FORM 8-K

Marina Biotech, Inc.

February 9, 2011

/s/ Peter S. Garcia

Peter S. Garcia

Chief Financial Officer

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Q26h5Y6QWwrQ3b5kN1QEkmJpHLLGzH60nP/ZcginyijC6oAKQaknwcaGip4ZIY6q K7YEKL9fLo4TuErvQDKHzg== 0001193125-11-029077.txt : 20110209 0001193125-11-029077.hdr.sgml : 20110209 20110209165413 ACCESSION NUMBER: 0001193125-11-029077 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20110209 ITEM INFORMATION: Other Events ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20110209 DATE AS OF CHANGE: 20110209 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Marina Biotech, Inc. CENTRAL INDEX KEY: 0000737207 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 112658569 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-13789 FILM NUMBER: 11587800 BUSINESS ADDRESS: STREET 1: 3830 MONTE VILLA PARKWAY CITY: BOTHELL STATE: WA ZIP: 98021 BUSINESS PHONE: 4259083600 MAIL ADDRESS: STREET 1: 3830 MONTE VILLA PARKWAY CITY: BOTHELL STATE: WA ZIP: 98021 FORMER COMPANY: FORMER CONFORMED NAME: MDRNA, Inc. DATE OF NAME CHANGE: 20080610 FORMER COMPANY: FORMER CONFORMED NAME: NASTECH PHARMACEUTICAL CO INC DATE OF NAME CHANGE: 19920703 8-K 1 d8k.htm FORM 8-K FORM 8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of Earliest Event Reported): February 9, 2011

Marina Biotech, Inc.

(Exact name of registrant as specified in its charter)


Delaware	000-13789	11-2658569
(State or other jurisdiction of incorporation)	(Commission File Number)	(I.R.S. Employer Identification No.)

3830 Monte Villa Parkway, Bothell, Washington		98021
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: 425-908-3600

N/A

Former name or former address, if changed since last report

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

¨	Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨	Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨	Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨	Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 8.01 Other Events.

Marina Biotech, Inc. (the “Company”) is filing this Current Report on Form 8-K to file as exhibits: (i) the audited financial statements of Cequent Pharmaceuticals, Inc. (“Cequent”), and the notes thereto, as of and for the period ended December 31, 2009 (the “Audited Cequent Financial Statements” ); (ii) the unaudited financial statements of Cequent, and the notes thereto, as of and for the period ended March 31, 2010 (the “Unaudited Cequent Financial Statements” and, together with the Audited Cequent Financial Statements, the “Cequent Financial Statements”); and (iii) the Company’s unaudited pro forma condensed combined consolidated financial information (the “Pro Forma Financial Statements”), which reflects the Cequent Financial Statements, which are included as Exhibits 99.1, 99.2 and 99.3, respectively. As previously disclosed, the Company consummated the acquisition of Cequent on July 21, 2010 pursuant to that certain Agreement and Plan of Merger, dated as of March 31, 2010, by and among the Company, Cequent, Calais Acquisition Corp. and a representative of the stockholders of Cequent. The Cequent Financial Statements and the Pro Forma Financial Statements are included in the Definitive Proxy Statement on Schedule 14A that was filed with the Securities and Exchange Commission on June 8, 2010. The Company filed a Current Report on Form 8-K on October 15, 2010 to file as exhibits the unaudited financial statements of Cequent and the notes thereto, as of and for the period ended June 30, 2010 (the “Cequent June 30 Financial Statements”), and the Company’s unaudited pro forma condensed combined consolidated financial information, which reflects the Cequent June 30 Financial Statements and updated pro forma adjustments, which are not being modified or superseded as a result of the filing of this Current Report.

Item 9.01 Financial Statements and Exhibits.

(d)

Exhibits


Exhibit No.		Description

23.1		Consent of Wolf & Company, P.C., independent auditors.

99.1		Audited financial statements of Cequent Pharmaceuticals, Inc. as of December 31, 2009

99.2		Unaudited financial statements of Cequent Pharmaceuticals, Inc. as of March 31, 2010

99.3		Unaudited pro forma condensed combined consolidated financial information of Marina Biotech, Inc.

SIGNATURES

Pursuant to the requirements 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 hereunto duly authorized.

