concern, we would potentially present our financial statements on a liquidation basis of accounting.
 
Research Contracts
 
We regularly enter into contracts with third parties to perform research and development activities on our behalf in connection with our scientific technologies. Costs incurred under these contracts are recognized ratably over the term of the contract or based on actual enrollment levels which we believe corresponds to the manner in which the work is performed. Clinical trial, contract services and other outside costs require that we make estimates of the costs incurred in a given accounting period and record accruals at period end as the third party service periods and billing terms do not always coincide with our period end. We base our estimates on our knowledge of the research and development programs, services performed for the period, past history for related activities and the expected duration of the third party service contract, where applicable.
 
Fair Value and Classification of Financial Instruments
 
Historically, we have issued warrants to purchase shares of our common stock in connection with our debt and equity financings. We record each of the securities issued on a relative fair value basis up to the amount of the proceeds received. We estimate the fair value of the warrants using the Black-Scholes valuation model. The Black-Scholes valuation model is dependent on a number of variables and estimates including interest rates, dividend yield, volatility and the expected term of the warrants. Our estimates are based on market interest rates at the date of issuance, our past history for declaring dividends, our estimated stock price volatility and the contractual term of the warrants. The value ascribed to the warrants in connection with debt offerings is considered a cost of capital and amortized to interest expense over the term of the debt.


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We have, at certain times, issued preferred stock and notes, which were convertible into common stock at a discount from the common stock market price at the date of issuance. The amount of the discount associated with such conversion rights represents an incremental yield, or “beneficial conversion feature” that is recorded when the consideration allocated to the convertible security, divided by the number of common shares into which the security converts, is below the fair value of the common stock at the date of issuance of the convertible instrument.
 
A beneficial conversion feature associated with the preferred stock is recognized as a return to the preferred stockholders and represents a non-cash charge in the determination of net loss attributable to common stockholders. The beneficial conversion feature is recognized in full immediately if there is no redemption date for the preferred stock, or over the period of issuance through the redemption date, if applicable. A beneficial conversion feature associated with debentures, notes or other debt instruments is recognized as a discount to the debt and is amortized as additional interest expense using the effective interest method over the remaining term of the debt instrument.
 
Lease Accrual
 
We are required to make significant judgments and assumptions when estimating the liability for our net ongoing obligations under our amended lease agreement relating to our former executive offices located in Boston, Massachusetts. We use a discounted cash-flow analysis to calculate the amount of the liability. We applied a discount rate of 15% representing our best estimate of our credit-adjusted risk-free rate. The discounted cash-flow analysis is based on management’s assumptions and estimates of our ongoing lease obligations, and income from sublease rentals, including estimates of sublease timing and sublease rental terms. It is possible that our estimates and assumptions will change in the future, resulting in additional adjustments to the amount of the estimated liability, and the effect of any adjustments could be material. We review our assumptions and judgments related to the lease amendment on at least a quarterly basis, until the outcome is finalized, and make whatever modifications we believe are necessary, based on our best judgment, to reflect any changes in circumstances.
 
Stock-Based Compensation
 
We measure compensation costs for all share-based awards at fair value on grant date and recognize it as expense over the requisite service period or expected performance period of the award. We estimate the fair value of stock-based awards using the Black-Scholes valuation model on the grant date. The Black-Scholes valuation model requires us to make certain assumptions and estimates concerning the expected term of the awards, the rate of return of risk-free investments, our stock price volatility, and our anticipated dividends. If any of our estimates or assumptions prove incorrect, our results could be materially affected.
 
Marketable Securities
 
From time to time, we invest in marketable securities. These marketable securities consist exclusively of investments in United States agency bonds and corporate debt obligations. These marketable securities are adjusted to fair value on the Consolidated Balance Sheet through other comprehensive income. If a decline in the fair value of a security is considered to be other than temporary, the investment is written down to a new cost basis and the unrealized loss is removed from accumulated other comprehensive loss and recorded in the Consolidated Statements of Operations. We evaluate whether a decline in fair value is other than temporary based on factors such as the significance of the decline, the duration of time for which the decline has been in existence and our ability and intent to hold the security to maturity. To date, we have not recorded any other than temporary impairments related to our marketable securities. These marketable securities are classified as current assets because they are highly liquid and are available, as required, to meet working capital and other operating requirements.


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Results of Operations
 
Years Ended December 31, 2009 and 2008
 
Global market and economic conditions have been, and continue to be, disruptive and volatile. In particular, the cost of raising money in the debt and equity markets has increased substantially while the availability of funds from those markets has diminished significantly. Recent distress in the financial markets has adversely affected our ability to raise capital. We must immediately raise additional funds in order to continue operations.
 
Our net loss and net loss attributable to common stockholders was $10,776,937 during the year ended December 31, 2009 as compared with $20,847,459 during the year ended December 31, 2008. Net loss attributable to common stockholders totaled $0.46 per share during 2009 as compared with $1.00 per share during 2008. The decrease in net loss in 2009 was primarily due to lower operating expenses resulting from our decision to significantly curtail operations pending additional funding. The decrease in net loss attributable to common stockholders on a per share basis in 2009 was primarily due to the decrease in net loss in 2009 and an increase in weighted average shares outstanding of approximately 2,478,000 shares in 2009, which was primarily the result of common stock issuances during 2009.
 
Research and development expenses were $3,702,781 during the year ended December 31, 2009 as compared with $10,851,844 during the year ended December 31, 2008. The decrease in 2009 was primarily attributable to our decision to scale back operations specifically resulting in (i) lower costs of approximately $4,254,000 associated with our nerve repair program, primarily related to Cethrin clinical costs including our Phase I/IIa trial and suspended preparations for our Phase IIb trial; (ii) lower costs of approximately $1,375,000 associated with our molecular imaging program primarily related to decreased Altropane clinical costs and (iii) lower compensation and related costs of approximately $1,332,000 primarily related to lower headcount. Subject to our ability to raise additional capital, we are currently planning for an increase in our research and development expenses over the next twelve months although there may be significant fluctuations on a quarterly basis. This expected increase is primarily related to higher Altropane clinical costs. Our current working capital constraints may limit our planned expenditures.
 
General and administrative expenses were $4,623,201 during the year ended December 31, 2009 as compared with $7,858,968 during the year ended December 31, 2008. The decrease in 2009 was primarily related to (i) lower compensation and related costs of approximately $1,974,000 primarily related to decreased headcount; (ii) lower commercialization and communication costs of approximately $532,000 and (iii) lower legal, patent and consulting costs of approximately $459,000 primarily related to slowdowns in operations and resolution of the dispute with BioAxone. We currently anticipate that our general and administrative expenses will decrease over the next twelve months primarily related to reduced headcount, although there may be significant fluctuations on a quarterly basis.
 
Interest expense totaled $2,523,095 during the year ended December 31, 2009 as compared to $2,215,663 during the year ended December 31, 2008. The increase in the 2009 period was primarily attributable to the issuance of $10,000,000 in convertible promissory notes in 2008 which bear interest at the rate of 5% per annum and the issuance of $1,350,000 in promissory notes in 2009 which bear interest at the rate of 7% per annum.
 
Investment income was $7,140 during the year ended December 31, 2009 as compared with investment income of $79,016 during the year ended December 31, 2008. The decrease in 2009 was primarily due to lower average cash, cash equivalent and marketable securities balances in 2009 than in 2008.
 
At December 31, 2009, we had net deferred tax assets of approximately $50,538,000 for which a full valuation allowance has been established. As a result of our concentrated efforts on research and development, we have a history of incurring net operating losses, or NOLs, and expect to incur additional net operating losses for the foreseeable future. Accordingly, we have concluded that it is more likely than not that the future benefits related to the deferred tax assets will not be realized and, therefore, we have provided a full valuation allowance for these assets. In the event we achieve profitability, these deferred tax assets may be available to offset future income tax liabilities and expense, subject to limitations that may occur from ownership changes under provisions of the Internal Revenue Code. In 1995 and 2005, we experienced a change in ownership as defined by Section 382 of the Internal Revenue Code. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain stockholders or public groups in the


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stock of a corporation by more than 50 percentage points over a three-year period. Since our formation, we have raised capital through the issuance of capital stock on several occasions which, combined with stockholders’ subsequent disposition of those shares, has resulted in two changes of control, as defined by Section 382. As a result of the 2005 ownership change, utilization of our NOLs is subject to an annual limitation under Section 382 determined by multiplying the value of our stock at the time of the ownership change by the applicable long-term tax-exempt rate resulting in an annual limitation amount of approximately $1,000,000. Any unused annual limitation may be carried over to later years, and the amount of the limitation may, under certain circumstances, be subject to adjustment if the fair value of our net assets are determined to be below or in excess of the tax basis of such assets at the time of the ownership change, and such unrealized loss or gain is recognized during the five-year period after the ownership change. Federal research and development tax credits were also impaired by the ownership change and were reduced accordingly.
 
Years Ended December 31, 2008 and 2007
 
Our net loss and net loss attributable to common stockholders was $20,847,459 during the year ended December 31, 2008 as compared with $19,548,348 during the year ended December 31, 2007. Net loss attributable to common stockholders totaled $1.00 per share during 2008 as compared with $1.04 per share during 2007. The increase in net loss in 2008 was primarily due an increase in interest expense. The decrease in net loss attributable to common stockholders on a per share basis in 2008 was primarily due to an increase in weighted average shares outstanding of approximately 2,009,000 shares in 2008, which was primarily the result of the conversion of notes payable into common stock in June 2007.
 
Research and development expenses were $10,851,844 during the year ended December 31, 2008 as compared with $10,475,158 during the year ended December 31, 2007. The increase in 2008 was primarily attributable to higher costs of approximately $1,165,000 associated with our nerve repair program, primarily related to Cethrin clinical costs including our Phase I/IIa trial and preparations for future clinical development. The increase was partially offset by (i) lower costs of approximately $337,000 associated with our molecular imaging program primarily related to our second generation technetium-based molecular imaging agent and (ii) lower compensation and related costs of approximately $309,000 primarily related to lower recruiting and temporary staffing costs in 2008.
 
General and administrative expenses were $7,858,968 during the year ended December 31, 2008 as compared with $8,405,967 during the year ended December 31, 2007. The decrease in 2008 was primarily related to (i) lower legal, patent and consulting costs of approximately $582,000 and (ii) lower commercialization and communication costs of approximately $157,000. The decrease was partially offset by higher compensation and related costs of approximately $306,000 primarily related to employee severance costs.
 
Interest expense totaled $2,215,663 during the year ended December 31, 2008 as compared to $876,071 during the year ended December 31, 2007. The increase in the 2008 period was attributable to the issuance of $10,000,000 and $25,000,000 in convertible promissory notes in 2008 and 2007, respectively that bear interest at the rate of 5% per annum and the related non-cash interest expense of approximately $621,000 related to the beneficial conversion features. In March 2007, we issued amended and restated notes which eliminated all outstanding principal and accrued interest due under notes previously issued in August 2006, October 2006 and February 2007. In June 2007, the $10,000,000 in amended and restated promissory notes was converted into 4,000,000 shares of common stock.
 
Investment income was $79,016 during the year ended December 31, 2008 as compared with investment income of $208,848 during the year ended December 31, 2007. The decrease in 2008 was primarily due to lower average cash, cash equivalent and marketable securities balances in 2008 than in 2007.
 
Liquidity and Capital Resources
 
Global market and economic conditions have been, and continue to be, disruptive and volatile. In particular, the cost of raising money in the debt and equity markets has increased substantially while the availability of funds from those markets has diminished significantly. Recent distress in the financial markets has adversely affected our ability to raise capital. We must immediately raise additional funds in order to continue operations.


