NOTE 1

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS

The Company

Chelsea Therapeutics International, Ltd. (“Chelsea Ltd.” or the “Company”) is a development stage pharmaceutical company focused on the acquisition, development and commercialization of innovative pharmaceutical products. Specifically, the Company is developing Northera™ (droxidopa), a novel therapeutic agent for the treatment of symptomatic neurogenic orthostatic hypotension, or Neurogenic OH, in patients with primary autonomic failure, dopamine β-hydroxylase, or DBH, deficiency and non-diabetic autonomic neuropathy. The Company also has an interest in evaluating other potentially norepinephrine related conditions and diseases including intradialytic hypotension, fibromyalgia and adult attention deficit hyperactivity disorder. The Company has also devoted resources to the development of pharmaceuticals for multiple autoimmune disorders, including rheumatoid arthritis, psoriasis, inflammatory bowel disease and cancer. 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 Chelsea Ltd.’s 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

The accompanying condensed consolidated financial statements include the accounts of the Company and its operating subsidiary, which shall collectively be referred to as the “Company”. These statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial reporting and the instructions to Form 10-Q and do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of the Company’s management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the results for the interim periods have been included. Operating results for the three and six months ended June 30, 2013 are not necessarily indicative of the results for the year ending December 31, 2013 or future periods. The accompanying condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K/A filed on March 14, 2013 and available on the website (www.sec.gov) of the United States Securities and Exchange Commission, or the SEC. The accompanying condensed consolidated balance sheet as of December 31, 2012 has been derived from the audited balance sheet as of that date included in the Form 10-K/A.

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, or FDA, the European Medicines Agency, or EMA and other regulatory agencies, undertaking preclinical trials and clinical trials of product candidates and raising capital. In addition, during late 2011 and early 2012, the Company conducted activities in preparation for the planned commercial launch of Northera but, upon receipt of the complete response letter, or CRL, from the FDA in March 2012, brought such activities to a close. The Company is a development stage company and has generated no revenue since inception.

On July 3, 2013, the Company resubmitted its Northera New Drug Application, or NDA, that, based upon guidance received from the FDA, included data from Study 306B and other studies. The FDA has indicated that it would potentially consider data from Study 306B as confirmatory evidence of both the safety and efficacy of Northera. On July 15, 2013, the Company received notification from the FDA that the filing had been both acknowledged and accepted and that the FDA deemed the resubmission a complete response to the CRL and assigned a new Prescription Drug User Fee Act, or PDUFA, goal date of January 3, 2014. However, on July 25, 2013, the FDA notified the Company that they have noted deficiencies in the NDA that relate primarily to the formatting of certain submitted electronic datasets and statistical programs describing the methods used to generate tables and listings. The deficiencies are unrelated to study conduct, interpretability of study results, or validity of study conclusions. The Company believes that the matter can be resolved quickly, and expects to submit the necessary response in August. Until the response is received by FDA, the Agency has informed the Company that the six month review clock for the NDA specified under PDUFA will not start. Therefore, upon a successful resubmission with the currently requested changes sought by the FDA, a new PDUFA date will be set by the FDA.

The Northera NDA, including the resubmission, includes data from the Company’s two largest completed Phase III efficacy studies (Studies 301 and 306B), data from other randomized, controlled trials (Study 302, Study 303 and Study 306A), an integrated summary of efficacy for various studies, an expanded, 650-patient safety database, two long-term, open label extension studies, a dedicated thorough QTc study and a 24-hour ambulatory blood pressure monitoring study. The FDA has further informed the Company that data from short-term endpoints measuring symptomatic benefits, may be sufficient evidence of efficacy as required for approval and that durability of response, determined by endpoints measuring long-term symptomatic benefits, may be studied and demonstrated in post-approval study or studies.

While recent guidance from the FDA, including an indication that it would review data from Study 306B, is encouraging, the FDA was clear that Study 306B data remains subject to a thorough review, including review of clinical datasets and sensitivity analyses. In this regard, the FDA has indicated that it might conduct audits of clinical sites, and audits of the contract research organization, or CRO, involved in the study and the sponsor to validate the integrity of data included in the resubmission. The FDA further indicated that approval using data from Study 306B in support of efficacy claims for Northera would only be possible should such data provide substantial evidence of efficacy, thereby establishing, in a second, strongly-positive, confirmatory trial, that Northera is safe and effective for the treatment of Neurogenic OH. As such, the FDA is under no obligation to approve Northera if they are not adequately satisfied with the conclusions drawn from the data presented or other analyses conducted. The Company cannot provide any assurance that the FDA will approve Northera. The FDA might find the Northera NDA, despite the additional data from Study 306B and other studies, insufficient to allow a marketing approval for Northera and require additional clinical evidence from additional randomized controlled trials. Alternatively, the FDA might choose to approve Northera with a requirement for a post-approval efficacy study. Accordingly, the Company plans to initiate an additional clinical study of Northera in Neurogenic OH and anticipate patient enrollment would begin in the fourth quarter of 2013.