EXHIBIT INDEX


Exhibit No.		Description

23.1		Consent of Wolf & Company, P.C., independent auditors.

99.1		Audited financial statements of Cequent Pharmaceuticals, Inc. as of December 31, 2009

99.2		Unaudited financial statements of Cequent Pharmaceuticals, Inc. as of March 31, 2010

99.3		Unaudited pro forma condensed combined consolidated financial information of Marina Biotech, Inc.

EX-23.1 2 dex231.htm CONSENT OF WOLF & COMPANY, P.C. CONSENT OF WOLF & COMPANY, P.C.

Exhibit 23.1

Consent of Independent Auditor

We consent to the incorporation by reference in Registration Statements (Nos. 333-44035, 333-59472, 333-62800, 333-72742, 333-108845, 333-148771, 333-164326, 333-168447, 333-169254 and 333-169882) on Form S-3 and Registration Statements (Nos. 333-28785, 333-46214, 333-49514, 333-92206, 333-92222, 333-118206, 333-126905, 333-135724, 333-146183, 333-153594 and 333-170071) on Form S-8 of Marina Biotech, Inc. of our report dated April 12, 2010, relating to our audits of the financial statements of Cequent Pharmaceuticals, Inc. for the years ended December 31, 2009 and 2008 and for the period from November 10, 2003 (inception) to December 31, 2009, which appear in this Current Report on Form 8-K of Marina Biotech, Inc.

/s/ Wolf & Company, P.C.

Wolf & Company, P.C.

Boston, Massachusetts

February 9, 2011

EX-99.1 3 dex991.htm AUDITED FINANCIAL STATEMENTS OF CEQUENT PHARMACEUTICALS, INC. Audited financial statements of Cequent Pharmaceuticals, Inc.

Exhibit 99.1

INDEX TO FINANCIAL STATEMENTS

CEQUENT PHARMACEUTICALS, INC.

(A Development Stage Company)

Years ended December 31, 2009 and 2008 and the Period from

November 10, 2003 (Inception) through December 31, 2009

CONTENTS


	Page
Independent Auditors’ Report		2

Balance Sheets		3

Statements of Operations		4

Statements of Changes in Stockholders’ Equity		5

Statements of Cash Flows		7

Notes to Financial Statements		8

INDEPENDENT AUDITORS’ REPORT

To the Board of Directors

Cequent Pharmaceuticals, Inc.

Cambridge, Massachusetts

We have audited the accompanying balance sheets of Cequent Pharmaceuticals, Inc. (a development stage company) as of December 31, 2009 and 2008, and the related statements of operations, changes in stockholders’ equity and cash flows for the years then ended and for the period from November 10, 2003 (inception) to December 31, 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 financial statements referred to above present fairly, in all material respects, the financial position of Cequent Pharmaceuticals, Inc. as of December 31, 2009 and 2008, and the results of its operations and its cash flows for the years then ended and for the period from November 10, 2003 (inception) to December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.

/s/ Wolf & Company, P.C.

Boston, Massachusetts

April 12, 2010

CEQUENT PHARMACEUTICALS, INC.

(A Development Stage Company)

BALANCE SHEETS

ASSETS


	December 31,
	2009			2008
Current assets:
Cash and cash equivalents	$	3,213,748		$	5,580,661
Prepaid expenses		37,211			92,889

Total current assets		3,250,959			5,673,550

Property and equipment, net		417,224			573,967
Other assets		45,133			80,859

Total assets	$	3,713,316		$	6,328,376


LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	131,009		$	119,285
Accrued expenses		331,938			371,871
Capital lease—current portion		13,656			14,057
Deferred revenue—current portion		576,087			576,087

Total current liabilities		1,052,690			1,081,300

Capital lease, net of current portion		17,769			30,984
Deferred revenue, net of current portion		836,956			1,413,043

Total liabilities		1,907,415			2,525,327

Commitments

Stockholders’ equity:
Series A redeemable, convertible preferred stock, $0.001 par value; authorized 14,850,000 shares, issued and outstanding none and 14,850,000 shares, at December 31, 2009 and 2008, respectively		—			15,430,682
Series A-1 redeemable, convertible preferred stock, $0.001 par value; authorized 27,584,420 shares and none, issued and outstanding 15,176,263 shares and none, at December 31, 2009 and 2008, respectively (preference in liquidation of $16,970,068 at December 31, 2009)		16,966,615			—
Common stock , $0.001 par value; authorized 130,000,000 shares and 22,550,000 shares, issued and outstanding 5,820,127 and 2,820,127 at December 31, 2009 and 2008, respectively		5,820			2,820
Additional paid-in capital		1,719,445			—
Deficit accumulated during the development stage		(16,885,979	)		(11,630,453	)

Total stockholders’ equity		1,805,901			3,803,049

Total liabilities and stockholders’ equity	$	3,713,316		$	6,328,376

See accompanying notes to the financial statements.