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Net cash used for operating activities, primarily related to our net loss, totaled $8,060,298 in 2009 as compared to $14,983,246 in 2008. The decrease in net loss in 2009 is primarily related to reductions in R&D and G&A spending in 2009 totaling $10,384,830 partially offset by decreases in accounts payable and prepaid expenses totaling $3,194,158. There can be no assurances that the Company will be able to continue these payment terms. Net cash provided by investing activities totaled $76,476 in 2009 as compared to cash provided by investing activities of $1,121,387 in 2008. The change in investing activities is primarily associated with the sale of marketable securities used to fund operations. Net cash provided by financing activities totaled $8,224,812 in 2009 as compared to $11,002,541 in 2008. The decrease in 2009 primarily reflects the decrease in notes payable issued in 2009.
 
To date, we have dedicated most of our financial resources to the research and development of our product candidates, general and administrative expenses (including costs related to obtaining and protecting patents). Since inception, we have primarily satisfied our working capital requirements from the sale of our securities through private placements. These private placements have included the sale and issuance of preferred stock, common stock, promissory notes and convertible debentures.
 
A summary of financings completed during the three years ended March 31, 2010 is as follows:
 
             
Date
  Net Proceeds Raised     Securities or Debt Instrument Issued
 
March 2010
  $ 0.3 million     Promissory Note
February 2010
  $ 0.2 million     Promissory Note
January 2010
  $ 0.3 million     Promissory Note
December 2009
  $ 0.3 million     Promissory Note
November 2009
  $ 1.0 million     Common Stock
September 2009
  $ 0.7 million     Convertible Preferred Stock
August 2009
  $ 0.6 million     Convertible Preferred Stock
July 2009
  $ 0.6 million     Convertible Preferred Stock
June 2009
  $ 0.5 million     Convertible Preferred Stock
May 2009
  $ 1.0 million     Convertible Preferred Stock
April 2009
  $ 0.5 million     Convertible Preferred Stock
March 2009
  $ 1.0 million     Convertible Preferred Stock
February 2009
  $ 0.2 million     Common Stock
February 2009
  $ 1.0 million     Promissory Notes
January 2009
  $ 1.0 million     Common Stock
November 2008
  $ 1.0 million     Common Stock
June 2008
  $ 5.0 million     Convertible Promissory Notes
March 2008
  $ 5.0 million     Convertible Promissory Notes
August 2007
  $ 10.0 million     Convertible Promissory Notes
May 2007
  $ 6.0 million     Convertible Promissory Notes
March 2007
  $ 9.0 million     Convertible Promissory Notes
 
In the future, our working capital and capital requirements will depend on numerous factors, including the progress of our research and development activities, the level of resources that we devote to the developmental, clinical, and regulatory aspects of our technologies, and the extent to which we enter into collaborative relationships with pharmaceutical and biotechnology companies.
 
As of December 31, 2009, we have experienced total net losses since inception of approximately $203,969,000 , stockholders’ deficit of approximately $47,509,000 and a net working capital deficit of approximately $4,536,000. The cash and cash equivalents available at December 31, 2009 will not provide sufficient working capital to meet our anticipated expenditures for the next twelve months. At March 22, 2010, we had cash and cash equivalents of approximately $130,000 which combined with our ability to control certain costs, including those related to clinical trial programs, preclinical activities, and certain general and


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administrative expenses will enable us to meet our anticipated cash expenditures into April, 2010. We must immediately raise additional funds in order to continue operations.
 
In order to continue as a going concern, we will need to raise additional capital through one or more of the following: a debt financing, an equity offering, or a collaboration, merger, acquisition or other transaction with one or more pharmaceutical or biotechnology companies. We are currently engaged in fundraising efforts. There can be no assurance that we will be successful in our fundraising efforts or that additional funds will be available on acceptable terms, if at all. We also cannot be sure that we will be able to obtain additional credit from, or effect additional sales of debt or equity securities to certain of our existing investors (described below). If we are unable to raise additional or sufficient capital or if we violate a debt covenant or default under the March 2008 Amended Purchase Agreement or the June 2008 Purchase Agreement (described below) we may need to cease operations or reduce, cease or delay one or more of our research or development programs and/or adjust our current business plan and in any such event may not be able to continue as a going concern. Additionally, our common stock was delisted from trading on the NASDAQ Capital Market as a result of our failure to meet continued listing requirements of NASDAQ. On May 8, 2009 we began trading on the Pink Sheets OTC Market. This delisting could have an adverse affect on our ability to obtain future financing and could adversely impact our stock price and the liquidity of our common stock. See the risk factor entitled “Our common stock has been delisted from, the NASDAQ Capital Market.”
 
In connection with the common stock financing completed by us in March 2005, or the March 2005 Financing, we agreed with the purchasers in such financing, including Robert Gipson, Thomas Gipson, and Arthur Koenig, or the March 2005 Investors, that, subject to certain exceptions, we would not issue any shares of our common stock at a per share price less than $2.50 without the prior consent of the March 2005 Investors holding at least a majority of the shares issued in the March 2005 Financing. On March 22, 2010, the closing price of our common stock was $.21. The failure to receive the requisite waiver or consent of the March 2005 Investors could have the effect of delaying or preventing the consummation of a financing by us should the price per share in such financing be set at less than $2.50.
 
Convertible Notes Payable
 
In March 2007, we entered into a convertible promissory note purchase agreement, or the March 2007 Purchase Agreement, with Robert Gipson, Thomas Gipson and Arthur Koenig, referred to as the Purchasers and also the March 2007 Note Holders, pursuant to which we could borrow up to $15,000,000 from the March 2007 Note Holders prior to December 31, 2007. In March 2007, we issued convertible promissory notes to the March 2007 Note Holders in the aggregate principal amount of $9,000,000 pursuant to the March 2007 Purchase Agreement. Certain of the material terms of the convertible promissory notes are described below.
 
In May 2007, we amended and restated the March 2007 Purchase Agreement, or the May 2007 Amended Purchase Agreement, to (i) eliminate the requirement for the March 2007 Note Holders to make further advances under the March 2007 Purchase Agreement and (ii) add Highbridge International, LLC, or Highbridge, as a Purchaser. In May 2007, we issued a convertible promissory note to Highbridge in the aggregate principal amount of $6,000,000 pursuant to the May 2007 Amended Purchase Agreement.
 
In August 2007, we amended and restated the May 2007 Amended Purchase Agreement, or the August 2007 Amended Purchase Agreement, to (i) increase the amount we could borrow by $10,000,000 to $25,000,000 and (ii) add Ingalls & Snyder Value Partners LP, or ISVP, as a Purchaser. In August 2007, we issued a convertible promissory note to ISVP in the aggregate principal amount of $10,000,000 pursuant to the August 2007 Amended Purchase Agreement.
 
In March 2008, we amended and restated the August 2007 Amended Purchase Agreement, or the March 2008 Amended Purchase Agreement, to (i) increase the amount we could borrow by $5,000,000 to $30,000,000 and (ii) provide that we may incur up to an additional $5,000,000 of indebtedness from the Purchasers upon the same terms and conditions as the March 2008 Amended Purchase Agreement. In March 2008, we issued a convertible promissory note to Robert Gipson, or the March 2008 RG Note, in the aggregate principal amount of $5,000,000 pursuant to the March 2008 Amended Purchase Agreement.
 
The amounts borrowed by us under the March 2008 Amended Purchase Agreement bear interest at the rate of 5% per annum and may be converted, at the option of the Purchasers into (i) shares of our common stock at a


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conversion price per share of $2.50, (ii) the right to receive future royalty payments related to our molecular imaging products (including Altropane and Fluoratec) in amounts equal to 2% of our pre-commercial revenue related to such products plus 0.5% of future net sales of such products for each $1,000,000 of outstanding principal and interest that a Purchaser elects to convert into future payments, or (iii) a combination of (i) and (ii). Any outstanding notes that are not converted into our common stock or into the right to receive future payments will become due and payable by the earlier of December 31, 2010 or the date on which a Purchaser declares an event of default (as defined in the March 2008 Amended Purchase Agreement). However, each Purchaser is prohibited from effecting a conversion if at the time of such conversion the common stock issuable to such Purchaser, when taken together with all shares of common stock then held or otherwise beneficially owned by a Purchaser exceeds 19.9%, or 9.99% for Highbridge and ISVP, of the total number of issued and outstanding shares of our common stock immediately prior to such conversion unless and until our stockholders approve the conversion of all of the shares of common stock issuable thereunder.
 
In June 2008, we entered into a convertible promissory note purchase agreement, or the June 2008 Purchase Agreement, with Robert Gipson pursuant to which we could borrow up to $5,000,000. In June 2008, we issued a convertible promissory note to Robert Gipson, or the June 2008 RG Note, in the aggregate principal amount of $5,000,000 pursuant to the June 2008 Purchase Agreement. The terms of the June 2008 Purchase Agreement are consistent with those of the March 2008 Amended Purchase Agreement described above.
 
We are subject to certain debt covenants pursuant to the March 2008 Amended Purchase Agreement and the June 2008 Purchase Agreement, or Purchase Agreements. If we (i) fail to pay the principal or interest due under the Purchase Agreements, (ii) file a petition for action for relief under any bankruptcy or similar law or (iii) an involuntary petition is filed against us, all amounts borrowed under the Purchase Agreements may become immediately due and payable by us. In addition, without the consent of the Purchasers, we may not (i) create, incur or otherwise permit to be outstanding any additional indebtedness for money borrowed, (ii) declare or pay any cash dividend, or make a distribution on, repurchase, or redeem, any class of our stock, subject to certain exceptions or sell, lease, transfer or otherwise dispose of any of our material assets or property or (iii) dissolve or liquidate. In January 2010 the Purchasers agreed to amend the Purchase Agreements to allow us to make additional borrowings of up to $5,000,000 on terms acceptable to our Board of Directors.
 
Promissory Notes
 
In December 2009 we issued a promissory note to Robert Gipson in the amount of $350,000 and payable on demand. The Note bears interest at the rate of 7% per annum.
 
Convertible Preferred Stock
 
During 2009 the we completed the following sales of Series F Convertible Preferred Stock to Robert Gipson:
 
                 
    Number of Shares
       
Date of Issuance
  Issued     Gross Proceeds  
 
March 19, 2009
    20,000     $ 500,000  
March 31, 2009
    20,000       500,000  
April 16, 2009
    20,000       500,000  
May 12, 2009
    40,000       1,000,000  
June 10, 2009
    20,000       500,000  
July 9, 2009
    12,000       300,000  
July 23, 2009
    12,000       300,000  
August 11, 2009
    12,000       300,000  
August 26, 2009
    12,000       300,000  
September 10, 2009
    12,000       300,000  
September 28, 2009
    16,000       400,000  
                 
      196,000     $ 4,900,000  
                 


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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.
 
The terms of the Series F Stock contain provisions that may require redemption in circumstances that are beyond the Company’s control. Therefore, the shares have been recorded, net of issuance costs of approximately $25,000, as convertible, redeemable stock outside of permanent equity. The Series F Stock was recorded at fair value on the date of issuance. As of December 31, 2009, the Company recorded approximately $192,000 in accretion on the Series F Stock.
 
Common Stock
 
In November 2008, we completed a private placement with Robert Gipson of 543,478 shares of our common stock which raised $1,000,000 in gross proceeds. In connection with the November 2008 private placement, we also issued warrants to Mr. Gipson (the “November 2008 Warrants”) to purchase 543,478 additional shares of common stock that were exercisable at $1.84 per share between six months and two years after the closing. In connection with the private placement, we agreed with Mr. Gipson (the “Letter Agreement”) that if we sold shares of our common stock at a price below $1.84, subject to certain exceptions, prior to December 31, 2009, Mr. Gipson would be entitled to receive, for no additional consideration, additional shares of common stock and warrants in accordance with a pre-determined formula. In addition, Dawson James Securities, Inc., (“Dawson James”) in its capacity as agent for the private placement, was entitled to a warrant to purchase 38,043 shares of common stock (the “Agent Warrant”). The Agent Warrant had a term of five years and was exercisable at a price equal to $1.84. In February 2009, Dawson James gave up its right to the Agent Warrant.
 
