Business, Liquidity and Summary of Significant Accounting Policies | Note 1 — Business, Liquidity and Summary of Significant Accounting Policies Business We are a biotechnology company focused on the discovery, development and commercialization of nucleic acid-based therapies to treat orphan diseases. Our pipeline includes CEQ508, a product in clinical development for the treatment of Familial Adenomatous Polyposis (“FAP”), for which we have received Orphan Drug Designation (“ODD”) from the U.S. Food and Drug Administration (“FDA”), and preclinical programs for the treatment of type 1 myotonic dystrophy (“DM1”) and Duchenne muscular dystrophy (“DMD”). Since 2010, we have strategically acquired/in-licensed and further developed nucleic acid chemistry and delivery-related technologies in order to establish a novel and differentiated drug discovery platform. This platform allows us to distinguish ourselves from others in the nucleic acid therapeutics area in that we are the only company capable of creating a wide variety of therapeutics targeting coding and non-coding RNA via multiple mechanisms of action such as RNA interference (“RNAi”), messenger RNA translational inhibition, exon skipping, microRNA (“miRNA”) replacement, miRNA inhibition, and steric blocking in order to modulate gene expression either up or down depending on the specific mechanism of action. Our goal is to dramatically improve the lives of the patients and families affected by orphan diseases through either our own efforts or those of our collaborators and licensees. Liquidity The accompanying condensed consolidated financial statements have been prepared on the basis that we will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business. At June 30, 2015, we had an accumulated deficit of approximately $336.5 million, $110.4 million of which has been accumulated since we focused on RNA therapeutics in June 2008. To the extent that sufficient funding is available, we will continue to incur losses as we continue our research and development (“R&D”) activities. In addition, we have had and will continue to have negative cash flows from operations. We have funded our losses primarily through the sale of common and preferred stock and warrants, revenue provided from our license agreements and, to a lesser extent, equipment financing facilities and secured loans. In 2014, we funded operations with a combination of the issuance of preferred stock and license-related revenues. At June 30, 2015, we had negative working capital of $1.27 million and $0.73 million in cash. Our resumed operating activities consume the majority of our cash resources. We believe that our current cash resources will enable us to fund our intended operations through March 2016. Our ability to execute our operating plan beyond March 2016 depends on our ability to obtain additional funding. The volatility in our stock price, as well as market conditions in general, could make it difficult for us to raise capital on favorable terms, or at all. If we fail to obtain additional capital when required, we may have to modify, delay or abandon some or all of our planned activities, or terminate our operations. We are currently pursuing both non-dilutive means of obtaining additional capital, primarily from existing and potential future licenses and partnerships, and dilutive means of obtaining additional capital, primarily through the offering of our equity and debt securities. However, there can be no assurance that we will be successful in such endeavors. The accompanying condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Basis of Preparation and Summary of Significant Accounting Policies Basis of Preparation Use of Estimates Fair Value of Financial Instruments We follow authoritative guidance with respect to fair value reporting issued by the Financial Accounting Standards Board (“FASB”) for financial assets and liabilities, which defines fair value, provides guidance for measuring fair value and requires certain disclosures. The guidance does not apply to measurements related to share-based payments. The guidance discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels: Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active. Level 3: Unobservable inputs in which little or no market data exists, therefore developed using estimates and assumptions developed by us, which reflect those that a market participant would use. Our cash is subject to fair value measurement and value is determined by Level 1 inputs. We measure the liability for committed stock issuances with a fixed share number using Level 1 inputs. We measure the liability for price adjustable warrants and certain features embedded in notes using the Black-Scholes option pricing model (“Black-Scholes Model”) under various probability weighted scenarios, using Level 3 inputs. The following tables summarize our liabilities measured at fair value on a recurring basis as of December 31, 2014 and June 30, 2015: Level 1 Level 3 Balance at Quoted prices in Level 2 Significant December 31, active markets for Significant other unobservable (In thousands) 2014 identical assets observable inputs inputs Liabilities: Fair value liability for price adjustable warrants $ 9,225 $ - $ - $ 9,225 Fair value