CEQUENT PHARMACEUTICALS, INC.

(A Development Stage Company)

STATEMENTS OF OPERATIONS


	Years Ended December 31,						Period from November 10, 2003 (Inception) through December 31, 2009
	2009			2008
Revenue	$	581,087		$	390,872		$	1,096,957

Operating expenses:
Research and development		3,498,223			4,293,766			11,272,709
General and administrative		2,314,262			2,118,403			6,469,902

Total operating expenses		5,812,485			6,412,169			17,742,611

Operating loss		(5,231,398	)		(6,021,297	)		(16,645,654	)

Other income (expense):
Other income (expense)		(2,313	)		—			10,287
Interest income		11,753			149,840			445,884
Interest expense		(33,568	)		(3,910	)		(71,731	)

Other income (expense), net		(24,128	)		145,930			384,440

Net loss	$	(5,255,526	)	$	(5,875,367	)	$	(16,261,214	)

See accompanying notes to the financial statements.

CEQUENT PHARMACEUTICALS, INC.

(A Development Stage Company)

STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Years Ended December 31, 2009 and 2008 and the Period from November 10, 2003 (Inception) through December 31, 2009


	Series A and A-1 Preferred Stock				Common Stock						Treasury Stock						Additional Paid-in Capital			Deficit Accumulated During the Development Stage			Total Stockholders’ Equity



	Shares		Amount		Shares			Amount			Shares			Amount
Issuance of common stock for cash		—	$	—		918,253		$	918			—		$	—		$	1,332		$	—		$	2,250
Net loss		—		—		—			—			—			—			—			(1,579	)		(1,579	)

Balance as of December 31, 2004		—		—		918,253			918			—			—			1,332			(1,579	)		671
Issuance of common stock for cash		—		—		103,048			103			—			—			4,386			—			4,489
Net loss		—		—		—			—			—			—			—			(247,665	)		(247,665	)

Balance as of December 31, 2005		—		—		1,021,301			1,021			—			—			5,718			(249,244	)		(242,505	)
Issuance of Series A preferred stock, net of issuance costs of $83,038		6,000,000		5,916,962		—			—			—			—			—			—			5,916,962
Issuance of common stock for cash		—		—		1,368,910			1,369			—			—			3,318			—			4,687
Issuance of common stock in conjunction with license agreement		—		—		437,059			437			—			—			52,010			—			52,447
Repurchase of common stock		—		—		—			—			(86,090	)		(86	)		—			—			(86	)
Net loss		—		—		—			—			—			—			—			(684,205	)		(684,205	)

Balance as of December 31, 2006		6,000,000		5,916,962		2,827,270			2,827			(86,090	)		(86	)		61,046			(933,449	)		5,047,300
Issuance of Series A preferred stock, net of issuance costs of $91,399		5,500,000		5,408,601		—			—			—			—			—			—			5,408,601
Accretion of Series A issuance costs		—		23,061		—			—			—			—			(23,061	)		—			—
Accretion of Series A dividends		—		80,000		—			—			—			—			(61,107	)		(18,893	)		—
Issuance of common stock in conjunction with license agreement		—		—		78,947			79			—			—			9,395			—			9,474
Share-based compensation expense		—		—		—			—			—			—			13,727			—			13,727
Retirement of treasury stock		—		—		(86,090	)		(86	)		86,090			86			—			—			—
Net loss		—		—		—			—			—			—			—			(4,196,872	)		(4,196,872	)

Balance as of December 31, 2007		11,500,000		11,428,624		2,820,127			2,820			—			—			—			(5,149,214	)		6,282,230

(continued)

See accompanying notes to financial statements.

CEQUENT PHARMACEUTICALS, INC.