In January 2009, we completed a private placement with Robert Gipson of 1,000,000 shares of its common stock which raised $1,000,000 in gross proceeds. In addition, we issued an additional 456,522 shares of our common stock to Mr. Gipson pursuant to a Letter Agreement. In connection with the January 2009 private placement, Mr. Gipson agreed to the cancellation of the November 2008 Warrants.


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In February 2009, we entered into a private placement with Cato Holding Company (“Cato”) of 200,000 shares of our common stock at a purchase price of $1.00 per share. In connection with the February 2009 private placement, we agreed with Cato that if we sell shares of our common stock, or securities convertible into common stock, prior to September 30, 2009, and the purchaser of such securities receives warrants to purchase additional shares of common stock (a “Qualified Financing”), subject to certain exceptions, Cato shall be entitled to receive, for no additional consideration, a warrant to purchase shares of common stock with the same terms and conditions as those provided to a purchaser in a Qualified Financing.
 
In November 2009, we entered into a private placement with Robert Gipson of 2,500,000 shares of our common stock which raised $1,000,000 in gross proceeds. In addition, in March 2010 we issued an additional 1,500,000 shares of our common stock to Mr. Gipson pursuant to a Letter Agreement.
 
Contractual Obligations and Commitments
 
As of December 31, 2009, our approximate future minimum contractual obligations were as follows:
 
                                         
    Payments Due by Period  
          Less Than One
    One to
    Three to Five
    More Than
 
Contractual Obligations
  Total     Year     Three Years     Years     Five Years  
 
Operating Lease Obligations(1)
  $ 1,247,000     $ 592,000     $ 655,000     $     $  
Convertible Notes Payable(2)
    34,880,000             34,880,000              
Other Contractual Obligations(3)
    29,000       19,000       10,000              
                                         
Total
  $ 36,156,000     $ 611,000     $ 35,545,000     $     $  
                                         
 
 
(1) Such amounts primarily consist of minimum rental payments for our Hopkinton, Massachusetts office lease through its expiration in 2011. In addition, we have an office lease in Boston, Massachusetts that expires in 2012 for which we have entered into two sublease agreements covering the entire leased space. Total rent expense under all of our leases was approximately $277,000 for the year ended December 31, 2009.
 
(2) Such amount was adjusted for the beneficial conversion features reducing the carrying values of the notes.
 
(3) Such amounts primarily reflect research and development commitments with third parties.
 
Recent Accounting Pronouncements
 
In April 2009, the Financial Accounting Standards Board, or FASB, issued FASB Accounting Standards Codification, or ASC, 825-10-65, “Interim Disclosures about Fair Value of Financial Instruments.” ASC 825-10-65 amends ASC 825-10 to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as annual financial statements. The ASC requires a publicly traded company to include disclosures about the fair value of its financial instruments whenever it issues summarized financial information for interim reporting periods. Such entity is required to disclose in the body or in the accompanying notes of its summarized financial information for interim reporting periods and in its financial statements for annual reporting periods the fair value of all financial instruments for which it is practicable to estimate that value, whether recognized or not recognized in the statement of financial position. Fair value information disclosed in the notes must be presented together with the related carrying amount in a form that makes it clear whether the fair value and carrying amount represent assets or liabilities and how the carrying amount relates to what is reported in the statement of financial position. Such entity also must disclose the methods and significant assumptions used to estimate the fair value of financial instruments and describe changes in methods and significant assumptions during the period. We adopted this ASC for the quarter ended June 30, 2009 and the adoption did not have a material impact on our consolidated results of operations and financial position.
 
In April 2009, FASB issued ASC 820-10-65, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.” This ASC provides additional guidance for estimating fair value in accordance with ASC 820, “Fair


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Value Measurements”, when the volume and level of activity for the asset or liability have significantly decreased. This ASC also includes guidance on identifying circumstances that indicate a transaction is not orderly. This ASC emphasizes that even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation technique(s) used, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. We adopted this ASC for the quarter ended June 30, 2009 and the adoption did not have a material impact on our consolidated results of operations and financial position.
 
In May 2009, the FASB issued ASC 855-10, “Subsequent Events” to establish accounting and disclosure standards for events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It defines financial statements as available to be issued, requiring the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, whether it be the date the financial statements were issued or the date they were available to be issued. We adopted this pronouncement upon issuance. This standard had no material impact on our financial position, results of operations or cash flows.
 
In June 2009, the FASB issued ASC 105-10, “The FASB Accounting Standards Codification, and the Hierarchy of Generally Accepted Accounting Principles,” or the Codification as the single source of authoritative nongovernmental Generally Accepted Accounting Principles in the United States. The Codification is effective for interim and annual periods ending after September 15, 2009. Upon the effective date, the Codification will be the single source of authoritative accounting principles to be applied by all nongovernmental U.S. entities. All other accounting literature not included in the Codification will be nonauthoritative. The adoption of the Codification had no material impact on our financial position or results of operations.
 
Off-Balance Sheet Arrangements
 
We had no “off balance sheet arrangements” (as defined in Item 303(a)(4) of Regulation S-K) during the year ended December 31, 2009.
 
Item 7A.   Quantitative and Qualitative Disclosures about Market Risk.
 
We generally maintain a portfolio of cash equivalents, and short-term and long-term marketable securities in a variety of securities which can include commercial paper, certificates of deposit, money market funds and government and non-government debt securities. The fair value of these available-for-sale securities are subject to changes in market interest rates and may fall in value if market interest rates increase. Our investment portfolio includes only marketable securities with active secondary or resale markets to help insure liquidity. We have implemented policies regarding the amount and credit ratings of investments. Due to the conservative nature of these policies, we do not believe we have material exposure due to market risk. We may not have the ability to hold our fixed income investments until maturity, and therefore our future operating results or cash flows could be affected if we are required to sell investments during a period in which increases in market interest rates have adversely affected the value of our securities portfolio. For fixed rate debt, changes in interest rates generally affect the fair market value of the debt instrument, but not earnings or cash flows. We do not have an obligation to prepay any fixed rate debt prior to maturity and, therefore, interest rate risk and changes in the fair market value of fixed rate debt should not have a significant impact on earnings or cash flows until such debt is refinanced, if necessary. The terms related to our fixed rate debt are described in Note 5 to the consolidated financial statements. For variable rate debt, changes in interest rates generally do not impact the fair market value of the debt instrument, but do affect future earnings and cash flows. We did not have any variable rate debt outstanding during the fiscal year ended December 31, 2009.


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Item 8.   Financial Statements and Supplementary Data.
 
 
Report of Independent Registered Public Accounting Firm
 
 
To the Board of Directors and Stockholders
Alseres Pharmaceuticals, Inc.
 
 
We have audited the accompanying consolidated balance sheets of Alseres Pharmaceuticals, Inc. and Subsidiaries (the “Company”) (a development stage enterprise) as of December 31, 2009 and 2008, and the related consolidated statements of operations, comprehensive loss and stockholders’ (deficit) equity and cash flows for each of the three years in the period ended December 31, 2009 and for the period from October 16, 1992 (Inception) to December 31, 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. The financial statements for the period from October 16, 1992 (inception) to December 31, 2006 were audited by other auditors and our opinion, insofar as it relates to cumulative amounts included for such prior periods, is based solely on the reports of such other auditors.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of the other auditors provide a reasonable basis for our opinion.
 
In our opinion, based on our audits and the reports of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Alseres Pharmaceuticals, Inc. and Subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009 and the period from October 16, 1992 (Inception) to December 31, 2009, in conformity with U.S. generally accepted accounting principles.
 
We were not engaged to examine management’s assessment of the effectiveness of Alseres Pharmaceuticals, Inc. and Subsidiaries’ internal control over financial reporting as of December 31, 2009, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting, and, accordingly, we do not express an opinion thereon.
 
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations, its total liabilities exceed its total assets, and it has determined that it will need to raise additional capital. This raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
 
/s/ McGladrey & Pullen, LLP
 
Burlington, Massachusetts
March 31, 2010


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Stockholders of Alseres Pharmaceuticals, Inc.:
 
In our opinion, the consolidated statements of operations, of comprehensive loss and stockholders’ (deficit) equity and of cash flows for the period from October 16, 1992 (date of inception) to December 31, 2006 (not separately presented herein) present fairly, in all material respects, the results of operations and cash flows of Alseres Pharmaceuticals, Inc. (formerly Boston Life Sciences, Inc.) and its subsidiaries (a development stage enterprise) for the period from October 16, 1992 (date of inception) to December 31, 2006 (not separately presented herein) in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
 
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has a net working capital deficit, a stockholders’ deficit and has suffered recurring losses and negative cash flows from operations that raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
/s/  PricewaterhouseCoopers LLP
 
Boston, Massachusetts
April 2, 2007


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ALSERES PHARMACEUTICALS, INC.
(A Development Stage Enterprise)

CONSOLIDATED BALANCE SHEETS
 
                                 
    December 31,
    December 31,
             
    2009     2008              
 
ASSETS
Current assets:
                               
Cash and cash equivalents
  $ 314,964     $ 73,974                  
Marketable securities (Note 2)
                           
Security deposits
    38,928       79,728                  
Prepaid expenses and other current assets
    34,231       163,706                  
                                 
Total current assets
    388,123       317,408                  
Fixed assets, net (Note 3)
    106,272       178,643                  
Indemnity fund (Note 10)
    115,720       115,462                  
Security deposits and other assets
    180,700       233,737                  
                                 
Total assets
  $ 790,815     $ 845,250                  
                                 
 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
                               
Accounts payable and accrued expenses (Note 4)
  $ 3,522,581     $ 4,895,799                  
Notes payable (Note 5)
    1,350,000                        
Accrued lease (Note 6)
    51,493       45,425                  
                                 
Total current liabilities
    4,924,074       4,941,224                  
Convertible notes payable (Note 5)
    34,155,632       33,456,374                  
Accrued interest payable (Note 5)
    4,057,086       2,313,090                  
Accrued lease, excluding current portion (Note 6)
    96,426       147,923                  
                                 
Total liabilities
    43,233,218       40,858,611                  
                                 
Commitments and contingencies (Note 9)
                               
Series F convertible redeemable preferred stock, $.01 par value; 200,000 shares designated; 196,000 and 0 shares issued and outstanding at December 31, 2009 and 2008, respectively (liquidation preference of $4,900,000 at December 31, 2009)
    5,066,919                        
                                 
Stockholders’ deficit:
                               
Preferred stock, $.01 par value; 1,000,000 shares authorized; 25,000 shares designated Convertible Series A, 500,000 shares designated Convertible Series D, and 800 shares designated Convertible Series E; no shares issued and outstanding at December 31, 2009 and 2008
                           
Common stock, $.01 par value; 80,000,000 shares authorized; 25,555,645 and 21,399,123 shares issued and outstanding at December 31, 2009 and 2008, respectively
    255,556       213,991                  
Additional paid-in capital
    146,913,395       143,671,984                  
Deficit accumulated during development stage
    (194,678,273 )     (183,899,336 )                
                                 
Total stockholders’ deficit
    (47,509,322 )     (40,013,361 )                
                                 
Total liabilities and stockholders’ deficit
  $ 790,815     $ 845,250                  
                                 
 
The accompanying notes are an integral part of the consolidated financial statements.


