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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-K







|x | 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



| ̈ | 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 000-51462





CHELSEA
THERAPEUTICS INTERNATIONAL, LTD.

(Exact name of Registrant as specified in its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 20-3174202                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)

3530 Toringdon Way, Suite 200, Charlotte, North Carolina 28277

(Address
of principal executive offices, including zip code)

(704) 341-1516

(Registrants telephone number, including area code)







|                                |  |                                          
|------------------------------- |  | -----------------------------------------
|Title of each class             |  | Name of each exchange on which registered
|Common Stock, $0.0001 Par Value |  | Nasdaq Capital Market                    

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.0001 Par Value





Indicate by check mark if the Registrant is a well-known seasoned issuer (as defined in Rule 405 of the Securities
Act).    Yes   ̈    No  x

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act.    Yes   ̈    No  x

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days.    Yes  x    No   ̈

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).    Yes   ̈    No   ̈

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of Registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ̈

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act (Check one):



|                              |  |                              
|----------------------------- |  | -----------------------------
|Large accelerated filer      ̈ |  | Accelerated filer     x      
|Non-accelerated filer      ̈   |  | Smaller reporting company    ̈

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Act).    Yes   ̈    No  x

The aggregate market value of the registrants common stock held by non-affiliates of the Registrant, based on the closing price of the
Registrants common stock on June 30, 2009 ($4.22 per share) was $94,691,567. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

At March 10, 2010, 40,200,406 shares of the Registrants common stock, $.0001 par value per share, were outstanding.

Documents Incorporated By Reference

Portions of the Registrants definitive Proxy Statement to be filed for its 2010 Annual Meeting of Stockholders currently scheduled to be held May 26, 2010 are incorporated by reference into
Part III of this report.









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ANNUAL REPORT ON FORM 10-K

Table of Contents

[UPDATE}



|           |  |                                                                                                              |  |     
|---------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|           |  |                                                                                                              |  | Page
|           |  | PART I                                                                                                       |  |     
|           |  |                                                                                                             
|Item 1.    |  | Business                                                                                                     |  | 1   
|           |  |                                                                                                             
|Item 1A.   |  | Risk Factors                                                                                                 |  | 23  
|           |  |                                                                                                             
|Item 1B.   |  | Unresolved Staff Comments                                                                                    |  | 36  
|           |  |                                                                                                             
|Item 2.    |  | Properties                                                                                                   |  | 36  
|           |  |                                                                                                             
|Item 3.    |  | Legal Proceedings                                                                                            |  | 37  
|           |  |                                                                                                             
|Item 4.    |  | Reserved                                                                                                     |  |     
|           |  |                                                                                                             
|           |  | PART II                                                                                                      |  |     
|           |  |                                                                                                             
|Item 5.    |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 38  
|           |  |                                                                                                             
|Item 6.    |  | Selected Consolidated Financial Data                                                                         |  | 39  
|           |  |                                                                                                             
|Item 7.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 40  
|           |  |                                                                                                             
|Item 7A.   |  | Quantitative and Qualitative Disclosures about Market Risk                                                   |  | 53  
|           |  |                                                                                                             
|Item 8.    |  | Financial Statements and Supplementary Data                                                                  |  | 54  
|           |  |                                                                                                             
|Item 9.    |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 55  
|           |  |                                                                                                             
|Item 9A.   |  | Controls and Procedures                                                                                      |  | 55  
|           |  |                                                                                                             
|Item 9B.   |  | Other Information                                                                                            |  | 56  
|           |  |                                                                                                             
|           |  | PART III                                                                                                     |  |     
|           |  |                                                                                                             
|Item 10.   |  | Directors and Executive Officers of the Registrant                                                           |  | 57  
|           |  |                                                                                                             
|Item 11.   |  | Executive Compensation                                                                                       |  | 57  
|           |  |                                                                                                             
|Item 12.   |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 57  
|           |  |                                                                                                             
|Item 13.   |  | Certain Relationships and Related Transactions, and Director Independence                                    |  | 57  
|           |  |                                                                                                             
|Item 14.   |  | Principal Accounting Fees and Services                                                                       |  | 57  
|           |  |                                                                                                             
|           |  | PART IV                                                                                                      |  |     
|           |  |                                                                                                             
|Item 15.   |  | Exhibits and Financial Statement Schedules                                                                   |  | 58  
|           | 
|SIGNATURES |  | 61                                                                                                          



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PART I

Except for the historical information contained herein, the matters set forth in this Report include forward-looking statements within the meaning of the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially. These risks and uncertainties are
detailed throughout the report and will be further discussed from time to time in our periodic reports filed with the Securities and Exchange Commission. The forward-looking statements included in this Report speak only as of the date hereof.

ITEM 1. BUSINESS.

Overview

We are a development stage pharmaceutical company that seeks to
acquire, develop and commercialize innovative products for the treatment of a variety of human diseases. Our strategy is to develop technologies that address important unmet medical needs or offer improved, cost-effective alternatives to current
methods of treatment. Specifically, we are developing a novel therapeutic agent for the treatment of symptomatic neurogenic orthostatic hypotension, or NOH, and related conditions and diseases along with our development of prescription products for
multiple autoimmune disorders including rheumatoid arthritis, psoriasis, inflammatory bowel disease and cancer.

We are
currently focusing the majority of our drug development resources on two clinical stage development projects: droxidopa for symptomatic NOH and other potential indications; and our portfolio of non-metabolized antifolate compounds for the treatment
of rheumatoid arthritis.

Product Pipeline Summary

Droxidopa, our most advanced investigational product candidate, is an orally active synthetic precursor of norepinephrine. It is being developed for the treatment of symptomatic NOH and is currently
approved and marketed in Japan for the treatment of symptomatic orthostatic hypotension, freezing of gait in Parkinsons disease, or PD, and intradialytic hypotension, or IDH. During 2007, the U.S. Food and Drug Administration, or FDA, granted
orphan drug status to droxidopa for the treatment of symptomatic NOH and the European Medicines Agency, or EMEA, granted orphan medicinal product designation for the treatment of orthostatic hypotension in patients with pure autonomic failure, or
PAF, and patients with multiple system atrophy, or MSA. Droxidopa is currently in Phase III clinical trials designed to support the registration of droxidopa in the United States for the treatment of symptomatic NOH. We are also developing droxidopa
for the treatment of IDH. In March 2009, we announced positive results from a double-blind, placebo controlled Phase II trial of droxidopa for the treatment of IDH in which droxidopa demonstrated a dose dependent, statistically significant benefit
across multiple, clinically relevant assessment criteria for IDH. The data also showed that droxidopa was well tolerated by patients with the most common treatment related side effect reported being headache (3%).

In early 2009, we initiated a Phase II trial of droxidopa, alone and in combination with carbidopa, for the treatment of fibromyalgia, under
approval from the United Kingdoms Medicines and Healthcare Products Regulatory Agency, or MHRA.

To facilitate a fuller
understanding of the breadth of potential therapeutic applications of droxidopa, we have also been exploring opportunities to support additional, investigator-sponsored studies of droxidopa in indications for which we believe a strong clinical
rationale exists. Diseases that may potentially be treated with droxidopa include attention deficit hyperactivity disorder, or ADHD, chronic fatigue syndrome, freezing of gait in PD and other indications in which norepinephrine deficiencies are
believed to play a role. In February 2010, we announced that a new investigator-led Phase II clinical study of droxidopa alone and in combination with carbidopa in ADHD had been initiated by the Narrows Institute for Biomedical Research in New York.



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In addition to droxidopa, we are currently developing a portfolio of molecules for the
treatment of various autoimmune/inflammatory diseases. The most advanced platform is a portfolio of metabolically inert antifolate molecules engineered to have potent anti-inflammatory and anti-tumor activity to treat a range of immunological
disorders, including two clinical stage product candidates; CH-1504 and CH-4051. Both are orally available molecules with anti-inflammatory, autoimmune and anti-tumor properties that potently inhibit several key enzymes required for cell
proliferation. Preclinical and clinical data to date suggests superior safety and tolerability, as well as increased potency versus methotrexate, or MTX, currently the leading antifolate treatment and standard of care for a broad range of abnormal
cell proliferation diseases. Diseases that may potentially be treated with these compounds include rheumatoid arthritis, psoriasis, Crohns disease, ankylosing spondylitis, uveitis, psoriatic arthritis and several different kinds of cancer.

In March 2009, we announced positive results from the evaluation of CH-1504 for the treatment of rheumatoid arthritis in a
Phase II head-to-head clinical trial to compare its efficacy and tolerability against MTX. In April 2009, we announced positive results from a Phase I study of CH-4051 that was designed to determine the maximum tolerated dose based on results of
single-ascending and multiple-ascending dose evaluations. Phase I data suggests CH-4051 retains the superior safety and tolerability profile of CH-1504 while preclinical data suggests both an enhanced potency compared to CH-1504 and significant
superiority to methotrexate. As a result, we do not expect to make further investments in the development of CH-1504, our previous lead antifolate product candidate. We do plan to initiate an evaluation of CH-4051 in a Phase II study in rheumatoid
arthritis in the second quarter of 2010. Complementing our antifolate program is a second platform consisting of a portfolio of dihydroorotate dehydrogenase, or DHODH, inhibiting compounds known as the I-3D portfolio. Preclinical animal data for
this portfolio of compounds have shown potential applications in autoimmune diseases and transplantation.

We also remain
active in evaluating potential in-licensing and acquisition candidates to identify and acquire additional drug candidates as available funding might allow.

To date, we have not received approval for the sale of any of our drug candidates in any market and, therefore, have not generated any revenues from our drug candidates.

Our Strategy

Our mission
is to create long-term stockholder value by acquiring, developing and commercializing innovative products for the treatment of a variety of human diseases that address important unmet medical needs or offer improved, cost-effective alternatives to
current methods of treatment. Since inception in 2002, we have focused primarily on organizing and staffing our company, negotiating in-licensing agreements with our partners, acquiring, developing and securing our proprietary technology,
participating in regulatory discussions with the FDA, the EMEA and other regulatory agencies, undertaking preclinical and clinical trials of our product candidates and raising capital. We are a development stage company and have generated no
revenues since inception. We do not anticipate generating any product revenue until approvals are successfully obtained from the FDA or equivalent foreign regulatory bodies to begin selling pharmaceutical candidates.

We expect the progress of our development programs to be a primary factor affecting our expenses, losses and cash position in the future.
During 2009 and in 2010, we initiated, plan to initiate or completed clinical trials as follows:



| |  |  | Phase III pivotal clinical programs for droxidopa in neurogenic orthostatic hypotension, requiring up to approximately 335 patients over three trials;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Phase II program for CH-1504 in rheumatoid arthritis, completed in 2009 with 201 enrolled and randomized patients;
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | Phase II program for droxidopa in hypotension associated with dialysis, completed in 2009 with 85 patients;
| | - |  | -----------------------------------------------------------------------------------------------------------



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| |  |  | Phase II program for droxidopa in fibromyalgia, requiring approximately 120 patients;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | Phase I single and maximum tolerated dose (MTD) studies for CH-4051 completed in 2009 with 56 patients; and
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | Phase II program for CH-4051 in rheumatoid arthritis, to begin in 2010 requiring approximately 250 patients.
| | - |  | ------------------------------------------------------------------------------------------------------------

We also continue to discuss our antifolate program with large pharmaceutical companies to gauge their interest in licensing this library of
compounds. We believe a partner may be able to manage Phase III trials and global commercialization more effectively and with less risk than we could and, accordingly, our current strategy is to pursue such a partnership. Similarly, as we are
currently not planning to establish commercial operations outside of the United States, we continue to discuss potential licensing arrangements for droxidopa in Europe and other markets outside the United States. In the course of these discussions,
the program has generated interest among potential partners and we continue to evaluate the licensing potential for droxidopa in North America. Any such partnership would aim to provide significant value to us and our stockholders, while maximizing
the opportunities for droxidopa in global markets. We also continue to pursue and evaluate potential out-licensing arrangements for our I-3D portfolio of DHODH inhibiting compounds.

We have retained a management team with leading core competencies and expertise in numerous fields, including manufacturing, research,
clinical, regulatory and business development. Our management and advisors are comprised of experienced pharmaceutical and biotechnology industry veterans and respected experts. We are led by our Chief Executive Officer, Dr. Simon Pedder,
formerly Vice President, Pharmaceutical Business, Oncology at Hoffmann-La Roche Inc., who has over 20 years of senior pharmaceutical management experience, including drug development and business experience. During his time at Roche, Dr. Pedder
was responsible for a number of global development programs, successful registrations and product launches.

Plan of Operation

Our plan of operation is to continue implementing our business strategy, especially the clinical development of our
current drug candidates including droxidopa and our portfolio of antifolates. As we have in the past, we plan to continue exploring the feasibility of other licensed or newly developed compounds and to expand our drug candidate portfolio by
acquiring additional drug technologies for development as our resources permit. We expect our principal expenditures during the next 18 months to include:



| |  |  | operating expenses, including marketing, general and administrative and business development expenses; and
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | product development expenses, including the costs incurred with respect to our clinical trials for droxidopa and our antifolates.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------

As part of meeting our operating needs and as resources permit, we may hire additional scientific,
marketing, and administrative staff. In addition, we intend to continue using clinical research organizations and third parties to perform our clinical studies and manufacturing.

Corporate History

Our operating company was incorporated in Delaware in
April 2002 under the name Aspen Therapeutics, Inc., and changed its name to Chelsea Therapeutics, Inc. in July 2004. On February 11, 2005, Chelsea Therapeutics, Inc. completed a merger with Ivory Capital Corporation, a publicly traded Colorado
corporation formed in May 1988. At the time of the transaction, Ivory Capital had only nominal assets and no operating activities. In connection with this merger transaction, a wholly owned subsidiary of Ivory Capital Corporation merged with and
into Chelsea Therapeutics, Inc., with Chelsea Therapeutics, Inc. remaining as the surviving corporation and a wholly owned subsidiary of Ivory Capital Corporation. In connection with the merger, the



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former stockholders of Chelsea Therapeutics, Inc. received 96.75% percent of our outstanding equity on a fully diluted basis. Pursuant to the terms of the merger, the sole officer and director of
Ivory Capital Corporation prior to the merger was replaced with the officers and directors of Chelsea Therapeutics, Inc.

On
June 17, 2005, Ivory Capital Corporation formed a wholly owned subsidiary in Delaware named Chelsea Therapeutics International, Ltd. for the purposes of reincorporating in Delaware. On July 28, 2005, Ivory Capital Corporation merged with
Chelsea Therapeutics International, Ltd., with Chelsea Therapeutics International, Ltd. as the surviving corporation. As a result, Chelsea Therapeutics International, Ltd. is the public reporting company and is the 100% owner of Chelsea
Therapeutics, Inc., its operating subsidiary.

Except where the context provides otherwise, references to we,
us, our and similar terms mean Chelsea Therapeutics International, Ltd., Ivory Capital Corporation and Chelsea Therapeutics, Inc. When we refer to business and financial information relating to periods prior to
December 31, 2004, we are referring to the business and financial information of Chelsea Therapeutics, Inc. unless the context requires otherwise. When we refer to business and financial information for periods between January 1, 2005 and
July 28, 2005, we are referring to the business and financial information of Ivory Capital Corporation.

Products Under Development

DROXIDOPA

Product Overview

Droxidopa, a synthetic amino acid, is converted by the body into norepinephrine and, as a
prodrug of norepinephrine, provides replacement therapy for norepinephrine deficiency. Norepinephrine is both a hormone and a neurotransmitter. As a hormone, secreted by the adrenal gland, it works alongside epinephrine/adrenaline to give the body
sudden energy in times of stress, known as the fight or flight response. As a neurotransmitter, it passes nerve impulses from one neuron to the next. While norepinephrine, as a catecholamine does not penetrate the blood-brain barrier,
droxidopa, as a neutral amino acid, is able to do so thus providing both a peripheral and central effect on circulating norepinephrine levels. By producing and replenishing depleted norepinephrine via endogenous enzymatic pathway, droxidopa is
believed to allow for the re-uptake of norepinephrine into peripheral and central nervous system neurons.

Droxidopa is
currently approved and marketed by Dainippon Sumitomo Pharma Co., Ltd., or DSP, in Japan for the treatment of symptomatic orthostatic hypotension, freezing of gait in PD and IDH. Droxidopa received initial Japanese marketing approval in 1989 and has
historically generated annual revenues of approximately $50 million in Japan. In addition to the indications studied by DSP and subsequently approved in Japan, diseases that may potentially be treated with droxidopa include fibromyalgia, chronic
fatigue syndrome, ADHD, and other indications in which norepinephrine deficiencies are believed to play a role.

Clinical Development

We are currently focusing our internal resources on the clinical development of droxidopa in three indications: NOH; IDH; and
fibromyalgia. In order to maximize the potential therapeutic applications of droxidopa while conserving capital, we have also been exploring opportunities to support additional, investigator-sponsored studies of droxidopa in indications for which we
believe a strong clinical rationale exists.

Neurogenic Orthostatic Hypotension

Given the extensive body of clinical data generated by DSP and exclusivity available to us under terms of our licensing agreement, we plan to
seek initial marketing approval of droxidopa, under the brand name Northera, in the United States and European Union for the treatment of symptomatic NOH, an indication for which the drug has been approved in Japan since 1989.



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Orthostatic hypotension is a sudden decrease in blood pressure when a person assumes a
standing position and is characterized by lightheadedness, dizziness, blurred vision and syncope. There are multiple known causes for orthostatic hypotension including those that are considered cardiovascular, endocrine and neurological (or
neurogenic) in nature. NOH results from a deficient release and/or activity of norepinephrine, a neurotransmitter used by autonomic nerves to send signals to the blood vessels and the heart.

We estimate that nearly 300,000 patients suffer from chronic, symptomatic NOH in the United States and the European Union combined. This
condition is commonly associated with PD, PAF, and MSA, the latter encompassing disorders previously known as striatonigral degeneration, olivoponto-cerebellar atrophy and the Shy-Drager syndrome.

In January 2007, the FDA granted orphan drug status for droxidopa for the treatment of symptomatic NOH in patients with primary autonomic
failure (PD, MSA, and PAF), dopamine-ß-hydroxylase deficiency and non-diabetic autonomic neuropathy. In the United States, orphan drug status provides seven years of marketing exclusivity and may impact FDA requirements for clinical trials,
potentially reducing the time and expense required for such trials. In August 2007, the European Commission granted two orphan medicinal product designations for droxidopa for the treatment of orthostatic hypotension in patients with PAF and MSA.
Although we can expect 10 years of data exclusivity for droxidopa upon approval in Europe as a new chemical entity, orphan drug status could impact requirements for clinical trials in Europe, thereby reducing the time and costs associated with our
development of droxidopa for this market.

The FDA has also granted Fast Track designation to droxidopa for symptomatic NOH.
Fast Track designation is designed to facilitate the review of products that address serious or potentially life-threatening conditions for which there is an unmet medical need. Fast Track designation allows a company to file a New Drug Application,
or NDA, on a rolling basis as data becomes available. This permits the FDA to review the filing as it is received, rather than waiting for the entire document prior to commencing the review process. In addition, drugs that have Fast Track
designation are more likely to be considered appropriate for Priority Review. A Priority Review generally reduces the time it takes the FDA to review a NDA.

In February 2008, we initiated a Phase III clinical program in symptomatic NOH in primary autonomic failure. At that time, our Phase III program for droxidopa consisted of two similar double-blind pivotal
trials (Study 301 and Study 302) designed to compare droxidopa to placebo at multiple sites in North America, Europe and Australia. Both Phase III trials were intended to assess the safety and efficacy of up to 600 mg t.i.d. of droxidopa in patients
suffering from symptomatic NOH associated with primary autonomic failure. Both studies were designed to evaluate functional and symptomatic improvements through multiple endpoints including the orthostatic hypotension questionnaire, or OHQ. The OHQ
is a novel global measure of disease activity specific to NOH which consists of a two-part questionnaire that includes the six-item orthostatic hypotension symptom assessment scale, or OHSA and the four-item orthostatic hypotension daily activities
scale, or OHDAS, along with corresponding OHSA, OHDAS and OHQ composite scores. The primary efficacy endpoint for Studies 301 and 302 was defined as the relative symptomatic change, as measured by the mean score of Item 1 (dizziness or
lightheadedness) of the OHSA, 14 days following randomization either to continued therapy with droxidopa or to placebo in Study 302 and seven days in Study 301.

In February 2008, we reached an agreement with the FDA on a Special Protocol Assessment, or SPA for the design of Study 301. The SPA process allows for FDA evaluation of a clinical trial protocol intended
to form the primary basis of an efficacy claim in support of a NDA, and provides a binding agreement that the study design, including trial size, clinical endpoints and/or data analyses are acceptable to support regulatory approval.

In September 2009, we announced preliminary data from Study 302, the first of these two pivotal double-blind Phase III trials. Study 302 was
an enriched, withdrawal-design study in which all patients underwent an initial open-label dose titration then continued on drug treatment for one week prior to a two-week blinded randomized withdrawal treatment period. While strong symptomatic
benefit was demonstrated during the open-



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label dose titration and run-in phase of the trial, results of the trial did not demonstrate a statistically significant improvement relative to placebo, as measured by the mean score of
Item 1 (dizziness or light-headedness) of the OHSA scale during the double-blind phase of the trial, the studys primary endpoint. While the study did not meet its primary endpoint, additional analysis confirmed statistically significant
symptomatic benefit across five clinically relevant assessment criteria that reflect symptomatic improvements and corroborate other supportive symptom data. Data from the trial also supported the safety and tolerability of droxidopa.

Significantly, a subgroup analysis of the 44 PD patients enrolled in Study 302, demonstrated a more robust response compared to the overall
study population of 101 patients. PD patients receiving droxidopa showed improvement over placebo on 9 of the 10 individual items of the OHQ as well as all 3 composite measures. On the four question OHDAS, the 44 PD patients on droxidopa
demonstrated a statistically significant improvement in their ability to perform activities of daily living that require standing for a short period of time (p<0.05), standing for a long time (p<0.01), and walking for a short time (p<0.05).
This compares to the 101 total patients that only reported statistically significant improvements in activities that require standing for a short time (p<0.05) and standing for a long time (p<0.05).

The marked improvements observed across each of the individual OHDAS variables resulted in a highly significant benefit as measured by both
the OHDAS composite and the OHQ composite for PD patients receiving droxidopa in Study 302. The OHDAS composite was statistically significant with p<0.005 and the OHQ composite, which was a retrospective, post hoc analysis, was statistically
significant at p<0.01.

In November 2009, we met with the FDA to review both the results of Study 302 as well as the
results of an independent analysis of the sensitivity of efficacy scales used in Study 302. As a result of this meeting, the FDA agreed to allow us to modify the primary endpoint and enroll an additional 24 patients in Study 301, an on-going
induction design, double-blind, placebo controlled pivotal Phase III study of droxidopa for the treatment of symptomatic NOH.

The primary endpoint of Study 301 was changed to the relative improvement in the OHQ composite score between droxidopa and placebo. The OHQ composite score is a single endpoint that reflects the average of the OHSA composite score and the
OHDAS composite score. The FDA agreed that the revised primary endpoint reflects a more comprehensive global assessment of the clinical benefit of droxidopa for the treatment of symptomatic NOH in the heterogeneous patient population of primary
autonomic failure, Dopamine-ß-hydroxylase deficiency and non-diabetic autonomic neuropathy and would therefore be suitable for supporting a symptomatic claim. Although we had already enrolled 126 patients, exceeding our initial target
enrollment of 118 patients, in Study 301 by September 2009, the results were not unblinded. To further de-risk the study and maximize the potential significance of the outcome, we decided to increase the power of the study to greater than 80% by
randomizing an additional 24 patients upon reopening enrollment at select North American centers. The FDA subsequently confirmed that the SPA originally awarded to Study 301 in 2008 remained in effect following the protocol amendments approved by
the FDA in January 2010.

The FDA confirmed that while Study 302, which failed to achieve statistical significance using only
item 1 of the OHSA as a primary endpoint, could not be used as a pivotal study, it did provide valuable information about the benefits of droxidopa. Both the safety and efficacy data from this study will be considered to be a supportive part of
future regulatory filings. Further, the FDA indicated that the number of patients already enrolled in our pivotal program would be sufficient to support the safety of droxidopa in an NDA in this indication.

The FDA also recommended that we submit a confirmatory pivotal study to support an NDA filing. Based on this recommendation, we plan to
initiate a new clinical trial, Study 306, in 2010. Study 306 is a multinational, randomized, placebo-controlled, induction-design, double-blinded Phase III trial evaluating up to 84 patients with symptomatic NOH associated with PD. The trial will be
approximately 12 weeks in duration and include an initial, blinded dose titration period lasting up to two weeks, after which all patients will continue on to an 8-week double-blind treatment period. During the blinded titration period, patients
randomized into the treatment



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arm will be titrated daily with up to 600 mg of droxidopa t.i.d. or a matching placebo. As in Study 301, the primary endpoint of the trial will be the relative improvement in the OHQ composite
score between droxidopa and placebo. Enrollment is expected to be complete by year-end, providing for top-line data in the second quarter of 2011.

In addition to the pivotal efficacy trials included in our registration program, we are currently conducting multiple extension studies designed to provide supportive safety data for our NDA in NOH. These
ongoing studies include:



| |  |  | Study 303: a renewable three-month, open-label extension to Study 302 which includes a randomized withdrawal efficacy assessment after the initial
three months;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Study 304: a renewable three-month, open-label extension to Study 301; and
| | - |  | --------------------------------------------------------------------------



| |  |  | Study 305: a 24-hour blood pressure monitoring study in a subgroup of 18 patients from Study 301
| | - |  | ------------------------------------------------------------------------------------------------

Results from our registration program, in combination with data secured from DSP, are expected to support applications for marketing
approval, under the brand name Northera in both the United States and the European Union. Based on the original scope of our registration program, consisting of Study 301 and Study 302, we had anticipated that at least one additional trial
might be required for approval in the European Union. However, we now believe that our expanded registration program, and specifically Study 306, could satisfy requirements previously outlined by the EMEA for approval in the EU. We cannot predict
with certainty the timing of our clinical trials. However, we currently anticipate market launch no sooner than the first quarter of 2012.

Intradialytic Hypotension

Intradialytic hypotension, or IDH, is another indication for which DSP conducted
extensive clinical evaluation. Pivotal clinical studies conducted by DSP have demonstrated the efficacy of droxidopa in the prevention of vertigo, dizziness and weakness associated with hypotension in hemodialysis patients. Subsequently, in 2000,
after showing benefit in clinical trials, DSP received expanded marketing approval in Japan for this indication.

Intradialytic hypotension is the most common adverse event during routine hemodialysis. IDH is often defined as a decrease in systolic blood pressure by 3 20 mm Hg or a decrease in mean arterial
pressure by 10 mm Hg. IDH has been reported in 15-25% of all hemodialysis patients, with elderly patients reporting an even higher incidence. Many adverse hemodialysis events, including headaches, lightheadedness, nausea, cramps, and seizures, are
associated with IDH. These complications can routinely interrupt dialysis sessions, resulting in insufficient uremia toxin removal and necessitating repetition of the procedure. Interruptions due to IDH increase the costs of both the dialysis
treatment sessions and the long-term care of less healthy hemodialysis patients.

In March 2009, we reported results from a
double-blind, placebo controlled trial comparing 400mg and 600mg of droxidopa to placebo. Following a two-week run-in period to establish a baseline for all measurements, patients in this three-arm study received a single oral dose of droxidopa or
placebo one hour prior to each dialysis treatment over a four-week period. In order to determine useful clinical endpoints for a Phase III program, the trial evaluated the efficacy of droxidopa using multiple clinically relevant measures, including:
the change from baseline in average mean arterial blood pressure during dialysis; the change from baseline in average mean nadir (lowest) blood pressure, during dialysis; the number of treatment interventions, including early termination, required
during dialysis sessions; and the change from baseline in mean postdialytic blood pressure during the final two weeks of the study period. The study recruited 85 patients at 15 sites in the United States. Droxidopa demonstrated a dose dependent,
statistically significant benefit across multiple, clinically relevant assessment criteria for IDH. While the study did not achieve an improvement in mean arterial blood pressure during dialysis, the prospective primary endpoint for the study,
droxidopa demonstrated a significant benefit in limiting the



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severity of the drop (nadir) in blood pressure during treatment. The data also showed that droxidopa was well tolerated by patients with the most common treatment-related side effect reported
being headache (3%). Results from this study might be used to determine clinical endpoints for a potential future Phase III program that might allow us to file for the first marketing approval of a therapeutic agent for IDH in the United States.

Fibromyalgia

Fibromyalgia is a polysymptomatic syndrome characterized by chronic, widespread musculoskeletal pain, multiple tender points, abnormal pain sensitivity, and is often accompanied by severe fatigue, insomnia and mood symptoms. According to
the American College of Rheumatology, fibromyalgia is the second most commonly diagnosed condition in rheumatology clinics in the United States after osteoarthritis and is estimated to affect over six million Americans. While the precise etiology of
fibromyalgia remains unknown, current research includes the role of norepinephrine reuptake and availability in the central nervous system. Norepinephrine, a widely used neurotransmitter in the central and peripheral nervous systems, has long been
linked to both chronic pain and depression. While norepinephrine, as a catecholamine, does not penetrate the blood-brain barrier, droxidopa, as a neutral amino acid, is able to do so thus providing both a peripheral and central affect on circulating
norepinephrine levels. In prior studies conducted by DSP, droxidopa has shown statistically significant dose-dependent analgesia in chronic pain.

We initiated a Phase II trial of droxidopa, both alone and in combination with carbidopa for the treatment of fibromyalgia in January 2009. The Phase II trial, being conducted in the U.K., is a
multi-centre, randomized, double-blind, placebo-controlled, dose response, factorial 12-arm parallel group study evaluating 120 patients equally randomized to receive droxidopa monotherapy, carbidopa monotherapy, droxidopa/carbidopa combination
therapy or placebo. Accordingly, 10 patients will be randomized into each of 12 groups to receive: 200mg, 400mg or 600 mg of droxidopa TID; 25mg or 50mg carbidopa TID; 200/25mg, 400/25mg or 600/25mg droxidopa/carbidopa TID; 200/50mg, 400/50mg or
600/50mg droxidopa/carbidopa TID; or placebo over a 9-week treatment period. The primary endpoint will be the average reduction in pain as measured by the Short Form McGill Pain Questionnaire. Secondary outcomes of the study include Fibromyalgia
Index Questionnaire (FIQ), Patient Global Impression of Change (PGI-C), Multidimensional Fatigue Inventory (MFI), and Hamilton Anxiety Depression survey (HAMA).

Given the significant market opportunity associated with fibromyalgia, the number of on-going and anticipated clinical trials related to this indication, and the competition for both physicians and
patients, we plan to conduct an interim analysis of this study in mid-2010 to evaluate the potential to collapse certain arms of the trial, potentially minimizing overall recruitment requirements and expediting the conclusion of the trial. We
currently do not anticipate completing this trial or reporting clinical results in this indication until 2011 at the earliest.

Additional
Potential Indications for Droxidopa

In addition to the indications for which we have established active clinical programs,
we believe there are a significant number of other therapeutic indications in which norepinephrine function plays a key role and for which droxidopa may provide clinical benefit. To facilitate research in additional indications and maximize the
long-term development potential, we have initiated an extra-mural development program that enables independent investigators to conduct clinical trials in their respective fields of expertise. Specifically, we have been exploring three Phase II
clinical studies, under investigator-sponsored investigational new drug applications, or INDs, intended to evaluate the safety and efficacy of droxidopa in ADHD, chronic fatigue syndrome and freezing of gait in PD, respectively. For studies
conducted under investigator-sponsored INDs, we will have limited control over the timing for initiating or completing these studies and, therefore, cannot predict with any certainty when data from these programs will be available. In February 2010,
we announced that a new investigator-led Phase II clinical study of droxidopa, alone and in combination with carbidopa, in ADHD had been initiated by the Narrows Institute for Biomedical Research in New York.



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We plan to continue working with key opinion leaders to identify and evaluate additional
potential indications for droxidopa and may provide droxidopa for future studies when deemed appropriate and as funding and availability of drug substance permits.

Droxidopa Competition

Neurogenic Orthostatic Hypotension

Midodrine(ProAmatine®)

Midodrine is
currently the only FDA approved therapeutic for the treatment of orthostatic hypotension. Midodrine, originally developed by Roberts Pharmaceuticals (later acquired by Shire) under the brand name ProAmatine®, is an alpha-agonist that works by stimulating alpha receptors, consequently increasing vasculature tone and thereby producing an elevation in blood
pressure. Given this direct mechanism of action, it is not surprising that supine hypertension is the most frequently occurring adverse event associated with its use. Midodrines product label contains a black box warning for this side effect,
along with the statement that Midodrine has not shown benefit to patients Activities of Daily Living, or symptomatic/functional benefit.

Recently, the FDA has indicated publically that unless two studies are successfully completed within a specified timeframe to confirm the symptomatic benefit of midodrine, the agency will consider
removing midodrine from the market. Midodrine is the only approved compound for orthostatic hypotension in the U.S. and its removal could facilitate higher sales and/or more rapid acceptance of droxidopa in this indication. However the FDA has
never removed a drug under similar circumstances and we can provide no assurance that they will do so in the case of midodrine.

Other than the increase in blood pressure caused by vasoconstriction, additional midodrine side effects include paresthesia, piloerection, dysuria, and pruritis. Annual sales (branded and generic) in the United States total approximately
$60 million, based on 2005 data. In addition to Shires manufacturing of the ProAmatine brand, Mylan Pharmaceuticals, Eon Labs and Impax Laboratories are generic manufacturers of the compound.

Fludrocortisone(Florinef®)

Fludrocortisone is also widely used in the
treatment of orthostatic hypotension although this specific indication has not been approved by the FDA. Fludrocortisone is a synthetic adrenocortical steroid possessing very potent mineralocorticoid properties and high glucocorticoid activity.
Fludrocortisone, in small oral doses (0.1 mg.) produces marked sodium retention and increased urinary potassium excretion leading to enhanced plasma volume and a rise in blood pressure. Side effects include hypertension, water and sodium retention
and K+ loss. Fludrocortisone is not FDA approved for NOH.

Intradialytic Hypotension

There is currently no FDA approved drug for treatment or prevention of intradialytic hypotension. Common methods for treating IDH include the
manual adjustment of ultrafiltration rate, a cumbersome procedure in daily practice. Some dialysis patients are known to take Midodrine prophylactically, either before or during dialysis, to prevent intradialytic hypotension. However, Midodrine is
known to be eliminated through the kidneys and is removed by dialysis, thereby limiting its widespread use in this indication.

Fibromyalgia

While doctors have used antidepressants and pain drugs for years, in June
2007, the FDA granted its first approval for the treatment of fibromyalgia to Phizers Lyrica®, which was
already used to treat epilepsy and neuropathic pain. Worldwide sales of Lyrica® in 2009 totaled $2.8 billion.
Eli Lilly received approval in 2008 to market Cymbalta®, a selective serotonin and norepinephrine reuptake
inhibitor, to treat fibromyalgia and generated worldwide sales in all indications of $3.1 billion in 2009. Cypress Biosciences, with their partner



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Forest Laboratories, received FDA approval in early 2009 for Savella® for the treatment of fibromyalgia. Savella® is a norepinephrine serotonin reuptake inhibitor that increases the level of norepinephrine more than it does serotonin.

Droxidopa Marketing

We do
not currently have a commercial sales and marketing organization in any territory and do not plan to establish the necessary infrastructure to support future sales outside of the United States. As a result, we would expect to partner with or license
droxidopa to companies with established infrastructure in the European Union and other markets. With regard to the United States, we believe that the market for droxidopa in NOH, our most immediate commercial opportunity, could be addressed through
the establishment of a marketing and sales organization on a stand-alone basis. During 2008, we conducted studies to further evaluate the marketing potential and pricing opportunities for droxidopa in the United States. The favorable results of
these studies were suggestive of a significant market opportunity. Given the attractive commercial opportunity and the nature of marketing a drug under orphan drug protection, there may exist opportunities for us to more effectively pursue
co-marketing, co-promotion or other alliances within the United States.