(A Development Stage Company)

STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Concluded)

Years Ended December 31, 2009 and 2008 and the Period from November 10, 2003 (Inception) through December 31, 2009


	Series A and A-1 Preferred Stock						Common Stock				Treasury Stock				Additional Paid-in Capital			Deficit Accumulated During the Development Stage			Total Stockholders’ Equity



	Shares			Amount			Shares		Amount		Shares		Amount
Issuance of Series A preferred stock		3,350,000			3,350,000			—		—		—		—		—			—			3,350,000
Issuance of warrants		—			—			—		—		—		—		5,533			—			5,533
Accretion of Series A issuance costs		—			42,058			—		—		—		—		(37,667	)		—			4,391
Accretion of Series A dividends		—			610,000			—		—		—		—		(4,128	)		(605,872	)		—
Share-based compensation expense		—			—			—		—		—		—		36,262			—			36,262
Net loss		—			—			—		—		—		—		—			(5,875,367	)		(5,875,367	)

Balance as of December 31, 2008		14,850,000			15,430,682			2,820,127		2,820		—		—		—			(11,630,453	)		3,803,049
Accretion of Series A dividends		—			1,183,805			—		—		—		—		(1,183,805	)		—			—
Series A preferred stock converted to common stock		(3,000,000	)		(3,000,000	)		3,000,000		3,000		—		—		2,997,000			—			—
Issuance of Series A-1 preferred stock, net of issuance costs of $89,132		3,326,263			3,237,131			—		—		—		—		—			—			3,237,131
Accretion of Series A and Series A-1 issuance costs		—			114,997			—		—		—		—		(114,997	)		—			—
Share-based compensation expense		—			—			—		—		—		—		21,247			—			21,247
Net loss		—			—			—		—		—		—		—			(5,255,526	)		(5,255,526	)

Balance as of December 31, 2009		15,176,263		$	16,966,615			5,820,127	$	5,820		—	$	—	$	1,719,445		$	(16,885,979	)	$	1,805,901

See accompanying notes to financial statements.

CEQUENT PHARMACEUTICALS, INC.

(A Development Stage Company)

STATEMENTS OF CASH FLOWS


	Years Ended December 31,						Period from November 10, 2003 (Inception) through December 31, 2009
	2009			2008
Cash flows from operating activities:
Net loss	$	(5,255,526	)	$	(5,875,367	)	$	(16,261,214	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization expense		202,863			166,284			448,097
Non-cash interest expense		27,469			3,910			31,379
Share-based compensation expense		21,247			36,262			71,236
Fair value of common stock issued in conjunction with license agreement		—			—			61,921
Changes in operating assets and liabilities:
Restricted cash		—			41,229			—
Prepaid expenses and other assets		63,935			37,832			(108,190	)
Accounts payable		11,724			(122,685	)		131,009
Accrued expenses		(39,933	)		178,629			336,329
Deferred revenue		(576,087	)		864,128			1,413,043

Net cash used in operating activities		(5,544,308	)		(4,669,778	)		(13,876,390	)

Cash flows from investing activities:
Purchases of property and equipment		(46,120	)		(239,773	)		(820,280	)

Net cash used in investing activities		(46,120	)		(239,773	)		(820,280	)

Cash flows from financing activities:
Proceeds from issuance of preferred stock, net of issuance costs		3,237,131			3,350,000			17,912,694
Repayments of capital lease		(13,616	)		—			(13,616	)
Proceeds from issuance of common stock		—			—			11,426
Repurchase of common stock		—			—			(86	)

Net cash provided by financing activities		3,223,515			3,350,000			17,910,418

(Decrease) increase in cash and cash equivalents		(2,366,913	)		(1,559,551	)		3,213,748
Cash and cash equivalents at beginning of period		5,580,661			7,140,212			—

Cash and cash equivalents at end of period	$	3,213,748		$	5,580,661		$	3,213,748

Supplemental disclosure of cash flow information and non-cash transactions:
Cash paid for interest	$	1,696		$	—		$	35,949

Exchange of Series A Preferred stock and dividends for Series A-1 Preferred stock and dividends	$	13,643,805		$	—		$	13,643,805

Exchange of Series A Preferred stock for Common Stock	$	3,000,000		$	—		$	3,000,000

Accretion of dividend and issuance costs on Series A Preferred stock	$	1,298,802		$	652,058		$	2,053,921

Relative fair value of warrants recorded as deferred financing costs	$	—		$	5,533		$	5,533

Property and equipment acquired under capital leases	$	—		$	45,041		$	45,041

See accompanying notes to financial statements.