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ALSERES PHARMACEUTICALS, INC.
(A Development Stage Enterprise)

CONSOLIDATED STATEMENTS OF OPERATIONS
 
                                 
                      From Inception
 
                      (October 16,
 
                      1992) to
 
    For the Year Ended December 31,     December 31,
 
    2009     2008     2007     2009  
 
Revenues
  $     $     $     $ 900,000  
Operating expenses:
                               
Research and development
    3,702,781       10,851,844       10,475,158       115,482,830  
General and administrative
    4,623,201       7,858,968       8,405,967       64,124,454  
Purchased in-process research and development
                      12,146,544  
                                 
Total operating expenses
    8,325,982       18,710,812       18,881,125       191,753,828  
                                 
Loss from operations
    (8,325,982 )     (18,710,812 )     (18,881,125 )     (190,853,828 )
Other expenses
    65,000                   (1,517,878 )
Interest expense
    (2,523,095 )     (2,215,663 )     (876,071 )     (10,006,996 )
Investment income
    7,140       79,016       208,848       7,702,429  
                                 
Net loss
    (10,776,937 )     (20,847,459 )     (19,548,348 )     (194,676,273 )
Preferred stock beneficial conversion feature
                      (8,062,712 )
Accrual of preferred stock dividends and modification of warrants held by preferred stock stockholders (Note 7)
                      (1,229,589 )
                                 
Net loss attributable to common stockholders
  $ (10,776,937 )   $ (20,847,459 )   $ (19,548,348 )   $ (203,968,574, )
                                 
Basic and diluted net loss attributable to common stockholders per share
  $ (0.46 )   $ (1.00 )   $ (1.04 )        
                                 
Weighted average common shares outstanding
    23,361,458       20,883,066       18,874,070          
                                 
 
The accompanying notes are an integral part of the consolidated financial statements.


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ALSERES PHARMACEUTICALS, INC.
(A Development Stage Enterprise)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS AND STOCKHOLDERS’ (DEFICIT) EQUITY
For the Period from inception (October 16, 1992) to December 31, 2009
 
                                                                         
                                              Deficit
       
                                        Accumulated
    Accumulated
    Total
 
    Preferred Stock     Common Stock                 Other
    During
    Stockholders’
 
    Number of
          Number of
          Additional Paid-
    Deferred
    Comprehensive
    Development
    (Deficit)
 
    Shares     Amount     Shares     Par Value     In Capital     Compensation     Income (Loss)     Stage     Equity  
 
Issuance of common stock to founders
                    304,009     $ 3,040     $ 45,685                             $ 48,725  
Issuance of common stock upon exercise of warrants and options
                    1,185,039       11,850       7,584,589                               7,596,439  
Issuance of common stock and warrants, net of issuance costs of $1,928,421
                    11,516,790       115,168       56,343,378                               56,458,546  
Issuance of common stock and warrants upon Merger
                    723,947       7,239       14,596,709                               14,603,948  
Issuance of common stock upon conversion of convertible debentures
                    31,321       313       988,278                               988,591  
Issuance of warrants in connection with debentures, net of issuance costs of $392,958
                                    3,632,632                               3,632,632  
Issuance of warrants in connection with preferred series C stock issuance and related beneficial conversion feature, net of issuance costs of $590,890
                                    3,736,789                               3,736,789  
Accretion of preferred series C stock
                                    (4,327,679 )                             (4,327,679 )
Issuance of preferred stock, net of issuance costs of $4,078,821
    240,711     $ 2,296,355                       23,288,101                               25,584,456  
Conversion of preferred stock into common stock and payment of interest in common stock, net of issuance costs of $27,664
    (240,149.7 )     (1,491,474 )     1,553,749       15,538       7,655,122                               6,179,186  
Conversion of debentures and payment of interest in common stock, net of issuance costs of $307,265
                    317,083       3,171       4,844,249                               4,847,420  
Conversion of preferred stock into common stock and modification of warrants
    (561.3 )     (3,501,539 )     900,646       9,006       3,492,533                                
Preferred stock conversion inducement
                                    (600,564 )                             (600,564 )
Amortization of preferred stock Series E beneficial conversion feature
            2,696,658                       (2,696,658 )                              
Issuance of warrants in connection with Series E Stock, net of issuance costs of $278,426
                                    2,049,297                               2,049,297  
Issuance of common stock in connection with cancellation of warrants
                    42,667       427       (427 )                              
Accrual of dividends on preferred Series E stock
                                    (573,597 )                             (573,597 )
Beneficial conversion feature on 10% convertible secured promissory notes
                                    558,000                               558,000  
Deferred compensation related to stock options and warrants granted
                                    804,607     $ (804,607 )                      
Compensation expense related to stock options and warrants
                                    3,470,199       804,607                       4,274,806  
Modification of options and warrants
                                    1,804,694                               1,804,694  
Other
                    783       8       69,925                               69,933  
Comprehensive loss:
                                                                       
Net loss from inception (October 16, 1992) to December 31, 2006
                                                          $ (143,503,529 )     (143,503,529 )
                                                                         
Balance at December 31, 2006
                16,576,034       165,760       126,765,862                   (143,503,529 )     (16,571,907 )
Issuance of common stock upon exercise of warrants and options
                    202,183       2,022       143,683                               145,705  
Issuance of common stock upon conversion of notes payable
                    4,000,000       40,000       9,960,000                               10,000,000  
Beneficial conversion feature on convertible notes payable
                                    1,880,000                               1,880,000  
Compensation expense related to stock options
                                    1,665,155                               1,665,155  
Expense related to modification of stock options
                                    5,614                               5,614  
Comprehensive loss:
                                                                       
Unrealized gain on marketable securities
                                                    9,310               9,310  
Net loss
                                                            (19,548,348 )     (19,548,348 )
                                                                         
Comprehensive loss
                                                                    (19,539,038 )
                                                                         
Balance at December 31, 2007
                20,778,217       207,782       140,420,314             9,310       (163,051,877 )     (22,414,471 )
Issuance of common stock upon exercise of options
                    1,100       11       2,530                               2,541  
Issuance of common stock upon conversion of notes payable
                    48,000       480       119,520                               120,000  


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ALSERES PHARMACEUTICALS, INC.
(A Development Stage Enterprise)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS AND STOCKHOLDERS’ (DEFICIT) EQUITY — (Continued)
For the Period from inception (October 16, 1992) to December 31, 2009
 
                                                                         
                                              Deficit
       
                                        Accumulated
    Accumulated
    Total
 
    Preferred Stock     Common Stock                 Other
    During
    Stockholders’
 
    Number of
          Number of
          Additional Paid-
    Deferred
    Comprehensive
    Development
    (Deficit)
 
    Shares     Amount     Shares     Par Value     In Capital     Compensation     Income (Loss)     Stage     Equity  
 
Beneficial conversion feature on convertible notes payable
                                    380,000                               380,000  
Compensation expense related to stock options
                                    1,670,063                               1,670,063  
Issuance of common stock
                    571,806       5,718       1,079,557                               1,085,275  
Comprehensive loss:
                                                                       
Unrealized loss on marketable securities
                                                    (9,310 )             (9,310 )
Net loss
                                                            (20,847,459 )     (20,847,459 )
                                                                         
Comprehensive loss
                                                                    (20,856,769 )
                                                                         
Balance at December 31, 2008
        $       21,399,123     $ 213,991     $ 143,671,984     $     $     $ (183,899,336 )   $ (40,013,361 )
                                                                         
Issuance of common stock upon exercise of options
                                                                   
Compensation expense related to stock options
                                    1,473,083                               1,473,083  
Issuance of common stock
                    4,156,522       41,565       1,960,435                               2,002,000  
Issuance of preferred stock
    196,000     $ 5,066,919                       (192,107 )                     (2,000 )     4,872,812  
Comprehensive loss:
                                                                       
Net Loss
                                                            (10,776,937 )     (10,776,937 )
                                                                         
Comprehensive loss
                                                                    (10,776,937 )
                                                                         
Balance at December 31, 2009
    196,000     $ 5,066,919       25,555,645     $ 255,556     $ 146,913,395     $     $     $ (194,678,273 )   $ (42,442,403 )
                                                                         
 


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ALSERES PHARMACEUTICALS, INC.
(A Development Stage Enterprise)

CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                                 
                      From Inception
 
                      (October 16,
 
                      1992) to
 
    For the Year Ended December 31,     December 31,
 
    2009     2008     2007     2009  
 
Cash flows from operating activities:
                               
Net loss
  $ (10,776,937 )   $ (20,847,459 )   $ (19,548,348 )   $ (194,676,273 )
Adjustments to reconcile net loss to net cash used for operating activities:
                               
Purchased in-process research and development
                      12,146,544  
Write-off of acquired technology
                      3,500,000  
Interest expense settled through issuance of notes payable
                      350,500  
Non-cash interest expense
    716,358       638,367       221,523       3,224,923  
Non-cash charges related to options, warrants and common stock
    1,473,086       1,755,338       1,670,769       11,052,881  
Amortization and depreciation
    72,371       52,953       84,861       2,791,317  
Changes in current assets and liabilities:
                               
Decrease (increase) in prepaid expenses and other current assets
    129,475       718,356       (614,330 )     688,335  
(Decrease) increase in accounts payable and accrued expenses
    (1,435,956 )     1,169,321       (6,947,420 )     2,687,178  
Increase in accrued interest payable
    1,806,734       1,572,673       740,417       4,119,824  
(Decrease) increase in accrued lease
    (45,429 )     (42,795 )     (30,753 )     147,919  
                                 
Net cash used for operating activities
    (8,060,298 )     (14,983,246 )     (24,423,281 )     (153,966,852 )
Cash flows from investing activities:
                               
Cash acquired through Merger
                      1,758,037  
Purchases of fixed assets
          (143,112 )     (36,912 )     (1,652,114 )
Decrease (increase) in security deposits and other assets
    76,734       35,550       33,398       (419,763 )
(Increase) in indemnity fund
    (258 )     (2,284 )     (5,328 )     (115,720 )
Purchases of marketable securities
                (3,359,879 )     (132,004,923 )
Sales and maturities of marketable securities
          1,231,233       2,128,646       132,004,923  
                                 
Net cash provided by (used for) investing activities
    76,476       1,121,387       (1,240,075 )     (429,560 )
Cash flows from financing activities:
                               
Proceeds from issuance of common stock
    2,000,000       1,002,541       145,705       66,731,339  
Proceeds from issuance of preferred stock
    4,900,000                   39,922,170  
Preferred stock conversion inducement
                      (600,564 )
Proceeds from issuance of promissory notes
    1,350,000       10,000,000       27,000,000       52,935,000  
Proceeds from issuance of convertible debentures
                      9,000,000  
Principal payments of notes payable
                      (7,146,967 )
Dividend payments on Series E Cumulative Convertible Preferred Stock
                      (516,747 )
Payments of financing costs
    (25,188 )           (57,722 )     (5,612,855 )
                                 
Net cash provided by financing activities
    8,224,812       11,002,541       27,087,983       154,711,376  
                                 
Net increase (decrease) in cash and cash equivalents
    240,990       (2,859,318 )     1,424,627       314,964  
Cash and cash equivalents, beginning of period
    73,974       2,933,292       1,508,665        
                                 
Cash and cash equivalents, end of period
  $ 314,964     $ 73,974     $ 2,933,292     $ 314,964  
                                 
Supplemental cash flow disclosures:
                               
Non-cash transactions
                               
Cash paid for interest
  $     $     $     $ 628,406  
 
The accompanying notes are an integral part of the consolidated financial statements.