It is possible that we might directly commercialize
or co-promote droxidopa in IDH and other smaller potential therapeutic indications. Given the size of the fibromyalgia market, the vast sales forces required to compete in this market, and the necessary infrastructure required, our marketing
strategy in this indication is likely to include contracting with or licensing to third parties, particularly for territories outside the United States. Out-licensing arrangements might be negotiated and entered into prior to droxidopa receiving
marketing approval in one or more of the indications currently under clinical development

METABOLICALLY INERT ANTIFOLATES

Product Overview

Our portfolio of novel antifolate compounds was originally developed by Dr. M. Gopal Nair and licensed to us in 2004. A library of orally available and metabolically inert antifolate compounds with
potent autoimmune, anti-inflammatory and anti-tumor properties, these compounds are engineered to treat a broad range of immunological disorders with less harmful and unpleasant side effects than those typically associated with classical antifolates
such as methotrexate, or MTX, currently the leading antifolate treatment and standard of care for a broad range of abnormal cell proliferation diseases.

Drug candidates from this portfolio, including both clinical candidates CH-1504 and CH-4051, inhibit dihydrofolate reductase, an enzyme required for cell proliferation. Both compounds potently inhibit
enzymes required for cell proliferation, but, due to the lack of metabolism, are devoid of the metabolites believed to play a significant role in the liver and kidney toxicities associated with long-term use of MTX and show a clinically relevant
decrease in toxicity compared to MTX.

We believe these unique antifolates might have clinical advantages over MTX as they
might have less toxicity and increased tolerability while maintaining equal or potentially greater efficacy. Potential advantages over existing therapies, supported by our preclinical and clinical work to date, include:



| |  |  | higher response rate, including efficacy in patients that have failed MTX therapy;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | faster onset of action;
| | - |  | -----------------------



| |  |  | better tolerability; and
| | - |  | ------------------------



| |  |  | superior toxicity profile.
| | - |  | --------------------------

Diseases that may potentially be treated with metabolically inert antifolates include rheumatoid arthritis, psoriasis, Crohns disease, uveitis, ankylosing spondylitis, inflammatory bowel disease,
cancer and other immunological disorders.



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Clinical Development

Our portfolio of metabolically inert antifolates consists of two clinical stage drug candidates and additional preclinical candidates. CH-1504, currently the most clinically advanced of our antifolate
compounds, has completed Phase II trials in rheumatoid arthritis. We currently do not expect to conduct additional trials or make further investments in the development of CH-1504. Our intent is to focus our clinical resources on further development
of CH-4051, the second clinical stage compound in this portfolio and the more potent L-enantiomer of CH-1504. CH-4051 is currently being developed with a lead indication of rheumatoid arthritis, having completed Phase I trials in April 2009 and
scheduled for Phase II trials beginning in the second quarter of 2010.

Rheumatoid arthritis is a chronic inflammatory disease
that leads to pain, stiffness, swelling and limitation in the motion and function of multiple joints. If left untreated, rheumatoid arthritis can produce serious destruction of joints that frequently leads to permanent disability. Though the joints
are the principal body part affected by rheumatoid arthritis, inflammation can develop in other organs as well. The disease currently affects over two million Americans, almost 1% of the population, and is two to three times more prevalent in women.
Onset can occur at any point in life with most patients developing the disease between the ages of 35 and 50.

We believe that
in rheumatoid arthritis patients, our novel antifolates might have significant clinical advantages over MTX due to their metabolic stability. Because of this stability, it can be hypothesized that in those patients who are unresponsive to MTX, a
metabolism-blocked antifolate might be clinically efficacious since it is not deactivated by these enzymatic processes.

CH-4051

In parallel to our clinical development of CH-1504, we continued additional preclinical evaluation, including formulation
work on the enantiomers of CH-1504. After conducting studies to determine the relative potency of the L- and D-isomers, we found that the L-isomer, now identified as CH-4051, was the more potent of the two thus prompting additional preclinical
evaluation of CH-4051.

In April 2008, we reported findings from a 17-day preclinical study of CH-4051 designed to test the
efficacy of CH-4051 in a rat collagen-induced arthritis (CIA) model. The results reveal efficacy in delaying the onset of the disease, significantly decreasing the severity and, at certain doses, completely blocking all development of rheumatoid
arthritis. The most significant finding from this study was that once daily dosing of 10mg/kg of CH-4051 administered from day 0 completely prevented the onset of arthritis. Similarly, twice daily 5mg/kg doses of CH-4051 reduced the severity of
disease in all animals and prevented disease onset in some. Both the once-daily dose of 10mg/kg and the twice-daily dose of 5mg/kg dose of CH-4051 demonstrated better prevention of disease than 0.25mg/kg of methotrexate (a known maximally tolerated
dose, or MTD, in this model) administered every three days.

In April 2009, we announced positive findings from our Phase I
study of CH-4051. Data from this single and multiple ascending dose study demonstrated that CH-4051 is safe and well tolerated up to a MTD of 7.5mg. This randomized, double-blind, placebo-controlled study was conducted at Kendle Internationals
Clinical Pharmacology Unit in the Netherlands. The primary objective of the study was to evaluate the safety, tolerability and pharmacokinetics of single and multiple ascending doses of CH-4051 in healthy male volunteers and to determine the MTD.

The single ascending dose (SAD) phase of the study evaluated 5mg, 10mg, 20mg and 40mg doses of CH-4051. Each group contained
6 volunteers randomized 5:1 to receive either CH-4051 or placebo. In this escalating dose study, each cohort of subjects received a higher dose of the drug than the preceding cohort.

Based on the findings from the SAD study, we selected 5mg, 7.5mg, 10mg and 20mg of CH-4051 for evaluation in a multiple ascending dose (MAD)
study with the objective of exploring a wide range of doses,



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including and exceeding those believed to be therapeutically relevant. In the MAD study, 32 subjects in 4 cohorts of 8 volunteers were randomized 6:2 to receive repeat daily oral doses of CH-4051
or placebo for 14 consecutive days.

Results demonstrated that CH-4051 was well tolerated at doses up to and including 7.5mg,
a dose range likely to be effective for multiple autoimmune disorders. The 5mg dose was as well tolerated as placebo. High doses of CH-4051 demonstrated mostly mild toxicities, with the 10mg and 20mg doses groups reporting both gastrointestinal
side-effects and reversible liver enzyme elevations. No serious adverse events occurred during the study. The dose range determined to be safe and well tolerated in this study is substantially higher than the 0.25mg to 1.0mg dose range of the less
potent CH-1504 that demonstrated comparable efficacy and improved safety and tolerability to methotrexate in the recent Phase II rheumatoid arthritis trial.

Based on these findings, we plan to initiate a Phase II trial of CH-4051 in rheumatoid arthritis in the second quarter 2010. The planned study is expected to be a multi-national, 12-week double-blind and
randomized efficacy evaluation in 250 rheumatoid arthritis patients that are deemed to be partial responders to MTX treatment. Patients will be treated for a 12-week period after a screening and MTX-washout, with a 4-week follow up period. The 5-arm
trial will compare daily oral doses of 0.3 mg, 1.0 mg, 3.0 mg and 3.0 mg plus folate of CH-4051 to a 20 mg weekly dose of MTX plus folate supplement. The primary efficacy analysis will be conducted using the hybrid American College of Rheumatology,
or ACR, score (hACR) which allows for a more comprehensive assessment of treatment benefit across all seven symptomatic and functional components of the ACR criteria, included in the standard ACR 20/50/70 evaluations historically used in RA trials.

CH-1504

In
June 2005, we commenced Phase I single and multiple dose escalation clinical trials of CH-1504 in healthy volunteers. These trials were conducted at Guys Hospital in London under the Clinical Trial Authorization, issued by the Medicines and
Healthcare Products Regulatory Agency, the United Kingdoms health authority. The in vivo portion and preliminary analysis of these trials were completed in December 2005.

Continuing evaluation of these results in light of additional preclinical data suggested that the bioavailability of CH-1504 was low and had
significant pharmacokinetic variability. Discussions among our personnel, external consultants and potential partners suggested the bioavailability of CH-1504 could be improved through standard alterations to the formulation. Consequently, we
engaged in a comprehensive screening of approximately 25 commercially viable salts and, based on the results of that screening process, selected a disodium salt of CH-1504 to take forward. Having selected a salt formulation, we initiated
complimentary pharmaceutical enhancements to the compound that include evaluation of various solid dosage form options. The primary goal of these formulation efforts was to improve the solubility of the compound, increasing bioavailability and
reducing pharmacokinetic variation of CH-1504. A formulation using gelucire to increase solubility was selected. Subsequent human bioequivalence studies showed 1.0 mg of the new formulation to be comparable to 15.0 mg of the original free acid
formulation and demonstrated an 11.4-fold improvement in relative bioavailability, as measured by area under the curve with an 8.9-fold increase in peak plasma levels (Cmax).

Based on these studies, in March 2009 we announced the results of a Phase II proof of concept study for CH-1504 in rheumatoid
arthritis. The study was a multi-national, 12-week double-blind and randomized study in Russia, Ukraine, Poland and Canada with 200 MTX-naive rheumatoid arthritis patients. The 4-arm trial included a 0.25, 0.5 or 1.0 mg daily dose of
CH-1504 versus a 20 mg weekly dose of MTX. Results showed comparable ACR 20/50/70 response rates among patients treated with CH-1504 compared to methotrexate. In addition, the efficacy of CH-1504 was associated with improved tolerability and
reduced liver enzyme elevations compared with methotrexate.

Because Phase I data suggests CH-4051 retains the superior safety
and tolerability profile of CH-1504 while preclinical data suggests both an enhanced potency compared to CH-1504 and significant superiority to methotrexate, we have no additional trials planned for CH-1504.



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Other Potential Indications for our Antifolate Portfolio

As we proceed in our clinical development of our antifolate portfolio for rheumatoid arthritis, we expect to continue our evaluation of its
potential in other indications. Additional potential indications for our antifolates include rheumatoid arthritis, psoriasis, Crohns disease, uveitis, ankylosing spondylitis, inflammatory bowel disease, certain cancers and other immunological
disorders. As our antifolates advance in rheumatoid arthritis studies, we will begin to focus on the timing of clinical programs for our antifolate compounds in these additional indications. Notwithstanding the foregoing, because of our limited
funding, clinical studies will initially be pursued in rheumatoid arthritis.

Antifolate Competition

There are many different drugs that are used to treat rheumatoid arthritis, including hormones, small molecules and biologics, which are
manufactured using recombinant technology. The normal course of therapy for rheumatoid arthritis begins with analgesics, such as aspirin, and non-steroidal anti-inflammatory agents, followed by disease modifying anti-rheumatic drugs, or DMARDs,
including low dose steroids, MTX, DHODH inhibitors and biologics, and, finally, reconstructive joint surgery for patients failing all therapies. DMARDs are the only drugs that have been shown to alter the course of the disease.

Currently Available Antifolates. MTX, a classical antifolate, was originally used as a chemotherapy drug to treat certain kinds of
cancer, but was also found to be beneficial in treating inflammatory arthritis and psoriasis. MTX is generic and marketed in both injectable and oral formulations by multiple companies including Barr Laboratories, Boehringer Ingelheim Pharma, Mayne
Pharma and Mylan Laboratories. Traditional oral DMARDs include MTX, leflunomide, auranofin, sulfaszlazine, cyclosporine, hydroxychloroquine, azathioprine and penicillamine.

Currently Available Biologics. Although there have been positive results for biologics, we believe physicians are
likely to reserve anti-tumor necrosis factor (anti-TNF) and other biologic therapies for patients who have failed or had a limited response to initial MTX monotherapy. Despite increased aggressiveness of treating physicians and easier reimbursement,
we believe front line use with biologics either in monotherapy or in combination with MTX is unlikely to occur due to their high costs and side effect profile. Enbrel®, Humira® and Remicade® are TNF blockers that have been approved by the FDA and are the top selling biologics for rheumatoid arthritis.
These three TNF blockers are administered to patients by injection and can be used alone or in combination with other DMARDs or NSAIDs such as aspirin or ibuprofen.

Enbrel®, which is developed by Amgen, is the top selling biologic for rheumatoid arthritis, and is also indicated for juvenile rheumatoid arthritis, early rheumatoid
arthritis, psoriatic arthritis and ankylosing spondylitis. Enbrel® had global sales of $6.3 billion in 2009.
Remicade® is a chimeric anti-TNF monoclonal antibody developed by Johnson & Johnson for the treatment
of rheumatoid arthritis and Crohns disease with combined global sales of $4.4 billion in 2009. Abbott Laboratories Humira® had 2009 global sales of $5.4 billion. Both Remicade® and Humira® contain black box
warnings for tuberculosis. Rituxan®, an anti-CD20 monoclonal antibody, is currently marketed by Genetech and
Roche for rheumatoid arthritis in patients refractory to other DMARD therapy. Orencia® (abatacept), a CTLA-4
fusion protein, developed by Bristol-Myers Squibb, is marketed as a once-monthly infusion for rheumatoid arthritis as a monotherapy and combination with sales of $0.6 billion in 2009. UCB is currently marketing Cimzia®, an injectable, pegylated anti-TNF antibody for the treatment of rheumatoid arthritis in the United States with
sales of $104 million in 2009.

DMARDs in Development.Rigel Pharmaceuticals R788 (fostamatinib disodium),
licensed by AstraZeneca in February 2010, showed proof of concept in a Phase II clinical trial in rheumatoid arthritis. An oral syk kinase inhibitor, R788 demonstrated statistically significant results in treating rheumatoid arthritis patients.
Pfizer is in Phase III development of an oral tablet formulation of CP-690550 (tasocitinib), a Janus kinase (JAK)-3 inhibitor, for the potential treatment of rheumatoid arthritis, psoriasis, asthma and inflammatory bowel disorders, including
Crohns disease and ulcerative colitis, and the treatment of transplant rejection. We believe that with significant



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ACR scores and good tolerability as observed in clinical trials to date, and with the benefit of oral delivery, R788 and CP-690550 may be favorable alternatives to the currently approved
biological agents. However we anticipate that, like other biologics, these compounds would work best in combination with MTX and should not significantly impact the opportunity available to our antifolate portfolio.

Antifolate Marketing

Given
the size of the rheumatoid arthritis market, the vast sales forces required to compete in this market, and the necessary infrastructure required, our marketing strategy for our antifolates is likely to include contracting with or licensing to third
parties, particularly for territories outside the United States. It is possible that we might directly commercialize or co-promote our antifolate compounds in the smaller therapeutic indications such as psoriasis or irritable bowel disease.
Out-licensing arrangements might be negotiated and entered into prior to one or more of our antifolate drug candidates being approved for marketing.

I-3D PORTFOLIO

Overview

In May 2006, we signed an agreement with Active Biotech AB for the co-development and commercialization of the I-3D portfolio, a group of orally active compounds that inhibit the enzyme dihydroorotate
dehydrogenase (DHODH) for the treatment of autoimmune diseases and transplant rejection. At the time of the agreement, Active Biotech had already isolated more than 15 compounds and conducted extensive preclinical modeling resulting in the
identification of two potential lead compounds.

Having previously demonstrated proof of concept in both
rheumatoid arthritis and transplant rejection in animal models, the joint development committee selected AB-224050 as the first I-3D compound to undergo IND-enabling toxicology studies during the third quarter of 2006. As part of the ongoing
evaluation and preparation for Phase I trials, the joint development committee initiated a Phase 0 (micro-dosing) study to evaluate the half-life of AB-224050 in humans in the first quarter of 2007. Based on the results of the micro-dosing study and
other ongoing preclinical activity, it was determined that, while demonstrating a significantly shorter half-life than Arava®, AB-224050 would require additional work prior to the commencement of Phase I clinical trials. In 2007, the joint development committee continued preclinical
optimization of AB-224050 and conducted further comparisons of AB-224050 versus other compounds in the I-3D.

In April 2008,
following a decision to focus its resources on its immunomodulatory compounds, Active Biotech AB discontinued its participation in the I-3D co-development program and granted us exclusive global rights to the portfolio in exchange for royalties on
future sales. As a result of our limited funding and strategic development efforts associated with the development of droxidopa and our antifolate drug candidates, we currently do not have any active clinical or preclinical programs associated with
compounds from this portfolio.

I-3D Additional Indications

In addition to therapeutic applications in rheumatoid arthritis, compounds from the I-3D portfolio are believed to have broad clinical
application in immune-mediated inflammatory disorders including transplant rejection, psoriasis and systemic lupus erythematosus.

Scientific Advisory Boards

We retain the services of certain qualified individuals on our Scientific Advisory
Boards which normally meet at least yearly. Meetings or consultations with Scientific Advisory Board members are held more often when significant developments arise or new information becomes available that require expert review. The boards provide
an opportunity to review our scientific, research and clinical development plans from the



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perspective of experts and key opinion leaders in the medical community. Specifically, the Scientific Advisory Boards provide advice concerning the design of clinical research protocols to be
utilized for the development of our drug candidates and they provide an opportunity to test the validity of our assumptions regarding the attitudes of the medical community relative to various drug characteristics that might be highlighted during
development.

Our Scientific Advisory Board for NOH consists of the following individuals:

Horacio Kaufmann, MD is currently the F.B. Axelrod Professor of Neurology and Professor of Medicine and Pediatrics at the New York
University School of Medicine. He is the director of the Dysautonomia Research Laboratory at the New York University Medical Center. Dr. Kaufmann is the past President of the American Autonomic Society, former Chairman of the Autonomic Nervous
System Section of World Federation of Neurology and the American Academy of Neurology and co-Editor-in-Chief of Clinical Autonomic Research. He is a world renowned expert in the treatment of autonomic disorders, autonomic physiology and
pathophysiology. Dr. Kaufmann has published extensively in the medical literature, particularly on the treatment of orthostatic hypotension in neurodegenerative disorders, such as Parkinsons disease and multiple system atrophy. His research on
autonomic disorders has been funded by the National Aeronautics and Space Administration, the National Institute of Health, National Organization of Rare Disorders, the DANA foundation and the Dysautonomia Foundation.

Roy Freeman, MD is Professor of Neurology at Harvard Medical School and director of the Center for Autonomic and Peripheral Nerve
Disorders in the Department of Neurology at Beth Israel Deaconess Medical Center in Boston, Massachusetts. Dr. Freemans clinical and research expertise is in the physiology and pathophysiology of the autonomic nervous system and small
nerve fibers. He is also an authority on the neurological complications of diabetes, the autonomic complications of Parkinsons disease and multiple system atrophy, the diagnosis and treatment of autonomic and peripheral nervous system
disorders and neuropathic pain. Dr. Freeman is widely published in these research areas.

Phillip Low, MD is past
chairman of the division of neurophysiology at the Mayo Clinic in Rochester, Minnesota. He is founder and director of the Autonomic Laboratory which evaluates autonomic function. He serves as director of the Mayo Autonomic Disorders Project, the
first program grant for autonomic disorders to be funded by the National Institutes of Health. His research is focused on studies of the pathophysiology of orthostatic intolerance and its amelioration. Diseases studied include multiple system
atrophy, autoimmune autonomic neuropathy and postural tachycardia syndrome. Dr. Low is Associate Editor of the journal Autonomic Neuroscience. He also serves on the editorial board of numerous publications including Muscle & Nerve,
Journal of Clinical Neurophysiology and Journal of Clinical Neuromuscular Diseases. He also serves on the scientific advisory board of the Neuropathy Association and is a member of the steering committee NIDDK/NHLBI Animal Models of Diabetic
Complications Neuropathy Disease Validation Committee.

Peter LeWitt, MD is Professor of Neurology and Psychiatry at
Wayne State University School of Medicine in Detroit, Michigan. He is a specialist in Parkinsons disease and other movement disorders and also directs a laboratory research program investigating neurochemical mechanisms and diagnostic markers
in Parkinsons and Alzheimers diseases. He has served as a scientific review consultant for the National Institutes of Health and the Veterans Administration. Other advisory affiliations with national organizations include the
International Essential Tremor Foundation and the National Parkinson Foundation. Dr. LeWitt further serves as president of the Michigan Parkinson Foundation. He has been a steering committee member and clinical investigator for the Parkinson
Study Group and other clinical trials research consortia. Dr. LeWitt is editor-in-chief of Clinical Neuropharmacology and also serves on the editorial board of the Journal of Neural Transmission.

Italo Biaggioni, MDis Professor of Medicine and Pharmacology and the Associate Director of the General Clinical Research Center,
which he developed, at Vanderbilt University in Nashville, Tennessee. With over 25 years of experience in biomedical research in general and clinical research in particular, the focus of Dr. Biaggionis clinical research is the interaction
between neural (autonomic) and metabolic (adenosine, nitric



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oxide) factors that regulate blood pressure. His basic research focuses on the role of adenosine receptors in disease processes and their target for drug development. He has had 20 years of
continuous funding from the National Institute of Health, over 200 publications in peer-reviewed journals, and is on the editorial board of several journals including Hypertension, Journal of Pharmacology and Experimental Therapeutics, Journal of
Applied Physiology and Clinical Autonomic Research. He is a founding member of the American Autonomic Society and served as its President from 2006 to 2008.

Our Scientific Advisory Board for rheumatology consists of the following individuals:

Lee Simon, M.D.is presently a principal in a consulting firm helping companies to create successful drug development programs through good designs and using insightful regulatory strategy. He also serves as head regulatory
consultant to Leerink Swann/Medacorp in Boston, Massachusetts. He previously had served as a voluntary faculty member at Harvard and the Beth Israel Deaconess Medical Center and has been a rheumatologist for 25 years. Dr. Simon is a fellow of
the American College of Physicians and the American College of Rheumatology. Dr. Simon received his M.D. from the University of Maryland, completed his internship and residency in internal medicine at the Johns Hopkins Hospital, and trained in
the arthritis unit of the Massachusetts General Hospital and Harvard Medical School. In addition to his many academic appointments, Dr. Simon has been a consultant to and a senior member of the FDA where he served as Division Director for
analgesic, anti-inflammatory and ophthalmologic drug products. Dr. Simon has served on the editorial boards of multiple journals, has authored more than 110 original publications, review articles, and chapters, and has served as an editor of
four books.

Vibeke Strand, M.D. is an Clinical Professor in the Division of Immunology at Stanford University School
of Medicine and has over twenty years of experience as a clinical investigator and subspecialist rheumatologist in private practice as well as in senior positions in pharmaceutical and biotechnology firms, planning and overseeing clinical trials in
autoimmune diseases, AIDS, transplantation and cancer. For the past eleven years, she has served as an independent consultant in clinical and regulatory affairs to pharmaceutical and biotechnology companies, developing strategies for the efficient
development of immunologically-based products and treatments for autoimmune diseases. She has worked to promote forums for the discussion of rational product development among industry, FDA and academia. She is a co-founder of a biyearly conference
and a member of the organizing committees for six international consensus conferences on outcome measures for rheumatology clinical trials. As a fellow of the American College of Physicians and the American College of Rheumatology, she has authored
or co-authored more than 75 articles, 20 book and textbook chapters and co-edited two books. Dr. Strand earned her M.D. at the University of California San Francisco School of Medicine. She completed a residency in Internal Medicine at Michigan
State and a Fellowship in Rheumatology/Immunology at the University of California San Francisco School of Medicine.

Arthur
F. Kavanaugh, M.D. is a Professor of Medicine at the University of California, San Diego (UCSD) School of Medicine. In addition, he is the Director of the Center for Innovative Therapy of the UCSD Division of Rheumatology, Allergy, and
Immunology. Dr. Kavanaugh earned his BS in biology at the Massachusetts Institute of Technology in Cambridge, Massachusetts and his M.D. at Saint Louis University School of Medicine in Saint Louis, Missouri. He completed a residency in Internal
Medicine and then a fellowship in Clinical Immunology/Allergy at the Baylor College of Medicine in Houston, Texas. Dr. Kavanaugh also completed a Rheumatology fellowship at the University of Texas Southwestern Medical School in Dallas.
Dr. Kavanaugh has authored more than 120 scientific publications and book chapters. He is on the editorial board for several journals, and has served as peer reviewer for more than a dozen scientific journals. Dr. Kavanaugh is a fellow of the
American Academy of Allergy, Asthma, and Immunology, and the American College of Rheumatology, or ACR. He has been a member of and chaired a number of committees in these organizations.

Joel M. Kremer, M.D. is a Professor of Medicine at the Albany Medical College and is also Director of Research at The Center for
Rheumatology in Albany. Dr. Kremer earned his M.D. from Temple University School of Medicine and trained in Internal Medicine and Rheumatology at Albany Medical College. He has



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worked extensively with methotrexate and combinations of new agents with methotrexate. Dr. Kremer is the recipient of the Engalaticheff Award given by The Arthritis Foundation for
contributions which improve the quality of life of patients with arthritis in 1997. He is the author of approximately 100 peer-reviewed publications, 16 chapters and six texts. He is president and founder of CORRONA, a research
organization which gathers data from rheumatologists and patients throughout the United States.

Michael H. Schiff,
M.D. is Clinical Professor of Medicine, Rheumatology Division, University of Colorado School of Medicine at Denver and is board certified in Internal Medicine and Rheumatology. Dr. Schiff has received a number of Outstanding Clinical
Facility awards from the University of Colorado School Of Medicine, including the Academic Publications Award and the Research Project Award and was recently awarded the University of Colorado Career Achievement Award 2006. He was a founder of the
Denver Arthritis Clinic in 1976 where he practiced rheumatology and was the medical director of the clinical research unit until 2008. He has been principle investigator for over 200 research projects and has published 50 peer-reviewed journal
articles and 200 scientific abstracts. Dr. Schiff is a fellow of the American College of Rheumatology, as well as a member of a number of regional and national medical societies. In addition, Dr. Schiff has served as a board member of the
American College of Rheumatologys Research Education Foundation and served as vice president from 20012002. He served two terms as president of the Colorado Society of Internal Medicine. His primary interest has been in the use of DMARDs
and biologics for the management of rheumatoid arthritis.

Edward C. Keystone, M.D. is a Professor of Medicine at the
University of Toronto and a Senior Consultant in Rheumatology at Mount Sinai Hospital. Dr. Keystone recently established The Rebecca Macdonald Centre for Arthritis and Autoimmune Disease, which is devoted to research into genomics,
therapeutics, and outcomes in autoimmune inflammatory joint disease. Dr. Keystone obtained his M.D. and specialty degrees and fellowships in both Rheumatology and Internal Medicine from the University of Toronto. He then carried out his
research training at the Clinical Research Centre in Harrow, London, United Kingdom. He was on staff as a consultant rheumatologist at The Wellesley Central Hospital, Toronto from 1976 to 1998. He is the author of more than 145 peer-reviewed papers,
reviews and book chapters, and has been the recipient of numerous teaching awards and honors, including the Senior Investigator Award of the Canadian Rheumatology Association.

Government Regulation

The FDA and foreign regulatory agencies regulate
many aspects of product development and marketing of our product candidates including research, development, manufacture, labeling, promotion, advertising, distribution, and marketing. Meeting the various US and international regulatory requirements
often takes several years, and the actual time required can vary substantially based upon the type, complexity and novelty of the pharmaceutical product and the therapeutic indication. Furthermore, meeting the regulatory requirements as well as
maintaining compliance often necessitates implementing costly procedures. Failure to comply with the applicable requirements mandated by the FDA and other regulatory agencies can result in administrative or judicial sanctions. In the United States,
such sanction may include the FDAs refusal to approve pending NDAs, warning letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions and/or criminal prosecution.

Success in preclinical or early-stage clinical trials does not ensure success in late-stage clinical trials. Data obtained from preclinical
and early stage clinical activities are not always conclusive and are susceptible to varying interpretations that could negatively impact our trials and delay, limit or prevent regulatory approval. In addition, we cannot be certain that the FDA or
any other international regulatory agency will grant approval for any of our products under development on a timely basis, if at all. Delays in obtaining, or failures to obtain, regulatory approvals would have a material adverse effect on our
business. Even if a product receives regulatory approval, the approval might be significantly limited to specific indications or uses. After regulatory approval is obtained and the product becomes available on the market, the later discovery, over
time, of previously unknown problems with a product might result in restrictions on the product or even complete withdrawal of the product from the market.



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Drug Approval Process in the United States

In the United States, the FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act, or FDCA, and those regulations are published in
the Federal Register. None of our drugs may be marketed in the United States until the drug has received FDA approval. The process required before a drug can be marketed in the United States includes:



| |  |  | preclinical laboratory tests, animal pharmacology and toxicology studies, and formulation studies;
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | submission to the FDA of an investigational new drug application, or IND, for human clinical testing, which must be cleared by the FDA before human
clinical trials can begin in the United States;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | adequate and well-controlled human clinical trials to establish the safety and efficacy of the drug for each indication;
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| |  |  | submission to the FDA of a new drug application, or NDA;
| | - |  | --------------------------------------------------------



| |  |  | satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the drug is produced to assess compliance with
current good manufacturing practices, or cGMPs; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | FDA review and approval of the NDA.
| | - |  | -----------------------------------

Preclinical tests include laboratory tests and animal studies. The conduct of the preclinical tests as well as the formulation of the compounds must comply with FDA regulations. The preclinical test data,
together with manufacturing information and analytical data of product chemistry, are submitted to the FDA as part of an IND, which must become effective before human clinical trials can begin. An IND will automatically become effective 30 days
after receipt by the FDA, unless before that time the FDA raises concerns or questions regarding the clinical trials as outlined in the IND. In such a case, the IND sponsor and the FDA must resolve any outstanding FDA concerns or questions before
clinical trials can proceed. Within the 30 day period, the FDA may put a clinical hold on the IND. We cannot be certain that submission of an IND will result in clearance by the FDA to allow clinical trials to begin.

Clinical trials involve the administration of the investigational drug to human subjects under the supervision of qualified clinical
investigators. Clinical trials are conducted under protocols detailing the objectives of the study, the parameters to be used in monitoring safety, and the effectiveness criteria to be evaluated. Each clinical trial protocol must be submitted to the
FDA as part of the IND.

Clinical trials typically are conducted in three sequential phases, but the phases might overlap. The
study protocol and informed consent information for study subjects in clinical trials must also be approved by an Institutional Review Board for each institution where the trials will be conducted. Study subjects must sign an informed consent form
before participating in a clinical trial. The normal clinical trial phases are:



| |  |  | Phase I usually involves the initial introduction of the investigational drug into healthy volunteers to evaluate its short-term safety, dosage
tolerance, metabolism, pharmacokinetics and pharmacologic actions, and, if possible, to gain an early indication of its effectiveness.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Phase II usually involves trials in a small patient population to evaluate dosage tolerance and appropriate dosage, identify possible adverse effects
and safety risks, and evaluate preliminarily the efficacy of the drug for specific indications.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Phase III trials usually involve further evaluation of clinical safety and efficacy by using the drug in its final form in a larger patient population.
There can be no assurance that Phase I, Phase II, or Phase III testing will be completed successfully within any specified period of time, if at all. Furthermore, clinical trials might be suspended by us or the FDA at any time on various grounds,
including a finding that the subjects or patients are being exposed to an unacceptable health risk.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Once the required clinical testing is successfully completed, the results of the preclinical
studies and of the clinical studies, as well as information on the manufacture and composition of the drug, are submitted to the FDA in a NDA. If the FDA grants NDA approval, the product can then be marketed for one or more approved indications. On
the other hand, if the FDA reviews the application and deems it to be inadequate to support the NDA approval, and hence, marketing approval, we cannot ensure that any approval will be granted on a timely basis, if at all. The FDA might also refer
the application to the appropriate advisory committee, typically a panel of clinicians and scientists, for review, evaluation and a recommendation as to whether the application should be approved. The FDA is not bound by the recommendations of the
advisory committee.

The overall drug development process, including preclinical testing, clinical trials through to marketing
approval requires substantial time, effort and financial resources.

The FDA has various programs, including fast track,
priority review, and accelerated approval, that are intended to expedite or simplify the process for reviewing drugs, and/or provide for approval on the basis of surrogate endpoints. Generally, drugs that might be eligible for one or more of these
programs are those for serious or life-threatening conditions, those with the potential to address unmet medical needs, and those that provide meaningful benefit over existing treatments. We cannot ensure that any of our drugs will qualify for any
of these programs, or that, if a drug does qualify, that the review time will be reduced.

Section 505b2 of the FDCA
allows the FDA to approve a follow-on drug on the basis of data in the scientific literature or data used by FDA in the approval of other drugs. This procedure potentially makes it easier for generic drug manufacturers to obtain rapid approval of
new forms of drugs based on proprietary data of the original drug manufacturer.

Before approving an NDA, the FDA usually will
inspect the facility or the facilities at which the drug is manufactured, and will not approve the product unless the manufacturing site is good manufacturing practices, or cGMP, compliant. If the FDA evaluates the NDA and the manufacturing
facilities as acceptable, the FDA might issue an approval letter, or in some cases, an approvable letter followed by an approval letter. Both letters usually contain a number of conditions that must be met in order to secure final approval of the
NDA. When and if those conditions have been met to the FDAs satisfaction, the FDA will issue an approval letter. The approval letter authorizes commercial marketing of the drug for specific indications. As a condition of NDA approval, the FDA
might require post-marketing testing and surveillance to monitor the drugs safety or efficacy, or they may impose other conditions.

After approval, certain changes to the approved product, such as adding new indications, making certain manufacturing changes, or making certain additional labeling claims, are subject to further FDA
review and approval. Before we could market our product candidates for additional indications, we must obtain additional approvals from the FDA. Obtaining approval for a new indication generally requires that additional clinical studies be
conducted. We cannot ensure that any additional approval for new indications, if any, for any product candidate will be approved on a timely basis, or at all.

Post-Approval Requirements

Often, even after a drug has been approved by
the FDA for sale, the FDA might require that certain post-approval requirements be satisfied, including the conduct of additional clinical studies. If such post-approval conditions are not satisfied, the FDA might withdraw its approval of the drug.
In addition, holders of an approved NDA are required to:



| |  |  | report certain adverse reactions to the FDA;
| | - |  | --------------------------------------------



| |  |  | comply with certain requirements concerning advertising and promotional labeling for their products; and
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | continue to have quality control and manufacturing procedures conform to cGMP after approval.
| | - |  | ---------------------------------------------------------------------------------------------



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The FDA periodically inspects the sponsors records related to safety reporting and/or
manufacturing facilities, including an assessment of compliance with cGMP. Accordingly, manufacturers must continue to expend time, money, and effort in the area of production and quality control to maintain cGMP compliance. We intend to use third
party manufacturers to produce our products in clinical and commercial quantities, and future FDA inspections might identify compliance issues at the facilities of our contract manufacturers that might disrupt production or distribution, or require
substantial resources to correct. In addition, discovery of problems with a product after approval might result in restrictions on a product, manufacturer, or holder of an approved NDA, including withdrawal of the product from the market.

Orphan Drug Designations

The FDA can grant orphan drug designation to drugs intended to treat a rare disease or condition, which generally is a disease or condition that affects fewer than 200,000 individuals in the
United States. Orphan drug designation must be requested before submitting an NDA. If the FDA grants orphan drug designation, which it might not, the identity of the therapeutic agent and its potential orphan use are publicly disclosed by the FDA.
Orphan drug designation does not necessarily convey an advantage in, or shorten the duration of, the review and approval process. If a product which has an orphan drug designation subsequently receives the first FDA approval for the indication for
which it has such designation, the product is entitled to orphan exclusivity, meaning that the FDA will not approve any other applications to market the same drug for the same indication, except in certain very limited circumstances, for a period of
seven years. Orphan drug designation does not prevent competitors from developing or marketing different drugs for that indication.

Regulations Outside the United States

Before our products can be marketed outside of the United States, they
are subject to regulatory approval similar to that required in the United States, although the requirements governing the conduct of clinical trials, including additional clinical trials that might be required, product licensing, pricing and
reimbursement vary widely from country to country. No action can be taken to market any product in a country until an appropriate application has been approved by the regulatory authorities in that country. The current approval process varies from
country to country, and the time spent in gaining approval varies from that required for FDA approval. In certain countries, the sales price of a product must also be approved. The pricing review period often begins after market approval is granted.
Even if a product is approved by a regulatory authority, satisfactory prices might not be approved for such product.