CEQUENT PHARMACEUTICALS, INC.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

Years Ended December 31, 2009 and 2008, and the Period from

November 10, 2003 (Inception) to December 31, 2009

1.	NATURE OF OPERATIONS

Business

Cequent Pharmaceuticals, Inc. (“Cequent”) was incorporated on November 10, 2003 under the laws of the State of Delaware.

Cequent is an early-stage biopharmaceutical company developing novel therapeutics to prevent and treat a wide range of human diseases based on Cequent’s proprietary technology, TransKingdom RNA interference (tkRNAi^TM). The FDA recently approved Cequent’s IND (investigational new drug) application for the first trial of an orally administered RNA interference drug in humans.

Since its inception, Cequent has devoted substantially all of its efforts to business planning, research and development, recruiting management and technical staff, acquiring operating assets and raising capital. Accordingly, Cequent is considered to be in the development stage.

Cequent is subject to a number of risks similar to other companies in its industry including rapid technological change, uncertainty of market acceptance of the product, competition from larger companies with substitute products and dependence on key personnel.

2.	SIGNIFICANT ACCOUNTING POLICIES

A summary of the significant accounting policies followed by Cequent in the preparation of the accompanying consolidated financial statements follows:

Use of estimates

The process of preparing 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 disclosure of assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and changes in estimates may occur.

Cash and cash equivalents

Cequent considers all highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents.

Financial instruments

Cequent’s financial instruments, consisting of cash and cash equivalents, accounts payable and accrued liabilities are carried at cost, which approximates fair value due to the short-term nature of these instruments. The carrying value of capital lease obligations approximates its fair value due to the market terms of the arrangements.

CEQUENT PHARMACEUTICALS, INC.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS (Continued)

Derivative instruments

Cequent generally does not use derivative instruments to hedge exposures to cash-flow or market risks; however, certain warrants to purchase common stock that do not meet the requirements for classification as equity are classified as liabilities. In such instances, net-cash settlement is assumed for financial reporting purposes, even when the terms of the underlying contracts do not provide for a net-cash settlement. Such financial instruments are initially recorded at fair value, or relative fair value when issued with other instruments, with subsequent changes in fair value charged (credited) to operations in each reporting period. If these instruments subsequently meet the requirements for classification as equity, Cequent reclassifies the fair value to equity.

At December 31, 2009, Cequent had outstanding warrants to purchase 198,249 shares of its common stock with an exercise price of $0.07 per share. These warrants are considered to be derivative instruments since the agreements contain “down round” provisions whereby the number of shares covered by the warrants is subject to change in the event of certain dilutive stock issuances. The fair value of these derivative instruments at January 1, 2009 and December 31, 2009 was immaterial, as was the change in the fair value during that period. The fair value of these warrants was estimated using the Black-Scholes option pricing model and assumptions consistent with those disclosed in “Share-based payments” below.

The primary underlying risk exposure pertaining to the warrants is the change in fair value of the underlying common stock for each reporting period.

Property and equipment

Property and equipment are carried at cost. Depreciation and amortization expense is provided over the estimated useful lives of the assets using the straight-line method. A summary of the estimated useful lives is as follows:


Classification		Estimated Useful Life
Computer hardware and software		3 years
Office furniture and equipment		5 years
Lab equipment		5 years
Leasehold improvements		Shorter of lease term or useful life

Depreciation and amortization expense was $202,863 and $166,284 for the years ended December 31, 2009 and 2008, respectively.

Maintenance and repairs are charged to expense as incurred, while any additions or improvements are capitalized.

Research and development expenses

Costs incurred for research and development are expensed as incurred.

Income taxes

CEQUENT PHARMACEUTICALS, INC.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS (Continued)

reverse. A valuation allowance is recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Accordingly, Cequent provides a valuation allowance, if necessary, to reduce deferred tax assets to amounts that are realizable.

Tax positions taken or expected to be taken in the course of preparing Cequent’s tax returns are required to be evaluated to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions not deemed to meet a more-likely-than-not threshold would be recorded as a tax expense in the current year. There were no uncertain tax positions that require accrual or disclosure to the financial statements as of December 31, 2009.

Concentrations of credit risk

Cequent has no significant off-balance-sheet concentration of credit risk such as foreign exchange contracts, option contracts or other foreign hedging arrangements. Cequent may from time to time have cash in banks in excess of FDIC insurance limits.