liability for shares to be issued 75 75 - - Total liabilities at fair value $ 9,300 $ 75 $ - $ 9,225 Level 1 Level 3 Quoted prices in Level 2 Significant Balance at active markets for Significant other unobservable (In thousands) June 30, 2015 identical assets observable inputs inputs Liabilities: Fair value liability for price adjustable warrants $ 5,582 $ - $ - $ 5,582 Total liabilities at fair value $ 5,582 $ - $ - $ 5,582 The following presents activity of the fair value liability of price adjustable warrants determined by Level 3 inputs for the six-month period ended June 30, 2015: Weighted average as of each measurement date Fair value liability for price Contractual adjustable warrants Exercise Stock life Risk free (in thousands) Price Price Volatility (in years) rate Balance at December 31, 2014 $ 9,225 $ 0.42 $ 0.95 121 % 3.51 0.90 % Change in fair value included in Statement of Operations (3,643 ) Balance at June 30, 2015 $ 5,582 $ 0.42 $ 0.59 102 % 2.09 0.70 % Net Income (Loss) per Common Share Three Months Ended June 30, Six Months Ended June 30, 2014 2015 2014 2015 Stock options outstanding 284,505 1,316,106 284,505 1,316,106 Warrants 7,031,058 1,323,291 21,310,695 1,323,291 Convertible preferred stock - 8,000,000 8,000,000 8,000,000 Total 7,315,563 10,639,397 29,595,200 10,639,397 The following is a reconciliation of basic and diluted net income (loss) per share: Three Months Ended June 30, Six Months Ended June 30, 2014 2015 2014 2015 Net income (loss) – numerator basic $ 3,921 $ 904 $ (11,157 ) $ 1,318 Change in fair value liability for price adjustable warrants - (1,914 ) - (3,643 ) Net loss excluding change in fair value liability for price adjustable warrants $ 3,921 $ (1,010 ) $ (11,157 ) $ (2,325 ) Weighted average common shares outstanding – denominator basic 25,633 26,036 23,563 26,036 Assumed conversion of Series C 102 - - - Effect of price adjustable warrants 9,066 4,257 - 4,257 Weighted average dilutive common shares outstanding 34,801 30,293 23,563 30,293 Net income (loss) per common share – basic $ 0.15 $ 0.03 $ (0.47 ) $ 0.05 Net income (loss) per common share – diluted $ 0.11 $ (0.03 ) $ (0.47 ) $ (0.08 ) | Note 1 — Business, Liquidity and Summary of Significant Accounting Policies Business We are a biotechnology company focused on the discovery, development and commercialization of nucleic acid-based therapies to treat orphan diseases. Our pipeline includes CEQ508, a product in clinical development for the treatment of Familial Adenomatous Polyposis (“FAP”), for which we have received Orphan Drug Designation (“ODD”) from the U.S. Food and Drug Administration (“FDA”), and preclinical programs for the treatment of type 1 myotonic dystrophy (“DM1”) and Duchenne muscular dystrophy (“DMD”). Since 2010, we have strategically acquired/in-licensed and further developed nucleic acid chemistry and delivery-related technologies in order to establish a novel and differentiated drug discovery platform. This platform allows us to distinguish ourselves from others in the nucleic acid therapeutics area in that we are the only company capable of creating a wide variety of therapeutics targeting coding and non-coding RNA via multiple mechanisms of action such as RNA interference (“RNAi”), messenger RNA translational inhibition, exon skipping, microRNA (“miRNA”) replacement, miRNA inhibition, and steric blocking in order to modulate gene expression either up or down depending on the specific mechanism of action. Our goal is to dramatically improve the lives of the patients and families affected by orphan diseases through either our own efforts or those of our collaborators and licensees. Liquidity The accompanying consolidated financial statements have been prepared on the basis that we will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business. At December 31, 2014, we had an accumulated deficit of approximately $337.8 million, $112.1 million of which has been accumulated since the corporation focused on RNA therapeutics in June 2008. To the extent that sufficient funding is available, we will in the future continue to incur losses as we continue our research and development (“R&D”) activities. In addition, we have had and will continue to have negative cash flows from operations. We have funded our losses primarily through the sale of common and preferred stock and warrants, revenue provided from our license agreements with other parties and, to a lesser extent, equipment financing facilities and secured loans. In 2014, we funded operations with a combination of issuances of preferred stock and license-related revenues. At December 31, 2014, we had a working capital surplus of $0.6 million and $1.8 million in cash. Our resumed operating activities consumed the majority of our cash resources during 2014. In February 2014, certain debt holders exchanged secured promissory notes in the aggregate principal and interest amount of $1.5 million for 2.0 million shares of our common stock. In addition, in March 2014, we sold 1,200 shares of our Series C Convertible Preferred Stock and 6.0 million warrants to purchase one share of common stock for $0.75 per share, resulting in gross proceeds of $6.0 million. We believe that our current cash resources, which include an upfront licensing