In
Europe, marketing authorizations may be submitted via a centralized, or decentralized (or national level) approach. The centralized procedure is mandatory for the approval of biotechnology products and provides for the grant of a single marketing
authorization that is valid in all European Union member states. As of January 1995, a mutual recognition procedure is available at the request of the applicant for all medicinal products that are not subject to the centralized procedure. There can
be no assurance that the chosen regulatory strategy will secure regulatory approvals on a timely basis or at all.

Manufacturing

We own no manufacturing facilities, quality control laboratories or warehouses for storage and distribution of our product
candidates. We use third-party contractors for manufacturing drug substances under development. We also use contractors for preformulation, formulation and analytical development as well as manufacturing of drug products used for clinical studies.
If any of our products are approved by the FDA for marketing, we plan to use third-party contractors for producing the commercial product. This strategy enables us to direct our financial resources to product development without devoting resources
to the time and costs associated with building manufacturing plants and laboratories. We plan on implementing this strategy for the foreseeable future.



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Intellectual Property

We actively seek to obtain, maintain and enforce patent protection for our products, formulations, processes, methods and other proprietary technologies, preserve our trade secrets, and operate without
infringing on the proprietary rights of other parties, both in the United States and in other key markets. Our goal is to obtain, where appropriate, the broadest intellectual property protection possible for our current product candidates, including
CH-1504, CH-4051 and droxidopa, and any future product candidates and proprietary technologies through a combination of contractual arrangements and patents, both in the United States and other countries.

Our patent estate for the antifolate portfolio, including CH-1504 and CH-4051, includes one issued U.S. patent, one issued European patent,
seven pending U.S. patent applications, two pending Patent Cooperation Treaty (PCT) patent applications and several related patent applications pending in countries outside the United States, including Europe and Japan. The issued U.S. patent is
U.S. Patent No. 5,912,251, issued June 15, 1999 and entitled Metabolically Inert Anti-Inflammatory and Anti-Tumor Antifolates and the issued European patent is EP 1,062,209 issued May 13, 2009. Three of the pending U.S.
patent applications are published as US 2006-0111272, US 2008-0214585 and US 2009-0253720 and the remainder are unpublished patent applications. The pending applications are directed to compositions, methods of use and certain new antifolate
compounds.

The issued U.S. and European patents cover our current product candidates, CH-1504 and CH-4051, as well as certain
analogues, including claims to these compounds as compositions of matter, in pharmaceutical formulations and for use in treatment of certain diseases. The pending U.S. patent applications and international applications expand our proprietary
position, claiming additional compounds and their uses as well as new uses of CH-1504. We plan to continue to strengthen our patent estate on our antifolate portfolio by filing and pursuing additional patents.

Our patent estate for droxidopa includes six pending U.S. patent applications and seventeen related patent applications pending in countries
outside the United States, including Europe and Japan which are directed to pharmaceutical compositions comprising droxidopa and therapeutic methods of treatment using droxidopa. We plan to continue to strengthen our patent estate on droxidopa by
filing and pursuing additional patents.

The patent estate for the I-3D portfolio includes U.S. Patent No. 7,074,831,
issued July 11, 2006, related issued patents in Europe and Mexico, as well as a pending U.S. patent application and a number of related patent applications pending in countries outside the United States.

Our success also depends upon the skills, knowledge and experience of our scientific and technical personnel, our consultants and advisors,
as well as our licensors and contractors. To help protect our proprietary know-how and our inventions for which patents are unobtainable or difficult to obtain, we rely on trade secret protection and confidentiality agreements. To this end, it is
our policy to require all of our employees, consultants, advisors and contractors to enter into agreements that prohibit the disclosure of confidential information and, where applicable, require disclosure and assignment to us of the ideas,
developments, discoveries and inventions important to our business.

Employees

We have attracted and retained a management team with core competencies and expertise in numerous fields, including manufacturing, research,
clinical, regulatory and business development. Our management and advisors are comprised of experienced pharmaceutical and biotechnology industry veterans and respected experts. We are led by our Chief Executive Officer, Dr. Simon Pedder,
formerly Vice President, Pharmaceutical Business, Oncology at Hoffmann-La Roche Inc., who has over 20 years of senior pharmaceutical management experience, including drug development and business experience. During his time at Roche, Dr. Pedder
was responsible for a number of global development programs, successful registrations and product launches.



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We have a total of 18 employees. We believe the relationships with our employees are
satisfactory. We anticipate that we will need to identify, attract, train and retain other highly skilled personnel as we continue to develop our product candidates. Hiring for such personnel is competitive, and there can be no assurance that we
will be able to retain our key employees or attract, assimilate or retain the qualified personnel necessary for the development of our business.

Where you can find additional information

Our website address is www.chelseatherapeutics.com. We make
available free of charge through our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is
electronically filed with or furnished to the SEC.

Executive Officers of the Registrant

The following table sets forth the name, age and position of each of our executive officers as of March 3, 2010.



|                        |  |     |  |                                                           
|----------------------- |  | --- |  | ----------------------------------------------------------
|Name                    |  | Age |  | Position                                                  
|Simon Pedder            |  | 49  |  | President, Chief Executive Officer and Director           
|J. Nick Riehle          |  | 57  |  | Vice President, Administration and Chief Financial Officer
|William D. Schwieterman |  | 52  |  | Vice President, Chief Medical Officer                     
|L. Arthur Hewitt        |  | 56  |  | Vice President, Chief Scientific Officer                  
|Keith Schmidt           |  | 59  |  | Vice President, Sales and Marketing                       
|Joseph Oliveto          |  | 42  |  | Vice President, Operations                                
|Michael J. Roberts      |  | 40  |  | Vice President, Business Development                      

Simon Pedder, Ph.D.President, Chief Executive Officer and Director.Dr. Pedder joined us from Hoffmann-La Roche Inc. in April 2004 where he was Vice President of Pharmaceutical Business, Oncology and an executive officer
since February 2003. Prior to that he served as the Vice President, Drug Development at Shearwater Corporation from May 2001 until December 2002. Prior to that Dr. Pedder served in a number of positions at Hoffmann-La Roche, including as
Director, Pharmaceutical Business, Pharmaceutical Development and Project Management from May 1994 until May 2001. While at Hoffmann-La Roche, Dr. Pedder was in charge of the development of Pegasys and Copegus, which have combined annual
worldwide sales of over $1 billion, and oversaw a number of successful NDAs. Dr. Pedder has his Ph.D. in Pharmacology from the College of Medicine at the University of Saskatchewan in Canada.

J. Nick Riehle, MBAVice President, Administration and Chief Financial Officer.Mr. Riehle has been our Vice President,
Administration and Chief Financial Officer since July 2004. Prior to that he served as Chief Financial Officer at HAHT Commerce, Inc., a software company, from August 1996 until June 2003 and as an independent contractor from July 2003 until July
2004. Prior to that, Mr. Riehle served in various roles at Nortel Networks and IBM. Mr. Riehle has his Bachelor of Commerce from McGill University, his MBA from York University and earned a Certified Management Accountant (CMA) designation
from Ontario, Canada.

William D. Schwieterman, M.D.Vice President, Chief Medical Officer.Dr. Schwieterman
joined the company as an employee and officer in October 2009 after serving for more than a year on our Board of Directors and several years as a consultant and member of our Scientific Advisory Board for rheumatology. He is a rheumatologist and
board-certified internist who was formerly Chief of the Medicine Branch and Chief of the Immunology and Infectious Disease Branch in the Division of Clinical Trials at the FDA. In these capacities and others, Dr. Schwieterman spent 10 years at
the FDA in the Center for Biologics overseeing a wide range of clinical development plans for a large number of different types of molecules. Dr. Schwieterman helped author the FDAs Good Review Practices for investigational
products, and was instrumental in developing several



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guidance documents for the industry. Since leaving the FDA, he has acted as an independent consultant to biotechnology and pharmaceutical companies, focusing on clinical drug development and
regulatory matters. He currently serves on the board of directors of OXiGENE, Inc., a publicly traded company, and Neumedics, Inc., a privately held drug development company. Dr. Schwieterman holds a B.S. and M.D. from the University of
Cincinnati.

L. Arthur Hewitt, Ph.D.Vice President, Chief Scientific Officer.Dr. Hewitt was named our Chief
Scientific Officer in January 2010 after serving as our Vice President, Drug Development since May 2004. Prior to that he served as an independent contractor from January 2003 to May 2004, as Director of Scientific Affairs at Shearwater Corporation,
a drug delivery company, from October 2002 until January 2003 and as Director of Scientific Affairs for Amgen Canada from July 1991 until November 2000. During his years at Amgen, Dr. Hewitt oversaw the approval of Neupogen, Stemgen and
Infergen. Dr. Hewitt obtained his Ph.D. in Pharmacology from the Medical School at the University of Montreal.

Keith
Schmidt, MBAVice President, Marketing and Sales.Mr. Schmidt has served as our Vice President, Marketing and Sales since July 2006. In February 2007, Mr. Schmidt became one of our executive officers. Prior to that he was
President of his biotech consulting company, Tellico Pharma LLC from June 2005 and served as Vice President of Thomson Healthcare Advanced Therapeutics Communications, a medical education company, from February 2002 until May 2005. From 1996 until
January 2002, Mr. Schmidt served as an International Business Leader for Hoffmann-La Roche where he developed and led the global sales and marketing launch efforts for Pegasys and Copegus. Mr. Schmidt earned a Bachelor of Science from
South Dakota State University and an MBA from the University of San Francisco.

Joseph Oliveto, MBAVice President,
Operations. Mr. Oliveto joined us in June 2008 following a two-year assignment as Executive in Residence at Pappas Ventures, a life sciences venture capital firm. Prior to Pappas Ventures, he served in a number of progressively senior
positions at Hoffmann-La Roche, most recently as the Global Alliance Director for Roches licensing organization. Previous experience at Roche includes clinical development, project management, manufacturing process improvement and global
business. During his tenure, he played an integral part in the success of multiple NDA filings, developed comprehensive launch programs, including those for both Pegasys and Copegus, and closed multiple licensing deals. Mr. Oliveto obtained a
BA in Chemistry and an MBA from Rutgers University.

Michael J. Roberts, Ph.D.Vice President, Business
Development. Dr. Roberts was named an officer of Chelsea in January 2010 after having served since August 2004 as Senior Director of Business Development. He joined us from Nektar Therapeutics where he was Director of Business Development
for their Molecule Engineering technology. Prior to this he was Manager of Biopharmaceutical Research at Shearwater Corporation where he lead and was successful in the development of preclinical drug candidates from initial stages of research
through Phase I clinical study. Dr. Roberts obtained his Ph.D. in Materials Science from the University of Alabama in Huntsville and B.S. in Chemical Engineering from Pennsylvania State University.



|ITEM 1A. | RISK FACTORS.
|-------- | -------------

This
report contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed in this report. Factors that could cause or contribute to these differences include, but are not limited
to, those discussed below and elsewhere in this report and in any documents incorporated in this report by reference.

We currently have no
product revenue and will need to raise additional capital to operate our business.

To date, we have generated no product
revenue. Until, and unless, we receive approval from the FDA and other regulatory authorities for our product candidates, we cannot sell our drugs and will not have product revenue. Currently, our primary product candidates are droxidopa and our
antifolates portfolio, and none are



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approved by the FDA nor, with the exception of droxidopa which has Japanese approval, any other regulatory agency for sale. Therefore, for the foreseeable future, we will have to fund all of our
operations and development expenditures from cash on hand, equity or debt financings, licensing fees and grants. We anticipate that 2010 operating expenses will be approximately $38 million, including non cash items.

In order to fund operations and increase our cash reserves in 2010, we may seek to outlicense our products or seek additional sources of
financing and such opportunities might not be available on favorable terms, if at all. If we do not succeed in raising additional funds on acceptable terms, we might not be able to complete planned preclinical and clinical trials or obtain approval
of any product candidates from the FDA and other regulatory authorities. In addition, we could be forced to discontinue product development, reduce or forego sales and marketing efforts, forego attractive business opportunities or curtail
operations. Any additional sources of financing could involve the issuance of our equity securities, which would have a dilutive effect on our stockholders.

We are not currently profitable and might never become profitable.

We have
a history of losses and expect to incur substantial losses and negative operating cash flow for the foreseeable future, and we might never achieve or maintain profitability. Even if we succeed in developing and commercializing one or more product
candidates, we expect to incur substantial losses for the foreseeable future and might never become profitable. From inception through December 31, 2009 we had losses of $95.5 million. We had net losses of $25.8 million and $35.1 million for
the years ended December 31, 2009 and 2008, respectively, and we anticipate losses for the foreseeable future. Actual losses will depend on a number of considerations, including:



| |  |  | the pace of commercialization and marketing effort for droxidopa
| | - |  | ----------------------------------------------------------------



| |  |  | the pace and success of preclinical development and clinical trials for droxidopa, antifolates and other product candidates;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



| |  |  | possible out-licensing of our product candidates;
| | - |  | -------------------------------------------------



| |  |  | seeking regulatory approval for our various product candidates;
| | - |  | ---------------------------------------------------------------



| |  |  | discussions with regulatory agencies concerning the design of our clinical trials;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | our ability to identify and recruit patients into our clinical trials at costs consistent with our current estimates;
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | the pace of development of new intellectual property for our existing product candidates;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | in-licensing and development of additional product candidates;
| | - |  | --------------------------------------------------------------



| |  |  | implementing additional internal systems and infrastructure; and
| | - |  | ----------------------------------------------------------------



| |  |  | hiring additional personnel.
| | - |  | ----------------------------

We also expect to experience negative cash flow for the foreseeable future as we fund our operating losses and development expenditures. As a result, we will need to generate significant revenue in order
to achieve and maintain profitability. We might not be able to generate revenue or achieve profitability in the future and are unlikely to do so in the near term. Our failure to achieve or maintain profitability could negatively impact the value of
our securities.

We are a development-stage company and might not be able to commercialize any product candidates.

We are a development-stage company and have not demonstrated our ability to perform the functions necessary for the successful
commercialization of any product candidates. The successful commercialization of any product candidates will require us to perform a variety of functions, including:



| |  |  | continuing to undertake preclinical development and clinical trials;
| | - |  | --------------------------------------------------------------------



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| |  |  | participating in regulatory approval processes;
| | - |  | -----------------------------------------------



| |  |  | formulating and manufacturing products; and
| | - |  | -------------------------------------------



| |  |  | conducting sales, marketing and distribution activities.
| | - |  | --------------------------------------------------------

Our operations have been limited to organizing and staffing our company, negotiating in-licensing agreements with our partners, acquiring,
developing and securing our proprietary technology, participating in regulatory discussions with the FDA, the EMEA and other regulatory agencies and undertaking preclinical trials and clinical trials of our product candidates. These operations
provide a limited basis for you to assess our ability to commercialize our product candidates and the advisability of investing in our securities.

Our potential future earnings may be reduced should we decide to out-license one or more of our drug product candidates.

We may decide to out-license one or more of our drug product candidates, reducing future profits available to us. Should we license our drug product candidates to another pharmaceuticals company, it would
allow the partner to market and sell our compounds in one or more markets around the world. If either the antifolates or droxidopa are licensed to a strategic partner, the profit available to us may be substantially reduced from what might otherwise
be possible should we retain all rights to the products and market and sell them directly.

We might not obtain the necessary U.S. or
worldwide regulatory approvals to commercialize any product candidates.

We cannot assure you that we will receive the
approvals necessary to commercialize our product candidates including droxidopa, our antifolates, or any other product candidate either currently in our drug candidate portfolio or which we might acquire or develop in the future. We will need FDA
approval to commercialize our product candidates in the United States and approvals from equivalent regulatory authorities in foreign jurisdictions to commercialize our product candidates in those jurisdictions. In order to obtain FDA approval of
any product candidate, we must submit to the FDA a NDA demonstrating that the product candidate is safe for humans and effective for its intended use. This demonstration requires significant research and animal tests, which are referred to as
preclinical studies, as well as human tests, which are referred to as clinical trials. Satisfaction of the FDAs regulatory requirements typically takes many years, depends upon the type, complexity and novelty of the product candidate and
requires substantial resources for research, development and testing. We cannot predict whether our research and clinical approaches will result in drugs that the FDA considers safe for humans and effective for indicated uses. The FDA has
substantial discretion in the drug approval process and may require us to conduct additional preclinical and clinical testing or to perform post-marketing studies. The approval process might also be delayed by changes in government regulation,
future legislation or administrative action or changes in FDA policy that occur prior to or during our regulatory review. Delays in obtaining regulatory approvals might:



| |  |  | delay commercialization of, and our ability to derive product revenue from, a product candidate;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | reduce available time during which our intellectual property is protected under various U.S. and foreign patents;
| | - |  | -----------------------------------------------------------------------------------------------------------------



| |  |  | impose costly procedures on us; and
| | - |  | -----------------------------------



| |  |  | diminish any competitive advantages that we might otherwise enjoy.
| | - |  | ------------------------------------------------------------------

Even if we comply with all FDA requests, the FDA may ultimately reject one or more of our NDAs. We cannot be sure that we will ever obtain
regulatory clearance for any of our product candidates. Failure to obtain FDA approval of these product candidates, particularly droxidopa or our antifolates, will severely undermine our business and could substantially extend the period before we
have a saleable product, leaving us without any source of revenue until another product candidate can be developed. There is no guarantee that we will ever be able to develop or acquire another product candidate.



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In foreign jurisdictions, we must receive approval from the appropriate regulatory
authorities before we can commercialize any drugs. Foreign regulatory approval processes generally include all of the risks associated with the FDA approval procedures described above. We cannot assure you that we will receive the approvals
necessary to commercialize product candidates for sale outside the United States.

We face risks related to the recently announced results
of our study 302 clinical trial for droxidopa for the treatment of symptomatic neurogenic orthostatic hypotension (NOH).

In September 2009, we announced that preliminary data from Study 302, the first of our pivotal Phase III trials of droxidopa for the treatment of NOH, did not demonstrate a statistically significant improvement relative to placebo as
measured by the studys primary endpoint. While the study did not meet its primary endpoint, additional analysis confirmed statistically significant symptomatic benefit across five clinically relevant assessment criteria that reflect
symptomatic improvements and corroborate other supportive symptom data. Data from the trial also supported the safety and tolerability of droxidopa. Following our analysis of the 302 data, we met with the FDA in November 2009 to obtain greater
clarity about our options for completing our planned clinical and registration program for droxidopa and were given approval to change the primary endpoint for our partially completed 301 study. There are, however, significant risks following from
our 302 study results as we attempt to formulate a revised clinical plan for droxidopa. Specifically:



| |  |  | Despite the change in the primary endpoint of our 301 study and our decision to add additional patients to the study, significance in that endpoint may
not be achieved which would further delay our ability to seek approval for droxidopa from the FDA.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | As a result of the failure to achieve significance in our primary endpoint for the 302 study, the FDA has recommended that we perform a confirmatory
pivotal study, which we plan to call study 306. While we believe we have incorporated much of what we have learned during our 302 study analysis into the design of 306, we cannot be sure that the results of this study will meet requirements for FDA
approval.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We believe that the failure to achieve significance in the primary 302 endpoint and the resulting need for the confirmatory pivotal 306 study will
delay the market launch of droxidopa in the US market by just over one year to the first quarter of 2012, compared to our earlier estimate of the second half of 2010, even if we are successful in the 301 and 306 studies and are able to meet all
other requirements to the satisfaction of the FDA. While we believe that the design of the 306 study may better meet some of the previously expressed expectations of the EMEA in Europe than either 301 or 302 and thus result in less of a delay there,
as of this time we have not discussed the specifics or this trial design with the EMEA and cannot be sure that it will be acceptable. If the EMEA determines that it does not meet their requirements, we can expect a similar delay in Europe as well as
in other global markets that we might wish to address. These studies and the regulatory process could take longer than we expect.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The targeted geographic distribution of patients for the additional patients being enrolled in Study 301 and the 306 study as well as the targeted mix
of patient indications in these studies are different than for the 302 study and the earlier stages of the 301 study and we cannot be certain that we will be able to meet our revised timelines for these studies, particularly with respect to patient
recruitment.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The delays and risks as outlined above are likely to require additional financing for the droxidopa clinical program, are likely to result in financing
at a lower price than might have otherwise been available and might make the process of carrying out such a financing more difficult. If such financing is equity financing it would cause dilution for our stockholders, which could be significant
depending on the price and the amount of stock sold.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | If we require additional capital for the development of droxidopa, we may not be able to raise capital on favorable terms or at all.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | We may determine that it is in our best interest to out-license droxidopa. However, given the regulatory and financing uncertainties, we may not be
able to complete an out-licensing agreement on terms beneficial to us or at all.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our drug candidates may require
extensive reformulation work prior to approval or they may prove unsuitable for further development regardless of reformulation efforts.

We are currently utilizing a formulation of droxidopa in our clinical trials that is obtained from Dainippon Sumitomo Pharma Co., Ltd., or DSP, which uses a process incompatible with FDA GMP guidelines.
During 2008, we collaborated with a contract manufacturing organization and successfully developed a GMP compatible formulation of droxidopa. DSP has also finalized an approvable formulation for the US market. While we believe this activity has been
successful, final resolution of the manufacturing process and supplier could impact our launch of droxidopa in the US market.

Other formulation issues may arise or prove more significant than anticipated, either with droxidopa, CH-4051 or with other drug candidates in our portfolio.

Our product candidate CH-4051 has had only limited formal clinical trials.

Our product candidate, CH-4051, is in an early stage of development and requires extensive clinical testing. In November 2008, we commenced Phase I dose escalation clinical trials of CH-4051 in humans in Kendle Internationals Clinical
Pharmacology Unit, Utrecht, Netherlands under the authority of Stichting Therapeutische Evaluatie Geneesmiddelen  Medisch Ethische Toetsingscommissie, an Independent Ethics Committee. It is our intention to commence Phase II clinical trials
for CH-4051 in rheumatoid arthritis in 2010. After the completion of those trials and depending on available funding, we may initiate several additional Phase II studies in other indications and, as appropriate, Phase III studies in rheumatoid
arthritis with or without a partner. Upon completion of the Phase III studies in rheumatoid arthritis, we hope to use data from these studies to file a NDA in the United States. We currently estimate a global filing of the NDA no sooner than 2013.
However, at any point during the process we might decide to focus our efforts on a different lead compound, and we cannot predict with any certainty the success or timing of our clinical trials, if or when we might submit an NDA for regulatory
approval of this product candidate or whether such an NDA will be accepted. We do not expect to conduct additional trials or make further investments in the development of CH-1504, formerly our lead antifolate product candidate.

There has been only very limited testing of our I-3D product candidates.

Our I-3D product candidates are early in their development. None of the candidates have had adequate toxicology testing in animals to permit
clinical testing and there is no clinical evidence of efficacy for any of these candidates, despite limited similarities with compounds currently marketed by others. Animal toxicology trials on our I-3D compounds may not permit further development
of these drugs or we may have to carry out toxicology trials on several compounds before we find one that is appropriate for clinical testing, if at all. Once clinical trials are undertaken, the compound or compounds may not prove adequately safe
and efficacious in humans and may not be approved by the FDA or other regulatory agencies. Moreover, because of the scarcity of capital and competing priorities within our development program we do not know when we will be able to continue any such
testing or commence clinical trials.

Clinical trials are very expensive, time-consuming and difficult to design and implement.

Human clinical trials are very expensive and difficult to design and implement, in part because they are subject to
rigorous regulatory requirements. The clinical trial process is also time-consuming. For example, because we did not receive orphan drug status from the EMEA for droxidopa as a treatment for Parkinsons disease, our clinical trials for that
indication might have to be more involved and take longer to complete and get



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reviewed than otherwise would have been the case. Furthermore, failure can occur at any stage of the trials, and we could encounter problems that cause us to abandon or repeat clinical trials.
The commencement and completion of clinical trials might be delayed by several factors, including:



| |  |  | unforeseen safety issues;
| | - |  | -------------------------



| |  |  | clarification of dosing issues;
| | - |  | -------------------------------



| |  |  | lack of effectiveness during clinical trials;
| | - |  | ---------------------------------------------



| |  |  | slower than expected rates of patient recruitment, including the aggregate of approximately 500 patients required to complete the several Phase II and
Phase III trials that are or are expected to be ongoing in 2010;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | inability to monitor patients adequately during or after treatment;
| | - |  | -------------------------------------------------------------------



| |  |  | inability or unwillingness of medical investigators to follow our clinical protocols; and
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | unexpected emergence of competitive drugs against which our compounds might compete for clinical trial resources or need to be tested.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------

In addition, we or the FDA or another governing regulatory agency may suspend our clinical trials at any
time if it appears that we are exposing participants to unacceptable health risks or if the regulatory agency finds deficiencies in the conduct of these or our regulatory submissions. Therefore, we cannot predict with any certainty the schedule for
our current or any future clinical trials.

The results of our clinical trials might not support our product candidate claims.

Even if our clinical trials are completed as planned, we cannot be certain that their results will support our product
candidate claims. Success in preclinical testing and early clinical trials does not ensure that later clinical trials will be successful, and we cannot be sure that the results of later clinical trials will replicate the results of prior clinical
trials and preclinical testing. The clinical trial process might fail to demonstrate that our product candidates are safe for humans and effective for indicated uses. This failure would cause us to abandon a product candidate and might delay
development of other product candidates. Any delay in, or termination of, our clinical trials will delay the filing of our NDAs with the FDA and, ultimately, our ability to commercialize our product candidates and generate product revenue.

We intend to explore additional indications for droxidopa, however these programs may not prove successful.

We have announced our exploration of certain additional indications for droxidopa and we may make similar announcements in the future. While
trials conducted by our partner, DSP, for the Japanese market provide evidence of efficacy for certain indications, other indications may be explored for which we have no existing clinical evidence of efficacy. Such trials are likely to be very
costly. We do not have market approval from the FDA or other regulatory agencies for any of the indications we are exploring and there are no guarantees that additional clinical trials will provide new evidence of efficacy in the targeted
indications or permit us to gain market approval from regulatory agencies.

Physicians and patients might not accept and use our drugs.

Even if the FDA approves any of our product candidates, physicians and patients might not accept and use them. Acceptance
and use of our products will depend upon a number of factors including:



| |  |  | perceptions by members of the healthcare community, including physicians, about the safety and effectiveness of our drug;
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | cost-effectiveness of our product relative to competing products;
| | - |  | -----------------------------------------------------------------



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| |  |  | understanding by prescribing physicians of the medical conditions we are attempting to address;
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | availability of reimbursement for our product from government or other healthcare payers; and
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | effectiveness of marketing and distribution efforts by us and our licensees and distributors, if any.
| | - |  | -----------------------------------------------------------------------------------------------------

Because we expect that sales of our product candidates could, if approved, generate a substantial portion of our product revenue for an
extended period, the failure of such a drug to find market acceptance would harm our business and could require us to seek additional financing or curtail our operations.

Our drug development program depends upon third-party researchers who are outside our control.

We depend upon independent clinical research organizations, investigators and other collaborators, such as universities and medical institutions, to conduct our preclinical and clinical trials under
agreements with us. These collaborators are not our employees and we cannot control the amount or timing of resources that they devote to our programs. They might not assign as great a priority to our programs or pursue them as diligently as we
would if we were undertaking such programs ourselves. If outside collaborators fail to devote sufficient time and resources to our drug development programs, or if their performance is substandard, the approval of our FDA applications, if any, and
our introduction of new drugs, if any, will be delayed. If we cannot successfully enter into new agreements with outside collaborators on acceptable terms, or if we encounter disputes over or cannot renew or, if necessary, amend existing agreements,
the development of our drug candidates could be delayed. These collaborators might also have relationships with other commercial entities, some of which might compete with us. If our collaborators assist our competitors at our expense, our
competitive position would be harmed.

Our drug development program also depends upon our partners who are outside our control.

We have licensed certain rights related to droxidopa from DSP and depend upon them for data and support in advancing our
clinical program for this compound. In addition, DSP is currently the preferred manufacturer of this compound for our clinical program and commercialization efforts. Without the timely support of DSP or any other partners, our drug development
programs could suffer significant delays, require significantly higher spending or face cancellation.

We rely exclusively on third parties
to formulate and manufacture any product candidates.

We have only limited experience in drug formulation and no experience
in drug manufacturing and do not intend to establish our own manufacturing facilities. We lack the resources and expertise to formulate or manufacture our own product candidates. While we have a contract in place with DSP covering droxidopa, we
currently have no contract for the commercial scale manufacture of our antifolates or I-3D compounds. We have contracted with one or more manufacturers to manufacture, supply, store and distribute drug supplies for our clinical trials. If any of our
current product candidates or any other product candidates that we may develop or acquire in the future receive FDA approval, we will rely on one or more third-party contractors to manufacture our drugs. Our anticipated future reliance on a limited
number of third-party manufacturers exposes us to the following risks:



| |  |  | We might not be able to identify manufacturers on acceptable terms or at all because the number of potential manufacturers is limited and the FDA must
approve any replacement contractor. This approval would require new testing and compliance inspections. In addition, a new manufacturer would have to be educated in, or develop substantially equivalent processes for, production of our products after
receipt of FDA approval, if any.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our third-party manufacturers might be unable to formulate and manufacture our drugs in the volume and of the quality required to meet our clinical
needs and commercial needs, if any.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our contract manufacturers might not perform as agreed or might not remain in the contract manufacturing business for the time required to supply our
clinical trials or to successfully produce, store and distribute our products.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Drug manufacturers are subject to ongoing periodic unannounced inspection by the FDA, the DEA, and corresponding state agencies to ensure strict
compliance with good manufacturing practice and other government regulations and corresponding foreign standards. We do not have control over third-party manufacturers compliance with these regulations and standards.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Each of these risks could delay our clinical trials, the approval, if any, of our product candidates by the
FDA or the commercialization of our product candidates or result in higher costs or deprive us of potential product revenue.

We have no
experience selling, marketing or distributing products and only limited internal capability to do so.

We currently have no
sales, marketing or distribution capabilities other than as provided by our Vice President of Sales and Marketing. We anticipate expanding our marketing and sales capabilities over the next 18 to 24 months in anticipation of commercializing
droxidopa. We would need to allocate resources to, or contract with one or more third parties for, the sale and marketing of our other proposed products. As a result, our future success depends, in part, on:



| |  |  | our ability to enter into and maintain collaborative relationships for these capabilities, either through out-licensing of our compounds or through
contracting organizations;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the collaborators strategic interest in the products under development; and
| | - |  | ----------------------------------------------------------------------------



| |  |  | such collaborators ability to successfully market and/or sell any such products.
| | - |  | ---------------------------------------------------------------------------------

To the extent that we decide not to, or are unable to, enter into collaborative arrangements with respect to the sales and marketing of our
proposed products or if we decide to add internal resources to complement third party resources, significant development expenditures, management resources and time will be required to establish and develop our own marketing and sales force with
technical expertise.

If we cannot compete successfully for market share against other drug companies, we will not achieve sufficient
product revenue and our business will suffer.

The market for our antifolate product candidates is characterized by intense
competition and rapid technological advances. The initial market for droxidopa, while smaller, has well established generic competition. Other markets for droxidopa, such as fibromyalgia, are emerging with new and heavily marketed offerings. If our
antifolates, droxidopa or other product candidates receive FDA approval, they will compete with a number of existing and future drugs and therapies developed, manufactured and marketed by others. Existing or future competing products might provide
greater therapeutic convenience, efficacy or other benefits for a specific indication than our products or might offer comparable performance at a lower cost. If our products fail to capture and maintain market share, we will not achieve sufficient
product revenue and our business will suffer.

We will compete against fully integrated pharmaceutical companies and smaller
companies that are collaborating with larger pharmaceutical companies, academic institutions, government agencies and other public and private research organizations. Many of these competitors have compounds already approved or in development. In
addition, many of these competitors, either alone or together with their collaborative partners, operate larger research and development programs or have substantially greater financial resources than we do, as well as significantly greater
experience in:



| |  |  | developing drugs;
| | - |  | -----------------



| |  |  | undertaking preclinical testing and human clinical trials;
| | - |  | ----------------------------------------------------------



| |  |  | obtaining FDA and other regulatory approvals of drugs;
| | - |  | ------------------------------------------------------



| |  |  | formulating and manufacturing drugs;
| | - |  | ------------------------------------



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| |  |  | launching, marketing and selling drugs; and
| | - |  | -------------------------------------------



| |  |  | post-marketing safety surveillance.
| | - |  | -----------------------------------

Our ability to generate product revenue will be diminished if our drugs sell for inadequate prices or patients are unable to obtain adequate levels of reimbursement.

Our ability to commercialize our drugs, alone or with collaborators, will depend in part on the extent to which reimbursement will be
available from:



| |  |  | government and health administration authorities;
| | - |  | -------------------------------------------------



| |  |  | private health maintenance organizations and health insurers; and
| | - |  | -----------------------------------------------------------------



| |  |  | other healthcare payers.
| | - |  | ------------------------

Significant uncertainty exists as to the reimbursement status of newly approved healthcare products. Healthcare payers, including Medicare, are challenging the prices charged for medical products and
services. Government and other healthcare payers increasingly attempt to contain healthcare costs by limiting both coverage and the level of reimbursement for drugs. Even if a product candidate is approved by the FDA, insurance coverage might not be
available and reimbursement levels might be inadequate to cover our drug. If government and other healthcare payers do not provide adequate coverage and reimbursement levels for our product, once approved, market acceptance and our revenue could be
reduced.

Specifically, not all physicians recognize a separate indication for symptomatic neurogenic orthostatic hypotension
and we cannot provide assurances that reimbursement will be approved by the relevant decision makers even if droxidopa receives market approval from the FDA or other regulatory authorities.

In addition, the U.S. and international healthcare industry is subject to changing political, economic and regulatory influences that may
significantly affect the purchasing practices and pricing of pharmaceuticals. The laws and regulations governing and issued by the FDA and other healthcare policies might change, and additional government regulations might be enacted, which could
prevent or delay regulatory approval of our product candidates. The U.S. Congress has also considered and may adopt legislation that could have the effect of putting downward pressure on the prices that pharmaceutical and biotechnology companies can
charge for prescription drugs, including the proposed healthcare reform legislation. Cost-containment measures, whether instituted by healthcare providers or imposed by government health administration regulators or new regulations, could result in
greater selectivity in the purchase of drugs. As a result, healthcare payers might challenge the price and cost effectiveness of our products. In addition, in many major markets outside the United States, pricing approval is required before sales
may commence. As a result, significant uncertainty exists as to the reimbursement status of approved healthcare products.

Developments by
competitors might render our products or technologies obsolete or non-competitive.

Companies that currently sell both
generic and proprietary compounds for the treatment of rheumatoid arthritis include, but are not limited to, Abbott Laboratories, Amgen, Sanofi-Aventis, Barr Laboratories, Boehringer Ingelheim Pharma, Hoffmann-La Roche, Johnson & Johnson,
Bristol-Myers Squibb and Mylan Laboratories. Alternative technologies are being developed to treat rheumatoid arthritis by numerous companies including Pfizer, Rigel, UCB, and GSK which are in advanced clinical trials or filed with regulatory
agencies. Companies that currently sell compounds used for the treatment of orthostatic hypotension include Shire, Mylan Pharmaceuticals, Eon Labs, Impax Laboratories and King Pharmaceuticals. In addition, companies pursuing different but
related fields represent substantial competition. Many of these organizations competing with us have substantially greater capital resources, larger research and development staffs and facilities, longer drug development history in obtaining
regulatory approvals and greater manufacturing and marketing capabilities than we do. These organizations also compete with us to attract qualified personnel and parties for acquisitions, joint ventures or other collaborations.



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While the FDA has indicated that they might remove midodrine from the market, we can have no assurances
that it will be removed.