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ALSERES PHARMACEUTICALS, INC.
(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1.   The Company and its Significant Accounting Policies
 
Alseres Pharmaceuticals, Inc. and its subsidiaries (the “Company”) is a biotechnology company engaged in the development of therapeutic and diagnostic products primarily for disorders in the central nervous system. The Company was founded in 1992 and merged with a publicly held company in 1995 (the “Merger”) whereby the Company changed its name to Boston Life Sciences, Inc. Effective June 7, 2007, the Company changed its name to Alseres Pharmaceuticals, Inc. During the period from inception through December 31, 2009, 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 in the development stage as defined in Statement of Financial Accounting Standards (“SFAS”) No. 7, “Accounting and Reporting by Development Stage Enterprises.”
 
The accompanying consolidated financial statements have been prepared on a basis which assumes that the Company will continue as a going concern which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The uncertainty inherent in the need to raise additional capital and the Company’s recurring losses from operations raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
As of December 31, 2009, we have experienced total net losses since inception of approximately $203,969,000 , stockholders’ deficit of approximately $47,509,000 and a net working capital deficit of approximately $4,536,000. For the foreseeable future, the Company expects to experience continuing operating losses and negative cash flows. The cash and cash equivalents available at December 31, 2009 will not provide sufficient working capital to meet our anticipated expenditures for the next twelve months. At March 22, 2010, we had cash and cash equivalents of approximately $130,000 which combined with our ability to control certain costs, including those related to clinical trial programs, preclinical activities, and certain general and administrative expenses will enable us to meet our anticipated cash expenditures into April, 2010. We must immediately raise additional funds in order to continue operations.
 
In order to continue as a going concern, the Company must immediately raise additional funds through one or more of the following: a debt financing, an equity offering or a collaboration, merger, acquisition or other transaction with one or more pharmaceutical or biotechnology companies. The Company is currently engaged in fundraising efforts. There can be no assurance that the Company will be successful in its fundraising efforts or that additional funds will be available on acceptable terms, if at all. The Company also cannot be sure that it will be able to obtain additional credit from, or effect additional sales of debt or equity securities to the Purchasers (Note 5). If the Company is unable to raise additional or sufficient capital or if it violates a debt covenant or defaults under the March 2008 Amended Purchase Agreement or the June 2008 Purchase Agreement (Note 5), it will need to cease operations or reduce, cease or delay one or more of its research or development programs and/or adjust its current business plan and in any such event may not be able to continue as a going concern. Additionally, our common stock was delisted from trading on the NASDAQ Capital Market as a result of our failure to meet continued listing requirements of NASDAQ. On May 8, 2009 we began trading on the Pink Sheets OTC Market. This delisting has had an adverse affect on our ability to obtain future financing and could continue to adversely impact our stock price and the liquidity of our common stock.
 
In connection with the common stock financing completed by the Company in March 2005 (the “March 2005 Financing”), the Company agreed with the purchasers in such financing, including Robert Gipson, Thomas Gipson and Arthur Koenig (the “March 2005 Investors”) that, subject to certain exceptions, it would not issue any shares of its common stock at a per share price less than $2.50 without the prior consent of the March 2005 Investors holding at least a majority of the shares issued in the March 2005 Financing. The failure to receive the requisite waiver or consent of the March 2005 Investors could have the effect of delaying


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ALSERES PHARMACEUTICALS, INC.
(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
or preventing the consummation of a financing by the Company should the price per share in such financing be set at less than $2.50.
 
A summary of the Company’s significant accounting policies is as follows:
 
Basis of Presentation
 
The Company’s consolidated financial statements include the accounts of its six subsidiaries where all of the Company’s operations are conducted. At December 31, 2009, all of the subsidiaries were wholly-owned. All significant intercompany transactions and balances have been eliminated. The Company operates as one segment and all long-lived assets are maintained in the United States of America.
 
Use of Estimates
 
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosures of contingencies at the date of the consolidated financial statements and the reported amounts of expenses during the reporting period. Significant estimates in these consolidated financial statements have been made in connection with the calculation of research and development expenses, marketable securities, the fair value and classification of financial instruments, our lease accrual and stock-based compensation expense. The Company bases its estimates on historical experience and various other assumptions that management believes to be reasonable under the circumstances. Actual results could differ from those estimates. Changes in estimates are reflected in reported results in the period in which they become known.
 
Cash, Cash Equivalents and Marketable Securities
 
The Company considers all highly liquid marketable securities purchased with an original maturity of three months or less to be cash equivalents. The Company invests its cash equivalents primarily in overnight repurchase agreements, money market funds, and United States treasury and agency obligations. The Company’s cash balances may exceed federally insured limits periodically throughout the year. However, the Company does not believe that it is subject to any unusual credit risk beyond the normal credit risk associated with commercial banking relationships.
 
Marketable securities, which are classified as available-for-sale, are recorded at fair value. Unrealized gains or losses are not immediately recognized in the Consolidated Statements of Operations but are reflected in the Consolidated Statements of Comprehensive Loss and Stockholders’ Deficit as a component of accumulated other comprehensive income (loss) until realized. Realized gains (losses) are determined based on the specific identification method. If a decline in the fair value of a security is considered to be other than temporary, the investment is written down to a new cost basis and the unrealized loss is removed from accumulated other comprehensive loss and recorded in the Consolidated Statement of Operations. The Company evaluates whether a decline in fair value is other than temporary based on factors such as the significance of the decline, the duration of time for which the decline has been in existence and the Company’s ability and intent to hold the security to maturity. To date, the Company has only recorded temporary impairments related to marketable securities. Marketable securities consist of United States agency bonds and corporate debt obligations (Note 2). The Company classifies marketable securities as current assets because they are highly liquid and available, as required, to meet working capital and other operating requirements.


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ALSERES PHARMACEUTICALS, INC.
(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Financial Instruments
 
The carrying amounts of the Company’s financial instruments, which include cash and cash equivalents, marketable securities, accounts payable and accrued expenses approximate their fair values as of December 31, 2009 and 2008 due to their short maturity. It is not practicable to estimate the fair value of the Company’s convertible debt. However, it is likely that the fair value of the debt would be materially less than the carrying value of the debt because the conversion price of $2.50 is higher than the Company’s stock price of $0.20 as of December 31, 2009.
 
Fixed Assets
 
Fixed assets are stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets, ranging from three to five years. Leasehold improvements are stated at cost and amortized using the straight-line method over the term of the lease or the estimated useful lives of the assets, whichever is shorter.
 
Research and Development Expenses
 
All research and development expenses are expensed as incurred. Research and development expenses include costs incurred in performing research and development activities such as salary and benefits, stock-based compensation expense, facility costs, license fees, contractual services, sponsored research and development, and clinical trial costs.
 
The Company has entered into licensing agreements with certain collaborators that provide the Company with the rights to certain patents and technologies, and the right to market and distribute any products developed. Obligations initially incurred to acquire these rights are recognized and expensed on the date that the Company acquires the rights due to the early stage of the related technology. Terms of the various license agreements may require the Company to make milestone payments upon the achievement of certain product development objectives and pay royalties on future sales, if any, of commercial products resulting from the collaboration.
 
Stock-Based Compensation Expense
 
We measure compensation costs for all share-based awards at fair value on grant date and recognize it as expense over the requisite service period or expected performance period of the award. We estimate the fair value of stock-based awards using the Black-Scholes valuation model on the grant date. The Black-Scholes valuation model requires us to make certain assumptions and estimates concerning the expected term of the awards, the rate of return of risk-free investments, our stock price volatility, and our anticipated dividends. If any of our estimates or assumptions prove incorrect, our results could be materially affected.
 
The Company recognizes stock-based compensation expense on awards with performance conditions in accordance with Financial Accounting Standards Board (“FASB”) ASC 718, Compensation- Stock Compensation All stock-based awards to non-employees are accounted for in accordance with FASB ASC 505-50 Equity-Based Payments to Non-Employees.
 
Income Taxes
 
The Company uses the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recorded for the expected future tax consequences of temporary differences between the financial reporting and income tax bases of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences reverse. A valuation allowance is established to reduce net deferred tax assets to the amount expected to be realized.


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ALSERES PHARMACEUTICALS, INC.
(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Effective January 1, 2007, the Company adopted the provisions of FASB ASC 740, Income Taxes which clarifies the accounting for income tax positions by prescribing a minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements. Under ASC 740 the Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits of the tax position. The Company records reserves for uncertain tax positions in accordance with ASC 740.
 
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 antidilutive.
 
The following common stock equivalents, on an as exercised or converted basis, were excluded from the computation of diluted net loss per common share because they were anti-dilutive. The exercise of those common stock equivalents outstanding at December 31, 2009 could potentially dilute earnings per share in the future.
 
                         
    2009     2008     2007  
 
Stock options
    3,695,745       4,184,403       4,457,965  
Warrants
    2,000       583,521       2,000  
                         
      3,697,745       4,767,924       4,459,965  
                         
 
Beneficial Conversion Feature
 
The Company has, at certain times, issued preferred stock and notes which were convertible into common stock at a discount from the common stock market price at the date of issuance. The amount of the discount associated with such conversion rights represents an incremental yield, i.e. a “beneficial conversion feature”, that is recorded when the consideration allocated to the convertible security, divided by the number of common shares into which the security converts, is below the fair value of the common stock at the date of issuance of the convertible instrument.
 
A beneficial conversion feature associated with preferred stock is recognized as a return to the preferred stockholders and represents a non-cash charge in the determination of net loss attributable to common stockholders. The beneficial conversion feature is recognized in full immediately if there is no redemption date for the preferred stock, or over the period of issuance through the redemption date, if applicable. A beneficial conversion feature associated with debentures, notes or other debt instruments is recognized as discount to the debt and is amortized as additional interest expense using the effective interest method over the remaining term of the debt instrument.
 
Convertible Redeemable Shares
 
The Company follows the guidance found in ASR 268 (Rule 5-02.28 of Regulation S-X), as well as ASC 480-10-S99-3 (EITF Topic D-98) in determining if convertible, redeemable shares are more akin to equity or a liability. Due to the fact that the Series F shares are mandatorily redeemable for cash or for a variable, uncapped, number of common shares, they are more akin to a liability and as such are classified outside of permanent equity.


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ALSERES PHARMACEUTICALS, INC.
(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Recent Accounting Pronouncements
 
In April 2009, the Financial Accounting Standards Board, or FASB, issued FASB Accounting Standards Codification, or ASC, 825-10-65, “Interim Disclosures about Fair Value of Financial Instruments.” ASC 825-10-65 amends ASC 825-10 to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as annual financial statements. The ASC requires a publicly traded company to include disclosures about the fair value of its financial instruments whenever it issues summarized financial information for interim reporting periods. Such entity is required to disclose in the body or in the accompanying notes of its summarized financial information for interim reporting periods and in its financial statements for annual reporting periods the fair value of all financial instruments for which it is practicable to estimate that value, whether recognized or not recognized in the statement of financial position. Fair value information disclosed in the notes must be presented together with the related carrying amount in a form that makes it clear whether the fair value and carrying amount represent assets or liabilities and how the carrying amount relates to what is reported in the statement of financial position. Such entity also must disclose the methods and significant assumptions used to estimate the fair value of financial instruments and describe changes in methods and significant assumptions during the period. We adopted this ASC for the quarter ended June 30, 2009 and the adoption did not have a material impact on our consolidated results of operations and financial position.
 
In April 2009, FASB issued ASC 820-10-65, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.” This ASC provides additional guidance for estimating fair value in accordance with ASC 820, “Fair Value Measurements”, when the volume and level of activity for the asset or liability have significantly decreased. This ASC also includes guidance on identifying circumstances that indicate a transaction is not orderly. This ASC emphasizes that even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation technique(s) used, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. We adopted this ASC for the quarter ended June 30, 2009 and the adoption did not have a material impact on our consolidated results of operations and financial position.
 