Impairment of long-lived assets

Cequent continually monitors events and changes in circumstances that could indicate carrying amounts of long-lived assets may not be recoverable. An impairment loss is recognized when expected cash flows are less than an asset’s carrying value. Accordingly, when indicators of impairment are present, Cequent evaluates the carrying value of such assets in relation to the operating performance and future undiscounted cash flows of the underlying assets. Cequent’s policy is to record an impairment loss when it is determined that the carrying amount of the asset may not be recoverable. No impairment charges were recorded in the years ended December 31, 2009 and 2008.

Revenue recognition

Through December 31, 2009, Cequent’s revenue primarily relates to a single option agreement (see Note 10). Revenue is recognized when persuasive evidence of an arrangement exists, the price is fixed or determinable, delivery has occurred and collectibility is reasonably assured. Non-refundable, upfront payments received in connection with license option agreements are recognized over the option term on a straight-line basis.

Share-based payments

Cequent recognizes compensation costs resulting from the issuance of stock-based awards to employees, non-employees and directors as an expense in the statement of operations over the service period based on a measurement of fair value for each stock-based award.

The fair value of each option grant was estimated as of the date of grant using the Black-Scholes option-pricing model. The fair value is amortized as compensation cost on a straight-line basis over the requisite service period of the awards, which is generally the vesting period. Due to its limited operating history and limited number of sales of its common stock, Cequent estimated its volatility in consideration of a number of factors including the volatility of comparable public companies.

CEQUENT PHARMACEUTICALS, INC.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS (Continued)

The following assumptions were used to estimate the fair value of stock options granted using the Black-Scholes option pricing model:


	2009	2008
Risk-free interest rate	1.87 – 2.57%	1.52 – 3.3%
Expected life	5 years	5 years
Volatility	69%	46%
Dividend rate	0%	0%

Recent accounting pronouncements

In June 2008, the Financial Accounting Standards Board (“FASB”) ratified an accounting pronouncement that provides that an entity should use a two step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions. This accounting pronouncement is effective for fiscal years beginning after December 15, 2008. The consensus must be applied to outstanding instruments as of the beginning of the fiscal year in which the consensus is adopted and should be treated as a cumulative-effect adjustment to the opening balance of retained earnings. Early adoption is not permitted. On January 1, 2009, Cequent adopted this pronouncement and it did not have a material impact on Cequent’s financial statements or related disclosures.

In October 2009, the FASB issued two related accounting pronouncements, ASU 2009-13 and ASU 2009-14, relating to revenue recognition. One pronouncement provides guidance on allocating the consideration in a multiple-deliverable revenue arrangement and requires additional disclosure, while the other pronouncement provides guidance specific to revenue arrangements that include software elements.

For multiple-deliverable arrangements, the pronouncement eliminates the requirement that there be objective and reliable evidence of fair value of the undelivered item in order for the delivered item to be considered a separate unit of accounting. Now, the delivered item shall be considered a separate unit of accounting if the delivered item has value to the customer on a standalone basis and, if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item or items is considered probable and substantially in the control of the vendor. Arrangement consideration shall be allocated at the inception of the arrangement to all deliverables on the basis of their relative selling price. When applying the relative selling price method, the selling price of each deliverable shall be determined using vendor-specific objective evidence, if it exists; third party evidence of selling price; or if neither of those exist, the vendor shall use its best estimate of the selling price for that deliverable.

The pronouncement specific to certain revenue arrangements that include software elements amends the scope of arrangements that are accounted for under software revenue recognition rules and provides guidance for allocating the arrangement consideration. The pronouncement clarifies that the following arrangements are outside the scope of accounting under software revenue recognition rules and must follow the general revenue recognition rules for multiple-deliverable arrangements: 1) non-software components of tangible products, 2) software components of tangible products that are sold, licensed or leased with tangible products when the software components and non-software components of the tangible product function together to deliver the tangible product’s essential functionality, and 3) undelivered elements that relate to software that is essential to the tangible product’s functionality in 2 above. If an arrangement contains software and non-software deliverables, consideration must be allocated to the non-software deliverables individually and to the software deliverables as a group based on the relative selling price method.

CEQUENT PHARMACEUTICALS, INC.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS (Continued)

Both of these pronouncements are effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 and both must be adopted together. Early adoption is permitted. If a company elects early adoption and the period of adoption is not the beginning of the company’s fiscal year, the company is required to apply the guidance in these pronouncements retrospectively from the beginning of the company’s fiscal year. A company may also elect to adopt the guidance in these pronouncements retrospectively to prior periods. Cequent does not expect the adoption of these pronouncements to have a material impact on its financial statements.