The FDA has indicated publically that unless two studies are successfully completed within a
specified timeframe to confirm the symptomatic benefit of midodrine, the agency will consider removing midodrine from the market. Midodrine is the only approved compound for orthostatic hypotension in the U.S. and its removal could facilitate
higher sales and/or more rapid acceptance of Northera (droxidopa) in this indication. However the FDA has never removed a drug under similar circumstances and we can provide no assurance that they will do so in the case of midodrine.

Our success, competitive position and future revenue will depend in part on our ability to obtain and maintain patent protection for our
products, methods, processes and other technologies, to preserve our trade secrets, to prevent third parties from infringing on our proprietary rights and to operate without infringing the proprietary rights of third parties.

We do not know whether any of our pending patent applications or those patent applications that we may file or license in the future will
result in the issuance of any patents. Moreover, we cannot predict the degree of patent protection that will be afforded by those patent applications that do result in issuance. Although we generally seek the broadest patent protection available for
our proprietary compounds, we may not be able to obtain patent protection for the actual composition of any particular compound and may be limited to protecting a new method of use for the compound or otherwise restricted in our ability to prevent
others from exploiting the compound. If our patent protection for any particular compound is limited to a particular method of use or indication such that, if a third party were to obtain approval of the compound for use in another indication, we
could be subject to competition arising from off-label use.

Moreover, our issued patents and those that may issue in the
future, or those licensed to us, may be challenged, invalidated, rendered unenforceable or circumvented, any of which could limit our ability to stop competitors from marketing related products. In addition, the rights granted under any issued
patents may not provide us with competitive advantages against competitors with similar compounds or technologies. Furthermore, our competitors may independently develop similar technologies in a manner that does not infringe our patents or other
intellectual property.

If a third party legally challenges our patents or other intellectual property rights that we own or
license, we could lose certain of these rights. For example, third parties may challenge the validity of our U.S. or foreign patents through reexaminations, oppositions or other legal proceedings. If successful, a challenge to our patents or other
intellectual property rights could deprive us of competitive advantages and permit our competitors to use our technology to develop similar products.

In addition, we do not anticipate having patent protection on droxidopa when and if it receives market approval by the FDA for NOH under the brand name Northera. While the orphan drug
designation for this compound by the FDA will provide seven years of market exclusivity, we will not be able to exclude other companies from manufacturing and/or selling this compound beyond that timeframe.

Claims by third parties that we infringe their proprietary rights may result in liability for damages or prevent or delay our developmental and
commercialization efforts.

If a third party were to file a patent infringement suit against us, we could be forced to stop
or delay research, development, manufacturing or sales of any infringing product in the country or countries covered by the patent infringed, unless we can obtain a license from the patent holder. Any necessary license may not be available on
acceptable terms or at all, particularly if the third party is developing or marketing a product competitive with the infringing product. Even if we are able to obtain a license, the rights may be nonexclusive, which would give our competitors
access to the same intellectual property. We also may be required to pay



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substantial damages to the patent holder in the event of an infringement. If we have supplied infringing products to third parties for marketing or have licensed third parties to manufacture, use
or market infringing products, we may be obligated to indemnify these third parties for any damages they may be required to pay to the patent holder and for any losses they may sustain themselves as a result.

We may initiate patent litigation against third parties to protect or enforce our patent rights. Failure to protect our patents and other proprietary
rights may materially harm our business, financial condition and results of operations.

Legal or administrative
proceedings may be necessary to defend against claims of infringement or to enforce our intellectual property rights. If we become involved in any such proceeding, irrespective of the outcome, we may incur substantial costs, and the efforts of our
technical and management personnel may be diverted, which could materially harm our business. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that disclosure
of some of our confidential information could be compelled and the information compromised. In addition, during the course of this kind of litigation, there could be public announcements of the results of hearings, motions or other interim
proceedings or developments that, if perceived as negative by securities analysts or investors, could have a substantial adverse effect on the trading price of our common stock.

Existing patents and proprietary rights could harm our competitive position.

Other entities may have or obtain patents or proprietary rights that could limit our ability to manufacture, use, sell, offer for sale or import products or impair our competitive position. In addition, to the extent that a third party
develops new technology that covers our products, we may be required to obtain licenses to that technology, which licenses might not be available or may not be available on commercially reasonable terms, if at all. Our failure to obtain a license to
any technology that we require may materially harm our business, financial condition and results of operations.

Changes in either patent
laws or in interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property or narrow the scope of our patent protection.

The laws of foreign countries may not protect our rights to the same extent as the laws of the United States. Therefore, enforceability or
scope of our patents in the United States or in foreign countries cannot be predicted with certainty, and, as a result, any patents that we own or license may not provide sufficient protection against competitors.

Some jurisdictions have laws that permit the government to force a patentee to grant a license to a third party for commercialization of a
patented product if the government concludes that the product is not sufficiently developed or not meeting the health needs of the population. Such compulsory licensing laws are very rarely invoked outside of South America and Africa. In addition, a
number of countries limit the enforceability of patents against government agencies or government contractors. In these countries, the patent owner may be limited to monetary relief and may be unable to enjoin infringement, which could materially
diminish the value of the patent. Such compulsory licenses could be extended to include some of our product candidates, which may limit our potential revenue opportunities.

Because of the extensive time required for development, testing and regulatory review of a new drug, it is possible that any related patent
may expire before any of our product candidates can be commercialized or remain in force for only a short period following commercialization. In either case, this would reduce any advantages of the patent.



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If we are unable to satisfy our obligations under current and future license agreements, we could lose
license rights which would adversely affect our business.

We are a party to a license agreement with M. Gopal Nair under
which we license patent rights for our product candidate CH-4051 and other antifolates. Similarly, we license patent and/or certain other rights from DSP for droxidopa. We may enter into additional licenses in the future. Our existing licenses
impose, and we expect future licenses will impose, various milestone payments, royalty payments and other obligations on us. If we fail to comply with our obligations in our intellectual property licenses with third parties, we could lose license
rights that are important to our business. If a licensor challenges our license position, our competitive position and business prospects could be harmed.

Our license agreement with Dr. Nair reserves rights to the licensor in India. Therefore, we will not commercialize our antifolates in India. Our license agreement with DSP reserves rights to the
licensor in Japan, Korea, China and Taiwan which preclude our commercialization of droxidopa in those markets.

If we are unable to enforce
trade secret protection and confidentiality agreements with our employees, our competitive position might be harmed.

Our
success also depends upon the skills, knowledge and experience of our scientific and technical personnel, our consultants and advisors, as well as our licensors and contractors. To help protect our proprietary know-how and our inventions for which
patents are unobtainable or difficult to obtain, we rely on trade secret protection and confidentiality agreements. To this end, it is our policy to require all of our employees, consultants, advisors and contractors to enter into agreements that
prohibit the disclosure of confidential information and, where applicable, require disclosure and assignment to us of the ideas, developments, discoveries and inventions important to our business. These agreements might not provide adequate
protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use or disclosure or the lawful development by others of such information. If any of our trade secrets, know-how or other proprietary
information is disclosed, the value of our trade secrets, know-how and other proprietary rights would be significantly impaired and our business and competitive position would suffer.

If we infringe the rights of third parties we could be prevented from selling products, forced to pay damages and defend against litigation.

If our products, methods, processes and other technologies infringe the proprietary rights of other parties, we could incur substantial costs
and we might have to:



| |  |  | obtain licenses, which might not be available on commercially reasonable terms, if at all;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | abandon an infringing drug candidate;
| | - |  | -------------------------------------



| |  |  | redesign our products or processes to avoid infringement;
| | - |  | ---------------------------------------------------------



| |  |  | stop using the subject matter claimed in the patents held by others;
| | - |  | --------------------------------------------------------------------



| |  |  | pay damages; or
| | - |  | ---------------



| |  |  | defend litigation or administrative proceedings, which might be costly whether we win or lose, and which could result in a substantial diversion of
valuable management resources.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We might not successfully manage our growth.

We are a small, development stage company. Our success will depend upon the expansion of our operations and the effective management of our
growth, which will place a significant strain on our management and on our administrative, operational and financial resources. We currently have 18 employees. We may also have to augment our operational, financial and management systems and hire
and train even more qualified personnel. If we are unable to manage our growth effectively, our business would be harmed.



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We might be exposed to liability claims associated with the use of hazardous materials and chemicals.

Our research and development activities might involve the controlled use of hazardous materials and chemicals. Although we
believe that our safety procedures, and those of our partners, for using, storing, handling and disposing of these materials comply with federal, state, local and, where applicable, foreign laws and regulations, we cannot completely eliminate the
risk of accidental injury or contamination from these materials. In the event of such an accident, we could be held liable for any resulting damages and any liability could materially adversely affect our business, financial condition and results of
operations. In addition, the laws and regulations governing the use, manufacture, storage, handling and disposal of hazardous or radioactive materials and waste products might require us to incur substantial compliance costs that could materially
adversely affect our business, financial condition and results of operations.

We rely on key executive officers and scientific and medical
advisors, and their knowledge of our business and technical expertise would be difficult to replace.

As a small,
development stage company, we are highly dependent on our executive officers, including particularly our Chief Executive Officer, Simon Pedder, Ph.D., and our principal scientific, regulatory and medical advisors. Dr. Pedder is the only
executive officer whose employment with us is governed by an employment agreement, and the term of employment under that agreement expires in May 2012. We do not have key person life insurance policies for any of our officers. The loss
of the technical knowledge and management and industry expertise of any of our key personnel could result in delays in product development, loss of any future customers and sales and diversion of management resources, which could adversely affect
our operating results.

If we are unable to hire additional qualified personnel, our ability to grow our business will be harmed.

As a small, development stage company, we will need to hire additional qualified personnel with expertise in preclinical
testing, clinical research and testing, government regulation, formulation and manufacturing and sales and marketing. We compete for qualified individuals with numerous pharmaceutical and biopharmaceutical companies, universities and other research
institutions. Competition for such individuals is intense, and we cannot be certain that our search for such personnel will be successful. Attracting and retaining qualified personnel is critical to our success.

We might incur substantial liabilities and might be required to limit commercialization of our products in response to product liability lawsuits.

The testing and marketing of medical products entail an inherent risk of product liability. If we cannot successfully defend
ourselves against product liability claims, we might incur substantial liabilities or be required to limit commercialization of our products. Our inability to obtain sufficient product liability insurance at an acceptable cost to protect against
potential product liability claims could prevent or inhibit the commercialization of our products. Although we carry clinical trial insurance, we might not be able to renew such insurance at a reasonable cost, if at all, or our intended
collaborators may be unable to obtain such insurance at a reasonable cost, if at all. Even if our agreements with any future collaborators entitle us to indemnification against losses, that indemnification might not be available or adequate should
any claim arise.

The trading volume of our common stock is limited and our investors may encounter difficulties selling significant
quantities of our stock without adversely impacting the price at which they can sell.

Since listing with the NASDAQ Stock
Market in May 2006, the trading volume for our stock has varied significantly from day to day and often the number of shares traded has been low. No assurance can be given that the current level of liquidity will be maintained or that a more liquid
trading market will develop. Any large transactions in our common stock might be difficult to conduct and may cause significant fluctuations in the price of our stock.



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The prices at which shares of our common stock are traded will likely be volatile.

You should expect the prices at which our common stock is traded to be highly volatile. Since the commencement of NASDAQ trading in May 2006,
the price has varied from a low of $1.09 to a high of $8.41. The expected volatile price of our stock will make it difficult to predict the value of your investment, to sell your shares at a profit at any given time, or to plan purchases and sales
in advance. A variety of other factors might also affect the market price of our common stock. These include, but are not limited to:



| |  |  | publicity regarding actual or potential clinical results relating to products under development by our competitors or us;
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | delays or failures in initiating, completing or analyzing preclinical or clinical trials or the unsatisfactory design or results of these trials;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | success or delays in commercialization of our product candidates;
| | - |  | -----------------------------------------------------------------



| |  |  | market acceptance of our product candidates;
| | - |  | --------------------------------------------



| |  |  | achievement or rejection of regulatory approvals by our competitors or us;
| | - |  | --------------------------------------------------------------------------



| |  |  | announcements of technological innovations or new commercial products by our competitors or us;
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | developments concerning proprietary rights, including patents;
| | - |  | --------------------------------------------------------------



| |  |  | developments concerning our collaborations;
| | - |  | -------------------------------------------



| |  |  | regulatory developments in the United States and foreign countries;
| | - |  | -------------------------------------------------------------------



| |  |  | economic or other crises and other external factors;
| | - |  | ----------------------------------------------------



| |  |  | period-to-period fluctuations in our results of operations;
| | - |  | -----------------------------------------------------------



| |  |  | changes in financial estimates by securities analysts; and
| | - |  | ----------------------------------------------------------



| |  |  | sales of our common stock.
| | - |  | --------------------------

We will not be able to control many of these factors, and we believe that period-to-period comparisons of our financial results will not necessarily be indicative of our future performance.

In addition, the stock market in general, and the market for pharmaceutical companies in particular, has experienced extreme price and
volume fluctuations that might have been unrelated or disproportionate to the operating performance of individual companies. These broad market and industry factors might seriously harm the market price of our common stock, regardless of our
operating performance.

We have never paid dividends and do not intend to pay cash dividends.

We currently anticipate that no cash dividends will be paid on our common stock in the foreseeable future. While our dividend policy will be
based on the operating results and capital needs of the business, it is anticipated that all earnings, if any, will be retained to finance our future operations.



|ITEM 1B. | UNRESOLVED STAFF COMMENTS.
|-------- | --------------------------

None.

ITEM 2. PROPERTIES.

We currently lease 9,956 square feet of office space in Charlotte, North Carolina. This lease currently requires us to make monthly payments
of $19,613. The lease expires on October 15, 2013 and calls for annual rent increases of 3%. The lease had initially provided an option to rent an additional 3,000 square feet of adjacent



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space. We elected to let that option lapse in November 2009. A security deposit equal to four months rent, or $76,163, was paid upon signing the lease. We believe that our current
facilities are adequate to meet our needs until at least the second half of 2011.

ITEM 3. LEGAL PROCEEDINGS.

We are not subject to any pending legal proceeding, nor are we aware of any threatened claims against us.



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##### Table of Contents

PART II

ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES.

Our common stock has been traded on the National Association of Securities Dealers Automatic Quotation System
(NASDAQ) under the symbol CHTP since May 2, 2006 and traded on the Over-the-Counter Bulletin Board under the symbol CHTP.OB from July 29, 2005 through May 1, 2006 and under the symbol
IVRC.OB from August 18, 2004 through July 28, 2005. The following table sets forth the high and low prices of our common stock for the reported periods, as reported by NASDAQ. These quotations reflect inter-dealer prices,
without retail mark-up, markdown, or commission and may not represent actual transactions. Trading on our common stock had historically been sporadic, exemplified by low trading volume, with 213 of 673 trading days between our listing on NASDAQ and
the end of 2008 having fewer than 10,000 shares traded. However, only 20 trading days in 2009 had such low trading volume.



|                                    |  |      |      |     |   |     
|----------------------------------- |  | ---- | ---- | --- | - | ----
|                                    |  | High |      | Low
|Fiscal year ended December 31, 2008 |  |      |      |     |   |     
|First Quarter                       |  | $    | 8.41 |     | $ | 4.77
|Second Quarter                      |  | $    | 6.00 |     | $ | 4.45
|Third Quarter                       |  | $    | 6.90 |     | $ | 2.67
|Fourth Quarter                      |  | $    | 3.42 |     | $ | 1.09
|                                    |  |     
|Fiscal year ended December 31, 2009 |  |      |      |     |   |     
|First Quarter                       |  | $    | 2.17 |     | $ | 1.27
|Second Quarter                      |  | $    | 5.00 |     | $ | 1.45
|Third Quarter                       |  | $    | 7.51 |     | $ | 1.71
|Fourth Quarter                      |  | $    | 3.42 |     | $ | 2.00

As of March 9,
2010, the last sale price of our common stock on NASDAQ was $2.90 per share. As of March 9, 2010, there were approximately 2,634 stockholders of record.

We have neither paid nor declared dividends on our common stock since our inception and do not plan to pay dividends in the foreseeable future. Any earnings that we may realize will be reinvested to
finance our operations.

The market prices for securities of pharmaceutical companies, including ours, have historically been
highly volatile, and the market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. Factors, such as fluctuations in our operating results,
announcements of technological innovations or new therapeutic products by us or others, clinical trial results, developments concerning agreements with collaborators, governmental regulation, developments in patent or other proprietary rights,
public concern as to the safety of drugs developed by us or others, future sales of substantial amounts of common stock by existing stockholders and general market conditions, can have an adverse effect on the market price of our common stock.



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ITEM 6. SELECTED FINANCIAL DATA.

The following table sets forth financial data with respect to us as of and for the five years ended December 31, 2009 and the period
from April 3, 2002 (inception) through December 31, 2009. The selected financial data below should be read in conjunction with the audited financial statements and related notes included elsewhere in this Annual Report on Form 10-K and
Managements Discussion and Analysis of Financial Condition and Results of Operations included in Item 7.



|                                                                       |  |                                                 |            |   |                                                            |   |            |      |  |   |            |   |  |      |            |   |  |   |            |   |  |   |         |  
|---------------------------------------------------------------------- |  | ----------------------------------------------- | ---------- | - | ---------------------------------------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | ---- | ---------- | - |  | - | ---------- | - |  | - | ------- | -
|                                                                       |  | Years ended December 31,                        |            |   | Period fromApril 3, 2002(Inception)throughDecember 31,2009 |  
|                                                                       |  | 2009                                            |            |   | 2008                                                       |   |            | 2007 |  |   | 2006       |   |  | 2005 |            |  
|                                                                       |  | (In thousands, except share and per share data) |            |   |                                                            |  
|Statement of Operations Data:                                          |  |                                                 |            |   |                                                            |   |            |      |  |   |            |   |  |      |            |   |  |   |            |   |  |   |         |  
|Operating expenses:                                                    |  |                                                 |            |   |                                                            |   |            |      |  |   |            |   |  |      |            |   |  |   |            |   |  |   |         |  
|Research and development                                               |  | $                                               | 23,985     |   |                                                            | $ | 27,109     |      |  | $ | 12,336     |   |  | $    | 6,864      |   |  | $ | 5,516      |   |  | $ | 77,619  |  
|Sales and marketing                                                    |  |                                                 | 2,289      |   |                                                            |   | 1,561      |      |  |   | 1,294      |   |  |      | 642        |   |  |   | 524        |   |  |   | 6,480   |  
|General and administrative                                             |  |                                                 | 4,076      |   |                                                            |   | 3,727      |      |  |   | 2,875      |   |  |      | 2,028      |   |  |   | 2,076      |   |  |   | 15,793  |  
|                                                                       |  |                                                 |            |   |                                                            |   |            |      |  |   |            |   |  |      |            |   |  |   |            |   |  |   |         |  
|Total operating expenses                                               |  |                                                 | 30,350     |   |                                                            |   | 32,397     |      |  |   | 16,505     |   |  |      | 9,534      |   |  |   | 8,116      |   |  |   | 99,892  |  
|                                                                       |  |                                                 |            |   |                                                            |   |            |      |  |   |            |   |  |      |            |   |  |   |            |   |  |   |         |  
|Operating loss                                                         |  |                                                 | (30,350    | ) |                                                            |   | (32,397    | )    |  |   | (16,505    | ) |  |      | (9,534     | ) |  |   | (8,116     | ) |  |   | (99,892 | )
|Interest income, net of expense                                        |  |                                                 | 188        |   |                                                            |   | 1,701      |      |  |   | 1,423      |   |  |      | 863        |   |  |   | 200        |   |  |   | 4,349   |  
|Other income (expense)                                                 |  |                                                 | 4,390      |   |                                                            |   | (4,390     | )    |  |   |           |   |  |      |           |   |  |   |           |   |  |   |        |  
|                                                                       |  |                                                 |            |   |                                                            |   |            |      |  |   |            |   |  |      |            |   |  |   |            |   |  |   |         |  
|Net loss                                                               |  | $                                               | (25,772    | ) |                                                            | $ | (35,086    | )    |  | $ | (15,082    | ) |  | $    | (8,671     | ) |  | $ | (7,916     | ) |  | $ | (95,543 | )
|                                                                       |  |                                                 |            |   |                                                            |   |            |      |  |   |            |   |  |      |            |   |  |   |            |   |  |   |         |  
|Net loss per basic and diluted share of common stock                   |  | $                                               | (0.82      | ) |                                                            | $ | (1.17      | )    |  | $ | (0.66      | ) |  | $    | (0.46      | ) |  | $ | (0.64      | ) |  |   |         |  
|                                                                       |  |                                                 |            |   |                                                            |   |            |      |  |   |            |   |  |      |            |   |  |   |            |   |  |   |         |  
|Weighted average number of basic and diluted common shares outstanding |  |                                                 | 31,549,739 |   |                                                            |   | 30,027,031 |      |  |   | 22,936,780 |   |  |      | 18,780,638 |   |  |   | 12,321,061 |   |  |   |         |  
|                                                                       |  |                                                 |            |   |                                                            |   |            |      |  |   |            |   |  |      |            |   |  |   |            |   |  |   |         |  



|                                                 |  |                    |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|------------------------------------------------ |  | ------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                 |  | As of December 31, |        
|                                                 |  | 2009               |         |   | 2008 |   |         | 2007 |  |   | 2006    |   |  | 2005 |        
|                                                 |  | (in thousands)     |        
|Balance Sheet Data:                              |  |                    |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Cash and cash equivalents                        |  | $                  | 22,295  |   |      | $ | 21,533  |      |  | $ | 34,076  |   |  | $    | 3,111   |   |  | $ | 3,173   |  
|Short-term investments, net                      |  |                    | 11,450  |   |      |   | 10,306  |      |  |   | 28,638  |   |  |      | 12,786  |   |  |   |        |  
|Working capital                                  |  |                    | 12,671  |   |      |   | 20,260  |      |  |   | 57,910  |   |  |      | 14,080  |   |  |   | 2,328   |  
|Long-term investments, net                       |  |                    |        |   |      |   | 11,329  |      |  |   |        |   |  |      |        |   |  |   |        |  
|Total assets                                     |  |                    | 34,349  |   |      |   | 44,130  |      |  |   | 63,163  |   |  |      | 16,171  |   |  |   | 3,427   |  
|Line of credit payable                           |  |                    | 11,466  |   |      |   | 7,277   |      |  |   |        |   |  |      |        |   |  |   |        |  
|Deficit accumulated during the development stage |  |                    | (95,543 | ) |      |   | (69,771 | )    |  |   | (34,685 | ) |  |      | (19,604 | ) |  |   | (10,932 | )
|Total stockholders equity                       |  |                    | 12,852  |   |      |   | 24,548  |      |  |   | 57,967  |   |  |      | 14,137  |   |  |   | 2,384   |  



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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.

The following discussion of our financial condition and results of operations should be read in
conjunction with the financial statements and the notes to those statements included elsewhere in this Annual Report on Form 10-K. This discussion contains predictions, estimates and other forward-looking statements that involve a number of risks
and uncertainties, including those discussed under Risk Factors and elsewhere in this Annual Report on Form 10-K. These risks could cause our actual results to differ materially from those anticipated in these forward-looking statements.

Overview

We are a development stage pharmaceutical company that seeks to acquire, develop and commercialize innovative products for the treatment of a variety of human diseases. Our strategy is to develop technologies that address important unmet
medical needs or offer improved, cost-effective alternatives to current methods of treatment. Specifically, we are developing a novel therapeutic agent for the treatment of symptomatic neurogenic orthostatic hypotension, or NOH, and related
conditions and diseases along with our development of prescription products for multiple autoimmune disorders including rheumatoid arthritis, psoriasis, inflammatory bowel disease and cancer.

We are currently focusing the majority of our drug development resources on two clinical stage development projects:
droxidopa for symptomatic NOH and other potential indications; and our portfolio of non-metabolized antifolate compounds for the treatment of rheumatoid arthritis. Droxidopa, our most advanced investigational product candidate, is an orally active
synthetic precursor of norepinephrine. It is being developed for the treatment of symptomatic NOH and is currently approved and marketed in Japan for the treatment of symptomatic NOH, freezing of gait in Parkinsons Disease, or PD, and
intradialytic hypotension, or IDH. During 2007, the FDA granted orphan drug status to droxidopa for the treatment of symptomatic NOH and the EMEA granted orphan medicinal product designation for the treatment of patients with Pure Autonomic Failure,
or PAF, and patients with multiple system atrophy, or MSA. Droxidopa is currently in Phase III clinical trials designed to support the registration of droxidopa, under the brand name Northera, in the United States for the treatment of symptomatic NOH.

In September 2009, we announced preliminary data from Study 302, the first of our pivotal double-blind Phase III trials, designed to compare droxidopa to placebo for the treatment of symptomatic NOH.
While strong symptomatic benefit was demonstrated during the open-label dose titration and run-in phase of the trial, results of the trial did not demonstrate a statistically significant improvement relative to placebo, as measured by the mean score
of Item 1 (dizziness or light-headedness) of the Orthostatic Hypotension Symptom Assessment, or OHSA, scale during the double-blind phase of the trial, the studys primary endpoint. While the study did not meet its primary endpoint,
additional analysis confirmed statistically significant symptomatic benefit across five clinically relevant assessment criteria that reflect symptomatic improvements and corroborate other supportive symptom data. Data from the trial also supported
the safety and tolerability of droxidopa.

In December 2009, we announced that after meeting with the FDA to obtain greater
clarity about our options for completing the planned clinical and registration program for droxidopa, the FDA had agreed for us to change the primary endpoint and increase the enrollment of Study 301, our other ongoing pivotal Phase III trial, being
conducted under a Special Protocol Assessment, or SPA. The primary endpoint of the trial will now be the relative improvement in the Orthostatic Hypotension Questionnaire (OHQ) composite score between droxidopa and placebo. The FDA agreed that the
revised primary endpoint reflects a more comprehensive global assessment of the clinical benefit of droxidopa for the treatment of symptomatic NOH in primary autonomic failure, a heterogeneous population consisting of patients suffering from PD,
MSA, PAF, Dopamine-ß-hydroxylase deficiency and non-diabetic autonomic neuropathy and would therefore be suitable for supporting a symptomatic claim. Although we had already enrolled 126 patients, exceeding our initial target enrollment of 118
patients, in Study 301 by September 2009, the results were not unblinded. To further de-risk the study and maximize the



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potential significance of the outcome, we decided to increase the power of the study to greater than 80% by randomizing an additional 24 patients by reopening enrollment at select North American
centers. The FDA subsequently confirmed that the SPA originally awarded to Study 301 in 2008 remained in effect following the protocol amendments approved by the FDA in December 2009.

The FDA also recommended that we submit a confirmatory pivotal study to support an NDA filing and that such study could be contained to a
small, highly enriched, homogeneous patient population. Based on this recommendation, we plan to initiate a new clinical trial, Study 306, in 2010. Study 306 is a randomized, double-blind, placebo-controlled, induction-design Phase III trial
evaluating up to 84 patients with symptomatic NOH associated with PD. The trial will be approximately 12 weeks in duration and include an initial, blinded dose titration period lasting up to two weeks, after which all patients will continue into an
8-week double-blind treatment period. The primary endpoint of the trial will be the relative improvement versus placebo in the OHQ composite score.

In March 2009, we announced positive results from a preliminary analysis of the completed double-blind, placebo controlled Phase II trial of droxidopa for the treatment of IDH. Droxidopa demonstrated
benefit and indication of dose response in multiple measures of IDH, particularly in alleviating serious adverse events and complications, such as dialysis disruption. In addition, an ongoing Phase II trial of droxidopa, alone and in combination
with carbidopa, for the treatment of fibromyalgia began in early 2009, under approval from the United Kingdoms Medicines and Healthcare Products Regulatory Agency.

In addition to droxidopa, we are currently developing a portfolio of molecules for the treatment of various autoimmune/inflammatory diseases. The most advanced platform is a portfolio of metabolically
inert antifolate molecules engineered to have potent anti-inflammatory and anti-tumor activity to treat a range of immunological disorders, including two clinical stage product candidates designated as CH-1504 and CH-4051. In March 2009, we
announced positive results from the completed Phase II head-to-head clinical trial of CH-1504 for the treatment of rheumatoid arthritis. This trial was designed to compare the efficacy and tolerability of CH-1504 against methotrexate, currently the
leading antifolate treatment and standard of care for a broad range of abnormal cell proliferation diseases. The analysis showed comparable ACR20/50/70 response rates to patients treated with 0.25mg, 0.50mg and 1.0mg of CH-1504 against patients
treated with a standard 20mg weekly oral dose of methotrexate. In addition, the efficacy of CH-1504 was associated with improved tolerability and reduced liver enzyme elevations compared with methotrexate. In April 2009, we announced positive
findings from our Phase I study of CH-4051, the L-isomer of CH-1504. Data from this single and multiple ascending dose study demonstrated that CH-4051 is safe and well tolerated up to a maximally tolerated dose of 7.5mg.

Following the completion of our Phase I studies, we plan to initiate a Phase II designed to compare CH-4051 to methotrexate in methotrexate
non-responder rheumatoid arthritis patients. This Phase II study is a double-blind, multiple-arm randomized study with a primary efficacy endpoint of the ACR hybrid score that combines a continuous scale of percentage improvement with the well known
ACR20/50/70. The trial is expected to be initiated in the second quarter of 2010. Complementing our antifolate program is a second platform consisting of a portfolio of therapeutics targeting immune-mediated inflammatory disorders and
transplantation.

Since inception we have focused primarily on organizing and staffing our company, negotiating in-licensing
agreements with our partners, acquiring, developing and securing our proprietary technology, participating in regulatory discussions with the FDA, the EMEA and other regulatory agencies and undertaking preclinical trials and clinical trials of our
product candidates. We are a development stage company and have generated no revenue since inception. We do not anticipate generating any product revenue until and unless we successfully obtain approval from the FDA or equivalent foreign regulatory
bodies to begin selling our pharmaceutical candidates although we could potentially generate revenue by entering into strategic agreements including out-licensing, co-development or co-promotion of our drug candidates. Developing pharmaceutical
products is a lengthy and expensive process. Even if we do not encounter unforeseen safety issues or timing or other delays



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during the course of developing our currently licensed product candidates, we would not anticipate receiving regulatory approval to market any such products until, at the earliest, 2012.
Development expenses incurred from inception to December 31, 2009 have been funded with proceeds from equity financings completed in December 2004, February 2006, March 2007, November 2007 and July 2009. On March 5, 2010, we
completed another equity financing. To the extent we move our products into additional clinical trials and expand our commercialization and marketing efforts for droxidopa, our need to finance operating costs will continue. Accordingly, our success
depends not only on the safety and efficacy of our product candidates, but also on our ability to finance the development and/or commercialization of the products.

Revenue and Cost of Revenue

We have not generated any revenue from
licensing, milestones or product sales through December 31, 2009. We do not expect to generate product revenue within the next 22 to 24 months but may decide to outlicense one or more of our drug product candidates during that timeframe. If
successful, we would anticipate revenue to be recorded from such a transaction. However, we might never be able to generate revenue. None of our existing product candidates are expected to be commercially available until, at the earliest, 2012, if
at all.

Research and Development

Research and development expenses consist primarily of costs associated with determining feasibility, licensing and preclinical and clinical testing of our licensed pharmaceutical candidates, including
salaries and related personnel costs, fees paid to consultants and outside service providers for drug manufacture and development, certain legal expenses and other expenses. All of our major research and development projects subject us to drug
development and regulatory risks, including specifically risks of delays and cost over-runs that could be material to our financial condition and results of operations. For certain programs, we might rely on collaborative partners or our ability to
enter into collaborations on favorable terms in order to advance a product candidate and pay a portion of the research and development expenses. See Item 1A. Risk Factors. We expense our research and development costs as they are
incurred. Research and development expenses, related to our three major research and development projects, for the years ended December 31, 2009, 2008 and 2007 were approximately $24.0 million, $27.1 million and $12.3 million, respectively, and
are detailed as follows:



|               |  |                          |        |      |   |        |  |   |       
|-------------- |  | ------------------------ | ------ | ---- | - | ------ |  | - | ------
|               |  | Years ended December 31,
|(in thousands) |  | 2009                     |        | 2008 |   | 2007  
|Antifolates    |  | $                        | 2,300  |      | $ | 8,900  |  | $ | 4,500 
|Droxidopa      |  |                          | 21,700 |      |   | 18,200 |  |   | 7,000 
|I-3D           |  |                          |       |      |   |       |  |   | 800   
|               |  |                          |        |      |   |        |  |   |       
|               |  | $                        | 24,000 |      | $ | 27,100 |  | $ | 12,300
|               |  |                          |        |      |   |        |  |   |       

Sales and Marketing

Selling and marketing expenses consist primarily of salaries and related expenses that support our business development activity, promotional
expenses, expenses related to the branding, pricing and market analysis of our pharmaceutical compounds and certain legal expenses.

General and Administrative

General and administrative expenses focus on the support of administrative
activities and consist primarily of salaries and related expenses for executive, finance and other administrative personnel, recruitment expenses for such personnel, consulting and professional fees and other corporate expenses, including general
legal and accounting activities, certain taxes and other government fees and facilities-related expenses.



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Corporate History

On February 11, 2005, we completed a merger with Ivory Capital Corporation, a publicly traded Colorado corporation, in which a wholly
owned subsidiary of Ivory Capital was merged with and into Chelsea, and Chelsea became a wholly owned subsidiary of Ivory Capital. The merger resulted in a change of control of Ivory Capital, with the former stockholders of Chelsea owning
approximately 96.75% of the resulting entity, after assuming the conversion of all outstanding options and warrants. In addition, the terms of the merger provided that the sole officer and director of Ivory Capital would be replaced by the officers
and directors of Chelsea. The transaction was accounted for as a reverse acquisition with Chelsea as the acquiring party and Ivory Capital as the acquired party, in substance, a reorganization of Chelsea. Accordingly, when we refer to our business
and financial information relating to periods prior to the merger, we are referring to the business and financial information of Chelsea unless the context indicates otherwise. On July 28, 2005, Ivory Capital Corporation merged with Chelsea
Therapeutics International, Ltd., with Chelsea Therapeutics International, Ltd. as the surviving corporation. As a result, Chelsea Therapeutics International, Ltd. is the public reporting company and is the 100% owner of Chelsea Therapeutics, Inc.,
its operating subsidiary.

When we refer to business and financial information for periods between January 1, 2005 and
July 28, 2005, we are referring to the business and financial information of Ivory Capital Corporation. Except as noted, all share numbers included herein reflect the conversion of every nine shares of Ivory Capital Corporation common stock for
one share of Chelsea Therapeutics International, Ltd. common stock that occurred in connection with our Delaware reincorporation on July 28, 2005.

Results of Operations

The tables below set forth, for the periods
indicated, certain items in our consolidated statements of operations and other pertinent financial and operating data.

Comparison of
Years ended December 31, 2009 and 2008



|                                   |  |                                   |        |   |                                   |   |        |           |  |   |         |   |  |      |  
|---------------------------------- |  | --------------------------------- | ------ | - | --------------------------------- | - | ------ | --------- |  | - | ------- | - |  | ---- | -
|(in thousands, except percentages) |  | For theYear endedDecember 31,2009 |        |   | For theYear endedDecember 31,2008 |   |        | $Increase |  |   | %Change |  
|Research and development expense   |  | $                                 | 23,985 |   |                                   | $ | 27,109 |           |  | $ | (3,124  | ) |  | -12  | %
|Sales and marketing expense        |  |                                   | 2,289  |   |                                   |   | 1,561  |           |  |   | 728     |   |  | 47   | %
|General and administrative expense |  |                                   | 4,076  |   |                                   |   | 3,727  |           |  |   | 349     |   |  | 9    | %
|Interest income                    |  |                                   | 337    |   |                                   |   | 1,707  |           |  |   | (1,370  | ) |  | -80  | %
|Interest expense                   |  |                                   | (149   | ) |                                   |   | (5     | )         |  |   | (144    | ) |  | 2880 | %
|Other (income) expense             |  |                                   | (4,390 | ) |                                   |   | 4,390  |           |  |   | (8,780  | ) |  | -200 | %

Research
and development expenses.We continued to incur significant development expenses in 2009, primarily related to our extensive clinical testing programs, particularly, clinical activities for droxidopa, including our pivotal Phase III trials in
NOH and Phase II trial in fibromyalgia. In addition, we incurred costs associated with our Phase II study of CH-1504 in rheumatoid arthritis, completed in March 2009, and our Phase I dosing study of CH-4051, completed in April 2009. Other activities
contributing to expenses in 2009 include manufacture, formulation, labeling and packaging and regulatory costs. As a percentage of operating expenses, research and development costs were 79% for the year ended December 31, 2009 compared with
84% for the same period of 2008. Also contributing to our expenses were compensation and related costs in both periods. A significant component of our costs in 2008 was related to the ongoing Phase II clinical trial for CH-1504 in rheumatoid
arthritis and investigational activities for follow-on molecules in our portfolio of antifolates. We also incurred significant costs during 2008 for clinical activities for droxidopa including the start of our Phase III programs in NOH and our Phase
II study in IDH. Other activities for droxidopa included manufacturing and



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formulation costs in support of the clinical programs and license milestone payments for dosing in a Phase III trial.