In additional discussions, the FDA has indicated that the revised Northera NDA will likely be reviewed by the Cardiovascular and Renal Drug Advisory Committee, or CRDAC and the Company intends to prepare rigorously for this possibility. Further, in addressing the possibility of accelerated approval based on trials to date, which have provided favorable data for the acute use only for Northera, the FDA reemphasized that another clinical study to demonstrate durability of effect would be required under such a scenario. As discussed above, the Company has worked and will continue to work with the FDA on the planned clinical study that would begin patient enrollment in the fourth quarter of 2013 to be able to meet that requirement if needed. The FDA also indicated that they required new bioequivalence data for a 300mg formulation of Northera that we had developed for commercialization and had not been used in any clinical trials. Accordingly, in June 2013 the Company completed such a 300mg bioequivalence study and has included data from that study in the revised Northera NDA to support a request for approval of commercial distribution of a 300mg formulation.

The Company has sustained operating losses since its inception and expects that such losses could continue for the foreseeable future. Management plans to continue financing the Company’s operations, as necessary, 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 or scale back certain activities including its commercialization program, or limit or cease operations in which event its business, financial condition and results of operations would be materially harmed.

Management believes that capital resources available at June 30, 2013 will be sufficient to meet the Company’s operating needs into the third quarter of 2014. This estimate assumes the planned costs of currently ongoing clinical activity and a planned new trial of Northera that could begin patient enrollment as early as the fourth quarter of 2013 with significant initial spending in the third quarter of 2013. In addition to the initial costs of a new clinical trial, this estimate also assumes various costs related to the 2013 resubmission of the Northera NDA and the costs to plan and prepare for a potential meeting of the CRDAC. The costs of additional activities related to, or subsequent to, a possible approval of Northera, or the commercialization of Northera should it be approved, have not been included in this guidance.

Basis of Consolidation

The accompanying financial statements present, on a condensed 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 amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements as well as the reported 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 might differ from these estimates under different assumptions or conditions.

Significant estimates and assumptions are required related to the estimated costs and estimated percentages of completion of research and development activities that are outsourced to third-party contractors, the valuation of assets and stock-based compensation. Some of these judgments can be subjective and complex, and, consequently, actual results may differ from these estimates. For any given individual estimate or assumption made by the Company, there may also be other estimates or assumptions that are reasonable. Although the Company believes that its estimates and assumptions are reasonable, they are based upon information available at the time the estimates and assumptions were made and actual results may differ significantly from such estimates.

Research and Development

Research and development expenditures are expensed based upon the estimated percentage of completion at the financial statement date applied against estimated amounts to complete the project. The Company often contracts with third-party CROs to facilitate, coordinate and perform agreed upon research and development activities. Estimates are calculated, maintained and presented to the Company by CROs and are then subjected to rigorous periodic internal review and analysis to ensure reasonableness of the estimates. Such review includes difficult, subjective and complex judgments, particularly in instances of studying orphan drug candidates where prior clinical activity is limited, providing little or no historical cost information. Given the highly variable nature of the costs involved in the completion of a clinical or pre-clinical trial, fluctuations in costs estimates can occur at any time during the trial or at its conclusion based on a number of factors including, but not limited to, the rate at which investigator sites are identified, the locations of those sites (US versus International), the timing of site activations, the rate at which patients are enrolled into a trial, changes to the number of sites and/or patients that are targeted for the trial, the timelines for trial completion and changes in scope of the actions to be taken by the contractor.

Given that the recognition of expense related to the Company’s contracted research and development activities comprise a significant component of reported expenses during any given period, such fluctuations can be material to the results of operations and/or the carrying value of assets and liabilities. The estimates to complete each contracted project are also used in the determination and disclosure of contractual obligations of the Company providing a snapshot of estimated cash requirements arising from future contractual payment obligations based upon the best information available at the time the financial statements are published.

To ensure that such estimates allow research and development costs to be expensed as incurred, the Company measures expense based on estimated 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. Contracts for research and development programs 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, the Company 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 estimated percentage of completion at a particular date. Although such fees may fluctuate during the life of a research and development program, such fluctuations are generally based on changes in or delays in the timelines for study completion.

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, the Company records a monthly expense estimate to recognize the fees during the contract period. Fees incurred to set up the clinical trial are expensed during the setup period. Estimating the costs of pass-through expenses for a contracted research and development program can be difficult and complex. Judgments used in the development of these estimates are based on a number of considerations, including the input of the CRO, the costs of previous clinical trials, estimates of patient recruitment rates, estimates of drop-out rates and estimates of site identification and activation rates. Estimates of investigator payments, lab costs, database development and management and adverse event reporting are based on parameters such as number of office visits, laboratory requirements, screening failure rates, location of the investigator site and the patient related factors discussed above. Historically, the Company has experienced fluctuations in the estimates of these costs and has implemented rigorous review processes to ensure reliability of estimates. Fluctuations that have occurred previously have been in the range of +/- 5% of total program costs and the Company would anticipate that similar fluctuations could occur in the future. Depending on the size of the trial, the estimated costs to complete and the volume of overall research and development activities during any given period, such fluctuations could be material to the results of operations and financial position (see Note 7).

Costs related to the acquisition and retention 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.