fee received from MiNA in January 2015, will enable us to fund our intended operations through July 2015. Our ability to execute our operating plan beyond July 2015 depends on our ability to obtain additional funding. The volatility in our stock price, as well as market conditions in general, could make it difficult for us to raise capital on favorable terms, or at all. If we fail to obtain additional capital when required, we may have to modify, delay or abandon some or all of our planned activities, or terminate our operations. These factors, among others, raise substantial doubt about our ability to continue as a going concern. The consolidated financial statements included in this prospectus do not include any adjustments that may result from the outcome of this uncertainty. We are currently pursuing both non-dilutive means of obtaining additional capital, primarily from existing and potential future licenses and partnerships, and dilutive means of obtaining additional capital, primarily through the offering of our equity and debt securities. However, there can be no assurance that we will be successful in such endeavors. Summary of Significant Accounting Policies Principles of Consolidation Use of Estimates Restricted Cash Fair Value of Financial Instruments Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active. Level 3: Unobservable inputs in which little or no market data exists, therefore developed using estimates and assumptions developed by us, which reflect those that a market participant would use. Our cash is subject to fair value measurement and is valued determined by Level 1 inputs. We measure the liability for committed stock issuances with a fixed share number using Level 1 inputs. We measure the liability for price adjustable warrants and certain features embedded in notes, using the Black-Scholes option pricing model (“Black-Scholes”), using Level 3 inputs. The following tables summarize our liabilities measured at fair value on a recurring basis as of December 31, 2013 and 2014: Balance at Level 1 Quoted Level 2 Level 3 Liabilities: Fair value liability for price adjustable warrants $ 5,226 $ - $ - $ 5,226 Fair value liability for shares to be issued 1,019 1,019 - - Total liabilities at fair value $ 6,245 $ 1,019 $ - $ 5,226 Balance at Level 1 Quoted Level 2 Level 3 Liabilities: Fair value liability for price adjustable warrants $ 9,225 $ - $ - $ 9,225 Fair value liability for shares to be issued 75 75 - - Total liabilities at fair value $ 9,300 $ 75 $ - $ 9,225 The following presents the activity in our accrued restructuring liability determined by Level 3 inputs for each of the years ended December 31, 2013 and 2014 (excludes stock to be issued, not carried in this liability account): Facility Related Liabilities (In thousands) 2013 2014 Balance, January 1 $ 392 $ 12 Cash payments (380 ) (12 ) Balance, December 31 $ 12 $ - The following presents activity of the fair value liability of price adjustable warrants determined by Level 3 inputs for the years ended December 31, 2013 and 2014: Weighted average as of each measurement date Fair value liability for price adjustable warrants (in thousands) Exercise Price Stock Price Volatility Contractual life (in years) Risk free rate Balance at December 31, 2012 $ 4,169 $ 0.28 $ 0.46 146 % 4.64 0.66 % Fair value of warrants issued in connection to amendments to notes payable 1,208 0.28 0.28 140 % 5.50 1.55 % Change in fair value included in consolidated statement of operations (151 ) - - - - - Balance at December 31, 2013 5,226 0.28 0.4 124 % 4.08 1.30 % Fair value of price-adjustable warrants issued in connection with Series C Convertible Preferred Shares 5,929 0.75 1.50 123 % 7.0 0.55 % Exercise of Warrants (1,917 ) 0.36 1.14 133 % 3.07 0.77 % Change in fair value included in consolidated statement of operations (13 ) - - - - - Balance at December 31, 2014 $ 9,225 $ 0.42 0.95 121 % 3.51 0.90 % Impairment of Long Lived Assets · For finite-lived intangible assets, such as developed technology rights, and for other long-lived assets, such as property and equipment, we compare the undiscounted amount of the projected cash flows associated with the asset, or asset group, to the carrying amount. If the carrying amount is found to be greater, we record an impairment loss for the excess of book value over fair value. In addition, in all cases of an impairment review, we re-evaluate the remaining useful lives of the assets and modify them, as appropriate; and · For indefinite-lived intangible assets, such as acquired in-process R&D assets, each year and whenever impairment indicators are present, we determine the fair value of the asset and record an impairment loss for the excess of book value over fair value, if any. Accrued Restructuring — Concentration of Credit Risk and Significant Customers We have been dependent on our collaborative and license agreements with a limited number of third parties for a substantial portion of our revenue, and our discovery and development activities may be delayed or reduced if we do not maintain successful collaborative arrangements. We had $2.1 million in licensing revenue in 2013 with 53% from Mirna Therapeutics, Inc. (“Mirna”), 38% from Arcturus, and 9% from Protiva Biotherapeutics, Inc. (“Tekmira”), a