Droxidopa.From inception through December 31, 2009, we had spent approximately $49 million in research and
development expenses on droxidopa. Assuming we do not enter into an out-license, co-development or other type of collaborative agreement with respect to this compound, we estimate that subsequent to that date we will need to incur approximately $25
million more, primarily to complete our Phase III clinical trials and submit an NDA, under the brand name Northera, to the FDA. These estimated costs do not include license payments, FDA filing-related costs or commercial drug product
purchases made prior to NDA approval. These estimated costs do include the costs of the recently identified changes to our planned registration program, including approximately $9 million for our confirmatory pivotal Phase III study, Study 306, $3
million for the randomization of additional patients into Study 301 and $4 million for the extension of our safety and access programs through 2011. Assuming FDA approval of droxidopa for marketing in the United States, we currently anticipate
launching the product and having initial sales or royalty revenue from it in the first quarter of 2012. In addition to the spending requirements above, we plan to spend up to approximately $2.5 million in 2010 for clinical proof of concept studies
in other indications unrelated to the NOH registration and commercialization program.

Antifolates.From
inception through December 31, 2009, we had spent approximately $26 million in research and development expenses on our portfolio of antifolates. We currently intend to seek a partner to assist us in the development of our antifolates after the
completion of Phase II proof-of-concept studies for CH-4051 in rheumatoid arthritis, expected in 2011. We estimate that we will spend approximately $13 million for this study in 2010 and 2011. Assuming an approval for marketing, we currently
estimate launch of this product and initial royalty revenue from it no sooner than 2014.

I-3D Portfolio.From inception through December 31, 2009, we had spent approximately $2.5 million in research and development expenses on the I-3D portfolio of compounds. We have conducted compound discovery work on the portfolio to try and indentify one
or more lead compounds. All of the work completed to date was performed before 2008 and we do not expect to incur significant additional expenses for these compounds until we select a partner or obtain additional financing.

Sales and marketing expenses. Although we had no formalized selling activities, the increase in sales and marketing expenses in 2009
were attributable to costs of initiating market research and commercialization activities for droxidopa in anticipation of positive results of Study 302. In addition, we performed market analysis studies for both droxidopa and our antifolates. Other
expenses included compensation and related costs, legal expenses and related costs for our intellectual property and travel costs for our business development efforts. During 2008, we incurred expenses of a similar nature but rather than preliminary
marketing activities related to the planned commercialization of droxidopa, our efforts were focused on the printing of educational materials and a pricing study for droxidopa.

General and administrative expenses. The increase in general and administrative expenses primarily consists of an increase in
compensation and related expenses. The remainder of the increase is related to moderate increases in other categories of spending during the period including office rent related to our headquarters and professional fees for accounting services
offset by a decrease in franchise tax expense due to the impact of 2008 operating losses on the taxable equity base.

Interest income. At December 31, 2009, we had cash and cash equivalents of $22.3 million and short-term investments of $11.45 million. Although the funding received from our July 2009 financing, proceeds from the sale and
redemption of auction rate securities, or ARS, and additional funding under the line of credit we have with UBS allowed us to maintain a higher than expected average cash and investments level over the period, the average cash and investment level
during 2009 was significantly lower than the level for the same period of 2008. When those lower average levels are combined with the loss of interest income on ARS earned in 2008, the deterioration of overall market interest rates and a shift of
our holdings in 2008 and 2009, other than ARS, into



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non-interest bearing accounts, Treasury funds, low-yielding commercial money market account and similar investments, interest earned decreased by $1.4 million.

Other (income) expense. During the year ended December 31, 2009, we recorded a gain of $4.4 million on the recovery of
previously recorded impairment losses for ARS that were redeemed at par and an increase in the fair value of our ARS Rights (see Liquidity and Capital Resources  Auction Rate Securities for a description). During the year ended
December 31, 2008, we had recorded the subsequently recovered other-than-temporary impairment loss related to our investments in ARS of approximately $4.4 million.

Comparison of Years ended December 31, 2008 and 2007





|                                   |  |                                   |        |                                   |   |           |  |         |        |  |     |  
|---------------------------------- |  | --------------------------------- | ------ | --------------------------------- | - | --------- |  | ------- | ------ |  | --- | -
|(in thousands, except percentages) |  | For theYear endedDecember 31,2008 |        | For theYear endedDecember 31,2007 |   | $Increase |  | %Change |       
|Research and development expense   |  | $                                 | 27,109 |                                   | $ | 12,336    |  | $       | 14,773 |  | 120 | %
|Sales and marketing expense        |  |                                   | 1,561  |                                   |   | 1,294     |  |         | 267    |  | 21  | %
|General and administrative expense |  |                                   | 3,727  |                                   |   | 2,875     |  |         | 852    |  | 30  | %
|Interest income                    |  |                                   | 1,707  |                                   |   | 1,424     |  |         | 283    |  | 20  | %
|Other expense                      |  |                                   | 4,390  |                                   |   |          |  |         | 4,390  |  | 100 | %

Research
and development expenses increased in 2008 primarily related to the advancement of our drug candidates into more extensive clinical testing programs and compensation costs related to the addition of new personnel during the year. As a percentage
of operating expenses, research and development costs increased to 84% for 2008 from 75% for 2007. During 2008, we continued our manufacturing, preclinical, Phase I and Phase II activities for our portfolio of antifolates and our manufacturing,
formulation, preclinical, Phase II and Phase III activities for droxidopa. Also contributing to the increase in research and development costs were a $0.7 million increase in compensation and related expenses, a $0.1 million increase in travel and
other employee related costs and a $0.3 million increase in licensing costs related to the achievement of certain milestones. These increases were offset by a decrease of $0.1 million in general contractor and outside services expense.

Sales and marketing expenses. We had no formalized selling activities for the year ended December 31, 2008. The increase is
primarily related to a $0.2 million increase in professional legal fees related to further securing our intellectual property and a $0.2 million increase in compensation and related expenses.

General and administrative expenses. The $0.8 million increase in general and administrative expenses consists of a $0.1 million
increase in compensation and related expenses; a $0.3 million increase in non-cash stock-based compensation based on stock option grants made in February 2008, the fair values of which reflect our increased stock price and volatility; a $0.1 million
increase in rent and facilities costs related to our new corporate headquarters; and a $0.1 million increase in franchise taxes due to our 2007 issuances of stock for financing purposes and the related increase in our stockholders equity.

Interest income. At December 31, 2008, we had cash and cash equivalents of $21.5 million and investments,
classified as short-term and long-term with a par value of approximately $26.0 million. Although we maintained a higher average cash and investments level over the year, interest earned increased by only $0.3 million, reflecting general reductions
in interest rates and the shift of our holdings, other than ARS, into Treasury funds and similar investments.

Other
expense. Based on a fair value analysis, we recorded an other-than-temporary impairment charge related to our investment in ARS of approximately $6.4 million, offset by a gain of $2.0 million recorded based on the fair value of the ARS Rights
obtained related to the future redemption of certain of those ARS.



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Liquidity and Capital Resources

From inception to December 31, 2009, we have incurred an aggregate net loss of approximately $95.5 million as a result of expenses
similar in nature to those described above.

As of December 31, 2009, we had working capital of approximately $12.7
million, cash and cash equivalents of approximately $22.3 million and short-term investments of approximately $11.45 million that are collateral for our line of credit. We have financed our operations primarily through sales of our stock and, to a
much lesser extent, through the issuance of our common stock pursuant to option or warrant exercises. Cash on hand results primarily from previous financing activities and proceeds from a line of credit, secured by investments in ARS, with UBS
offset by funds utilized for operating and investing activities. Our financing activities are more fully described in Financings below.

Auction Rate Securities

At December 31, 2009, our short-term investments of $11.45 million consisted of
the fair value of principal invested in certain ARS and the fair value of the ARS Rights. The ARS held by us are private placement securities with long-term nominal maturities for which the interest rates are reset through a Dutch auction on 28 or
35 day cycles. Although the monthly auctions had historically provided a liquid market for these securities, in early 2008, with the liquidity issues in the global credit and capital markets, auctions for these, and similar, securities began to fail
and by March 2008, market activity had essentially ceased. Our investments in these securities represent interests in collateralized debt obligations supported by pools of structured credit instruments consisting of student loans. None of the
collateral for the ARS held by us includes mortgage, credit card or insurance securitizations. As of December 31, 2009, our ARS holdings had a par value of $11.45 million and all but approximately $4.4 million were AAA/Aaa rated and insured by
the Federal Family Education Loan Program (FFELP) and/or over-collateralized by more than 10%. Of the remaining $4.4 million, all were collateralized at 100% and, consistent with our investment policy at the time of purchase, $0.75 million carried
an A rating, $1.15 million carried an Aa3/AAA rating and the remainder carried AAA/Aaa ratings.

Beginning in early February
2008, we experienced difficulty in liquidating our ARS as the amount of securities submitted for auction exceeded the market demand and auctions began to fail. When the auctions for these securities fail, the investments are not readily convertible
into cash until a future auction is successful, secondary markets emerge, the securities are redeemed by the issuer or they mature.

Per the terms of a settlement agreement executed in May 2009, all of our ARS holdings that were then classified as available-for-sale and had been purchased from BA were redeemed at 100% of par value, or $11.6 million, in June 2009. In
addition, BA also refunded to us the $0.4 million realized loss we incurred in January 2009 upon the sale of our $2.5 million par value ARS holding in Mississippi Higher Ed Assistance Corp. As such, we recorded a gain of approximately $4.1 million
related to the recovery of the previously recorded other-than-temporary impairment for these ARS holdings.

During the fourth
quarter of 2008, we finalized the details of our settlement agreement with UBS under the published terms accepting the terms of the settlement agreement from UBS for ARS Rights (the ARS Rights) for our illiquid ARS holdings purchased
from and maintained at UBS as of February 13, 2008. The ARS Rights provide us with the ability to sell the ARS, along with the ARS Rights, to UBS at the par value of the ARS no earlier than June 30, 2010 and expire on July 2, 2012.
UBS also agreed that an affiliate would provide us with a no net-cost line of credit for up to a portion of the market value (as determined by UBS) of our ARS holdings as of October 31, 2008. In March 2009, the line of credit was amended to
provide us with a credit line of up to the full par value of our ARS holdings at UBS and, accordingly, we have fully drawn down the line of credit and have recorded a corresponding liability at December 31, 2009 of $11.47 million, including
accrued interest. Though the loan is payable on demand, if the UBS affiliate should exercise its right to demand repayment of any portion of the loan prior to the date we can exercise our ARS Rights, UBS and its affiliates would be required to



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arrange for alternative financing on terms and conditions substantially the same as those contained in the line of credit agreement. If alternative financing cannot be established, then UBS
AG, or one of its affiliates, will purchase our pledged UBS ARS at par. As a result, the loan and any alternative financing will not be payable by us prior to the time that we are able to exercise our UBS ARS Rights in accordance with our
agreement with UBS. We expect to repay the line of credit with the proceeds from the exercise of those ARS Rights. Proceeds of any sales of our UBS ARS will first be applied to repayment of the line of credit with the balance, if any,
deposited into our account. Per the terms of the ARS Rights that allow us to redeem our ARS holdings at UBS on June 30, 2010, at the earliest, we have classified the fair value of our ARS holdings at UBS and the fair value of the associated ARS
Rights as short-term assets at December 31, 2009. Accordingly, we have also classified the liability recorded for the line of credit as a short term liability at December 31, 2009.

Based on our estimate of fair value, utilizing a discounted cash flow model that approximates the values determined by UBS under their
independent methodology, no additional trading loss for the year ended December 31, 2009 was deemed necessary. In addition, we recorded other income and a corresponding increase in the asset of $0.2 million for the increase in the fair value of
the ARS Rights recognized upon the full funding of par value under our line of credit. As of December 31, 2009, the fair value of our ARS holdings combined with the fair value of our ARS Rights total 100% of the par value of all ARS holdings at
UBS.

The valuation of our ARS investment portfolio is sensitive to market conditions and is based on our best estimate given
the facts available at the balance sheet date. The assumptions we utilized in the estimate of fair value have been difficult to predict and the resulting fair value estimate has been subject to fluctuation. However, with our success in gaining full
liquidity on our remaining ARS holdings at UBS, the future risk of such fluctuations is effectively offset by corresponding changes in the fair value of the ARS Rights.

General

We have incurred negative cash flows from operations since
inception. We have spent, and expect to continue to spend, substantial amounts in connection with implementing our business strategy, including our planned product development efforts, our clinical trials, our commercialization and marketing
activities for droxidopa and our efforts to secure opportunities for strategic alliances. Our continued operations will depend on whether we are able to raise additional funds through various potential sources, such as equity and debt financing or
strategic alliances. On March 5, 2010, we successfully completed a registered direct offering of our common stock along with warrants for the purchase of our common stock, generating net proceeds of approximately $16.8 million. Management
believes that these funds, combined with cash on hand at December 31, 2009, will be sufficient to meet our operating needs into the first quarter of 2011. We continue to actively pursue additional sources of liquidity, including but not limited
to, strategic relationships, out-licensing of our products, public or private sales of equity or debt and other sources. Such strategic relationships or out-licensing arrangements might require us to relinquish rights to certain of our technologies,
product candidates or products that we would otherwise seek to develop or commercialize ourselves. Such additional funds might not become available on acceptable terms, or at all, and there can be no assurance that any additional funding that we do
obtain will be sufficient to meet our needs. From inception through December 31, 2009 we had losses of $95.5 million. We had net losses of $25.8 million and $35.1 million for the years ended December 31, 2009 and 2008, respectively, and we
anticipate losses at least through 2010 unless we should successfully negotiate a strategic agreement earlier that might include out-licensing, co-development or co-promotion of one or more of our drug candidates. Actual losses will depend on a
number of considerations including:



| |  |  | continuing discussions with regulatory agencies concerning the design and results of our clinical trials;
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | the pace and success of development activities, including clinical programs for droxidopa, antifolates and other product candidates;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to identify and recruit patients into our clinical trials at costs consistent with our current estimates;
| | - |  | ---------------------------------------------------------------------------------------------------------------------



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| |  |  | seeking regulatory approval for our various product candidates;
| | - |  | ---------------------------------------------------------------



| |  |  | the pace of commercialization and marketing efforts for droxidopa;
| | - |  | ------------------------------------------------------------------



| |  |  | possible out-licensing of our product candidates;
| | - |  | -------------------------------------------------



| |  |  | the pace of development of new intellectual property for our existing product candidates;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | in-licensing and development of additional product candidates;
| | - |  | --------------------------------------------------------------



| |  |  | implementing additional internal systems and infrastructure; and
| | - |  | ----------------------------------------------------------------



| |  |  | hiring additional personnel.
| | - |  | ----------------------------

Should we raise additional funds by selling shares of common stock or other securities convertible into common stock, the ownership interest of our existing stockholders will be diluted. If we are not
able to obtain financing when needed, we may be required to delay, reduce the scope of, or eliminate one or more of our development programs or curtail operations. As a result, our business, financial condition and results of operations would be
materially harmed.

Financings

On March 5, 2010, we raised gross proceeds of approximately $18.2 million through the sale of 6,700,000 shares of common stock plus warrants for the purchase of 2,345,000 shares of common stock. The
warrants permit the holders to purchase the underlying common shares at $2.79 each and are exercisable in whole at any time, or in part from time to time, during the period commencing six months after the date of issuance and ending three years from
the date of issuance. These shares were offered pursuant to our shelf registration statement as filed with the Securities and Exchange Commission, or SEC, under which we may offer shares of our common stock and preferred stock, various series of
debt securities and/or warrants to purchase any of such securities, either individually or in units, in one or more offerings, up to a total dollar amount of $60 million. Such registration statement became effective as of August 20, 2009. In
connection with this offering, we estimate we will pay commissions and other offering-related costs of approximately $1.4 million.

On July 28, 2009, we raised gross proceeds of approximately $13.3 million through the sale of 3,325,000 shares of common stock. These shares were offered pursuant to our prior shelf registration statement, as amended effective
July 22, 2009 pursuant to Rule 462(b) to increase the dollar amount of securities available for sale, as filed with the SEC under which we could offer shares of common stock and preferred stock, various series of debt securities and/or warrants
to purchase any of such securities, either individually or in units, in one or more offerings, up to a total dollar amount of $62,218,060. There are no more securities available under this shelf registration. In connection with the July 2009
offering, we received net proceeds, after deducting placement fees and offering expenses, of approximately $12.4 million.

On
November 8, 2007, we raised gross proceeds of approximately $48.9 million through the sale of 7,388,172 shares of our common stock in a registered direct offering. These shares were offered pursuant to our prior shelf registration statement as
filed with the SEC, under which we were able to offer shares of our common stock and preferred stock, various series of debt securities and/or warrants to purchase any of such securities, either individually or in units, in one or more offerings, up
to a total dollar amount of $60.0 million, prior to its amendment. Such registration statement became effective as of October 11, 2007. In connection with this offering, we paid commissions and other offering-related costs of approximately $3.2
million.

On March 22, 2007, we raised gross proceeds of approximately $12.5 million through the private placement of
2,648,306 shares of our common stock plus warrants for the purchase of 794,492 shares of our common stock. The aggregate fair value of these warrants was approximately $1.3 million. The warrants permit the holders to purchase the underlying common
shares at $5.66 each and are exercisable in whole at any time, or in part from



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time to time, for cash, for five years from the date of issuance. The warrants are redeemable at par value at our option in the event that the volume weighted-average closing price of our common
stock is greater than $12.00 per share for any 20 consecutive trading days provided we give 60 business days written notice to the holders and simultaneously call all warrants on the same terms. Under the terms of the placement, we agreed to
and filed a registration statement with the SEC within 30 days of the closing for the shares of common stock sold and the shares of common stock underlying the warrants and such registration became effective on August 7, 2007. In connection
with this offering, we paid commissions and other offering-related costs of approximately $1.0 million in cash.

On
February 13, 2006, we raised gross proceeds of approximately $21.5 million through the private placement of 7,166,666 shares of our common stock plus warrants for the purchase of 2,149,999 shares of our common stock. The aggregate fair value of
these warrants was approximately $1.1 million. The warrants permit the holders to purchase the underlying common shares at $4.20 each and are redeemable at our option in the event that the volume weighted average closing bid price of our common
stock for any 20 consecutive trading days is at least $9.00 per share. In connection with this offering, we paid commissions and other offering-related costs of approximately $1.6 million in cash and issued warrants to the placement agent for the
purchase of 716,666 shares of our common stock with an exercise price of $3.30 per share, or 110% of the price of the shares sold in the offering and an aggregate fair value of approximately $0.7 million. Under the terms of the financing, we filed a
registration statement with the SEC within 30 days of the closing for the shares of common stock sold and the shares of common stock underlying the warrants and such registration became effective on March 29, 2006.

In December 2004, we raised gross proceeds of approximately $14.5 million through the private placement of 5,532,994 shares of our common
stock. The amount raised included the conversion of a $1.7 million stockholder loan along with accrued interest, for which a total of 677,919 shares of common stock were issued. In connection with this offering, we paid commissions and other
offering-related costs of approximately $1.0 million in cash and issued warrants to the placement agent for the purchase of 483,701 shares of our common stock with an aggregate fair value of approximately $14,000.

License Agreement and Development Agreement Obligations

In March 2004, we entered into a License Agreement with Dr. M. Gopal Nair, Ph.D., of the University of South Alabama College of Medicine, for rights to use, produce, distribute and market products
derived from an invention by Dr. Nair, claimed in US Patent # 5,912,251, entitled metabolically inert anti-inflammatory and antitumor antifolates, designated by us as CH-1504 and related compounds. The license provides us exclusive,
worldwide (excluding India) rights for these compounds.

In 2004, as consideration for these rights, we paid $150,000 and
issued Dr. Nair and his designees 471,816 shares of common stock at an estimated aggregate value of $402. As additional consideration, we agreed to pay to Dr. Nair and or his designees: (1) royalties on the sales should any compounds
be approved for commercial sale; (2) milestone payments, payable upon achievement of clinical milestones; and (3) payments to be made on specified anniversary dates, some of which were payable in equity, at our discretion. We made
milestone payments as required by the agreement of $100,000 each in March 2006 and 2005. In April 2007, we issued 26,643 shares of our common stock, subject to trading restrictions, at a value of approximately $5.63 per share, in settlement of the
$150,000 annual milestone payment for 2007. In March 2008, we made a milestone payment of $100,000 related to patient dosing in a Phase II study as required by the agreement. In April 2008, we issued 30,612 shares of common stock, subject to trading
restrictions, at a value of approximately $4.90 per share, in settlement of the 2008 anniversary milestone payment of $150,000. In April 2009, we made the 2009 anniversary milestone payment of $150,000. At December 31, 2009, remaining potential
future milestone payments, which are subject to our rights to terminate the license agreement, totaled approximately $1.35 million.



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The license agreement includes certain other covenants, which require us to, among other
things, maintain and prosecute patents related to the license; use commercially reasonable best efforts to bring the licensed product to market as soon as reasonably practicable and continue active, diligent marketing efforts; and prepare and
provide to the licensors certain reports concerning our development and commercialization efforts. In the event we fail to carry out our responsibilities under the license agreement, the licensors may terminate the license. We may elect to abandon
the maintenance and prosecution of any patent applications or issued patents and we retain the right to terminate the license agreement in whole or as to any portion by providing written notice of such intentions to the licensor. The license
agreement may also be terminated in the event we fail to make a scheduled milestone or royalty payment, we otherwise materially breach the license agreement, or if we become involved in a bankruptcy, insolvency or similar proceeding, provided that
we are entitled to notice of such intention to terminate and an opportunity to cure. Regardless, the license agreement shall expire concurrent with the date of the last to expire claim contained in the patent rights.

In May 2006, we entered into an agreement with Dainippon Sumitomo Pharma Co., Ltd., or DSP, for a worldwide, exclusive, sub-licensable
license and rights to certain intellectual property and proprietary information relating to droxidopa including, but not limited to all information, formulations, materials, data, drawings, sketches, designs, testing and test results, records and
regulatory documentation. As consideration for these rights, we paid DSP $100,000 and issued 63,131 shares of our common stock, with a value of approximately $4.35 per share, or $274,621. As additional consideration, we agreed to pay DSP and or its
designees: (1) royalties on the sales should any compound be approved for commercial sale; and (2) milestone payments, payable upon achievement of milestones as defined in the agreement. In January 2007, we received notification that the
FDA had granted orphan drug designation for droxidopa for the treatment of symptomatic neurogenic orthostatic hypotension. Based on the terms of the DSP agreement, the granting of orphan drug designation for droxidopa triggered a milestone payment
to DSP of $250,000. We made such payment in February 2007. In February 2008, we made a milestone payment under the agreement of $500,000 related to patient dosing in a Phase III study. At December 31, 2008, remaining potential future milestone
payments, subject to our right to terminate the license agreement, totaled $3.25 million.

Subsequent to execution of the
agreement, we agreed that DSP would initiate, and we would fund, activities focused on modifying the manufacturing capabilities of DSP in order to expand capacity and comply with cGMP regulations and all existing manufacturing requirements of the
FDA. Such activities were completed as of December 31, 2009.

In May 2006, we entered into a development and
commercialization agreement with Active Biotech AB to co-develop and commercialize the I-3D portfolio of orally active, dihydroorotate dehydrogenase (DHODH) inhibiting compounds for the treatment of autoimmune diseases and transplant rejection.
Under the terms of the development agreement, an initial payment of $1.0 million was made to Active Biotech during 2006 with such funds utilized to cover the initial costs of research and development efforts jointly approved by both parties. At
December 31, 2006, we had expensed the entire $1.0 million payment. At December 31, 2007, we had expensed cumulative costs of $1.0 million under the program, in excess of the initial payment of $1.0 million, related to costs of research
and development. During 2008, we ceased joint discovery efforts with Active Biotech on this portfolio and, accordingly, recorded no costs related to this program during 2009 or 2008. In April 2008, we entered into a termination and assignment
agreement with Active Biotech, whereby Active Biotech discontinued its participation in the I-3D co-development program and assigned its entire right, title and interest in the portfolio to us in exchange for royalties on future sales. The
termination agreement also eliminated our obligation related to payment of potential future development milestones under the development agreement.

Current and Future Financing Needs

We have incurred negative cash flow from operations since inception.
We have spent, and expect to continue to spend, substantial amounts in connection with implementing our business strategy, including our planned product development efforts, our clinical trials, our research and discovery efforts and our marketing
and



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branding initiatives. Based on our resources at December 31, 2009, the proceeds of our equity financing in March 2010 and our projection of spending needs during 2010, we believe that we
have sufficient capital resources to meet our operating needs into the first quarter of 2011.

We have based our estimate on
assumptions that might prove to be incorrect. The extent of our available resources and the actual amount of funds we will need to operate is subject to many factors, some of which might be beyond our control. These factors include the following:



| |  |  | the progress of our research activities;
| | - |  | ----------------------------------------



| |  |  | the costs and timing of regulatory approvals;
| | - |  | ---------------------------------------------



| |  |  | the number and scope of our research programs;
| | - |  | ----------------------------------------------



| |  |  | opportunities to sub-license our existing compounds to others;
| | - |  | --------------------------------------------------------------



| |  |  | our ability to maintain current research and development programs and to establish new research and development and licensing arrangements;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to achieve our milestones under licensing arrangements; and
| | - |  | -----------------------------------------------------------------------



| |  |  | the costs involved in prosecuting and enforcing patent claims and other intellectual property rights.
| | - |  | -----------------------------------------------------------------------------------------------------

Potential sources of additional liquidity include strategic relationships, out-licensing of our products, public or private sales of equity
or debt, the exercise of warrants by our warrant holders and other sources. We might seek to access the public or private equity markets again when and if conditions are favorable due to our long-term capital requirements. It is uncertain whether
additional funding will be available when we need it on terms that will be acceptable to us, or at all. If we raise funds by selling additional shares of common stock or other securities convertible into common stock, the ownership interest of our
existing stockholders will be diluted. If we are not able to obtain financing when needed, we might be unable to carry out our business plan. As a result, we might have to significantly delay certain activities or limit our operations and our
business, financial condition and results of operations would be materially harmed.

Off-Balance Sheet Arrangements

We do not have any unconsolidated entities, and accordingly, we have not entered into any transactions with unconsolidated entities whereby
we have financial guarantees, subordinated retained interests, derivative instruments or other contingent arrangements that expose us to material continuing risks, contingent liabilities, or any other obligations under a variable interest in an
unconsolidated entity that provides us with financing, liquidity, market risk or credit risk support.

Contractual Obligations and
Commitments

As of December 31, 2009, we have known contractual obligations and commitments of approximately $8.8
million, primarily related to contracted research and development activities. To facilitate an understanding of our contractual obligations and commercial commitments, the following data is provided as of December 31, 2009:



|                            |  |                        |           |          |   |           |  |           |           |                  |   |         |  |   |  
|--------------------------- |  | ---------------------- | --------- | -------- | - | --------- |  | --------- | --------- | ---------------- | - | ------- |  | - | -
|                            |  | Payments due by period
|Category                    |  | Total                  |           | < 1 Year |   | 1-3 Years |  | 3-5 Years |           | More than5 Years
|Operating lease obligations |  | $                      | 954,239   |          | $ | 244,532   |  | $         | 502,901   |                  | $ | 206,806 |  | $ | 
|Purchase obligations        |  |                        | 7,806,491 |          |   | 5,748,940 |  |           | 2,057,551 |                  |   |        |  |   | 
|                            |  |                        |           |          |   |           |  |           |           |                  |   |         |  |   |  
|Total                       |  | $                      | 8,760,730 |          | $ | 5,993,472 |  | $         | 2,560,452 |                  | $ | 206,806 |  | $ | 
|                            |  |                        |           |          |   |           |  |           |           |                  |   |         |  |   |  



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In addition, we have entered into certain other agreements that, as of December 31,
2009, might require us to make contingent milestone payments of up to approximately $4.75 million over the life of the agreements upon the achievement of certain clinical or commercial milestones. Such future payments are subject to our right to
terminate the agreements. In the event that the milestones are not achieved, we elect not to pursue further testing of the drug candidate or we terminate such agreements, we will have no further obligations under the agreements. The uncertainty
relating to the timing and occurrence of the commitments described prevents us from including them in the table above.

Critical Accounting
Policies

Our managements discussion and analysis of our financial condition and results of operations is based on
our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. Our significant accounting policies are more fully described in Note 1 to the consolidated financial
statements accompanying this Annual Report on Form 10-K. The following accounting policies are critical in fully understanding and evaluating our reported financial results.

Use of Estimates

The preparation of 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 and the disclosure of contingent liabilities at
the date of the financial statements as well as the reported revenue and expenses during the reporting periods. On an ongoing basis, management evaluates its estimates and judgments. Management bases estimates on historical experience and on various
other factors that it believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results might
differ from these estimates under different assumptions or conditions.

Research and Development

Research and development expenditures are expensed as incurred. We often contract with third parties to facilitate, coordinate and perform
agreed upon research and development activities. To ensure that research and development costs are expensed as incurred, we measure expense based on work performed for the underlying contract, typically utilizing a percentage-of-completion
approach, and record prepaid assets or accrue expenses on a monthly basis for such activities based on the measurement of liability from expense recognition and the receipt of invoices.

These contracts typically call for the payment of fees for services at the initiation of the contract and/or upon the achievement of certain
milestones. In the event that we prepay fees for future milestones, we record the prepayment as a prepaid asset and amortize the asset into research and development expense over the period of time the contracted research and development
services are performed. Most fees are incurred throughout the contract period and are expensed based on their percentage of completion at a particular date.

These contracts generally include pass through fees. Pass through fees include, but are not limited to, regulatory expenses, investigator fees, travel costs, and other miscellaneous costs including
shipping and printing fees. Because these fees are incurred at various times during the contract term and they are used throughout the contract term, we record a monthly expense allocation to recognize the fees during the contract
period. Fees incurred to set up the clinical trial are expensed during the setup period.

Costs related to the
acquisition of technology rights and patents for which development work is still in process are expensed as incurred and considered a component of research and development costs.



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Accounting for Stock-Based Compensation

We account for our stock options utilizing the fair value based method of accounting for stock options or similar equity instruments. In
determining the fair value of the equity instrument, we consider, among other factors, (i) the risk-free interest rate, (ii) the expected life of the options granted, (iii) the anticipated dividend yield, (iv) the estimated
future volatility of the underlying shares and (v) anticipated future forfeitures. To determine the risk-free interest rate, we utilize the U.S. Treasury yield curve in effect at the time of grant with a term consistent with the expected life
of our awards. We estimate the expected life of the options granted based on anticipated exercises in future periods assuming the success of our business model as currently forecasted. The expected dividends reflect our current and expected future
policy for dividends on our common stock. To determine the expected stock price volatility for our stock options, we examine historical volatilities for industry peers closely related to the current status of our business, but with sufficient
trading history to be able to determine volatility. Utilizing a weighted average calculation to account for the limited price history of our stock, we analyze the historical volatility of our stock price in combination with the historical volatility
of the industry peers selected to determine an appropriate volatility factor. We plan to continue to analyze the expected stock price volatility and expected term assumption at each grant date as more historical data for our common stock becomes
available. Given the limited service period for our current employees and the senior nature of the roles for those employees, we had estimated that we would experience no forfeitures or that our rate of forfeiture would be immaterial to the
recognition of compensation expense for those options currently outstanding. Our results of operations include non-cash compensation expense as a result of the issuance of stock option grants utilizing this method. We expect to record additional
non-cash compensation expense in the future, which might be significant. Due to the limited amount of historical data available to us, particularly with respect to stock-price volatility, employee exercise patterns and forfeitures, actual results
could differ from our assumptions.

Available-for-Sale and Trading Investments

Investments consist of investments in ARS. ARS are generally long-term debt instruments for which interest rates are reset through a Dutch
auction process that occurs at pre-determined calendar intervals, generally each 28 or 35 days. As all of our investments in ARS at December 31, 2009 are currently being held principally for the purpose of selling them in the near term they are
classified as trading securities. We have elected the fair value option in accounting for our trading securities and, accordingly, account for such investments at their determined fair value.

Fair Value Measurements and the Fair Value Option

For financial assets and liabilities and any other assets and liabilities carried at fair value, we complete analyses of fair value and provide certain disclosures about fair value measurements. Fair
value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Under the fair value hierarchy that prioritizes observable and
unobservable inputs used to measure fair value, we perform analyses on a consistent basis and design our disclosures surrounding such analyses and the fair value determined at the balance sheet date to meet required presentation and disclosure
requirements.



|ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
|-------- | -----------------------------------------------------------

We invest our cash in a variety of financial instruments in order to preserve principal and liquidity while maximizing returns and we do not invest in financial instruments or their derivatives for
trading or speculative purposes. To minimize the exposure due to adverse shifts in interest rates, we maintain investments of shorter maturities. Our investment guidelines include security type, credit quality and maturity and are intended to limit
market risk by restricting our investments to high quality debt instruments with relatively short maturities. At December 31, 2009, our investments primarily consisted of monies on deposit in non-interest bearing accounts and money market
accounts and ARS with long-term nominal maturities for which the interest rates are reset



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through a Dutch auction each month or, should those auctions fail, as determined by contractual obligation. All investments to date have been made in U. S. dollars and accordingly, we do not have
any exposure to foreign currency rate fluctuations.

Our interest income is sensitive to changes in the general level of
interest rates in the United States, particularly since our investments are and will be in short-term investments. To assess our interest rate risk, we performed a sensitivity analysis projecting potential future interest earnings on investments in
which we estimated the impact of a 1%, or 100 basis point, increase or decrease in our average interest rate over a 12 month time horizon. This analysis resulted in a potential effect of approximately $115,000 on the interest earned on investments.

At December 31, 2009, we had investments in ARS with par value of $11.45 million and an estimated fair value of $9.25
million and ARS Rights with an estimated fair value of $2.2 million. Historically, ARS were priced at par, as per industry convention, based on observed or reported verifiable trades and provided a liquid market for these ARS investments. However,
liquidity issues, beginning in 2008, virtually shut down most active market transactions for ARS. Our investments in ARS represent interests in collateralized debt obligations supported by pools of student loans, typically over-collateralized and/or
insured by the FFELP. None of the ARS investments in our portfolio were backed by sub-prime mortgage loans or other collateral with exposure to certain current market conditions. However, liquidity issues experienced in global credit and capital
markets have prevented us from liquidating our ARS investments as the amount of securities submitted for sale at recent ARS auctions has exceeded the market demand, though they continue to pay interest according to their stated terms. Although
insufficient demand related to the ARS auctions is expected to continue, we have successfully completed settlements for all of our ARS holdings and have received funding equivalent to 100% of the par value of our investments in ARS.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

(a) The financial statements required to be filed pursuant to this Item 8 are appended to this Annual Report on Form 10-K. An index of
the financial statements filed herewith is found on page 53.

