| Business, Liquidity and Summary of Significant Accounting Policies | Note 1 — Business, Liquidity and Summary of Significant Accounting Policies Business We are a biotechnology company that has 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”) and Fast Track Designation (“FTD”) 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 has been 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. Strategic Direction and Agreement to Acquire Assets As a result of our financial condition, on February 17, 2016, we announced that our Board of Directors had authorized a process to explore a range of strategic alternatives to enhance stockholder value, and that we have retained an advisor to assist us in exploring such alternatives. In connection with that process of exploring strategic alternatives, on April 29, 2016, we signed a term sheet with Turing Pharmaceuticals AG (“Turing”), a privately-held biopharmaceutical company focused on developing and commercializing innovative treatments for serious diseases, pursuant to which we would acquire Turing’s intranasal ketamine program for consideration consisting of approximately 53 million shares of our common stock (the “Turing Transaction”). The assets to be acquired from Turing would include all patents and intellectual property rights, clinical development plans, regulatory documents and existing product inventories. As per the term sheet, we would pay to Turing up to $95 million in success-based and
sales-based milestones plus a mid-single digit royalty on net sales, if any. Completion of the proposed Turing Transaction is contingent upon certain conditions, including the completion of customary due diligence considerations, the negotiation, execution and delivery of a definitive purchase agreement, and the satisfaction or waiver of the conditions set forth in the definitive purchase agreement, including, without limitation, the completion by us of a financing transaction yielding proceeds sufficient to initiate and support the Phase 3 efforts for the intranasal ketamine program to be acquired. There can be no assurance that a definitive purchase agreement will be executed or that a closing of the Turing Transaction will occur. The accompanying consolidated financial statements do not include any adjustments related to the Turing Transaction. Also in connection with the process of exploring strategic alternatives, on March 10, 2016, we signed a term sheet with Microlin Bio, Inc. (“Microlin”) pursuant to which we would sell to Microlin substantially all of the assets of our historical business operations. On May 3, 2016, we announced that we had determined to terminate negotiations with Microlin with respect to the proposed transaction. We will need additional capital in order to execute our strategy of concluding the Turing Transaction, and potentially either acquiring other assets or technology, or selling our existing assets or technology, or if the foregoing do not occur, our previous strategy of initiating the registration trial for and commercializing CEQ508, filing Investigational New Drug (“IND”) applications for both DM1 and DMD and bringing these two programs to human proof-of-concept trials. Recent Licensing and IP Developments In February 2016, we entered into an evaluation and option agreement covering certain of our platforms for the delivery of an undisclosed genome editing technology. The agreement contains an option provision for the exclusive license of our SMARTICLES platform in a specific gene editing field. In March 2016, we entered into a license agreement covering certain of our platforms for the delivery of an undisclosed genome editing technology. Under the terms of the agreement, we received an upfront license fee of $0.25 million, and
could receive up to $40 million in success-based milestones. In July 2016, we entered into a license agreement with an undisclosed licensee that grants such licensee rights to use our technology and intellectual property to develop and commercialize products combining certain molecules with our liposomal delivery technology known as NOV582. Under the terms of this agreement, the licensee agreed to pay to us an upfront license fee in the amount of $0.35 million (to be paid in installments through the end of 2017), along with milestone payments on a per-licensed-product basis and royalty payments in the low single digit percentages. We believe that, as a result of the issuance of US patent no. 9,023,793 on May 5, 2015, we became entitled to receive a milestone payment in the amount of $2 million under an Asset Purchase Agreement dated August 25, 2010 between us and Cypress Biosciences (“Cypress”), which was subsequently assigned by Cypress to Kyalin Biosciences, Inc., and further assigned to Retrophin, Inc. (“Retrophin”). We have advised Retrophin of our claim to payment of this milestone. However, Retrophin has denied our claim. Although we intend to vigorously pursue our right to receive the milestone payment, there can be no assurance that we will be successful in our endeavors to receive the payments to which we believe we are entitled. Note Purchase Agreement On June 20, 2016, we entered into a Note Purchase Agreement (the “Purchase Agreement”) with certain investors (the “Purchasers”), pursuant to which we issued to the Purchasers unsecured promissory notes in the aggregate principal amount of $0.3 million (the “Notes”). Interest shall accrue on the unpaid principal balance of the Notes at the rate of 12% per annum beginning on September 20, 2016. The Notes will become due and payable on June 20, 2017, provided, that, upon the closing of a financing transaction that occurs while the Notes are outstanding, each Purchaser shall have the right to either: (i) accelerate the maturity date of the Note held by such Purchaser or (ii) convert the entire outstanding principal balance under the Note held by such Purchaser and accrued interest thereon into our securities that are issued and sold at the closing of such financing transaction. Further, if we at any time while the Notes are outstanding receive any cash payments in the aggregate amount of not less than $0.25 million, as a result of the licensing, partnering or disposition of any of the technology held by us or any related product or asset, we shall pay to the holders of the Notes, on a pro rata basis, an amount equal to 25% of each payment actually received by us, which payments shall be applied against the outstanding principal balance of the Notes and the accrued and unpaid interest thereon, until such time as the Notes are repaid in full. In the Purchase Agreement, we agreed: (x) to extend the termination