In May 2009, the FASB issued ASC 855-10, “Subsequent Events” to establish accounting and disclosure standards for events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It defines financial statements as available to be issued, requiring the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, whether it be the date the financial statements were issued or the date they were available to be issued. We adopted this pronouncement upon issuance. This standard had no material impact on our financial position, results of operations or cash flows.
 
In June 2009, the FASB issued ASC 105-10, “The FASB Accounting Standards Codification, or the Codification, and the Hierarchy of Generally Accepted Accounting Principles,” as the single source of authoritative nongovernmental Generally Accepted Accounting Principles in the United States. The Codification is effective for interim and annual periods ending after September 15, 2009. Upon the effective date, the Codification will be the single source of authoritative accounting principles to be applied by all nongovernmental U.S. entities. All other accounting literature not included in the Codification will be nonauthoritative. The adoption of the Codification had no material impact on our financial position or results of operations.


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ALSERES PHARMACEUTICALS, INC.
(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Risks and Uncertainties
 
The Company is subject to risks and uncertainties common to the biotechnology industry. Such risks and uncertainties include, but are not limited to: (i) results from current and planned clinical trials, (ii) scientific data collected on the Company’s technologies currently in preclinical research and development, (iii) decisions made by the Food and Drug Administration (“FDA”) or other regulatory bodies with respect to the initiation of human clinical trials, (iv) decisions made by the FDA or other regulatory bodies with respect to approval and commercial sale of any of the Company’s proposed products, (v) the commercial acceptance of any products approved for sale and the ability of the Company to manufacture, distribute and sell for a profit any products approved for sale, (vi) the Company’s ability to obtain the necessary patents and proprietary rights to effectively protect its technologies, (vii) the outcome of any collaborations or alliances entered into by the Company in the future with pharmaceutical or other biotechnology companies, (viii) dependence on key personnel, (ix) maintaining NASDAQ listing requirements, (x) competition with better capitalized companies, (xi) ability to raise additional funds and (xii) compliance with debt agreements.
 
.
 
2.   Fixed Assets
 
Fixed assets consist of the following at December 31:
 
                 
    2009     2008  
 
Leasehold improvements
  $ 132,170     $ 132,170  
Computer equipment
    88,985       102,244  
Office furniture and equipment
    78,403       84,498  
                 
      299,558       318,912  
Less accumulated depreciation and amortization
    193,286       140,269  
                 
    $ 106,272     $ 178,643  
                 
 
Amortization and depreciation expense on fixed assets for the years ended December 31, 2009, 2008 and 2007 was approximately $72,000, $53,000 and $85,000, respectively, and $1,553,000 for the period from inception (October 16, 1992) through December 31, 2009.
 
3.   Accounts Payable and Accrued Expenses
 
Accounts payable and accrued expenses consist of the following at December 31:
 
                 
    2009     2008  
 
Research and development related
  $ 1,774,943     $ 2,874,827  
Accrued compensation and related
    124,915       639,390  
General and administrative related
    328,435       640,123  
Accrued interest expense
    62,738          
Accrued professional fees
    1,231,550       741,459  
                 
    $ 3,522,581     $ 4,895,799  
                 


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ALSERES PHARMACEUTICALS, INC.
(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
 
4.   Notes Payable and Debt
 
Convertible Notes Payable to Significant Stockholders
 
In August 2006, the Company issued to Robert Gipson an unsecured promissory note (the “RG Note”), pursuant to which the Company could borrow up to an aggregate principal amount of $3,000,000 from Robert Gipson. In October 2006, the Company issued an amended and restated unsecured promissory note (the “Amended RG Note”) to Robert Gipson to replace the RG Note. Under the Amended RG Note, (i) the aggregate principal amount that could be borrowed by the Company was increased from $3,000,000 to $4,000,000, and (ii) one of the dates triggering repayment under the definition of Maturity Date (as discussed below) was moved from December 31, 2007 to June 30, 2007.
 
In October 2006, the Company issued to Thomas Gipson (together with Robert Gipson, the “Lenders”) an unsecured promissory note, pursuant to which the Company could borrow up to an aggregate principal amount of $4,000,000 (the “TG Note,” together the with Amended RG Note, the “First Amended Notes”). The Company borrowed a total of $8,000,000 pursuant to the First Amended Notes. The outstanding principal amount borrowed under the First Amended Notes was due and payable upon the earliest to occur of: (i) June 30, 2007; (ii) the date on which the Company consummates an equity financing in which the gross proceeds to the Company total at least $10,000,000; and (iii) the date on which a Lender declares an event of default (as defined in the Notes), the first of these three events to occur referred to as the “Maturity Date.” Interest accrued on the outstanding principal amount under the First Amended Notes was initially payable on the Maturity Date at a rate of 9% per annum from the date of the advance to the Maturity Date.
 
In February 2007, the Company issued amended and restated unsecured promissory notes to the Lenders to replace the First Amended Notes (the “Second Amended Notes”). Under the Second Amended Notes, the aggregate principal amount that could be collectively borrowed by the Company was increased from $8,000,000 to $10,000,000. The Company borrowed an additional $2,000,000 from the Lenders, or $10,000,000 in the aggregate, pursuant to the Second Amended Notes.
 
In March 2007, the Company issued an amended and restated unsecured promissory note of $5,000,000 to each of the Lenders (the “Amended Notes”). The Amended Notes eliminated all outstanding principal and accrued interest due under the Second Amended Notes and the Company’s right to prepay any portion of the Amended Notes. The Amended Notes also required the Lenders to effect a conversion of the outstanding principal under the Amended Notes into shares of the Company’s common stock at a conversion price of $2.50 per share (the “Amended Notes Conversion”) upon approval by the Company’s stockholders of the conversion. The Company recorded a gain related to the forgiveness of interest of approximately $273,000 to net interest expense on the Company’s Consolidated Statement of Operations during the year ended December 31, 2007. On June 7, 2007, the Company’s stockholders approved the Amended Notes Conversion. On June 15, 2007, the Lenders converted the outstanding principal under the Amended Notes into 4,000,000 shares of the Company’s common stock.
 
March 2008 Amended Purchase Agreement
 
In March 2007, the Company entered into a convertible promissory note purchase agreement (the “March 2007 Purchase Agreement”) with Robert Gipson, Thomas Gipson and Arthur Koenig (the “Purchasers” and also referred to as the “March 2007 Note Holders”) pursuant to which the Company could borrow up to $15,000,000 from the March 2007 Note Holders prior to December 31, 2007. In March 2007, the Company issued convertible promissory notes to the March 2007 Note Holders (the “March Notes”) in the aggregate principal amount of $9,000,000 pursuant to the March 2007 Amended Purchase Agreement. Certain of the material terms of the convertible promissory notes are described below.


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ALSERES PHARMACEUTICALS, INC.
(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
In May 2007, the Company amended and restated the March 2007 Purchase Agreement (the “May 2007 Amended Purchase Agreement”) to (i) eliminate the requirement for the March 2007 Note Holders to make further advances under the March 2007 Purchase Agreement and (ii) add Highbridge as a Purchaser. In May 2007, the Company issued a convertible promissory note to Highbridge (the “Highbridge Note”) in the aggregate principal amount of $6,000,000 pursuant to the May 2007 Amended Purchase Agreement.
 
In August 2007, the Company amended and restated the May 2007 Amended Purchase Agreement (the “August 2007 Amended Purchase Agreement”) to (i) increase the amount the Company could borrow by $10,000,000 to $25,000,000 and (ii) add ISVP as a Purchaser. In August 2007, the Company issued a convertible promissory note to ISVP (the “2007 ISVP Note”) in the aggregate principal amount of $10,000,000 pursuant to the August 2007 Amended Purchase Agreement.
 
In March 2008, the Company amended and restated the August 2007 Amended Purchase Agreement (the “March 2008 Amended Purchase Agreement”) to (i) increase the amount the Company could borrow by $5,000,000 to $30,000,000 and (ii) provide that the Company may incur up to an additional $5,000,000 of indebtedness from the Purchasers upon the same terms and conditions as the March 2008 Amended Purchase Agreement. In March 2008, the Company issued a convertible promissory note to Robert Gipson (the “March 2008 RG Note”) in the aggregate principal amount of $5,000,000 pursuant to the March 2008 Amended Purchase Agreement.
 
All terms of the cumulative $30,000,000 in convertible promissory notes remain as originally agreed to. These amounts borrowed by the Company under the March 2008 Amended Purchase Agreement bear interest at the rate of 5% per annum and may be converted, at the option of the Purchasers, into (i) shares of the Company’s common stock at a conversion price per share of $2.50, (ii) the right to receive future payments related to the Company’s molecular imaging products (including Altropane and FLUORATEC) in amounts equal to 2% of the Company’s pre-commercial revenue related to such products plus 0.5% of future net sales of such products for each $1,000,000 of outstanding principal and interest that a Purchaser elects to convert into future payments, or (iii) a combination of (i) and (ii). Any outstanding notes that are not converted into the Company’s common stock or into the right to receive future payments will become due and payable by the earlier of December 31, 2010 or the date on which a Purchaser declares an event of default (as defined in the March 2008 Amended Purchase Agreement). However, each Purchaser is prohibited from effecting a conversion if at the time of such conversion the common stock issuable to such Purchaser, when taken together with all shares of common stock then held or otherwise beneficially owned by such Purchaser exceeds 19.9%, or 9.99% for Highbridge and ISVP, of the total number of issued and outstanding shares of the Company’s common stock immediately prior to such conversion unless and until the Company’s stockholders approve the conversion of all of the shares of common stock issuable thereunder.
 
June 2008 Amended Purchase Agreement
 
In June 2008, the Company entered into a convertible promissory note purchase agreement (the “June 2008 Purchase Agreement”) with Robert Gipson pursuant to which the Company could borrow up to $5,000,000. In June 2008, the Company issued a convertible promissory note to Robert Gipson (the “June 2008 RG Note”) in the aggregate principal amount of $5,000,000 pursuant to the June 2008 Purchase Agreement. The terms of the June 2008 Purchase Agreement are consistent with those of the March 2008 Amended Purchase Agreement described above.
 
Beneficial Conversion Features
 
The Highbridge Note was issued with a conversion price of $2.50 which was below the market price of the Company’s common stock on the date the May 2007 Amended Purchase Agreement was entered into. The Company recorded a beneficial conversion feature (“BCF”) of $480,000 (the “Highbridge BCF”) which was


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ALSERES PHARMACEUTICALS, INC.
(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
recognized as a decrease in the carrying value of the Highbridge Note and an increase to additional paid-in capital. The value of the Highbridge BCF is being recognized as interest expense using the effective interest method through December 31, 2010. The Company recorded interest expense related to the Highbridge BCF in the accompanying Consolidated Statement of Operations of approximately $131,000, $123,000 and $78,000 during the years ended December 31, 2009, 2008 and 2007, respectively.
 
The 2007 ISVP Note was issued with a conversion price of $2.50 which was below the market price of the Company’s common stock on the date the August 2007 Amended Purchase Agreement was entered into. Accordingly, the Company recorded a BCF of $1,400,000 (the “ISVP BCF”) which was recognized as a decrease in the carrying value of the 2007 ISVP Note and an increase to additional paid-in capital. The ISVP BCF is being recognized as interest expense using the effective interest method through December 31, 2010. The Company recorded interest expense related to the ISVP BCF in the accompanying Consolidated Statement of Operations of approximately $434,000, $392,000 and $137,000 during the years ended December 31, 2009, 2008 and 2007, respectively.
 
The March 2008 RG Note was issued with a conversion price of $2.50 which was below the market price of the Company’s common stock on the date the March 2008 Amended Purchase Agreement was entered into. Accordingly, the Company recorded a BCF of $380,000 (the “2008 RG BCF”) which was recognized as a decrease in the carrying value of the March 2008 RG Note and an increase to additional paid-in capital. The 2008 RG BCF is being recognized as interest expense using the effective interest method through December 31, 2010. The Company recorded interest expense related to the 2008 RG BCF in the accompanying Consolidated Statements of Operations of approximately $135,000 and $99,000 during the years ended December 31, 2009 and 2008, respectively.
 