(b) The unaudited quarterly financial data for the two-year
period ended December 31, 2009 is as follows:



|                                         |  |                              |            |   |               |   |            |              |  |   |               |   |  |   |            |  
|---------------------------------------- |  | ---------------------------- | ---------- | - | ------------- | - | ---------- | ------------ |  | - | ------------- | - |  | - | ---------- | -
|                                         |  | Year ended December 31, 2008 |           
|                                         |  | FirstQuarter                 |            |   | SecondQuarter |   |            | ThirdQuarter |  |   | FourthQuarter |  
|Operating expenses                       |  | $                            | 7,838,728  |   |               | $ | 7,774,601  |              |  | $ | 8,276,681     |   |  | $ | 8,507,302  |  
|Loss from operations                     |  |                              | (7,838,728 | ) |               |   | (7,774,601 | )            |  |   | (8,276,681    | ) |  |   | (8,507,302 | )
|Other expense                            |  |                              | (1,566,246 | ) |               |   |           |              |  |   | (2,109,927    | ) |  |   | (714,314   | )
|Net loss                                 |  |                              | (8,675,526 | ) |               |   | (7,317,003 | )            |  |   | (10,080,394   | ) |  |   | (9,013,228 | )
|Basic and diluted net loss per share (a) |  |                              | (0.29      | ) |               |   | (0.24      | )            |  |   | (0.34         | ) |  |   | (0.30      | )
|                                         | 
|                                         |  | Year ended December 31, 2009 |           
|                                         |  | FirstQuarter                 |            |   | SecondQuarter |   |            | ThirdQuarter |  |   | FourthQuarter |  
|Operating expenses                       |  | $                            | 7,854,679  |   |               | $ | 9,411,369  |              |  | $ | 7,085,736     |   |  | $ | 5,998,448  |  
|Loss from operations                     |  |                              | (7,854,679 | ) |               |   | (9,411,369 | )            |  |   | (7,085,736    | ) |  |   | (5,998,448 | )
|Other income (expense)                   |  |                              | 426,412    |   |               |   | 4,127,997  |              |  |   | (8,117        | ) |  |   | 32,026     |  
|Net loss                                 |  |                              | (7,428,267 | ) |               |   | (5,283,372 | )            |  |   | (7,093,853    | ) |  |   | (5,966,422 | )
|Basic and diluted net loss per share (a) |  |                              | (0.25      | ) |               |   | (0.18      | )            |  |   | (0.22         | ) |  |   | (0.18      | )



|(a) | Basic and diluted net loss per share for each of the quarters presented above is based on the respective weighted average number of common shares for
the quarters. As such, the sum of the quarters may not necessarily be equal to the full year loss per share amount. Basic and diluted net loss per share are identical
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | since potentially dilutive securities are excluded from the calculations, as the effect would be anti-dilutive for all periods presented.
| | -----------------------------------------------------------------------------------------------------------------------------------------

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

ITEM 9A. CONTROLS AND PROCEDURES.

Disclosure controls and procedures as defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934, or the Exchange Act, are designed only to provide reasonable assurance that they will meet their objectives that information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the SECs rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosures. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e)) pursuant to Exchange Act Rule 13a-15. Based upon that evaluation and
subject to the foregoing, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of December 31, 2009.

Changes in internal control over financial reporting.

Management has
determined that, as of December 31, 2009, there were no changes in our internal control over financial reporting that occurred during our fiscal quarter then ended that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.

Managements Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in
Rule 13a-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with accounting principles generally accepted in the United States. However, all internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only
reasonable assurance with respect to financial statement preparation and reporting.

Management assessed the effectiveness of
our internal control over financial reporting as of December 31, 2009. In making this assessment, management used the criteria set forth by the Committee of the Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework and the Guidance for Smaller Public Companies as published by COSO in June 2006. Based on our assessment, management believes that we maintained effective internal control over financial reporting as of December 31,
2009, based on those criteria.

Ernst & Young LLP, our independent registered public accounting firm, which has
audited the financial statements included in Part IV, Item 15 of this report, has also audited our internal control over financial reporting as of December 31, 2009, as stated in their report, which is included below.



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Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting

The Board of Directors and Stockholders

Chelsea Therapeutics International, Ltd. and Subsidiary

We have audited Chelsea Therapeutics International, Ltd and
Subsidiarys internal control over financial reporting as of December 31, 2009, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the
COSO criteria). Chelsea Therapeutics International, Ltd. and Subsidiarys management is responsible for maintaining effective internal control over financial reporting, and for their assessment of the effectiveness of internal control over
financial reporting included in the accompanying Managements Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Companys internal control over financial reporting based on our audit.

We conducted our audit 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A
companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the companys assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Chelsea Therapeutics International, Ltd. and Subsidiary maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the
COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheets of Chelsea Therapeutics International, Ltd. and Subsidiary (a development stage company) as of December 31, 2009 and 2008, and the related consolidated statements of operations, changes in
stockholders equity, and cash flows for the two years in the period ended December 31, 2009, and for the period from April 3, 2002 (inception) through December 31, 2009 of Chelsea Therapeutics International, Ltd. and Subsidiary and
our report dated March 10, 2010, expressed an unqualified opinion thereon.

/s/    Ernst & Young LLP

Raleigh, North Carolina

March 10, 2010

ITEM 9B. OTHER INFORMATION.

Not applicable.



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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

Incorporated by reference from the information under the headings Proposal One  Election of Directors and Section
16(a) Beneficial Ownership Reporting Compliance in our proxy statement for the 2010 Annual Meeting of Stockholders, which we will file with the SEC within 120 days of the end of the fiscal year to which this report relates.

The information required by Item 10 with respect to identification of our executive officers has been included in Item 1 of this
Form 10-K in reliance on General Instruction G of Form 10-K and Instruction 3 to Item 
401(b) of Regulation S-K.

ITEM 11. EXECUTIVE COMPENSATION.

Incorporated by reference from the information under the headings Director Compensation for Fiscal Year 2009 and Executive
Compensation and Other Matters in our proxy statement for the 2010 Annual Meeting of Stockholders, which we will file with the SEC within 120 days of the end of the fiscal year to which this report relates.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

Incorporated by reference from the information under the headings Security Ownership of Certain Beneficial Owners and
Management and Equity Compensation Plan Information in our proxy statement for the 2010 Annual Meeting of Stockholders, which we will file with the SEC within 120 days of the end of the fiscal year to which this report
relates.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

Incorporated by reference from the information under the headings Certain Transactions with Related Persons, Proposal One
 Election of Directors and Corporate Governance Matters in our proxy statement for the 2010 Annual Meeting of Stockholders, which we will file with the SEC within 120 days of the end of the fiscal year to which this
report relates.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Incorporated by reference from the information under the heading Audit Committee Report in our proxy statement for the 2010
Annual Meeting of Stockholders, which we will file with the SEC within 120 days of the end of the fiscal year to which this report relates.



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PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENTS



| | (a) | Financial Statements.
| | --- | ---------------------

The
following statements are filed as part of this report:



|                                                          |  |     
|--------------------------------------------------------- |  | ----
|                                                          |  | Page
|Reports of Independent Registered Public Accounting Firms |  | F-1 
|Consolidated Balance Sheets                               |  | F-3 
|Consolidated Statements of Operations                     |  | F-4 
|Consolidated Statements of Stockholders Equity           |  | F-5 
|Consolidated Statements of Cash Flows                     |  | F-8 
|Notes to Consolidated Financial Statements.               |  | F-10

Schedules not listed
above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto.



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| | (b) | Exhibits.
| | --- | ---------



|               |  |                                                                                                                                                                               |  |                  |  |          |  |               |  |              
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- |  | -------- |  | ------------- |  | -------------
|Exhibit Number |  | Description of Document                                                                                                                                                       |  | RegistrantsForm |  | Dated    |  | ExhibitNumber |  | FiledHerewith
|1.1            |  | Placement Agency Agreement dated November 1, 2007 by and among Chelsea Therapeutics International, Ltd., Leerink Swann LLC, Oppenheimer & Co. Inc. and Punk
Ziegel & Company. |  | 8-K              |  | 11/02/07 |  | 1.1           |  |              
|               |  |                                                                                                                                                                               |  |                  | 
|1.2            |  | Placement Agency Agreement dated July 22, 2009 by and among Chelsea Therapeutics International, Ltd., Wedbush Morgan Securities, Inc. and Ladenburg Thalmann & Co.
Inc.       |  | 8-K              |  | 07/23/09 |  | 1.1           |  |              
|               |  |                                                                                                                                                                               |  |                  | 
|2.3            |  | Placement Agency Agreement dated February 26, 2010 by and among the Company, Leerink Swann LLC and Needham & Company, LLC.                                                    |  | 8-K              |  | 02/26/10 |  | 1.1           |  |              
|               |  |                                                                                                                                                                               |  |                  | 
|2.1            |  | Agreement and Plan of Merger by and among Ivory Capital Corporation, Chelsea Therapeutics, Inc. and Chelsea Acquisition Corp, dated as of January 17, 2005.                   |  | 8-K             |  | 01/21/05 |  | 2.1           |  |              
|               |  |                                                                                                                                                                               |  |                  | 
|2.2            |  | Agreement and Plan of Merger between Ivory Capital Corporation and Chelsea Therapeutics International, Ltd., dated as of June 17, 2005.                                       |  | 14A             |  | 07/28/05 |  | Appendix A    |  |              
|               |  |                                                                                                                                                                               |  |                  | 
|3.1            |  | Certificate of Incorporation for Chelsea Therapeutics International, Ltd., as amended on May 28, 2009                                                                         |  |                  |  |          |  |               |  | X            
|               |  |                                                                                                                                                                               |  |                  | 
|3.2            |  | Bylaws of Chelsea Therapeutics International, Ltd.                                                                                                                            |  | S-1/A            |  | 08/18/05 |  | 3.2           |  |              
|               |  |                                                                                                                                                                               |  |                  | 
|4.1            |  | Form of Warrant issued March 5, 2010.                                                                                                                                         |  | 8-K              |  | 02/26/10 |  | 4.1           |  |              
|               |  |                                                                                                                                                                               |  |                  | 
|10.1*          |  | License Agreement dated as of March 24, 2004 between M. Gopal Nair and Chelsea Therapeutics, Inc. (f/k/a Aspen Therapeutics, Inc.)                                            |  | 8-K             |  | 02/16/05 |  | 10.1          |  |              
|               |  |                                                                                                                                                                               |  |                  | 
|10.3           |  | Form of Subscription Agreement for the purchase of Series A Convertible Preferred Stock of Chelsea Therapeutics, Inc.                                                         |  | 8-K             |  | 02/16/05 |  | 10.3          |  |              
|               |  |                                                                                                                                                                               |  |                  | 
|10.4           |  | Chelsea Therapeutics International, Ltd. 2004 Stock Plan, as amended, and forms of Notice of Stock Option Grant and Stock Option Agreement, as amended.                       |  | 10-K             |  | 03/12/07 |  | 10.4          |  |              
|               |  |                                                                                                                                                                               |  |                  | 
|10.5           |  | Form of Subscription Agreement and Warrant for the purchase of common stock, par value $0.0001 per share, of Chelsea Therapeutics International, Ltd.                         |  | 8-K              |  | 02/17/06 |  | 10.5          |  |              
|               |  |                                                                                                                                                                               |  |                  | 
|10.6           |  | Placement Agency Agreement dated November 28, 2005 between Chelsea Therapeutics International, Ltd. and Paramount BioCapital, Inc.                                            |  | 10-K             |  | 03/08/06 |  | 10.6          |  |              
|               |  |                                                                                                                                                                               |  |                  | 
|10.7           |  | Employment Agreement between Chelsea Therapeutics International, Ltd. and Dr. Simon Pedder, dated May 1, 2009.                                                                |  | 8-K              |  | 05/07/09 |  | 10.13         |  |              
|               |  |                                                                                                                                                                               |  |                  | 
|10.8*          |  | Development and Commercialization Agreement dated as of May 5, 2006 between Active Biotech AB and Chelsea Therapeutics International, Ltd.                                    |  | 10-Q             |  | 08/14/06 |  | 10.8          |  |              



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|               |  |                                                                                                                                                                                     |  |                  |  |          |  |               |  |              
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- |  | -------- |  | ------------- |  | -------------
|Exhibit Number |  | Description of Document                                                                                                                                                             |  | RegistrantsForm |  | Dated    |  | ExhibitNumber |  | FiledHerewith
|10.9*          |  | Exclusive License Agreement effective May 26, 2006 between Dainippon Sumitomo Pharma Co., Ltd. and Chelsea Therapeutics, Inc.                                                       |  | 10-Q             |  | 08/14/06 |  | 10.9          |  |              
|               |  |                                                                                                                                                                                     |  |                  | 
|10.10*         |  | Finders Agreement dated May 26, 2006 between Paramount BioCapital, Inc. and Chelsea Therapeutics International, Ltd.                                                               |  | 10-Q             |  | 08/14/06 |  | 10.10         |  |              
|               |  |                                                                                                                                                                                     |  |                  | 
|10.11          |  | Form of Subscription Agreement for the purchase of common stock of Chelsea Therapeutics International, Ltd. dated March 19, 2007 and related form of Warrant, dated March 22, 2007. |  | 8-K              |  | 03/20/07 |  | 10.11         |  |              
|               |  |                                                                                                                                                                                     |  |                  | 
|10.12          |  | Form of Subscription Agreement for the purchase of common stock of Chelsea Therapeutics International, Ltd. dated November 1, 2007.                                                 |  | 8-K              |  | 11/02/07 |  | 10.12         |  |              
|               |  |                                                                                                                                                                                     |  |                  | 
|10.13          |  | Form of Subscription Agreement for the purchase of common stock of Chelsea Therapeutics International, Ltd.                                                                         |  | 8-K              |  | 07/23/09 |  | 10.14         |  |              
|               |  |                                                                                                                                                                                     |  |                  | 
|10.14          |  | Form of Subscription Agreement for the purchase of common stock, par value $0.0001 per share, and warrants to purchase common stock of Chelsea Therapeutics International,
Ltd.     |  | 8-K              |  | 02/26/10 |  | 10.15         |  |              
|               |  |                                                                                                                                                                                     |  |                  | 
|21.1           |  | Subsidiaries of Chelsea Therapeutics International, Ltd.                                                                                                                            |  | 10-K             |  | 03/12/07 |  | 21.1          |  |              
|               |  |                                                                                                                                                                                     |  |                  | 
|23.1           |  | Consent of Independent Registered Public Accounting Firm.                                                                                                                           |  |                  |  |          |  |               |  | X            
|               |  |                                                                                                                                                                                     |  |                  | 
|23.2           |  | Consent of Independent Registered Public Accounting Firm.                                                                                                                           |  |                  |  |          |  |               |  | X            
|               |  |                                                                                                                                                                                     |  |                  | 
|31.1           |  | Certification by the Chief Executive Officer pursuant to Section 240.13a-14 or section 240.15d-14 of the Securities and Exchange Act of 1934, as amended.                           |  |                  |  |          |  |               |  | X            
|               |  |                                                                                                                                                                                     |  |                  | 
|31.2           |  | Certification by the Chief Financial Officer pursuant to Section 240.13a-14 or section 240.15d-14 of the Securities and Exchange Act of 1934, as amended.                           |  |                  |  |          |  |               |  | X            
|               |  |                                                                                                                                                                                     |  |                  | 
|32.1           |  | Certification by the Chief Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                       |  |                  |  |          |  |               |  | X            
|               |  |                                                                                                                                                                                     |  |                  | 
|32.2           |  | Certification by the Chief Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                       |  |                  |  |          |  |               |  | X            



|* | The registrant received confidential treatment with respect to certain portions of this exhibit. Such portions have been omitted from this exhibit and have been filed
separately with the SEC.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Filed by Ivory Capital Corporation, predecessor in interest.
|- | ------------------------------------------------------------



60



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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized this 10th day of March 2010.



CHELSEA THERAPEUTICS INTERNATIONAL, LTD.By:

/S/    SIMON
PEDDERSimon Pedder, Ph.D.President and Chief Executive Officer


Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the 10thday of March 2010.



|                                                  |  |                                                                                                        
|------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------
|Name                                              |  | Title                                                                                                  
|                                                  | 
|/S/    SIMON
PEDDER Simon Pedder, Ph.D.           |  | President, Chief Executive Officer and Director (Principal Executive Officer)                          
|                                                  | 
|/S/    J. NICK
RIEHLE J. Nick Riehle              |  | Vice President, Administration and Chief Financial Officer (Principal Financial and
Accounting Officer)
|                                                  | 
|/S/    MICHAEL
WEISER Michael Weiser, M.D., Ph.D. |  | Director                                                                                               
|                                                  | 
|/S/    KEVAN
CLEMENS Kevan Clemens, Ph.D.         |  | Director                                                                                               
|                                                  | 
|/S/    JOHNSON Y. N.
LAU Johnson Y.N. Lau, M.D.   |  | Director                                                                                               
|                                                  | 
|/S/    NORMAN
HARDMAN Norman Hardman, Ph.D.       |  | Director                                                                                               
|                                                  | 
|/S/    WILLIAM D.
RUECKERT William D. Rueckert    |  | Director                                                                                               
|                                                  | 
|/S/    ROGER
STOLL Roger Stoll, Ph.D.             |  | Director                                                                                               



61



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##### Table of Contents

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Chelsea Therapeutics International, Ltd. and Subsidiary

We have audited the accompanying consolidated balance sheets
of Chelsea Therapeutics International, Ltd. and Subsidiary (a development stage company) as of December 31, 2009 and 2008, and the related consolidated statements of operations, changes in stockholders equity, and cash flows for the years
then ended, and for the period from April 3, 2002 (inception) through 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 as of December 31, 2007, and for the period from April 3, 2002 (inception) through December 31, 2007, were audited by other auditors whose report dated March 10,
2008 expressed an unqualified opinion on those statements. The financial statements for the period from April 3, 2002 (inception) through December 31, 2007 include total operating expenses and net loss of $37,144,571 and $34,685,202,
respectively. Our opinion on the consolidated statements of operations, changes in stockholders equity, and cash flows for the period from April 3, 2002 (inception) through December 31, 2009, insofar as it relates to amounts for
prior periods through December 31, 2007, is based solely on the report of 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 provide a reasonable basis for our opinion.

In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Chelsea
Therapeutics International, Ltd. and Subsidiary at December 31, 2009 and 2008, and the consolidated results of their operations and their cash flows for the years then ended, and the period from April 3, 2002 (inception) through
December 31, 2009, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United States), Chelsea Therapeutics International, Ltd. and Subsidiarys internal control over financial reporting as of December 31, 2009, based on criteria established
in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 10, 2010, expressed an unqualified opinion thereon.



/s/    ERNST & YOUNG LLP


Raleigh, North Carolina

March 10, 2010



F-1



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##### Table of Contents

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Chelsea
Therapeutics International, Ltd.

We have audited the accompanying consolidated statements of operations, changes in
stockholders equity and cash flows of Chelsea Therapeutics International, Ltd. and Subsidiary (a development stage company) for the year ended December 31, 2007 and the period from April 3, 2002 (inception) to December 31, 2007.
These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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 provide a reasonable
basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the results of operations and cash flows for the year ended December 31, 2007 and the period from April 3, 2002 (inception) to December 31, 2007, in conformity with accounting principles generally accepted in the
United States of America.



|                                   
|-----------------------------------
|/s/    J. H. COHN LLP              
|                                   
|Roseland, New Jersey March 10, 2008



F-2



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##### Table of Contents

CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY

(A Development Stage Company)

CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                     |  |                  |             |   |                  |   |             |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ----------- | - | ---------------- | - | ----------- | -
|                                                                                                                                                                     |  | December 31,2009 |             |   | December 31,2008 |  
|Assets                                                                                                                                                               |  |                  |             |   |                  |   |             |  
|Current assets:                                                                                                                                                      |  |                  |             |   |                  |   |             |  
|Cash and cash equivalents                                                                                                                                            |  | $                | 22,294,649  |   |                  | $ | 21,532,553  |  
|Short-term investments, net                                                                                                                                          |  |                  | 11,450,000  |   |                  |   | 10,305,745  |  
|Prepaid contract research and manufacturing                                                                                                                          |  |                  | 293,886     |   |                  |   | 625,377     |  
|Other prepaid expenses and other current assets                                                                                                                      |  |                  | 129,687     |   |                  |   | 101,861     |  
|                                                                                                                                                                     |  |                  |             |   |                  |   |             |  
|Total current assets                                                                                                                                                 |  |                  | 34,168,222  |   |                  |   | 32,565,536  |  
|Property and equipment, net                                                                                                                                          |  |                  | 103,795     |   |                  |   | 159,189     |  
|Long-term investments, net                                                                                                                                           |  |                  |            |   |                  |   | 11,328,768  |  
|Other assets                                                                                                                                                         |  |                  | 76,950      |   |                  |   | 76,950      |  
|                                                                                                                                                                     |  |                  |             |   |                  |   |             |  
|                                                                                                                                                                     |  | $                | 34,348,967  |   |                  | $ | 44,130,443  |  
|                                                                                                                                                                     |  |                  |             |   |                  |   |             |  
|Liabilities and Stockholders Equity                                                                                                                                 |  |                  |             |   |                  |   |             |  
|Current liabilities:                                                                                                                                                 |  |                  |             |   |                  |   |             |  
|Accounts payable                                                                                                                                                     |  | $                | 2,842,566   |   |                  | $ | 4,304,283   |  
|Accrued compensation and related expenses                                                                                                                            |  |                  | 894,696     |   |                  |   | 579,875     |  
|Accrued contract research and manufacturing                                                                                                                          |  |                  | 5,501,329   |   |                  |   | 7,029,838   |  
|Other accrued expenses                                                                                                                                               |  |                  | 792,458     |   |                  |   | 391,082     |  
|Line of credit payable                                                                                                                                               |  |                  | 11,466,012  |   |                  |   |            |  
|                                                                                                                                                                     |  |                  |             |   |                  |   |             |  
|Total current liabilities                                                                                                                                            |  |                  | 21,497,061  |   |                  |   | 12,305,078  |  
|Line of credit payable                                                                                                                                               |  |                  |            |   |                  |   | 7,277,468   |  
|                                                                                                                                                                     |  |                  |             |   |                  |   |             |  
|Total liabilities                                                                                                                                                    |  |                  | 21,497,061  |   |                  |   | 19,582,546  |  
|                                                                                                                                                                     |  |                  |             |   |                  |   |             |  
|                                                                                                                                                                     |  |                 
|Commitments                                                                                                                                                          |  |                  |             |   |                  |   |             |  
|Stockholders equity:                                                                                                                                                |  |                  |             |   |                  |   |             |  
|Preferred stock, $0.0001 par value, 5,000,000 shares authorized, no shares issued and outstanding                                                                    |  |                  |            |   |                  |   |            |  
|Common stock, $0.0001 par value, 60,000,000 and 45,000,000 shares authorized, respectively and 33,500,406 and 30,111,479 shares
issued and outstanding, respectively |  |                  | 3,350       |   |                  |   | 3,011       |  
|Additional paid-in capital                                                                                                                                           |  |                  | 108,391,823 |   |                  |   | 94,316,239  |  
|Deficit accumulated during the development stage                                                                                                                     |  |                  | (95,543,267 | ) |                  |   | (69,771,353 | )
|                                                                                                                                                                     |  |                  |             |   |                  |   |             |  
|Total stockholders equity                                                                                                                                           |  |                  | 12,851,906  |   |                  |   | 24,547,897  |  
|                                                                                                                                                                     |  |                  |             |   |                  |   |             |  
|                                                                                                                                                                     |  | $                | 34,348,967  |   |                  | $ | 44,130,443  |  
|                                                                                                                                                                     |  |                  |             |   |                  |   |             |  

See accompanying notes to consolidated financial statements.



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##### Table of Contents

CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY

(A Development Stage Company)

CONSOLIDATED STATEMENTS OF OPERATIONS



|                                                                       |  |                                  |             |   |                                                            |   |             |      |  |   |             |   |  |   |             |  
|---------------------------------------------------------------------- |  | -------------------------------- | ----------- | - | ---------------------------------------------------------- | - | ----------- | ---- |  | - | ----------- | - |  | - | ----------- | -
|                                                                       |  | For the years ended December 31, |             |   | Period fromApril 3, 2002(inception)throughDecember 31,2009 |  
|                                                                       |  | 2009                             |             |   | 2008                                                       |   |             | 2007 |  |  
|Operating expenses:                                                    |  |                                  |             |   |                                                            |   |             |      |  |   |             |   |  |   |             |  
|Research and development                                               |  | $                                | 23,985,118  |   |                                                            | $ | 27,109,174  |      |  | $ | 12,336,266  |   |  | $ | 77,619,160  |  
|Sales and marketing                                                    |  |                                  | 2,289,451   |   |                                                            |   | 1,561,223   |      |  |   | 1,294,359   |   |  |   | 6,480,373   |  
|General and administrative                                             |  |                                  | 4,075,663   |   |                                                            |   | 3,726,915   |      |  |   | 2,874,762   |   |  |   | 15,792,583  |  
|                                                                       |  |                                  |             |   |                                                            |   |             |      |  |   |             |   |  |   |             |  
|Total operating expenses                                               |  |                                  | 30,350,232  |   |                                                            |   | 32,397,312  |      |  |   | 16,505,387  |   |  |   | 99,892,116  |  
|                                                                       |  |                                  |             |   |                                                            |   |             |      |  |   |             |   |  |   |             |  
|                                                                       |  |                                  |             |  
|Operating loss                                                         |  |                                  | (30,350,232 | ) |                                                            |   | (32,397,312 | )    |  |   | (16,505,387 | ) |  |   | (99,892,116 | )
|Interest income                                                        |  |                                  | 336,850     |   |                                                            |   | 1,706,568   |      |  |   | 1,423,842   |   |  |   | 4,536,808   |  
|Interest expense                                                       |  |                                  | (149,019    | ) |                                                            |   | (4,920      | )    |  |   |            |   |  |   | (187,959    | )
|Other income (expense)                                                 |  |                                  | 4,390,487   |   |                                                            |   | (4,390,487  | )    |  |   |            |   |  |   |            |  
|                                                                       |  |                                  |             |   |                                                            |   |             |      |  |   |             |   |  |   |             |  
|Net loss                                                               |  | $                                | (25,771,914 | ) |                                                            | $ | (35,086,151 | )    |  | $ | (15,081,545 | ) |  | $ | (95,543,267 | )
|                                                                       |  |                                  |             |   |                                                            |   |             |      |  |   |             |   |  |   |             |  
|Net loss per basic and diluted share of common stock                   |  | $                                | (0.82       | ) |                                                            | $ | (1.17       | )    |  | $ | (0.66       | ) |  |   |             |  
|                                                                       |  |                                  |             |   |                                                            |   |             |      |  |   |             |   |  |   |             |  
|Weighted average number of basic and diluted common shares outstanding |  |                                  | 31,549,739  |   |                                                            |   | 30,027,031  |      |  |   | 22,936,780  |   |  |   |             |  
|                                                                       |  |                                  |             |   |                                                            |   |             |      |  |   |             |   |  |   |             |  





See accompanying notes to consolidated financial statements.



F-4



---

##### Table of Contents

CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY

(A Development Stage Company)

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY



|                                                                                                                                    |  |              |  |                          |       |  |                                  |            |   |                                 |   |        |                                              |  |   |                          |   |  |   |             |   |  |   |            |  
|----------------------------------------------------------------------------------------------------------------------------------- |  | ------------ |  | ------------------------ | ----- |  | -------------------------------- | ---------- | - | ------------------------------- | - | ------ | -------------------------------------------- |  | - | ------------------------ | - |  | - | ----------- | - |  | - | ---------- | -
|                                                                                                                                    |  |              |  | AdditionalPaid-InCapital |       |  | UnpaidSubscriptionon commonstock |            |   | Deferredstock-basedcompensation |   |        | DeficitAccumulatedduring thedevelopmentstage |  |   | Totalstockholdersequity |  
|                                                                                                                                    |  | Common stock |  |                          |       |  |                                 
|                                                                                                                                    |  | Shares       |  | Amount                   |       |  |                                  |            |  
|Issuance of common stock to founders in April 2002                                                                                  |  | 5,428,217    |  | $                        | 542   |  | $                                | 4,083      |   |                                 | $ | (4,625 | )                                            |  | $ |                         |   |  | $ |            |   |  | $ |           |  
|                                                                                                                                    |  |              |  |                          |       |  |                                  |            |   |                                 |   |        |                                              |  |   |                          |   |  |   |             |   |  |   |            |  
|Balance at December 31, 2003                                                                                                        |  | 5,428,217    |  |                          | 542   |  |                                  | 4,083      |   |                                 |   | (4,625 | )                                            |  |   |                         |   |  |   |            |   |  |   |           |  
|Common stock issued in March 2004, at approximately $0.0009 per share, for license fee                                              |  | 471,816      |  |                          | 47    |  |                                  | 355        |   |                                 |   |       |                                              |  |   |                         |   |  |   |            |   |  |   | 402        |  
|Sale and issuance of common stock in April 2004, at approximately $0.0009 per share to chief executive                              |  | 478,330      |  |                          | 48    |  |                                  | 360        |   |                                 |   |       |                                              |  |   |                         |   |  |   |            |   |  |   | 408        |  
|Receipt of cash for stock subscription receivable                                                                                   |  |             |  |                          |      |  |                                  |           |   |                                 |   | 4,625  |                                              |  |   |                         |   |  |   |            |   |  |   | 4,625      |  
|Sale and issuance of common stock with detachable warrants in December 2004 at approximately $2.45 per share, net of issuance
costs |  | 5,532,994    |  |                          | 554   |  |                                  | 13,550,255 |   |                                 |   |       |                                              |  |   |                         |   |  |   |            |   |  |   | 13,550,809 |  
|Deferred stock-based compensation                                                                                                   |  |             |  |                          |      |  |                                  | 33,525     |   |                                 |   |       |                                              |  |   | (33,525                  | ) |  |   |            |   |  |   |           |  
|Amortization of deferred stock- based compensation                                                                                  |  |             |  |                          |      |  |                                  |           |   |                                 |   |       |                                              |  |   | 1,529                    |   |  |   |            |   |  |   | 1,529      |  
|Net loss                                                                                                                            |  |             |  |                          |      |  |                                  |           |   |                                 |   |       |                                              |  |   |                         |   |  |   | (3,016,559  | ) |  |   | (3,016,559 | )
|                                                                                                                                    |  |              |  |                          |       |  |                                  |            |   |                                 |   |        |                                              |  |   |                          |   |  |   |             |   |  |   |            |  
|Balance at December 31, 2004                                                                                                        |  | 11,911,357   |  |                          | 1,191 |  |                                  | 13,588,578 |   |                                 |   |       |                                              |  |   | (31,996                  | ) |  |   | (3,016,559  | ) |  |   | 10,541,214 |  
|Recapitalization of the Company (See Note 1)                                                                                        |  | 457,168      |  |                          | 46    |  |                                  | (400,046   | ) |                                 |   |       |                                              |  |   |                         |   |  |   |            |   |  |   | (400,000   | )
|Employee stock options exercised                                                                                                    |  | 14,663       |  |                          | 1     |  |                                  | 998        |   |                                 |   |       |                                              |  |   |                          |   |  |   |             |   |  |   | 999        |  
|Adoption of SFAS 123R                                                                                                               |  |             |  |                          |      |  |                                  | (31,996    | ) |                                 |   |       |                                              |  |   | 31,996                   |   |  |   |            |   |  |   |           |  
|Amortization of deferred stock- based compensation                                                                                  |  |             |  |                          |      |  |                                  | 99,319     |   |                                 |   |       |                                              |  |   |                         |   |  |   |            |   |  |   | 99,319     |  
|Variable accounting for stock options granted to third party                                                                        |  |             |  |                          |      |  |                                  | 58,594     |   |                                 |   |       |                                              |  |   |                         |   |  |   |            |   |  |   | 58,594     |  
|Net loss                                                                                                                            |  |             |  |                          |      |  |                                  |           |   |                                 |   |       |                                              |  |   |                         |   |  |   | (7,915,722  | ) |  |   | (7,915,722 | )
|                                                                                                                                    |  |              |  |                          |       |  |                                  |            |   |                                 |   |        |                                              |  |   |                          |   |  |   |             |   |  |   |            |  
|Balance at December 31, 2005                                                                                                        |  | 12,383,188   |  |                          | 1,238 |  |                                  | 13,315,447 |   |                                 |   |       |                                              |  |   |                         |   |  |   | (10,932,281 | ) |  |   | 2,384,404  |  
|Sale and issuance of common stock with detachable warrants in February 2006 at approximately $2.77 per share, net of issuance
costs |  | 7,166,666    |  |                          | 717   |  |                                  | 19,854,935 |   |                                 |   |       |                                              |  |   |                         |   |  |   |            |   |  |   | 19,855,652 |  
|Common stock issued in March 2006, at par, pursuant to net-share (cashless) exercise of common stock warrants                       |  | 15,461       |  |                          | 2     |  |                                  | (2         | ) |                                 |   |       |                                              |  |   |                         |   |  |   |            |   |  |   |           |  
|Common stock issued in May 2006, at approximately $4.35 per share, for license fee                                                  |  | 63,131       |  |                          | 6     |  |                                  | 274,615    |   |                                 |   |       |                                              |  |   |                         |   |  |   |            |   |  |   | 274,621    |  
|Employee stock options exercised                                                                                                    |  | 78,683       |  |                          | 8     |  |                                  | 5,072      |   |                                 |   |       |                                              |  |   |                         |   |  |   |            |   |  |   | 5,080      |  
|Stock-based compensation                                                                                                            |  |             |  |                          |      |  |                                  | 283,983    |   |                                 |   |       |                                              |  |   |                         |   |  |   |            |   |  |   | 283,983    |  
|Variable accounting for stock options granted to third party                                                                        |  |             |  |                          |      |  |                                  | 4,192      |   |                                 |   |       |                                              |  |   |                         |   |  |   |            |   |  |   | 4,192      |  
|Net loss                                                                                                                            |  |             |  |                          |      |  |                                  |           |   |                                 |   |       |                                              |  |   |                         |   |  |   | (8,671,376  | ) |  |   | (8,671,376 | )
|                                                                                                                                    |  |              |  |                          |       |  |                                  |            |   |                                 |   |        |                                              |  |   |                          |   |  |   |             |   |  |   |            |  
|Balance at December 31, 2006                                                                                                        |  | 19,707,129   |  |                          | 1,971 |  |                                  | 33,738,242 |   |                                 |   |       |                                              |  |   |                         |   |  |   | (19,603,657 | ) |  |   | 14,136,556 |  

See
accompanying notes to consolidated financial statements.