wholly-owned subsidiary of Tekmira Pharmaceuticals Corporation. We had $0.5 million in licensing revenue in 2014 from MiNA Therapeutics, Ltd. (“MiNA”). We maintain our cash in a single bank account. Any amount over the limits insured by the Federal Deposit Insurance Corporation could be at risk in the event of a bank default. Revenue Recognition Revenue from licensing arrangements is recorded when earned based on the specific terms of the contracts. Upfront non-refundable payments, where we are not providing any continuing services as in the case of a license to our IP, are recognized when the license becomes available to the other party. Milestone payments typically represent nonrefundable payments to be received in conjunction with the uncertain achievement of a specific event identified in the contract, such as initiation or completion of specified development activities or specific regulatory actions such as the filing of an Investigational New Drug Application (“IND”). We believe a milestone payment represents the culmination of a distinct earnings process when it is not associated with ongoing research, development or other performance on our part and it is substantive in nature. We recognize such milestone payments as revenue when it becomes due and collection is reasonably assured. Royalty and earn-out payment revenues are generally recognized upon commercial product sales by the licensee as reported by the licensee. R&D Costs Stock-based Compensation Non-employee stock compensation expense is recognized immediately for immediately vested portions of a grant, with the remaining portions recognized on a straight-line basis over the applicable vesting periods. At the end of each financial reporting period prior to vesting, the value of the unvested stock options, as calculated using Black-Scholes, is re-measured using the fair value of our common stock, and the stock-based compensation recognized during the period is adjusted accordingly. Net Loss per Common Share Year Ended December 31, 2013 2014 Stock options outstanding 284,829 1,084,106 Warrants 17,017,601 21,212,813 Common shares underlying Series C convertible preferred stock - 8,000,000 Total 17,302,430 30,296,919 Notes Payable Note amendments and changes must be analyzed for correct accounting application based on our financial condition and the changes in the debt instrument features and terms. For each note amendment, a series of analyses is performed to determine first whether the amendment was a troubled debt restructuring, as defined by conditions of default, our financial state and ability to repay loan, and whether the lender made a concession. If an amendment is not a troubled debt restructuring, then we perform a further analysis to determine if the amended terms are “substantially different” from the existing debt facility. The debt is considered extinguished if the present value of the cash flows under the terms of the new debt instrument is at least 10 percent different from the present value of the remaining cash flows under the terms of the original instrument. The new debt instrument is initially recorded at fair value, and that amount is used to determine the debt extinguishment gain or loss recognized and the effective rate of the new instrument. If it is determined that the original and new debt instruments are not substantially different, then a new effective interest rate is determined based on the carrying amount of the original debt instrument resulting from the modification, and the revised cash flows. If the exchange or modification is to be accounted for in the same manner as a debt extinguishment and the new debt instrument is initially recorded at fair value, then the fees paid including the fair value of warrants issued are included in the debt extinguishment gain or loss. If the exchange or modification is not to be accounted for in the same manner as a debt extinguishment, then the fees paid including the fair value of warrants issued are amortized as an adjustment of interest expense over the remaining term of the replacement or modified debt instrument using the interest method. Income Taxes We assess the likelihood that our deferred tax assets will be recovered from existing deferred tax liabilities or future taxable income. Factors we considered in making such an assessment include, but are not limited to, estimated utilization limitations of operating loss and tax credit carry-forwards, expected reversals of deferred tax liabilities, past performance, including our history of operating results, our recent history of generating tax losses, our history of recovering net operating loss carry-forwards for tax purposes and our expectation of future taxable income. We recognize a valuation allowance to reduce such deferred tax assets to amounts that are more likely than not to be ultimately realized. To the extent that we establish a valuation allowance or change this allowance, we would recognize a tax provision or benefit in the consolidated statements of operations. We use our judgment to determine estimates associated with the calculation of our provision or benefit for income taxes, and in our evaluation of the need for a valuation allowance recorded against our net deferred tax assets. |