In September 2008, Highbridge converted $120,000 of outstanding principal under the Highbridge Note into 48,000 shares of the Company’s common stock. In connection with the conversion, the Company recorded additional interest expense of approximately $6,300 during the year ended December 31, 2008 related to the unamortized portion of the Highbridge BCF.
 
At December 31, 2009, the aggregate carrying value of the Highbridge Note, the March Notes, the 2007 ISVP Note, the March 2008 RG Note and the June 2008 RG Note of $34,155,632 and the related accrued interest was classified as a long-term liability.
 
The Company is subject to certain debt covenants pursuant to the March 2008 Amended Purchase Agreement and the June 2008 Purchase Agreement (the “Purchase Agreements”). If the Company (i) fails to pay the principal or interest due under the Purchase Agreements, (ii) files a petition for action for relief under any bankruptcy or similar law or (iii) an involuntary petition is filed against the Company, all amounts borrowed under the Purchase Agreements may become immediately due and payable by the Company. In addition, without the consent of the Purchasers, the Company may not (i) create, incur or otherwise, permit to be outstanding any indebtedness for money borrowed, (ii) declare or pay any cash dividend, or make a distribution on, repurchase, or redeem, any class of the Company’s stock, subject to certain exceptions or sell, lease, transfer or otherwise dispose of any of the Company’s material assets or property or (iii) dissolve or liquidate.
 
Subsidiary Promissory Note
 
In February 2009, Neurobiologics, Inc. (the “Subsidiary”), a subsidiary of the Company, issued to Robert Gipson an unsecured promissory note, pursuant to which the Subsidiary borrowed an aggregate principal amount of $1,000,000 (the “Subsidiary Note”). Interest on the Subsidiary Note accrues at the rate of 7% per annum and all principal and accrued interest is due and payable on demand of Mr. Gipson.


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ALSERES PHARMACEUTICALS, INC.
(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
According to a Schedule 13G/A filed with the SEC on January 30, 2009, Robert Gipson beneficially owned approximately 47.2% of the outstanding common stock of the Company on December 31, 2008. Robert Gipson, who serves as a Senior Director of I&S and a General Partner of ISVP, served as a director of the Company from June 15, 2004 until October 28, 2004. According to a Schedule 13G/A filed with the SEC on January 30, 2009, Thomas Gipson beneficially owned approximately 29.0% of the outstanding common stock of the Company on December 31, 2008. According to a Schedule 13G/A filed with the SEC on January 30, 2009, Arthur Koenig beneficially owned approximately 9.7% of the outstanding common stock of the Company on December 31, 2008. According to a Schedule 13G filed with the SEC on January 30, 2009, ISVP owned approximately 16.5% of the outstanding common stock of the Company on December 31, 2008. According to a Schedule 13G filed with the SEC on February 10, 2009, Highbridge beneficially owned approximately 9.50% of the outstanding common stock of the Company on December 31, 2008.
 
Promissory Notes
 
In December 2009 the Company issued a promissory note to Robert Gipson in the amount of $350,000 and payable on demand. The Note bears interest at the rate of 7% per annum.
 
5.   Exit Activities
 
In September 2005, the Company relocated its headquarters to office space in Hopkinton, Massachusetts. In addition, the Company amended its Lease Agreement (the “Lease Amendment”), dated as of January 28, 2002 by and between the Company and Brentwood Properties, Inc. (the “Landlord”) relating to the Company’s former principal executive offices (the “Premises”) located in Boston, Massachusetts (the “Lease Agreement”). Pursuant to the terms of the Lease Amendment, the Landlord consented to, among other things, two sublease agreements which run through May 30, 2012, the term of the Lease Agreement, and which occupy all rentable square feet of the Premises. In consideration for the Landlord’s consent, the Company agreed to increase its security deposit provided for under the Lease Agreement from $250,000 to $388,600 subject to periodic reduction pursuant to a predetermined formula. At December 31, 2009, the security deposit under the Lease Agreement was approximately $124,500.
 
As a result of the Company’s relocation, an expense was recorded for the cost associated with the exit activity at its fair value in the period in which the liability is incurred. The liability recorded for the Lease Amendment was calculated by discounting the estimated cash flows for the two sublease agreements and the Lease Agreement using an estimated credit-adjusted risk-free rate of 15%. The expense and accrual recorded requires the Company to make significant estimates and assumptions. These estimates and assumptions will be evaluated and adjusted as appropriate on at least a quarterly basis for changes in circumstances. It is reasonably possible that such estimates could change in the future resulting in additional adjustments, and the effect of any such adjustments could be material.
 
The activity related to the lease accrual at December 31, 2009, is as follows:
                         
    Accrual at
    Cash Payments,
    Accrual at
 
    December 31,
    Net of Sublease
    December 31,
 
    2008     Receipts 2009     2009  
 
Lease Amendment
  $ 193,348     $ 45,429     $ 147,919  
Short-term portion of lease accrual
    45,425               51,493  
                         
Long-term portion of lease accrual
  $ 147,923             $ 96,426  
                         
 
During the years ended December 31, 2009, 2008 and 2007, the Company recorded approximately $26,000, $34,000 and $38,000, respectively of expense related to the imputed cost of the lease expense accrual included in general and administrative expenses in the accompanying Consolidated Statements of Operations.


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ALSERES PHARMACEUTICALS, INC.
(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
In May 2007, the Company decided to consolidate certain activities, cease operations at its Baltimore, Maryland location and terminate the two employees working at that location effective June 30, 2007. The Company recognized approximately $192,000 primarily related to one-time termination benefits in the accompanying Consolidated Statements of Operations during the year ended December 31, 2007.
 
6.   Stockholders’ Deficit
 
Common Stock
 
In November 2008, the Company completed a private placement with Robert Gipson of 543,478 shares of its common stock which raised $1,000,000 in gross proceeds. In connection with the November 2008 private placement, the Company also issued warrants (the “November 2008 Warrants”) to purchase 543,478 additional shares of common stock that were exercisable at $1.84 per share between six months and two years after the closing. In connection with the private placement, the Company agreed with Mr. Gipson (the “Letter Agreement”) that if the Company sold shares of its common stock at a price below $1.84, subject to certain exceptions, prior to December 31, 2009, Mr. Gipson would be entitled to receive, for no additional consideration, additional shares of common stock and warrants in accordance with a pre-determined formula. In addition, Dawson James Securities, Inc., (“Dawson James”) in its capacity as agent for the private placement, was entitled to a warrant to purchase 38,043 shares of common stock (the “Agent Warrant”). The Agent Warrant had a term of five years and was exercisable at a price equal to $1.84. In February 2009, Dawson James gave up its right to the Agent Warrant.
 
In January 2009, the Company completed a private placement with Robert Gipson of 1,000,000 shares of its common stock which raised $1,000,000 in gross proceeds. In addition, the Company issued an additional 456,522 shares of its common stock to Mr. Gipson pursuant to a Letter Agreement. In connection with the January 2009 private placement, Mr. Gipson agreed to the cancellation of the November 2008 Warrants.
 
In February 2009, the Company entered into a private placement with Cato Holding Company (“Cato”) of 200,000 shares of its common stock at a purchase price of $1.00 per share. In connection with the February 2009 private placement, the Company agreed with Cato that if the Company sells shares of its common stock, or securities convertible into common stock, prior to September 30, 2009, and the purchaser of such securities receives warrants to purchase additional shares of common stock (a “Qualified Financing”), subject to certain exceptions, Cato shall be entitled to receive, for no additional consideration, a warrant to purchase shares of common stock with the same terms and conditions as those provided to a purchaser in a Qualified Financing.
 
In November 2009, the Company entered into a private placement with Robert Gipson of 2,500,000 shares of its common stock which raised $1,000,000 in gross proceeds. In addition, in March 2010 the Company issued an additional 1,500,000 shares of its common stock to Mr. Gipson pursuant to a Letter Agreement.
 
Preferred Stock
 
The Company has authorized 1,000,000 shares of preferred stock of which 25,000 shares have been designated as Series A Convertible Preferred Stock, 500,000 shares have been designated as Series D Convertible Preferred Stock, and 800 shares have been designated as Series E Cumulative Convertible Preferred Stock (the “Series E Stock”). In March 2009, the Company designated 200,000 shares as Series F Convertible Preferred Stock (“Series F Stock”). The remaining authorized shares have not been designated.


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ALSERES PHARMACEUTICALS, INC.
(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Convertible Preferred Stock
 
During 2009 the company completed the following sales of Series F convertible Preferred Stock to Robert Gipson:
 
                 
    Number of Shares
       
Date of Issuance
  Issued     Gross Proceeds  
 
March 19, 2009
    20,000     $ 500,000  
March 31, 2009
    20,000       500,000  
April 16, 2009
    20,000       500,000  
May 12, 2009
    40,000       1,000,000  
June 10, 2009
    20,000       500,000  
July 9, 2009
    12,000       300,000  
July 23, 2009
    12,000       300,000  
August 11, 2009
    12,000       300,000  
August 26, 2009
    12,000       300,000  
September 10, 2009
    12,000       300,000  
September 28, 2009
    16,000       400,000  
                 
      196,000     $ 4,900,000  
                 
 
The key terms of the Series F Stock are summarized below:
 
Dividend.  The Series F Stock is entitled to receive any dividend that is paid to holders of our common stock. Any subdivisions, combinations, consolidations or reclassifications to the common stock must also be made accordingly to Series F Stock, respectively.
 
Liquidation Preference.  In the event of our liquidation, dissolution or winding up, before any payments are made to holders of our common stock or any other class or series of our capital stock ranking junior as to liquidation rights to the Series F Stock, the holders of the Series F Stock will be entitled to receive the greater of (i) $25.00 per share (subject to adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization affecting such shares) plus any outstanding and unpaid dividends thereon and (ii) such amount per share as would have been payable had each share been converted into common stock. After such payment to the holders of Series F Stock and the holders of shares of any other series of our preferred stock ranking senior to the common stock as to distributions upon liquidation, the remaining our assets will be distributed pro rata to the holders of our common stock.
 
Voting Rights.  Each share of Series F Stock shall entitle its holder to a number of votes equal to the number of shares of our common stock into which such share of Series F Stock is convertible.
 
Conversion.  Each share of Series F Stock is convertible at the option of the holder thereof at any time. Each share of Series F Stock is initially convertible into 25 shares of common stock, subject to adjustment in the event of certain dividends, stock splits or stock combinations affecting the Series F Stock or the common stock, and subject to adjustment on a weighted-average basis in the event of certain issuances by us of securities for a price less than the then-current price at which the Series F Stock converts into common stock.
 
Redemption.  At any time after September 1, 2011, any holder of Series F Stock may elect to have some or all of such shares redeemed by us at a price equal to the aggregate of (i) $25 per share (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization affecting such shares), or the Original Issue Price, plus (ii) all declared but unpaid dividends


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ALSERES PHARMACEUTICALS, INC.
(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
thereon, plus (iii) an amount computed at a rate per annum of 7% of the Original Issue Price from March 19, 2009 until the redemption date.
 
Accretion.  The terms of the Series F Stock contain provisions that may require redemption in circumstances that are beyond the Company’s control. Therefore, the shares have been recorded, net of issuance costs of approximately $25,000, as convertible, redeemable stock outside of permanent equity. The Series F Stock was recorded at fair value on the date of issuance. As of December 31, 2009, the Company recorded approximately $192,000 in accretion on the Series F Stock.
 