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##### Table of Contents

CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY

(A Development Stage Company)

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY(Continued)



|                                                                                                                                                                                      |  |              |  |                          |  |            |                                  |  |                                 |  |                                              |  |             |                          |  |             |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ |  | ------------------------ |  | ---------- | -------------------------------- |  | ------------------------------- |  | -------------------------------------------- |  | ----------- | ------------------------ |  | ----------- | -
|                                                                                                                                                                                      |  |              |  | AdditionalPaid-InCapital |  |            | UnpaidSubscriptionon commonstock |  | Deferredstock-basedcompensation |  | Deficitaccumulatedduring thedevelopmentstage |  |             | Totalstockholdersequity | 
|                                                                                                                                                                                      |  | Common stock |  |                          |  |            |                                 
|                                                                                                                                                                                      |  | Shares       |  | Amount                   |  |            |                                  |  |                                
|Balance at December 31, 2006                                                                                                                                                          |  | 19,707,129   |  | 1,971                    |  | 33,738,242 |                                  |  |                                |  |                                             |  | (19,603,657 | )                        |  | 14,136,556  |  
|Common stock issued during 2007, at par, pursuant to net-share (cashless) exercises of common stock warrants                                                                          |  | 68,136       |  | 6                        |  | (6         | )                                |  |                                |  |                                             |  |            |                          |  |            |  
|Fair value of warrants issued in May 2006 in consideration of finders fee at approximately $1.75 per share for which vesting was
conditioned on an even that occurred in January 2007 |  |             |  |                         |  | 433,750    |                                  |  |                                |  |                                             |  |            |                          |  | 433,750     |  
|Sale and issuance of common stock with detachable warrants in March 2007 at approximately $4.33 per share, net of issuance costs                                                      |  | 2,648,306    |  | 265                      |  | 11,476,412 |                                  |  |                                |  |                                             |  |            |                          |  | 11,476,677  |  
|Common stock issued in April 2007, at approximately $5.63 per share, for license fee                                                                                                  |  | 26,643       |  | 3                        |  | 149,997    |                                  |  |                                |  |                                             |  |            |                          |  | 150,000     |  
|Common stock issued in June 2007, at $4.20 per share, pursuant to exercise of common stock warrants, net of fees                                                                      |  | 60,000       |  | 6                        |  | 246,994    |                                  |  |                                |  |                                             |  |            |                          |  | 247,000     |  
|Common stock issued in October 2007, at $4.20 per share, pursuant to exercise of common stock warrants                                                                                |  | 1,200        |  |                         |  | 5,040      |                                  |  |                                |  |                                             |  |            |                          |  | 5,040       |  
|Sale and issuance of common stock in November 2007 at approximately $6.19 per share, net of issuance costs                                                                            |  | 7,388,172    |  | 739                      |  | 45,754,030 |                                  |  |                                |  |                                             |  |            |                          |  | 45,754,769  |  
|Employee stock options exercised                                                                                                                                                      |  | 17,868       |  | 2                        |  | 15,704     |                                  |  |                                |  |                                             |  |            |                          |  | 15,706      |  
|Stock-based compensation                                                                                                                                                              |  |             |  |                         |  | 828,626    |                                  |  |                                |  |                                             |  |            |                          |  | 828,626     |  
|Net loss                                                                                                                                                                              |  |             |  |                         |  |           |                                  |  |                                |  |                                             |  | (15,081,545 | )                        |  | (15,081,545 | )
|                                                                                                                                                                                      |  |              |  |                          |  |            |                                  |  |                                 |  |                                              |  |             |                          |  |             |  
|Balance at December 31, 2007                                                                                                                                                          |  | 29,917,454   |  | 2,992                    |  | 92,648,789 |                                  |  |                                |  |                                             |  | (34,685,202 | )                        |  | 57,966,579  |  





See accompanying notes to consolidated financial statements.



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##### Table of Contents

CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY

(A Development Stage Company)

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY(Continued)



|                                                                                                                                                       |  |              |  |                          |       |  |                                  |             |                                 |  |                                              |   |  |                          |   |  |   |             |   |  |   |             |  
|------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ |  | ------------------------ | ----- |  | -------------------------------- | ----------- | ------------------------------- |  | -------------------------------------------- | - |  | ------------------------ | - |  | - | ----------- | - |  | - | ----------- | -
|                                                                                                                                                       |  |              |  | AdditionalPaid-InCapital |       |  | UnpaidSubscriptionon commonstock |             | Deferredstock-basedcompensation |  | Deficitaccumulatedduring thedevelopmentstage |   |  | Totalstockholdersequity |  
|                                                                                                                                                       |  | Common stock |  |                          |       |  |                                 
|                                                                                                                                                       |  | Shares       |  | Amount                   |       |  |                                  |             |                                
|Balance at December 31, 2007                                                                                                                           |  | 29,917,454   |  |                          | 2,992 |  |                                  | 92,648,789  |                                 |  |                                              |  |  |                          |  |  |   | (34,685,202 | ) |  |   | 57,966,579  |  
|Common stock issued during 2008, at par, pursuant to net-share (cashless) exercises of common stock warrants                                           |  | 57,983       |  |                          | 6     |  |                                  | (6          | )                               |  |                                              |  |  |                          |  |  |   |            |   |  |   |            |  
|Common stock issued in 2008, at $4.20 per share, pursuant to exercise of common stock warrants                                                         |  | 11,200       |  |                          | 1     |  |                                  | 47,039      |                                 |  |                                              |  |  |                          |  |  |   |            |   |  |   | 47,040      |  
|Final adjustment to issuance costs accrued in conjunction with the sale and issuance of common stock in November 2007 at
approximately $6.19 per share |  |             |  |                          |      |  |                                  | 5,733       |                                 |  |                                              |  |  |                          |  |  |   |            |   |  |   | 5,733       |  
|Common stock issued in April 2008, at approximately $4.90 per share, for license fee                                                                   |  | 30,612       |  |                          | 3     |  |                                  | 149,997     |                                 |  |                                              |  |  |                          |  |  |   |            |   |  |   | 150,000     |  
|Employee stock options exercised                                                                                                                       |  | 94,230       |  |                          | 9     |  |                                  | 58,935      |                                 |  |                                              |  |  |                          |  |  |   |            |   |  |   | 58,944      |  
|Stock-based compensation                                                                                                                               |  |             |  |                          |      |  |                                  | 1,405,752   |                                 |  |                                              |  |  |                          |  |  |   |            |   |  |   | 1,405,752   |  
|Net loss                                                                                                                                               |  |             |  |                          |      |  |                                  |            |                                 |  |                                              |  |  |                          |  |  |   | (35,086,151 | ) |  |   | (35,086,151 | )
|                                                                                                                                                       |  |              |  |                          |       |  |                                  |             |                                 |  |                                              |   |  |                          |   |  |   |             |   |  |   |             |  
|Balance at December 31, 2008                                                                                                                           |  | 30,111,479   |  |                          | 3,011 |  |                                  | 94,316,239  |                                 |  |                                              |  |  |                          |  |  |   | (69,771,353 | ) |  |   | 24,547,897  |  
|Common stock issued during 2009, at par, pursuant to net-share (cashless) exercises of common stock warrants                                           |  | 63,927       |  |                          | 6     |  |                                  | (6          | )                               |  |                                              |  |  |                          |  |  |   |            |   |  |   |            |  
|Sale and issuance of common stock in July 2009 at approximately $3.73 per share, net of issuance costs                                                 |  | 3,325,000    |  |                          | 333   |  |                                  | 12,402,425  |                                 |  |                                              |  |  |                          |  |  |   |            |   |  |   | 12,402,758  |  
|Stock-based compensation                                                                                                                               |  |             |  |                          |      |  |                                  | 1,673,165   |                                 |  |                                              |  |  |                          |  |  |   |            |   |  |   | 1,673,165   |  
|Net loss                                                                                                                                               |  |             |  |                          |      |  |                                  |            |                                 |  |                                              |  |  |                          |  |  |   | (25,771,914 | ) |  |   | (25,771,914 | )
|                                                                                                                                                       |  |              |  |                          |       |  |                                  |             |                                 |  |                                              |   |  |                          |   |  |   |             |   |  |   |             |  
|Balance at December 31, 2009                                                                                                                           |  | 33,500,406   |  | $                        | 3,350 |  | $                                | 108,391,823 |                                 |  | $                                            |  |  | $                        |  |  | $ | (95,543,267 | ) |  | $ | 12,851,906  |  
|                                                                                                                                                       |  |              |  |                          |       |  |                                  |             |                                 |  |                                              |   |  |                          |   |  |   |             |   |  |   |             |  



See accompanying notes to
consolidated financial statements.



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##### Table of Contents

CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY

(A Development Stage Company)

CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                                  |  |                                  |             |   |                                                            |   |             |      |  |   |             |   |  |   |             |  
|------------------------------------------------------------------------------------------------- |  | -------------------------------- | ----------- | - | ---------------------------------------------------------- | - | ----------- | ---- |  | - | ----------- | - |  | - | ----------- | -
|                                                                                                  |  | For the years ended December 31, |             |   | Period fromApril 3, 2002(inception)throughDecember 31,2009 |  
|                                                                                                  |  | 2009                             |             |   | 2008                                                       |   |             | 2007 |  |  
|Operating activities:                                                                             |  |                                  |             |   |                                                            |   |             |      |  |   |             |   |  |   |             |  
|Net loss                                                                                          |  | $                                | (25,771,914 | ) |                                                            | $ | (35,086,151 | )    |  | $ | (15,081,545 | ) |  | $ | (95,543,267 | )
|Adjustments to reconcile net loss to net cash used in operating activities:                       |  |                                  |             |   |                                                            |   |             |      |  |   |             |   |  |   |             |  
|Non-cash stock-based compensation                                                                 |  |                                  | 1,673,165   |   |                                                            |   | 1,405,752   |      |  |   | 828,626     |   |  |   | 4,355,160   |  
|Depreciation and amortization                                                                     |  |                                  | 69,431      |   |                                                            |   | 57,164      |      |  |   | 31,022      |   |  |   | 229,904     |  
|Stock issued for license fee                                                                      |  |                                  |            |   |                                                            |   | 150,000     |      |  |   | 150,000     |   |  |   | 575,023     |  
|Non-cash interest expense                                                                         |  |                                  |            |   |                                                            |   |            |      |  |   |            |   |  |   | 34,020      |  
|Other-than temporary impairment (gain on recovery) of short-term and long-term investments        |  |                                  | (4,390,487  | ) |                                                            |   | 4,390,487   |      |  |   |            |   |  |   |            |  
|Gain on disposition of fixed assets                                                               |  |                                  |            |   |                                                            |   | (2,208      | )    |  |   |            |   |  |   | (2,208      | )
|Fair value of warrants for finders fee                                                           |  |                                  |            |   |                                                            |   |            |      |  |   | 433,750     |   |  |   | 433,750     |  
|Changes in operating assets and liabilities:                                                      |  |                                  |             |   |                                                            |   |             |      |  |   |             |   |  |   |             |  
|Prepaid expenses and other current assets                                                         |  |                                  | 303,665     |   |                                                            |   | (334,676    | )    |  |   | (175,743    | ) |  |   | (423,573    | )
|Accounts payable, accrued contract research and manufacturing expenses and other accrued expenses |  |                                  | (2,588,850  | ) |                                                            |   | 7,095,680   |      |  |   | 3,005,486   |   |  |   | 9,136,354   |  
|Accrued compensation and related expenses                                                         |  |                                  | 314,821     |   |                                                            |   | 12,607      |      |  |   | 157,313     |   |  |   | 894,696     |  
|                                                                                                  |  |                                  |             |   |                                                            |   |             |      |  |   |             |   |  |   |             |  
|Net cash used in operating activities                                                             |  |                                  | (30,390,169 | ) |                                                            |   | (22,311,345 | )    |  |   | (10,651,091 | ) |  |   | (80,310,141 | )
|                                                                                                  |  |                                  |             |   |                                                            |   |             |      |  |   |             |   |  |   |             |  
|Investing activities:                                                                             |  |                                  |             |   |                                                            |   |             |      |  |   |             |   |  |   |             |  
|Acquisitions of property and equipment                                                            |  |                                  | (14,037     | ) |                                                            |   | (175,028    | )    |  |   | (30,877     | ) |  |   | (335,169    | )
|Proceeds from sale of property and equipment                                                      |  |                                  |            |   |                                                            |   | 3,677       |      |  |   |            |   |  |   | 3,677       |  
|Redemptions (purchases) of short-term investments, net                                            |  |                                  | 14,575,000  |   |                                                            |   | 2,613,336   |      |  |   | (15,852,509 | ) |  |   | (11,450,000 | )
|Security deposits                                                                                 |  |                                  |            |   |                                                            |   | (63,489     | )    |  |   |            |   |  |   | (76,950     | )
|                                                                                                  |  |                                  |             |   |                                                            |   |             |      |  |   |             |   |  |   |             |  
|Net cash provided by (used in) investing activities                                               |  |                                  | 14,560,963  |   |                                                            |   | 2,378,496   |      |  |   | (15,883,386 | ) |  |   | (11,858,442 | )
|                                                                                                  |  |                                  |             |   |                                                            |   |             |      |  |   |             |   |  |   |             |  
|Financing activities:                                                                             |  |                                  |             |   |                                                            |   |             |      |  |   |             |   |  |   |             |  
|Proceeds from borrowings from affiliate                                                           |  |                                  |            |   |                                                            |   |            |      |  |   |            |   |  |   | 1,745,000   |  
|Proceeds from borrowings from line of credit                                                      |  |                                  | 4,188,544   |   |                                                            |   | 7,277,468   |      |  |   |            |   |  |   | 11,466,012  |  
|Proceeds from exercise of stock options                                                           |  |                                  |            |   |                                                            |   | 58,944      |      |  |   | 15,706      |   |  |   | 80,729      |  
|Proceeds from exercise of common stock warrants                                                   |  |                                  |            |   |                                                            |   | 47,040      |      |  |   | 252,040     |   |  |   | 299,080     |  
|Proceeds from sales of equity securities, net of issuance costs                                   |  |                                  | 12,402,758  |   |                                                            |   | 5,733       |      |  |   | 57,231,446  |   |  |   | 101,267,786 |  
|Recapitalization of the Company                                                                   |  |                                  |            |   |                                                            |   |            |      |  |   |            |   |  |   | (400,000    | )
|Receipt of cash for stock subscription receivable                                                 |  |                                  |            |   |                                                            |   |            |      |  |   |            |   |  |   | 4,625       |  
|                                                                                                  |  |                                  |             |   |                                                            |   |             |      |  |   |             |   |  |   |             |  
|Net cash provided by financing activities                                                         |  |                                  | 16,591,302  |   |                                                            |   | 7,389,185   |      |  |   | 57,499,192  |   |  |   | 114,463,232 |  
|                                                                                                  |  |                                  |             |   |                                                            |   |             |      |  |   |             |   |  |   |             |  
|Net increase (decrease) in cash and cash equivalents                                              |  |                                  | 762,096     |   |                                                            |   | (12,543,664 | )    |  |   | 30,964,715  |   |  |   | 22,294,649  |  
|Cash and cash equivalents, beginning of period                                                    |  |                                  | 21,532,553  |   |                                                            |   | 34,076,217  |      |  |   | 3,111,502   |   |  |   |            |  
|                                                                                                  |  |                                  |             |   |                                                            |   |             |      |  |   |             |   |  |   |             |  
|Cash and cash equivalents, end of period                                                          |  | $                                | 22,294,649  |   |                                                            | $ | 21,532,553  |      |  | $ | 34,076,217  |   |  | $ | 22,294,649  |  
|                                                                                                  |  |                                  |             |   |                                                            |   |             |      |  |   |             |   |  |   |             |  
|Supplemental disclosure of cash flow information:                                                 |  |                                  |             |   |                                                            |   |             |      |  |   |             |   |  |   |             |  
|Cash paid for interest                                                                            |  | $                                | 149,019     |   |                                                            | $ | 4,920       |      |  | $ |            |   |  | $ | 153,939     |  
|                                                                                                  |  |                                  |             |   |                                                            |   |             |      |  |   |             |   |  |   |             |  

See accompanying notes to consolidated financial statements.



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##### Table of Contents

CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY

(A Development Stage Company)

CONSOLIDATED STATEMENTS OF CASH FLOWS

Supplemental disclosure of non-cash investing
and financing activities:

During 2002, the Company issued 5,428,217 shares of its common stock for a subscription
receivable of $4,625.

During 2004, the Company converted a loan with an affiliate for aggregate principal of $1,745,000 and
accrued interest of $34,020 into shares of its common stock, issuing 677,919 shares, at approximately $2.62 per share in lieu of repayment of this obligation.

In December 2004, in conjunction with and as compensation for activities related to the December 2004 sale of equity securities, the Company issued warrants to purchase 483,701 shares of its common stock,
with a purchase price of approximately $2.88 per share and an aggregate fair value of $14,400.

In conjunction with the merger
and recapitalization of the Company effective February 11, 2005, the Company issued 11,911,357 shares of its common stock in exchange for all of the issued and outstanding shares of Chelsea Therapeutics, Inc. In addition, in conjunction with
and as compensation for facilitating the merger, the Company issued warrants for the purchase of 105,516 shares of its common stock at an exercise price of $2.62 per share and an aggregate fair value of $26,700.

In February 2006, in conjunction with and as compensation for activities related to the February 2006 sale of equity securities, the Company
issued warrants to purchase 716,666 shares of its common stock, with a purchase price of $3.30 per share and an aggregate fair value of approximately $705,000.

In May 2006, in conjunction with and as compensation for activities related to a licensing agreement and under a Finders Agreement, the Company issued warrants to purchase 250,000 shares of its
common stock, with an exercise price of $4.31 per share. The exercise of these warrants was conditioned on an event that occurred in January 2007 and, accordingly, the Company recorded a charge based on the warrants fair value determined at
January 2007 of $433,750.



See accompanying notes to
consolidated financial statements.



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##### Table of Contents

CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. The Company, Basis of Presentation and
Summary of Significant Accounting Policies

The Company

Chelsea Therapeutics International, Ltd. (Chelsea Ltd. or the Company) is a specialty pharmaceutical company focused
on the acquisition, development and commercialization of innovative pharmaceutical products. The Companys currently licensed compounds target a variety of prevalent medical conditions, particularly rheumatoid arthritis, psoriasis, cancer,
other immunological disorders, neurogenic orthostatic hypotension associated with Parkinsons Disease and other autonomic disorders. The Companys operating subsidiary, Chelsea Therapeutics, Inc. (Chelsea Inc.), was
incorporated in the State of Delaware on April 3, 2002 as Aspen Therapeutics, Inc., with the name changed in July 2004. In February 2005, Chelsea Inc. merged with a wholly-owned subsidiary of our predecessor company, Ivory Capital Corporation
(Ivory), a Colorado public company with no operations (the Merger). The Company reincorporated into the State of Delaware in July 2005, changing its name to Chelsea Therapeutics International, Ltd.

As a result of the Merger of Ivory and Chelsea Inc. in February 2005, and the reincorporation in Delaware in July 2005, Chelsea Ltd. is the
reporting company and is the 100% owner of Chelsea Inc. The separate existence of Ivory ceased in connection with the Delaware reincorporation in July 2005. Except where the context provides otherwise, references to the Company and
similar terms mean Ivory, Chelsea Ltd. and Chelsea Inc.

Basis of Presentation

Since inception, the Company has focused primarily on organizing and staffing, negotiating in-licensing agreements with partners, acquiring,
developing and securing its proprietary technology, participating in regulatory discussions with the United States Food and Drug Administration (FDA), the European Medicines Agency (EMEA) and other regulatory agencies and
undertaking preclinical trials and clinical trials of product candidates. The Company is a development stage company and has generated no revenue since inception.

The Company has sustained operating losses since its inception and expects such losses to continue over the next several years. Management plans to continue financing the Companys operations with
equity issuances, debt arrangements, strategic alliances or other arrangements of a collaborative nature. If adequate funds are not available, the Company may be required to delay, reduce the scope of, or eliminate one or more of its research or
development programs, delay certain activities, or limit or cease operations in which event its business, financial condition and results of operations would be materially harmed.

For presentation purposes, the Company has restated all information contained in this report related to shares authorized, issued and
outstanding and related disclosures of weighted average shares and loss per share to reflect the results of the Delaware reincorporation in July 2005 as if the Delaware reincorporation had occurred at the beginning of each of the periods presented.

Basis of Consolidation

The accompanying financial statements present, on a consolidated basis, the financial position and results of operations of Chelsea Ltd. and its subsidiary. All significant intercompany transactions and
balances have been eliminated in consolidation.

Use of Estimates

The preparation of 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



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##### Table of Contents

CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements as well as the reported revenues and expenses during the reporting periods.
On an ongoing basis, management evaluates its estimates and judgments. Management bases estimates on its historical experience and on various other factors that it believes are reasonable under the circumstances, the results of which form the basis
for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash and other highly-liquid investments with maturities of three months or less at the date of purchase.

Short-Term Investments

Short-term investments consist of
investments in auction rate securities, or ARS. ARS are generally long-term debt instruments for which interest rates are reset through a Dutch auction process that occurs at pre-determined calendar intervals, generally each 28 or 35 days. As all of
the Companys investments in ARS at December 31, 2009 are currently being held principally for the purpose of redeeming them under an executed settlement agreement in the near term, they are classified as trading securities. The Company
has elected the fair value option in accounting for its trading securities and, accordingly, accounts for such investments at their determined fair value, with changes in the fair value recorded in the statement of operations.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to a significant concentration of credit risk consist primarily of cash and cash equivalents and short-term investments. The Company maintains
deposits in federally insured financial institutions that, under the Temporary Liquidity Guarantee Program, are fully insured by the Federal Deposit Insurance Corporation. The Company also maintains deposits in excess of federally insured amounts in
interest-bearing money market accounts. However, management believes the Company is not exposed to significant credit risk for its cash and cash equivalents due to the financial position of the depository institutions in which those deposits are
held and the nature of the investments.

At December 31, 2009, the Company had investments in ARS, classified on the
consolidated balance sheet as short-term investments, with an aggregated par value of $11.45 million and an estimated aggregate fair value of $9.3 million. Historically, ARS were priced at par, as per industry convention, based on observed or
reported verifiable trades and provided a liquid market for these ARS investments. However, beginning in February 2008, market liquidity issues virtually shut down most active market transactions for ARS. The Companys remaining investments in
ARS represent interests in collateralized debt obligations supported by pools of student loans, typically over-collateralized and/or insured by the Federal Family Education Loan Program (FFELP). None of the ARS investments in the
Companys portfolio were backed by sub-prime mortgage loans or other collateral with exposure to certain current market conditions. However, liquidity issues experienced in global credit and capital markets during 2008 and 2009 have prevented
the Company from liquidating its ARS investments through the auction process as the amount of securities submitted for sale at ARS auctions has exceeded the market demand, though they continue to pay interest according to their stated terms.
Although insufficient demand related to the ARS auctions is expected to continue, the Company successfully completed settlements for all of its investments in ARS and, during 2009, received funding equivalent to 100% of the par value of its
remaining investments in ARS.



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##### Table of Contents

CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Fair Value of Financial Instruments

The carrying value of the Companys financial instruments, including cash and cash equivalents and accounts payable approximates fair
value given their highly-liquid and short-term nature.

For financial assets and liabilities and any other assets and
liabilities carried at fair value, the Company completes analyses of fair value and provides certain disclosures about fair value measurements. Fair value is based on the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date. Under the fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value, the Company performs analyses on a consistent basis and
designs its disclosures surrounding such analyses and the fair value determined at the balance sheet date to meet required presentation and disclosure requirements.

Property and Equipment

Property and equipment, which consists of
furniture and fixtures, software and equipment, is stated at cost and depreciated or amortized using the straight-line method over the estimated useful lives of the related assets. The useful life for all classes of assets other than leasehold
improvements is three years. The useful life for leasehold improvements is the shorter of the expected life of the leasehold improvement or the remaining term of the lease.

Impairment of Long-Lived Assets

The Company reviews long-lived
assets, including property and equipment, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. An impairment loss would be recognized when estimated
undiscounted future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. The impairment loss, if recognized, would be based on the excess of the carrying value of the impaired asset
over its respective fair value. Impairment, if any, is assessed using undiscounted cash flows. Through December 31, 2009, there has been no such impairment.

Research and Development

Research and development expenditures are
expensed as incurred. The Company often contracts with third parties to facilitate, coordinate and perform agreed upon research and development activities. To ensure that research and development costs are expensed as incurred, the Company
measures expense based on work performed for the underlying contract, typically utilizing a percentage-of-completion approach, and records prepaid assets or accrues expenses on a monthly basis for such activities based on the measurement of
liability from expense recognition and the receipt of invoices.

These contracts typically call for the payment of fees for
services at the initiation of the contract and/or upon the achievement of certain milestones. In the event that the Company prepays fees for future milestones, it records the prepayment as a prepaid asset and amortizes the asset into research
and development expense over the period of time the contracted research and development services are performed. Most fees are incurred throughout the contract period and are expensed based on their percentage of completion at a particular date.

These contracts generally include pass through fees. Pass through fees include, but are not limited to, regulatory
expenses, investigator fees, travel costs, and other miscellaneous costs including shipping and printing



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CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



fees. Because these fees are incurred at various times during the contract term and they are used throughout the contract term, the Company records an estimated monthly expense allocation to
recognize the fees during the contract period. Fees incurred to set up the clinical trial are expensed during the setup period.

Costs related to the acquisition of technology rights and patents for which development work is still in process are expensed as incurred and considered a component of research and development costs.

Loss per Share

Basic net loss per common share is calculated by dividing net loss by the weighted-average number of common shares outstanding for the period, without consideration for potentially dilutive securities. For the periods presented, basic and
diluted net loss per common share are identical as potentially dilutive securities from stock options and stock warrants would have an antidilutive effect since the Company incurred a net loss. The number of shares of common stock potentially
issuable at December 31, 2009, 2008 and 2007 upon exercise or conversion that were not included in the computations of net loss per share were 7,873,688, 7,055,089 and 6,572,308, respectively.

Income Taxes

The
Company determines deferred tax assets or liabilities based on the difference between the financial statement and the tax bases of assets and liabilities as measured by the enacted tax rates, which will be in effect when these differences reverse.
The Company provides a valuation allowance against net deferred tax assets unless, based upon the available evidence, it is more likely than not that the deferred tax assets will be realized.

The Company also recognizes, in its consolidated financial statements, the impact of a tax position if that position is more likely than not
to be sustained upon examination, based on the technical merits of the position and provides explicit disclosure about the Companys uncertainties related to the income tax position, including a detailed roll-forward of tax benefits taken that
do qualify for financial statement recognition.

Stock-Based Compensation

The Company accounts for its stock options using a fair value based method of accounting for stock options or similar equity instruments and
requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and non-employee directors based on estimated fair values determined using an option-pricing model. The value of the portion of the
award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Companys statements of operations.

The fair value of each option award made to employees and directors during the years ended December 31, 2009, 2008 and 2007 was estimated on the date of grant using the Black-Scholes closed-form
option valuation model utilizing the assumptions noted in the following table. To determine the risk-free interest rate, the Company utilized the U.S. Treasury yield curve in effect at the time of grant with a term consistent with the expected term
of the Companys awards. The Company estimated the expected life of the options granted based on anticipated exercises in future periods assuming the success of its business model as currently forecasted. The expected dividends reflect the
Companys current and expected future policy for dividends on its common stock. To determine the expected stock price volatility for stock options, the Company examined historical volatilities for industry peers closely related to the current
status of its business, but with sufficient trading history to be able to determine volatility. Utilizing a weighted average calculation to account for the limited price history of the Companys stock, an analysis of the historical volatility
of its stock price in combination with the historical



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CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



volatility of the industry peers selected was used to determine an appropriate volatility factor. The Company plans to continue to analyze the expected stock price volatility and expected term
assumption at each grant date as more historical data for its common stock becomes available. Given the limited service period for current employees and the senior nature of the roles for those employees, the Company estimated that it would
experience no forfeitures or that the rate of forfeiture would be immaterial to the recognition of compensation expense for those options currently outstanding. Due to the limited amount of historical data available to us, particularly with respect
to stock-price volatility, employee exercise patterns and forfeitures, actual results could differ from our assumptions.



|                                          |  |                                  |  |         |  |        
|----------------------------------------- |  | -------------------------------- |  | ------- |  | -------
|                                          |  | For the years ended December 31,
|                                          |  | 2009                             |  | 2008    |  | 2007   
|Weighted-average risk-free interest rate  |  | 1.75%                            |  | 2.95%   |  | 4.77%  
|Weighted-average expected life of options |  | 5 years                          |  | 5 years |  | 5 years
|Expected dividend yield                   |  | 0%                               |  | 0%      |  | 0%     
|Weighted-average expected volatility      |  | 82.71%                           |  | 63.64%  |  | 66.01% 

The Company records
compensation expense on a straight-line method over the vesting period of its options and recorded compensation expense of $1,673,165, $1,405,752 and $828,626 for the years ended December 31, 2009, 2008 and 2007, respectively, in conjunction
with option grants made to employees and non-employee directors. As of December 31, 2009, the Company had total unrecognized compensation expense related to options granted to employees and non-employee directors of approximately $3.1 million,
which will be recognized over a remaining average period of two years. The expected future amortization expense for unrecognized compensation expense for stock option grants to employees and non-employee directors at December 31, 2009 is as
follows:



|                              |  |   |          
|----------------------------- |  | - | ---------
|Year ending December 31, 2010 |  | $ | 1,559,362
|Year ending December 31, 2011 |  |   | 1,060,027
|Year ending December 31, 2012 |  |   | 426,812  
|Year ending December 31, 2013 |  |   | 64,608   
|                              |  |   |          
|                              |  | $ | 3,110,809
|                              |  |   |          

To date, option awards to consultants, advisors or
other independent contractors have been granted with an exercise price equal to the market price of the Companys stock at the date of the grant; have 10-year contractual terms; and vest dependent upon the completion of performance commitments.
As such, the value of stock options is measured at the then-current market value as of financial reporting dates and compensation cost is recognized for the net change in the fair value of the options for the reporting period, until such performance
commitments are met. Once each commitment is met, the options that vest in association with that commitment are adjusted, for the last time, to the then-current fair value and compensation cost is recognized accordingly (see Note 7).

In determining the fair value of options granted to consultants, advisors and other independent contractors, the Company uses the
Black-Scholes closed-form option valuation model in a manner consistent with its use in determining the fair value of options granted to employees and directors. However, the expected life of the options is based on the contractual lives as defined
in agreements with the third parties. No such grants were made during 2007, 2008 or 2009.



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CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Recent Accounting Pronouncements

In September 2009, the Financial Accounting Standards Board, or FASB, issued authoritative guidance that modifies the accounting for multiple
element arrangements. This guidance requires an entity to allocate revenue to each unit of accounting in multiple deliverable arrangements based on the relative selling price of each deliverable. It also changes the level of evidence of
stand-alone selling prices required to separate deliverables by allowing an entity to make its best estimate of the stand-alone selling price of the deliverables when more objective evidence of selling price is not available. Implementation of
this guidance is required no later than fiscal years beginning after June 15, 2010 and this guidance may be applied prospectively to new or materially modified arrangements after the effective date or retrospectively. Early application is
permitted. As the Company has no active multiple element arrangements, the adoption of this authoritative guidance will have no material impact on its consolidated financial position or results of operations.

2. Auction Rate Securities

At December 31, 2009, the Company held investments in student-loan backed ARS with an aggregate par value of $11.45 million, held at UBS Financial Services, Inc. (UBS) and classified as trading securities based on the terms of a
settlement agreement reached during 2008. As of December 31, 2008, the aggregate par value of such holdings was $11.575 million. Trading securities are carried at estimated fair value, based on available information. As the terms of the
settlement agreement allows these securities to be redeemed by, at the earliest, June 30, 2010, and it is the Companys intent to redeem those securities at that date, they were classified as short-term investments at December 31,
2009. During the fourth quarter of 2008, the Company finalized the details of its settlement agreement related to those ARS held at UBS and accepted the terms for ARS Rights (the ARS Rights) for the illiquid ARS holdings maintained at
UBS as of February 13, 2008. The ARS Rights provide the Company with the ability to sell the ARS, along with the ARS Rights, to UBS at the par value of the ARS no earlier than June 30, 2010, but no later than July 2, 2012. The ARS
Rights grant UBS the sole discretion and right to sell or otherwise dispose of ARS at any time up until June 30, 2010, so long as the holder receives a payment of par upon any sale or disposition. The ARS Rights are not transferable, not
tradable and will not be quoted or listed on any securities exchange or any other trading network.

On December 31, 2008,
the Company held investments in ARS with an aggregate par value of approximately $14.5 million, held at BA and classified as available-for-sale. During the year ended December 31, 2009, the Company received proceeds of $14.5 million, fully
redeeming these available-for-sale securities, including $0.4 million from partial redemptions at par, $11.6 million from full redemptions at par under a settlement agreement, $2.1 million for the sale of its $2.5 million par value position in
Mississippi Higher Ed Assistance Corp. in a secondary market transaction and $0.4 million as reimbursement of the loss on that secondary market transaction under a settlement agreement. The Company recorded a gain of approximately $4.2 million from
the recovery of the other-than-temporary impairment that the Company had recorded against these investments during 2008.

The
Companys ARS investments at December 31, 2009 represent interests in collateralized debt obligations supported by pools of student loans and none are collateralized by mortgage, credit card or insurance securitizations. All but
approximately $4.4 million of the par value of the Companys investments in ARS were AAA/Aaa rated, fully backed by the FFELP and/or over-collateralized. Of the remaining $4.4 million of investments at par value, all were collateralized at 100%
or greater and, consistent with the Companys investment policy at the time of purchase, $0.75 million carried an A rating, $1.15 million carried an Aa3/AAA rating and the remainder carried AAA/Aaa ratings. During the year ended
December 31, 2009, the Company has



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CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



not been notified of any modification to the credit ratings of the underlying issuing agencies for any of the investments held at that date.

As part of the settlement agreement finalized in the fourth quarter of 2008, UBS agreed that an affiliate would provide the Company with a
no net-cost line of credit. Under the terms of the line of credit agreements the Company received funds in December 2008 and March 2009 and had recorded a liability at December 31, 2009 of $11.47 million, including accrued interest. Though the
loan is payable on demand, if the UBS affiliate should exercise its right to demand repayment of any portion of the loan prior to the date, the Company can exercise its ARS Rights that would require UBS and its affiliates to arrange for alternative
financing on terms and conditions substantially the same as those contained in the line of credit agreement. If alternative financing cannot be established, then UBS AG, or one of its affiliates, will purchase the Companys pledged UBS ARS
at par. As a result, the loan and any alternative financing will not be payable by the Company prior to the time that is it able to exercise its ARS Rights in accordance with its agreement with UBS and, accordingly, the liability is classified
as a short-term liability at December 31, 2009. The Company expects to repay the line of credit with the proceeds from the exercise of those ARS Rights. Proceeds of any sales of the Companys UBS ARS will first be applied to
repayment of the line of credit with the balance, if any, deposited into its account.

As the UBS ARS Rights represent a
separate freestanding contract between the Company and UBS and are not transferable to a subsequent buyer, the existence of the ARS Rights had no effect upon the determination of fair value for the ARS at December 31, 2009. In 2008, recognizing
that the ARS Rights act as an economic hedge against any further price movement in those ARS holdings, the Company elected to account for the ARS Rights under the fair value option to mitigate volatility in reported earnings due to the relationship
between the ARS Rights and the ARS. The Company adjusts the ARS Rights to fair value at each financial statement date with corresponding changes in fair value reported in earnings. Simultaneously, the Company elected a one-time transfer of the ARS
covered under the settlement agreement with UBS from the available-for-sale category to the trading category recognizing the unprecedented failure of the entire market for ARS. This election allows all future movements in the fair value of the ARS
to be reported in earnings, creating relative accounting symmetry with the ARS Rights until the settlement is realized. The ARS Rights are recorded at fair value and are classified as short-term investments on the consolidated condensed balance
sheet as of December 31, 2009.

For those ARS held at UBS under the settlement agreement, the Company believes that
normal discounted cash flow modeling continues to have limited validity under current market conditions as the interest rates currently associated with the majority of these securities are not truly a factor of value. The ARS continue to pay
interest according to their stated terms. However, the application of additional discount factors related to issuer credit ratings, percentage of FFELP or insurance wraps, etc. makes modeling such discounted cash flows more feasible and the Company
determined that it should review the valuation for the UBS ARS based on those factors. The Company assigned risk component factors, utilized a liquidity discount of 300 basis points to reflect the continuing weakness in the market and utilized a
five-year life for these assets. In addition, in establishing the fair value of the ARS Rights as of December 31, 2009, the Company determined that, as the line of credit had been fully funded at 100% of the par value of the Companys ARS
holdings at UBS, discount factors should no longer be applied related to counterparty performance risk and the time value of money in a discounted cash flow methodology. Consequently, the fair value of the ARS Rights of approximately $2.2 million
and the fair value of the ARS of approximately $9.25 million, in the aggregate, total 100% of the par value of the Companys ARS held at UBS.

As a result of the analysis of fair value, the Company recorded a gain of approximately $0.2 million during the year ended December 31, 2009 related to the increased value of the ARS rights due to
the additional funding



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CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



received under the line of credit and the resulting elimination of any performance risk associated with the settlement. For the year ended December 31, 2008, the Company had recorded
other-than-temporary impairment losses related to its trading securities that were then classified as available-for-sale securities, of approximately $2.2 million. Offsetting the impairment charges recorded during the year ended December 31,
2008, the Company recorded other income and a corresponding long-term asset for the fair value of the ARS Rights obtained in November 2008 of $2.0 million. For 2008, the recording of the gain from the ARS Rights and the recognition of
other-than-temporary impairment losses resulted in a $0.2 million net expense impact on the consolidated statement of operations.