date of all of the warrants to purchase shares of our common stock (such warrants, the “Prior Warrants”) that were delivered to the purchasers pursuant to that certain Note and Warrant Purchase Agreement, dated as of February 10, 2012 between us and the purchasers identified on the signature pages thereto, as it has been amended to date, to February 10, 2020 and (y) to extend the anti-dilution protection afforded of the Prior Warrants so that such protection would apply to any financing transaction effected by us on or prior to June 19, 2017 (with any such adjustment only applying to 80% of the Prior Warrants). As the Prior Warrants were already recorded at fair value as a result of price adjustable terms, the impacts of the modification of the terms is included in the change in fair value of price adjustable warrants in the statement of operations. 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, 2016, we had an accumulated deficit of approximately $334.0 million, $108.3 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 operating losses as we execute our plan to raise additional funds, complete the Turing Transaction, and investigate either acquiring other technology or selling our existing assets or technology. 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, the sale of the Notes, revenue provided from our license agreements and, to a lesser extent, equipment financing facilities and secured loans. In 2015 and 2016, we funded operations with a combination of the issuance of the Notes, preferred stock and license-related revenues. At June 30, 2016, we had negative working capital of $2.7 million and $0.3 million in cash. Our limited operating activities consume the majority of our cash resources. We believe that our current cash resources, including the proceeds from the Notes received in June 2016 as noted above, will enable us to fund our intended operations through October 2016. Our ability to execute our operating plan beyond October 2016 depends on our ability to obtain additional funding, the subsequent closing of the Turing Transaction, and any subsequent plans to acquire other technology or sell our existing assets or technology. 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. There can be no assurance that we will be successful in any such endeavors. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. If the Turing Transaction is not consummated and we are unable to either find a viable purchaser for our assets or to obtain sufficient capital to continue our current operations or any other business that we may acquire, we may be forced to file bankruptcy as we will have minimal capital and operating assets to continue the business. Basis of Preparation and Summary of Significant Accounting Policies Basis of Preparation Use of Estimates Reclassifications 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”) 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, 2015 and June 30, 2016:
Level 1 Level 3
Balance at Quoted prices in Level 2 Significant
December 31, active markets for Significant other unobservable
(In thousands) 2015 identical assets observable inputs inputs
Liabilities:
Fair value liability for price adjustable warrants $ 2,491 $ - $ - $ 2,491
Fair value liability for shares to be issued 60 60 - -
Total liabilities at fair value $ 2,551 $ 60 $ - $ 2,491
Level 1 Level 3
Quoted prices in Level 2 Significant
Balance at active markets for Significant other unobservable
(In thousands) June 30, 2016 identical assets observable inputs inputs
Liabilities:
Fair value liability for price adjustable warrants $ 619 $ - $ - $ 619
Total liabilities at fair value $ 619 $ - $ - $ 619 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, 2016, including the impact of the modifications to the Prior Warrants made in conjunction with the Purchase Agreement:
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, 2015 $ 2,491 $ 0.42 $ 0.27 99 % 1.79 0.46 %
Fair value of derivative warrant liability reclassified to additional paid-in capital (86 )
Change in fair value included in Statement of Operations (1,786 )
Balance at June 30, 2016 $ 619 $ 0.43 $ 0.19 178 % 1.94 0.03 % Net Income (Loss) per Common Share
Three Months Ended June 30, Six Months Ended June 30,
2015 2016 2015 2016
Stock options outstanding 1,316,106 1,548,106 1,316,106 1,548,106
Warrants 1,323,291 3,416,104 1,323,291 9,416,104
Convertible preferred stock 8,000,000 7,550,000 8,000,000 7,550,000
Total 10,639,397 12,514,210 10,639,397 18,514,210 The following is a reconciliation of basic and diluted net income (loss) per share:
Three Months Ended June 30, Six Months Ended June 30,
(In thousands except per share amounts) 2015 2016 2015 2016
Net income (loss) – numerator basic $ 904 $ (643 ) $ 1,318 $ 424
Change in fair value liability for price adjustable warrants (1,914 ) 197 (3,643 ) (1,655 )
Net loss excluding change in fair value liability for price adjustable warrants $ (1,010 ) $ (446 ) $ (2,325 ) $ (1,231 )
Weighted average common shares outstanding – denominator basic 26,036 29,624 26,036 29,013
Effect of price adjustable warrants 4,257 (23,771 ) 4,257 (9,373 )
Weighted average dilutive common shares outstanding 30,293 5,853 30,293 19,640
Net income (loss) per common share – basic $ 0.03 $ (0.02 ) $ 0.05 $ 0.01
Net income (loss) per common share – diluted $ (0.03 ) $ (0.08 ) $ (0.08 ) $ (0.06 ) 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 IPR&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. |