Stock Options and Warrants
 
Stock Option Plans
 
The Company can issue both nonqualified and incentive stock options to employees, officers, consultants and scientific advisors of the Company under the Amended and Restated 2005 Stock Incentive Plan (the “2005 Plan”). At December 31, 2009, the 2005 Plan provided for the issuance of options, restricted stock, restricted stock units, stock appreciation rights or other stock-based awards to purchase 3,050,000 shares of the Company’s common stock. The 2005 Plan contains a provision that allows for an annual increase in the number of shares available for issuance under the 2005 Plan on the first day of each of the Company’s fiscal years during the period beginning in fiscal year 2006 and ending on the second day of fiscal year 2014. The annual increase in the number of shares shall be equal to the lowest of 400,000 shares; 4% of the Company’s outstanding shares on the first day of the fiscal year; and an amount determined by the Board of Directors. No adjustment to the 2005 Plan was made on January 1, 2010.
 
The Company also has outstanding stock options in three other stock option plans, the 1998 Omnibus Plan, the Amended and Restated Omnibus Stock Option Plan and the Amended and Restated 1990 Non-Employee Directors’ Non-Qualified Stock Option Plan. Both of these plans have expired and no future issuance of awards is permissible.
 
The Company’s Board of Directors determines the term, vesting provisions, price, and number of shares for each award that is granted. The term of each option cannot exceed ten years. The Company has outstanding options with performance conditions which, if met, would accelerate vesting upon achievement of the applicable milestones.
 
Stock-based employee compensation expense recorded during the years ended December 31, 2009, 2008 and 2007 are as follows:
 
                         
    2009     2008     2007  
 
Research and development
  $ 447,612     $ 506,534     $ 522,766  
General and administrative
    825,471       1,163,660       1,142,389  
                         
    $ 1,273,083     $ 1,670,194     $ 1,665,155  
                         
Impact on basic and diluted net loss attributable to common stockholders per share
  $ (0.05 )   $ (0.08 )   $ (0.09 )


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ALSERES PHARMACEUTICALS, INC.
(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The Company uses the Black-Scholes option-pricing model to calculate the fair value of each option grant on the date of grant. The fair value of stock options granted during the years ended December 31, 2009, 2008 and 2007 was calculated using the following estimated weighted-average assumptions:
 
             
    2009   2008   2007
 
Expected term
  5 years   5 years   6 years
Risk-free interest rate
  1.36%   2.5% - 3.7%   3.5% - 5.1%
Stock volatility
  90%   76%   90%
Dividend yield
  0%   0%   0%
 
Expected term — The Company determined the weighted-average expected term assumption for “plain vanilla” and performance-based option grants based on historical data on exercise behavior.
 
Risk-free interest rate — The risk-free interest rate used for each grant is equal to the U.S. Treasury yield curve in effect at the time of grant for instruments with a similar expected term.
 
Expected volatility — The Company’s expected stock-price volatility assumption is based on historical volatilities of the underlying stock which is obtained from public data sources.
 
Expected dividend yield — The Company has never declared or paid any cash dividends on its common stock and does not expect to do so in the foreseeable future. Accordingly, the Company uses an expected dividend yield of zero to calculate the grant-date fair value of a stock option.
 
Stock Options
 
A summary of the Company’s outstanding stock options for the year ended December 31, 2009 is presented below.
 
                 
    2009  
          Weighted-Average
 
    Shares     Exercise Price  
 
Outstanding at beginning of year
    4,184,403     $ 2.90  
Granted
    2,732,500       1.15  
Exercised
               
Forfeited and expired
    (3,221,158 )     2.88  
                 
Outstanding at end of year
    3,695,745       1.63  
                 
Options exercisable at year-end
    3,524,495       1.65  


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ALSERES PHARMACEUTICALS, INC.
(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The following table summarizes information about stock options outstanding at December 31, 2009:
 
                                                 
    Options Outstanding     Options Exercisable  
          Weighted-
                Weighted-
       
          Average
    Weighted-
          Average
    Weighted-
 
          Remaining
    Average
          Remaining
    Average
 
    Number
    Contractual
    Exercise
    Number
    Contractual
    Exercise
 
Range of Exercise Prices
  Outstanding     Life     Price     Exercisable     Life     Price  
 
$ 1.15 — $ 1.36
    2,713,000       4.4 years     $ 1.15       2,541,750       4.2 years     $ 1.15  
$ 2.00 — $ 3.00
    678,642       5.4 years       2.32       678,642       5.4 years       2.32  
$ 3.10 — $ 4.65
    255,363       6.7 years       3.40       255,363       6.7 years       3.40  
$ 4.99 — $ 6.96
    28,500       4.0 years       5.47       28,500       4.0 years       5.47  
$ 8.95 — $13.06
    8,740       1.7 years       10.55       8,740       1.7 years       10.55  
$15.62 — $22.36
    11,500       0.4 years       17.04       11,500       0.4 years       17.04  
                                                 
      3,695,745       4.7 years     $ 1.63       3,524,495       4.6 years     $ 1.65  
                                                 
 
There was no intrinsic value of outstanding and exercisable options as of December 31, 2009. The intrinsic value of options vested during the year ended December 31, 2009 was $0. The intrinsic value of options exercised during the years ended December 31, 2009, 2008 and 2007 was $0, $759 and $50,700, respectively. The weighted-average fair value of options granted at fair market value during 2009, 2008 and 2007 was $0.80, $1.52 and $2.17, respectively.
 
As of December 31, 2009, 384,172 shares are available for grant under the Company’s option plans.
 
As of December 31, 2009, there remained approximately $35,000 of compensation costs related to non-vested stock options to be recognized as expense over a weighted-average period of approximately .56 years.
 
On January 14, 2009, the Company’s compensation committee approved the cancellation of options to purchase an aggregate of 2,617,000 shares of the Company’s common stock and the regrant of options to purchase an aggregate of 2,562,500 shares of the Company’s common stock. The per share exercise prices of the cancelled options ranged from $1.96 to $4.06, with a weighted average exercise price of $2.92. These cancellations were effected under the 2005 Plan and inducement grants pursuant to Nasdaq Marketplace Rule 4350, each of which expressly permitted option exchanges and all regrants were effected under the 2005 Plan. Each of the regranted options contains the following terms: (i) an exercise price equal to the fair market value on the grant date which was the last sale price on January 14, 2009, or $1.15 per share; (ii) exercisable through January 31, 2014; and (iii) 50% vesting on the date of grant, 25% vesting on February 28, 2009, and 25% vesting on March 31, 2009.
 
Warrants
 
As of December 31, 2009, warrants outstanding to purchase common stock were as follows:
 
                     
Date of Issue
  Exercise Price per Share   Warrants Outstanding   Expiration Date
 
October 2001
  $ 9.50       2,000     October 2011
 
Each warrant is exercisable into one share of common stock. No warrants were exercised in 2009. At December 31, 2009, the Company has reserved 4,081,917 shares of common stock to meet its option and warrant obligations.


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ALSERES PHARMACEUTICALS, INC.
(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Rights Agreement
 
On September 11, 2001, the Company entered into a Rights Agreement (the “Rights Plan”) dated as of September 11, 2001, with Continental Stock Transfer & Trust Company, as rights agent (the “Rights Agent”), and declared a dividend of one right (a “Right”) to purchase from the Company one-thousandth of a share of its Series D Preferred Stock at an exercise price of $25 for each outstanding share of the Company’s common stock at the close of business on September 13, 2001. The Rights will expire on September 11, 2011.
 
In general, the Rights will be exercisable only if a person or group acquires 15% or more of the Company’s common stock or announces a tender offer, the consummation of which would result in ownership by a person or group of 15% or more of the Company’s common stock. If, after the Rights become exercisable, the Company is acquired in a merger or other business combination transaction, or sells 25% or more of its assets or earning power, each unexercised Right will entitle its holder to purchase a number of the acquiring company’s common shares as defined in the Rights Plan. At any time after any person or group has acquired beneficial ownership of 15% or more of the Company’s common stock, the Board, in its sole discretion, may exchange all or part of the then outstanding and exercisable Rights for shares of the Company’s common stock at an exchange ratio of one share of common stock per Right.
 
In November 2001, the Company and the Rights Agent amended the Rights Plan to provide that the Rights Plan will be governed by the laws of the State of Delaware.
 
In November 2002, the Company and the Rights Agent amended the Rights Plan to provide that, for purposes of any calculation under the Rights Plan of the percentage of outstanding shares of the Company’s common stock beneficially owned by a person, any shares of the Company’s common stock such person beneficially owns that are not outstanding (such as shares underlying options, warrants, rights or convertible securities) shall be deemed to be outstanding. The amendment also exempted each of I&S, ISVP and Robert Gipson (the “Ingalls Parties”) from being an “Acquiring Person” under the Rights Plan so long as such persons, collectively, together with all affiliates of such persons, shall beneficially own less than 20% of the shares of the Company’s common stock then outstanding.
 
On March 12, 2003, the Company and the Rights Agent amended the Rights Plan to provide that prior to June 1, 2005, the Ingalls Parties and their affiliates will be deemed not to beneficially own certain convertible notes and warrants of the Company and any common stock issued or issuable upon their conversion or exercise for purposes of determining whether such person is an “Exempt Person” under the Rights Plan.
 
On December 23, 2003, the Company and the Rights Agent amended the Rights Plan to add Boucher to the list of persons included in the definition of Ingalls Parties who are exempt from being an “Acquiring Person” so long as such persons, collectively, together with all affiliates of such persons, shall beneficially own less than 20% of the shares of the Company’s common stock then outstanding. In addition, the amendment provides that a person shall not be deemed to beneficially own securities held by another person solely by reason of an agreement, arrangement or understanding among such persons to vote such securities, if such agreement, arrangement or understanding is for the purpose of (i) soliciting revocable proxies or consents to elect or remove directors of the Company pursuant to a proxy or consent solicitation made or to be made pursuant to, and in accordance with, the applicable proxy solicitation rules and regulations promulgated under the Securities Exchange Act of 1934, as amended, and/or (ii) nominating one or more individuals (or being nominated) for election to the Company’s Board of Directors or serving as a director of the Company.
 
On March 14, 2005, the Company and the Rights Agent amended the Rights Plan to amend the definition of Exempt Person to include all purchasers of shares of the Company’s common stock in connection with the Company’s private placement completed in March 2005.


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ALSERES PHARMACEUTICALS, INC.
(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
 
7.   Fair Value Measurements
 
The Company adopted certain provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820 to evaluate the fair value of certain of its financial instruments required to be measured on a recurring basis. FASB ASC Topic 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Fair value is determined based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants exclusive of transaction costs.
 
FASB ASC Topic 820 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, described below:
 
Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. The fair value hierarchy gives the highest priority to Level 1 inputs.
 
Level 2: Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.
 
Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
 
The following table sets forth our financial assets that were measured at fair value on a recurring basis at December 31, 2009 by level within the fair value hierarchy. We did not have any non-financial assets or liabilities that were measured or disclosed at fair value on a recurring basis at December 31, 2009. Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
 
                                 
          Fair Value Measurement at Reporting Date Using  
          Quoted Prices in
    Significant
       
    Carrying Value
    Active Markets
    Other
    Significant
 
    at
    for
    Observable
    Unobservable
 
    December 31,
    Identical Assets
    Inputs
    Inputs
 
Description
  2009     (Level 1)     (Level 2)     (Level 3)  
 
Assets:
                               
Cash equivalents and money market funds — current assets
  $ 314,964     $ 314,964     $     $  
Money market funds — long term assets
  $ 115,720     $ 115,720     $     $  
                                 
Total
  $ 430,684     $ 430,684     $     $  
                                 
 
                                 
          Quoted Prices in
    Significant
       
    Carrying Value
    Active Markets
    Other