3. Fair
Value Measurements

In determining fair value, the Company utilizes techniques that optimize the use of observable inputs,
when available, and minimize the use of unobservable inputs to the extent possible. As normal trading activity within public markets for ARS ceased during the quarter ended March 31, 2008 and had not resumed with any regularity through
December 31, 2009, there continues to be an absence of observable market quotes (level 1 inputs). Trading activity in the secondary markets for ARS is not sufficiently active and the resulting data does not qualify as appropriate level 2
inputs. Data points that are available do not technically qualify as level 2 inputs and have been characterized as unobservable (level 3) inputs, along with other inputs including fair value information provided by UBS on the Companys ARS
holdings with UBS (based on percentage of collateralization, assessments of counterparty credit quality, default risk underlying the security, the mix of FFELP loans and private loans) and overall capital market liquidity.

The following fair value hierarchy table categorizes information regarding assets measured at fair value on a recurring basis:







|                                 |  |                                                            |        |                                           |   |                                        |  |       |        |  |   |       
|-------------------------------- |  | ---------------------------------------------------------- | ------ | ----------------------------------------- | - | -------------------------------------- |  | ----- | ------ |  | - | ------
|                                 |  | Assets Measured at Fair Value on a Recurring Basis        
|(in thousands)                   |  | Quoted prices inactive marketsfor identicalassets(Level 1) |        | Significantotherobservableinputs(Level 2) |   | Significantunobservableinputs(Level 3) |  | Total
|As of December 31, 2009          |  |                                                            |        |                                           |   |                                        |  |       |        |  |   |       
|Cash and Treasury funds          |  | $                                                          | 22,295 |                                           | $ |                                       |  | $     |       |  | $ | 22,295
|Auction rate securities (Note 2) |  |                                                            |       |                                           |   |                                       |  |       | 9,251  |  |   | 9,251 
|ARS Rights (Note 2)              |  |                                                            |       |                                           |   |                                       |  |       | 2,199  |  |   | 2,199 
|                                 |  |                                                            |        |                                           |   |                                        |  |       |        |  |   |       
|                                 |  | $                                                          | 22,295 |                                           | $ |                                       |  | $     | 11,450 |  | $ | 33,745
|                                 |  |                                                            |        |                                           |   |                                        |  |       |        |  |   |       



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CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The Companys assets that were measured at fair value on a recurring basis using
significant Level 3 inputs as of December 31, 2009 consisted of its investments in ARS and its ARS Rights. The following table summarizes the Companys fair value measurements using significant Level 3 inputs, and changes therein, for the
year ended December 31, 2009 (in thousands):



|                                     |  |   |         |  
|------------------------------------ |  | - | ------- | -
|Balance as of December 31, 2008      |  | $ | 21,634  |  
|Redemptions at par                   |  |   | (12,500 | )
|Sales on secondary market, net       |  |   | (2,075  | )
|Purchases                            |  |   |        |  
|Realized gains (losses)(1)           |  |   | 4,144   |  
|Increase in fair value of ARS Rights |  |   | 247     |  
|Transfers in and/or out of Level 3   |  |   |        |  
|                                     |  |   |         |  
|Balance as of December 31, 2009      |  | $ | 11,450  |  
|                                     |  |   |         |  



|(1) | Amount of total gains realized upon redemption for the year, excluding the increase in the fair value on ARS Rights, included in other income and expense in the
consolidated statements of operations attributable to the change in fair value related to assets redeemed in 2009 or still held as of the reporting date.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The valuation of the Companys ARS investment portfolio has been sensitive to market conditions and is based on managements best estimate given the facts available at the time of the estimate.
The assumptions utilized in the estimate of fair value have been difficult to predict and the resulting fair value estimates have been subject to fluctuation. However, with the Companys success in gaining full liquidity on its remaining ARS
holdings at UBS in 2009, the risk of such fluctuations are effectively offset by corresponding changes in the fair value of the ARS Rights.

4. Property and equipment:

Property and equipment consist of the following:



|                                               |  |              |          |   |      |   |          |  
|---------------------------------------------- |  | ------------ | -------- | - | ---- | - | -------- | -
|                                               |  | December 31, |         
|                                               |  | 2009         |          |   | 2008 |  
|Furniture and fixtures                         |  | $            | 156,249  |   |      | $ | 155,366  |  
|Software                                       |  |              | 19,046   |   |      |   | 19,046   |  
|Leasehold improvements                         |  |              | 24,142   |   |      |   | 24,142   |  
|Computer and office equipment                  |  |              | 104,493  |   |      |   | 91,338   |  
|                                               |  |              |          |   |      |   |          |  
|                                               |  |              | 303,930  |   |      |   | 289,892  |  
|Lessaccumulated depreciation and amortization |  |              | (200,135 | ) |      |   | (130,703 | )
|                                               |  |              |          |   |      |   |          |  
|                                               |  | $            | 103,795  |   |      | $ | 159,189  |  
|                                               |  |              |          |   |      |   |          |  

Depreciation and amortization expense was $69,431, $57,164 and $31,022 for the years ended December 31,
2009, 2008 and 2007, respectively.



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CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



5. Common Stock Offerings

On August 10, 2009, the Company filed a shelf registration statement with the Securities and Exchange Commission, or SEC, under which
the Company may offer shares of its common stock and preferred stock, various series of debt securities and/or warrants to purchase any of such securities, either individually or in units, in one or more offerings, up to a total dollar amount of
$60,000,000. Such registration statement became effective as of August 20, 2009.

On July 28, 2009, the Company
raised gross proceeds of approximately $13.3 million through the sale of 3,325,000 shares of its common stock. These shares were offered pursuant to the Companys prior shelf registration statement, as amended effective July 22, 2009
pursuant to Rule 462(b) to increase the dollar amount of securities available for sale, as filed with the SEC under which the Company could offer shares of its common stock and preferred stock, various series of debt securities and/or warrants to
purchase any of such securities, either individually or in units, in one or more offerings, up to a total dollar amount of $62,218,060. There are no more securities available under this shelf registration. In connection with the July 2009 offering,
the Company received net proceeds, after deducting placement fees and offering expenses, of approximately $12.4 million.

On
November 8, 2007, the Company raised gross proceeds of approximately $48.9 million through the sale of 7,388,172 shares of its common stock in a registered direct offering. These shares were offered pursuant to the Companys prior shelf
registration statement as filed with the SEC under which it could offer shares of its common stock and preferred stock, various series of debt securities and/or warrants to purchase any of such securities, either individually or in units, in one or
more offerings, up to a total dollar amount of $60.0 million. Such registration statement became effective as of October 11, 2007. In connection with this offering, the Company paid commissions and recorded or accrued other offering-related
costs of approximately $3.2 million.

On March 22, 2007, the Company raised gross proceeds of approximately $12.5 million
through the sale of 2,648,306 shares of its common stock plus warrants for the purchase of 794,492 shares of its common stock (the 2007 Placement). The aggregate fair value of these warrants was approximately $1.3 million. The warrants
permit the holders to purchase the underlying common shares at $5.66 each and are exercisable in whole at any time, or in part from time to time, for cash, for five years from the date of issuance. The warrants are redeemable at par value at the
Companys option in the event that the volume weighted-average closing price of the Companys common stock is greater than $12.00 per share for any 20 consecutive trading days provided the Company gives 60 business days written
notice to the holders and simultaneously call all warrants on the same terms. Under the terms of the 2007 Placement, the Company agreed to and filed a registration statement with the SEC within 30 days of the closing for the shares of common stock
sold and the shares of common stock underlying the warrants and such registration became effective on August 7, 2007. In connection with this offering, the Company paid commissions and other offering-related costs of approximately $1.0 million
in cash.

On February 13, 2006, the Company raised gross proceeds of approximately $21.5 million through the sale of
7,166,666 shares of its common stock plus warrants for the purchase of 2,149,999 shares of its common stock (the 2006 Placement). The allocated aggregate fair value of these warrants was approximately $1.1 million. The warrants permit
the holders to purchase the underlying common shares, for cash only, at $4.20 each and are exercisable in whole at any time, or in part from time to time, for five years from the date of issuance. The warrants are redeemable at par value at the
Companys option in the event that the Companys volume weighted-average closing bid price of its common stock is greater than $9.00 per share for any 20 consecutive trading days provided that the Company gives 30 business days
written notice to the holders and simultaneously calls all warrants on the same terms. In connection with the 2006 Placement, the Company paid commissions and other offering-related costs of approximately $1.6 million in cash and issued warrants to
the placement agent for the



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CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



purchase of 716,666 shares of the Companys common stock with an exercise price of $3.30 per share, or 110% of the price of the shares sold in the offering and an aggregate fair value of
approximately $0.7 million. Under the terms of the 2006 Placement, the Company agreed to and filed a registration statement with the SEC within 30 days of the closing for the shares of common stock sold and the shares of common stock underlying the
warrants and such registration became effective on March 29, 2006.

In December 2004, Chelsea, Inc. raised gross proceeds
of approximately $14.5 million through the sale of 5,532,994 shares of its common stock (the 2004 Placement). The amount raised includes the conversion of a $1.7 million stockholder loan along with accrued interest, for which a total of
677,919 shares of common stock were issued. In connection with this offering, Chelsea, Inc. paid commissions and other offering-related costs of approximately $1.0 million in cash and issued warrants to the placement agent for the purchase of
483,701 shares of its common stock with an aggregate fair value of approximately $14,000.

6. Commitments

Facility Lease

On
March 7, 2008 the Company entered into a lease for office space in Charlotte, North Carolina near its former office location to serve as its new corporate headquarters. Occupancy occurred on or about May 15, 2008 with monthly payments
beginning October 15, 2008 of approximately $19,000. The lease expires on October 15, 2013 and calls for annual rent increases of 3%. In addition, the lease initially provided an option to rent additional adjacent space. Such option
expired in November 2009. A security deposit equal to four months rent or approximately $76,000 was paid upon signing the lease. The future aggregate minimum lease payments under non-cancellable operating leases are approximately $0.9 million
through the lease expiration date of October 15, 2013.

The Company leased its former corporate headquarters under an
operating lease, as amended, that expired in June 2008. The lease contained no provisions for renewal periods of any fixed lengths.

Rent expense for the years ended December 31, 2009, 2008 and 2007 was $248,404, $179,614 and $57,960, respectively.

License Agreements

In March 2004, the Company entered into a License Agreement with Dr. M. Gopal
Nair, Ph.D., of the University of South Alabama College of Medicine, for rights to use, produce, distribute and market products derived from an invention by Dr. Nair, claimed in US Patent # 5,912,251, entitled metabolically inert
anti-inflammatory and antitumor antifolates, designated by Chelsea as CH-1504 and related compounds. The license provides the Company with exclusive, worldwide (excluding India) rights for this portfolio of antifolates that includes CH-1504
and related compounds. The Company made an upfront payment in May 2004 of $150,000 and anniversary milestone payments as required by the agreement of $100,000 each in March 2006 and 2005. In April 2007, the Company issued 26,643 shares of its common
stock, subject to trading restrictions, at a value of approximately $5.63 per share, in settlement of the $150,000 anniversary milestone payment for 2007. In March 2008, the Company made a milestone payment of $100,000 related to patient dosing in a
Phase II study as required by the agreement. In April 2008, the Company issued 30,612 shares of its common stock, subject to trading restrictions, at a value of approximately $4.90 per share, in settlement of the 2008 anniversary milestone payment
of $150,000. In April 2009, the Company made the 2009 anniversary milestone payment of $150,000. The Company is required to make additional payments upon the achievement of specific development and



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##### Table of Contents

CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



regulatory approval milestones. The Company is also obligated to pay royalties under the agreement until the later of the expiration of the applicable patent or the applicable last date of market
exclusivity after the first commercial sale, on a country-by-country basis. Future potential milestone payments total approximately $1,325,000 at December 31, 2009 and there are no minimum royalties required under the agreement.

In May 2006, the Company entered into an agreement with Dainippon Sumitomo Pharma Co., Ltd. (DSP) for a worldwide, exclusive,
sub-licensable license and rights to certain intellectual property and proprietary information (the DSP Agreement) relating to L-threo-3,4-dihydroxyphenylserine (L-DOPS or droxidopa) including, but not limited to
all information, formulations, materials, data, drawings, sketches, designs, testing and test results, records and regulatory documentation. As consideration for these rights, the Company paid DSP $100,000 and issued 63,131 shares of its common
stock, with a value of approximately $4.35 per share, or $274,621. During 2007, the Company made a milestone payment, related to obtaining orphan drug status from the FDA, under the DSP Agreement of $250,000. In February 2008, the Company made a
milestone payment under the DSP Agreement of $500,000 related to patient dosing in a Phase III study. As additional consideration, the Company agreed to pay DSP and or its designees (1) royalties on the sales should any compound be approved for
commercial sale; and (2) milestone payments, payable upon achievement of milestones as defined in the DSP Agreement. At December 31, 2009, remaining potential future milestone payments, subject to the Companys right to terminate the
DSP agreement, totaled $3.25 million.

The amount expended under these agreements and charged to research and development
expense was $150,000 during the year ended December 31, 2009, $750,000 during the year ended December 31, 2008 and $400,000 during the year ended December 31, 2007.

Subsequent to execution of the DSP Agreement, the Company and DSP agreed to initiate, and the Company agreed to fund, activities focused on
modifying the manufacturing capabilities of DSP in order to expand capacity and comply with regulations and requirements of the FDA. As of December 31, 2009, such activities have been completed. Based on work performed by DSP over a two year
period, the Company had paid approximately $2.7 million and had recorded liabilities for an additional $0.7 million of costs at December 31, 2009.

Development and Commercialization Agreement

Effective May 2006, the
Company entered into a development and commercialization agreement (the Development Agreement) with Active Biotech AB (AB) to co-develop and commercialize the I-3D portfolio of orally active, Dihydroorotate dehydrogenase
(DHODH) inhibiting compounds for the treatment of autoimmune diseases and transplant rejection. Under the terms of the Development Agreement, an initial payment of $1.0 million was made to AB at the time of the Development Agreement with
such funds utilized to cover the initial costs of research and development efforts jointly approved by both parties. At December 31, 2006, the Company had expensed the entire $1.0 million payment and expensed additional costs of $0.3 million.
During 2007, the Company expensed costs of $0.6 million under the program related to costs of research and development. During 2008, the Company and AB ceased joint discovery efforts on this portfolio and, accordingly, the Company has recorded no
costs related to this program during 2008 or 2009.

In April 2008, the Company and AB entered into a termination and
assignment agreement (the Termination Agreement), whereby AB discontinued its participation in the I-3D co-development program and assigned its entire right, title and interest in the portfolio to the Company in exchange for royalties on
future sales. The Termination Agreement also eliminated the Companys obligation related to payment of potential future development milestones under the Development Agreement.



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##### Table of Contents

CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Contract Research and Manufacturing Purchase Obligations

The Company often contracts with third parties to facilitate, coordinate and perform agreed upon research and development activities. These
contracts typically call for the payment of fees for services at the initiation of the contract and/or upon the achievement of certain milestones. The Company currently intends to continue its research and manufacturing activities as contracted at
December 31, 2009. However, there can be cancellation fees associated with these contracts that could be punitive in nature. Commitments under research and development programs represent contractual commitments entered into for materials and
services in the normal course of business and totaled approximately $7.8 million at December 31, 2009.

7. Stockholders Equity

On May 28, 2009, the Companys Certificate of Incorporation was amended to increase the number of authorized
shares of capital stock from 50,000,000 shares to 65,000,000 shares and to increase the number of authorized shares of common stock from 45,000,000 shares to 60,000,000 shares.

Preferred Stock

The Companys Certificate of Incorporation
provides that the Board of Directors of the Company has the authority to issue up to an aggregate of 5,000,000 shares of preferred stock in one or more classes or series and to determine, with respect to any such class or series, the designations,
powers, preferences and rights of such class or series, and the qualifications, limitations and restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption (including sinking fund
provisions), redemption prices, liquidation preferences and the number of shares constituting any class or series or the designation of such class or series, without further vote or action by the stockholders.

As of December 31, 2009, no shares of preferred stock were issued and outstanding.

Common Stock

In
April 2008, the Company issued 30,612 shares of its common stock, subject to trading restrictions, at a value of approximately $4.90 per share, as consideration for the $150,000 anniversary milestone payment due under its product license agreement
with Dr. M. Gopal Nair (see Note 6).

In April 2007, the Company issued 26,643 shares of its common stock, subject to
trading restrictions, at a value of approximately $5.63 per share, as consideration for the $150,000 anniversary milestone payment due under its product license agreement with Dr. M. Gopal Nair (see Note 6).

In May 2006, the Company issued 63,131 shares of its common stock as consideration for a product license agreement with DSP (see Note 6),
with a value of approximately $4.35 per share, or $274,621.

During April 2004, the Company issued 471,816 common shares as
consideration in the product license agreement (see Note 6) and 478,330 shares were sold to Simon Pedder, the Companys President and Chief Executive Officer under the terms of his employment agreement. These shares were valued at what was, at
that time, Chelseas common stock estimated aggregate fair value of $402 and $408, respectively, with such nominal values reflecting an asset-based valuation methodology.

During 2002, the Company issued 5,428,217 shares of its common stock for a subscription receivable of $4,625.



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##### Table of Contents

CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Warrants

At December 31, 2009 and 2008, the Company had outstanding warrants to purchase 4,060,758 and 4,180,449 shares, respectively, of the Companys common stock at prices ranging from $2.62 to $5.66
per share.

In March 2007, in conjunction with the 2007 Placement (see Note 5), the Company issued warrants for the purchase
of 794,492 shares of its common stock. The aggregate fair value of these warrants was approximately $1.3 million. The warrants permit the holders to purchase the underlying common shares at $5.66 each and are exercisable in whole at any time, or in
part from time to time, for cash, for five years from the date of issuance. The warrants are redeemable at par value at the Companys option in the event that the volume weighted-average closing price of the Companys common stock is
greater than $12.00 per share for any 20 consecutive trading days provided the Company gives 60 business days written notice to the holders and simultaneously call all warrants on the same terms.

In May 2006, in conjunction with and as compensation for activities related to the product license agreement with DSP (see Note 6) and under
a finders agreement, the Company issued warrants to purchase 250,000 shares of its common stock, with an exercise price of $4.31 per share. The exercise of these warrants was conditioned on an event that did not occur until January 2007. As
such, in January 2007, the Company recorded a charge based on the warrants aggregate fair value at that date of $433,750.

In February 2006, in conjunction with the 2006 Placement (see Note 5), the Company issued warrants for the purchase of 2,149,999 shares of its common stock. The allocated aggregate fair value of these warrants was approximately $1.1
million. The warrants permit the holders to purchase the underlying common shares at $4.20 each and are redeemable at the Companys option in the event that the volume weighted average closing bid price of its common stock for any 20
consecutive trading days is at least $9.00 per share. The Company also issued warrants to its placement agent to purchase 716,666 shares of its common stock with an exercise price of 110% of the purchase price per share based on shares sold in the
2006 Placement, or $3.30 per share and an aggregate fair value of approximately $705,000.

In February 2005, in conjunction
with and as compensation for facilitating the Merger (see Note 1), the Company issued warrants for the purchase of 105,516 shares of its common stock at an exercise price of approximately $2.62 per share. The aggregate fair value of these warrants
was approximately $26,700.

In December 2004, as compensation for fundraising efforts related to the 2004 Placement (see Note
5), the Company issued warrants to purchase 483,701 shares of its common stock, with a purchase price of 110% of the purchase price per share based on shares sold in the 2004 Placement, or, as converted under terms of the Merger Agreement,
approximately $2.89 per share. The aggregate fair value of these warrants was approximately $14,000.

Exercise of Common Stock Warrants

During 2009, various warrant holders exercised rights to purchase 119,691 shares of the common stock of the Company,
with an average exercise price of approximately $3.27 per share, pursuant to cashless exercises whereby the Company, in net share settlements, issued 63,927 shares of its common stock to the warrant holders based on the excess of the market price
over the exercise price on the respective dates of exercise.

During 2008, various warrant holders, on various dates,
exercised rights to purchase 100,487 shares of the common stock of the Company, with an average exercise price of approximately $2.91 per share, pursuant to



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##### Table of Contents

CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



cashless exercises whereby the Company, in net share settlements, issued 57,983 shares of its common stock to the warrant holders based on the excess of the market price over the exercise price
on the respective dates of exercise.

During 2008, various warrant holders, on various dates, exercised rights to purchase
11,200 shares of the common stock of the Company at an exercise price of $4.20 per share pursuant to a cash exercise whereby the Company recorded proceeds of $47,040.

During 2007, various warrant holders, on various dates, exercised rights to purchase 116,596 shares of the common stock of the Company, with an average exercise price of approximately $2.90 per share,
pursuant to cashless exercises whereby the Company, in net share settlements, issued 68,136 shares of its common stock to the warrant holders based on the excess of the market prices over the exercise prices on the respective dates of exercise.

During 2007, various warrant holders, on various dates, exercised rights to purchase 61,200 shares of the common stock of the
Company at an exercise price of $4.20 per share pursuant to a cash exercise whereby the Company recorded cash proceeds, net of expenses, of $252,040.

During 2006, various warrant holders, on various dates, exercised rights to purchase 30,422 shares of the Companys common stock, with an exercise price of approximately $2.89 per share, pursuant to
cashless exercises whereby the Company, in net share settlements, issued 15,461 shares of its common stock to the warrant holders based on the excess of the market prices over the exercise prices on the respective dates of exercise.

Stock Options

The
Company has a stock incentive plan (the Plan) under which incentive stock options for 5,000,000 shares of the Companys common stock may be granted. Grants under the Plan may be made to employees (including officers), directors,
consultants, advisors or other independent contractors who provide services to the Company or its subsidiary.

Options awards
to employees and directors are generally granted with an exercise price equal to the market price of the Companys stock at the date of the grant and generally have 10-year contractual terms.

During the years ended December 31, 2009, 2008 and 2007, the Company granted stock options to employees and non-employee directors for
the purchase of 938,290, 837,500 and 665,500 shares of its common stock, respectively. The grants made during the year ended December 31, 2009 had a weighted-average exercise price of $1.99 per share, a weighted average grant date fair value of
$1.33 per share and an aggregate intrinsic value at December 31, 2009 of approximately $0.8 million. The aggregate intrinsic value is calculated as the difference between the exercise prices of the underlying awards and the quoted closing price
of the common stock of the Company as of December 31, 2009 for those awards that have an exercise price below the quoted closing price. The grants made during the year ended December 31, 2008 had a weighted average exercise price of $6.11 per
share and a weighted average grant date fair value of approximately $3.41 per share with each grant having an exercise price greater than the market value at December 31, 2009, resulting in no aggregate intrinsic value as of that date. The
grants made during the year ended December 31, 2007 had a weighted average exercise price of $5.72 per share and a weighted average grant date fair value of approximately $3.39 per share with each grant having an exercise price greater than the
market value at December 31, 2009, resulting in no aggregate intrinsic value as of that date. Each option granted to employees and non-employee directors during 2009, 2008 and 2007 vests as to 25% of the shares on each of the first, second,
third and fourth anniversary of the vesting



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##### Table of Contents

CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



commencement date. Following the vesting periods, options are exercisable by employees until the earlier of 90 days after the employees termination with the Company or the ten-year
anniversary of the initial grant, subject to adjustment under certain conditions. Following the vesting periods, options are exercisable by non-employee directors until the earlier of 180 days after they cease to be a member of the Board of
Directors or the ten-year anniversary of the initial grant, subject to adjustment under certain conditions.

In January 2008,
the Board of Directors approved a modification for all grants previously made to Dr. Jason Stein, a former non-employee director who resigned from the Board on February 8, 2008. This modification extended the option exercise term until
December 31, 2008. As a result of the modification, the Company recorded additional compensation expense during 2008 of approximately $11,000.

A summary of the Companys stock option activity and related information since inception is as follows:



|                                 |  |                    |   |  |                  |   |  |                       |     
|-------------------------------- |  | ------------------ | - |  | ---------------- | - |  | --------------------- | ----
|                                 |  | AvailableFor Grant |   |  | Activity/Balance |   |  | Wtd AvgExercise Price
|Establish 2002 Option Plan       |  | 1,085,648          |   |  |                 |   |  |                       |     
|                                 |  |                    |   |  |                  |   |  |                       |     
|Balance at December 31, 2002     |  | 1,085,648          |   |  |                 |   |  |                       |     
|2003 Activity                    |  |                   |   |  |                 |   |  |                       | n/a 
|                                 |  |                    |   |  |                  |   |  |                       |     
|Balance at December 31, 2003     |  | 1,085,648          |   |  |                 |   |  |                       |     
|Cancel 2002 Stock Option Plan    |  | (1,085,648         | ) |  |                 |   |  |                       |     
|Establish 2004 Stock Option Plan |  | 1,085,648          |   |  |                 |   |  |                       |     
|2004 Option grants               |  | (363,835           | ) |  | 363,835          |   |  | $                     | 0.56
|                                 |  |                    |   |  |                  |   |  |                       |     
|Balance at December 31, 2004     |  | 721,813            |   |  | 363,835          |   |  |                       |     
|2005 Plan Amendment              |  | 410,784            |   |  |                 |   |  |                       |     
|2005 Option grants               |  | (761,451           | ) |  | 761,451          |   |  | $                     | 2.66
|2005 Cancellations               |  | 58,683             |   |  | (58,683          | ) |  | $                     | 2.62
|2005 Exercises                   |  |                   |   |  | (14,663          | ) |  | $                     | 0.07
|                                 |  |                    |   |  |                  |   |  |                       |     
|Balance at December 31, 2005     |  | 429,829            |   |  | 1,051,940        |   |  |                       |     
|2006 Plan Amendments             |  | 1,148,568          |   |  |                 |   |  |                       |     
|2006 Option grants               |  | (668,085           | ) |  | 668,085          |   |  | $                     | 3.61
|2006 Cancellations               |  | 8,802              |   |  | (8,802           | ) |  | $                     | 2.62
|2006 Exercises                   |  |                   |   |  | (78,683          | ) |  | $                     | 0.06
|                                 |  |                    |   |  |                  |   |  |                       |     
|Balance at December 31, 2006     |  | 919,114            |   |  | 1,632,540        |   |  |                       |     
|2007 Plan Amendments             |  | 1,500,000          |   |  |                 |   |  |                       |     
|2007 Option grants               |  | (665,500           | ) |  | 665,500          |   |  | $                     | 5.72
|2007 Exercises                   |  |                   |   |  | (17,868          | ) |  | $                     | 0.88
|                                 |  |                    |   |  |                  |   |  |                       |     
|Balance at December 31, 2007     |  | 1,753,614          |   |  | 2,280,172        |   |  |                       |     
|2008 Option grants               |  | (837,500           | ) |  | 837,500          |   |  | $                     | 6.11
|2008 Cancellations               |  | 148,802            |   |  | (148,802         | ) |  | $                     | 4.95
|2008 Exercises                   |  |                   |   |  | (94,230          | ) |  | $                     | 0.63
|                                 |  |                    |   |  |                  |   |  |                       |     
|Balance at December 31, 2008     |  | 1,064,916          |   |  | 2,874,640        |   |  |                       |     
|2009 Plan Amendments             |  | 855,000            |   |  |                 |   |  |                       |     
|2009 Option grants               |  | (938,290           | ) |  | 938,290          |   |  | $                     | 1.99
|                                 |  |                    |   |  |                  |   |  |                       |     
|Balance at December 31, 2009     |  | 981,626            |   |  | 3,812,930        |   |  |                       |     
|                                 |  |                    |   |  |                  |   |  |                       |     



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##### Table of Contents

CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



As of December 31, 2009, there were 3,812,930 options outstanding under the Plan
with a weighted average remaining contractual life of 7.2 years, a weighted average grant date fair value of $1.91 per share and an aggregate intrinsic value at December 31, 2009 of approximately $1.1 million. Also, options for 1,817,369 shares
had vested and were exercisable at December 31, 2009 with a weighted average remaining contractual life of 6.0 years, a weighted average exercise price of $3.64 per share, a weighted average grant date fair value of $1.51 per share and an
aggregate intrinsic value at December 31, 2009 of approximately $0.3 million. During the year ended December 31, 2009, no options were exercised. During the year ended December 31, 2008, options for 94,230 shares were exercised with a
weighted average exercise price of $0.63 per share and an aggregate intrinsic value as of the dates of exercise of approximately $0.4 million. During the year ended December 31, 2007, options for 17,868 shares were exercised with a weighted
average exercise price of $0.88 per share and an aggregate intrinsic value as of the dates of exercise of approximately $79,000. The weighted average exercise price for all vested and unvested options outstanding as of December 31, 2009, 2008
and 2007 is approximately $3.79, $4.38 and $3.62 per share, respectively.

Common Stock Reserved for Future Issuance

Common stock reserved for future issuance consists of the following:



|                                                 |  |              |  |          
|------------------------------------------------ |  | ------------ |  | ---------
|                                                 |  | December 31,
|                                                 |  | 2009         |  | 2008     
|Common stock warrants outstanding                |  | 4,060,758    |  | 4,180,449
|Common stock options outstanding                 |  | 3,812,930    |  | 2,874,640
|Common stock options available for future grants |  | 981,626      |  | 1,064,916
|                                                 |  |              |  |          
|                                                 |  | 8,855,314    |  | 8,120,005
|                                                 |  |              |  |          

8. Income Taxes

None of the Companys uncertain tax positions meet the more-likely-than-not recognition threshold, presuming that such tax position
would be examined by a relevant taxing authority that has full knowledge of all relevant information. As such, a tabular presentation of those tax benefits is not presented.

From time to time, the Company may be assessed interest or penalties by its tax jurisdictions, although, historically, there have been no
such assessments and the Company believes that any potential future assessments would be minimal and immaterial to the Companys results of operations and financial position. In the event the Company receives an assessment for interest and/or
penalties, it would be classified in the consolidated financial statements as general and administrative expense.

The Company
and its subsidiaries file tax returns in the United States and a small number of state jurisdictions. The statute of limitations for examination of the Companys returns has expired for years prior to 2006. There are no income tax examinations
currently in process nor has the Company been subject to examination since inception. The material jurisdictions subject to potential examination by taxing authorities for open tax years primarily include the United States and North Carolina.

The components of the deferred tax assets and the valuation allowance are shown below. The state carryforwards are shown net
of federal tax.



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CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                                   |  |              |             |   |      |   |             |  
|-------------------------------------------------- |  | ------------ | ----------- | - | ---- | - | ----------- | -
|                                                   |  | December 31, |            
|                                                   |  | 2009         |             |   | 2008 |  
|Deferred tax assets:                               |  |              |             |   |      |   |             |  
|Net operating loss carryforwardFederal            |  | $            | 30,332,686  |   |      | $ | 20,679,210  |  
|Net operating loss carryforwardState              |  |              | 4,103,834   |   |      |   | 2,797,775   |  
|Licensing costs                                    |  |              | 781,735     |   |      |   | 723,835     |  
|Compensation costs and deferred stock compensation |  |              | 1,676,185   |   |      |   | 1,030,344   |  
|Impairment losses on auction rate securities       |  |              |            |   |      |   | 1,694,728   |  
|Other temporary differences                        |  |              | (84,380     | ) |      |   | (37,942     | )
|                                                   |  |              |             |   |      |   |             |  
|                                                   |  |              | 36,810,060  |   |      |   | 26,887,950  |  
|Less valuation allowance                           |  |              | (36,810,060 | ) |      |   | (26,887,950 | )
|                                                   |  |              |             |   |      |   |             |  
|                                                   |  | $            |            |   |      | $ |            |  
|                                                   |  |              |             |   |      |   |             |  

The reasons for the difference between actual income tax benefit and the amount computed by applying the
statutory federal income tax rate to the losses before income tax benefit are as follows:



|                                               |  |              |   |  |        |   |  |        |  
|---------------------------------------------- |  | ------------ | - |  | ------ | - |  | ------ | -
|                                               |  | December 31, |  
|                                               |  | 2009         |   |  | 2008   |   |  | 2007   |  
|Rate reconciliation:                           |  |              |   |  |        |   |  |        |  
|Statutory federal rate                         |  | -34.00       | % |  | -34.00 | % |  | -34.00 | %
|State income tax rate (net of federal benefit) |  | -4.60        | % |  | -4.60  | % |  | -4.60  | %
|Certain non-deductible expenses                |  | 0.07         | % |  | 0.04   | % |  | 0.08   | %
|Effect of increase in valuation allowance      |  | 38.53        | % |  | 38.56  | % |  | 38.52  | %
|                                               |  |              |   |  |        |   |  |        |  
|Effective tax rate                             |  | 0.00         | % |  | 0.00   | % |  | 0.00   | %
|                                               |  |              |   |  |        |   |  |        |  

Given the Companys history of incurring operating losses, the Companys ability to realize its
deferred tax assets is not considered more likely than not. As a result, a valuation allowance equal to the total deferred tax assets has been established. The valuation allowance as of December 31, 2009 and 2008 was approximately $36.8 million
and $26.9 million, respectively. The increase in the valuation allowance during 2009 is primarily related to the increase in net operating losses.

At December 31, 2009, the Company had potentially utilizable federal and state net operating loss carryforwards of approximately $89.2 million. The net operating loss carryforwards expire in various
amounts for federal and state tax purposes through 2029 and 2024, respectively.

The utilization of the Companys net
operating losses may be subject to a substantial limitation should a change of ownership occur or have occurred, as defined under Section 382 of the Internal Revenue Code and similar state provisions. Such limitation could result in the
expiration of the net operating loss carryforwards before their utilization. Currently, a valuation allowance equal to the total deferred tax assets has been established. As such, any limitation resulting from the expiration of the net operating
loss carryforwards would be immaterial to the Companys financial condition or results of operations. Prior to any potential utilization, the Company does plan to undertake a detailed study in order to determine any potential §382
limitations as well as any potential impact of §383 limitations on the utilization of research and development tax credits that may be available to the Company. The Company is unable to fully estimate the impact of any such §382 and
§383 limitations nor has it undertaken the steps necessary to fully estimate the potential benefits that may be available to it from the utilization of net operating losses and research and development tax credits in future periods.



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CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



9. Savings and Retirement Plan

During 2005, the Company established a savings and retirement plan under Section 401(k) of the Internal Revenue Code that allows
eligible employees to annually contribute a portion of their annual salary to the plan. The Company matches such contributions up to a maximum of 4% of the employees compensation, as defined. For the years ended December 31, 2009, 2008
and 2007, the Company made contributions of approximately $120,000, $86,000 and $85,000, respectively.

10. Subsequent Events

For the year ended December 31, 2009, the Company evaluated events that occurred after December 31, 2009, the
balance sheet date, through March 10, 2010, the date that financial statements were issued.

Grant of Stock Options

In January 2010 the Company granted options for the purchase of 793,500 shares of its common stock to employees and
non-employee directors. These grants, made during the first quarter of 2009, have a weighted average exercise price of $2.94 per share, a weighted average fair value of $2.14 per share and were granted at an exercise price equal to the closing
market value of the Companys stock on the dates of grant.

Financing

On March 5, 2010, the Company raised gross proceeds of approximately $18.2 million through the sale of 6,700,000 shares of its common
stock plus warrants for the purchase of 2,345,000 shares of its common stock. The warrants permit the holders to purchase the underlying common shares at $2.79 each and are exercisable in whole at any time, or in part from time to time, during the
period commencing six months after the date of issuance and ending three years from the date of issuance. These shares were offered pursuant to the Companys shelf registration statement as filed with the SEC under which it may offer shares of
its common stock and preferred stock, various series of debt securities and/or warrants to purchase any of such securities, either individually or in units, in one or more offerings, up to a total dollar amount of $60 million. Such registration
statement became effective as of August 20, 2009. In connection with this offering, the Company estimates it will pay commissions and other offering-related costs of approximately $1.4 million.



F-28