In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820), Improving Disclosures about Fair Value Measurements. This Update requires new disclosures and clarifies existing disclosures regarding recurring and nonrecurring fair value measurements to provide increased transparency to users of the financial statements. The new disclosures and clarification of existing disclosures are effective for interim and annual periods beginning after December 15, 2009, except for the disclosures pertaining to the roll forward of activity for Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Cequent does not expect the adoption of this Update to have a material impact on its financial statements.

3.	OTHER ASSETS

Included in other assets are the following:


	2009		2008
Deposit on leased office space	$	45,133	$	45,133
Deferred financing costs		—		31,379
Other assets		—		8,257

		45,133		84,769
Less accumulated amortization on deferred financing costs		—		(3,910	)

	$	45,133	$	80,859

Amortization of deferred financing costs of $27,469 and $3,910 is included in interest expense in the years ended December 31, 2009 and 2008, respectively.

4.	PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:


	2009			2008
Computer software and hardware	$	143,158		$	160,830
Office furniture and equipment		101,642			101,642
Lab equipment		523,127			480,375
Leasehold improvements		76,354			76,354

		844,281			819,201
Less accumulated depreciation and amortization		(427,057	)		(245,234	)

	$	417,224		$	573,967

CEQUENT PHARMACEUTICALS, INC.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS (Continued)

5.	ACCRUED EXPENSES

Accrued expenses consisted of the following:


	2009		2008
Accrued bonus	$	195,800	$	277,640
Accrued expenses		40,042		55,748
Accrued severance		46,375		—
Accrued legal		35,000		16,560
Accrued vacation		9,788		21,923
Accrued other		4,933		—

	$	331,938	$	371,871

6.	LOAN AND SECURITY AGREEMENT

On July 7, 2008, Cequent entered into a Loan and Security Agreement (“Agreement”) for a $3,500,000 Growth Capital Facility (“Growth Capital Line”) with Silicon Valley Bank and Gold Hill Venture Lending 03, L.P (“Lenders”). The Agreement gave Cequent the right to draw advances through September 30, 2009 in an aggregate amount not to exceed the Growth Capital Line. Each advance must be repaid within thirty-six months commencing on the applicable amortization date through consecutive equal monthly payments of principal and interest. The principal amount of each advance accrues interest at a fixed per annum rate equal to 10%, payable monthly. The Agreement was secured by substantially all of Cequent’s assets with the exception of its intellectual property. For the years ended December 31, 2009 and 2008 there were no advances made under this Agreement and the Agreement expired on September 30, 2009.

In connection with the Agreement, Cequent issued to the Lenders, after the effect of certain anti-dilution rights, warrants to purchase 198,249 shares of common stock at an exercise price of $0.07 per share. The warrants have a ten year term and expire in 2018. The fair value was determined at issuance to be $5,533 which was recorded as a deferred financing cost and additional paid-in-capital. The fair value of the warrant was determined using the Black-Scholes option pricing model and assumptions consistent with those described in Note 2.

7.	CAPITAL LEASE

In December 2009, Cequent leased certain equipment under a capital lease agreement that is included in property and equipment and accumulated depreciation on the balance sheet at December 31, 2009:


Leased equipment	$	45,041
Less accumulated depreciation		(9,759	)

	$	35,282

CEQUENT PHARMACEUTICALS, INC.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS (Continued)

The term of the lease calls for monthly payments in the amount of $1,380 until December 2011. The minimum lease payments under the capital lease at December 31, 2009 are as follows:


Year Ending December 31,
2010	$	16,555
2011		16,555

Total		33,110
Less: amount representing interest		(1,685	)

	$	31,425

8.	INCOME TAXES

For the years ended December 31, 2009 and 2008, Cequent expensed $456 and $542, respectively, related to the Massachusetts excise tax, which is included in general and administrative expenses. At December 31, 2009 and 2008, Cequent had accrued amounts related to the Massachusetts excise tax of $4,933 and none, respectively.

Deferred taxes

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The only significant component of Cequent’s deferred tax asset relates to its net operating loss carryforward.

Cequent has provided a valuation allowance against the deferred tax assets, since it has a history of losses. Cequent currently believes that it is more likely than not that the deferred tax assets relating to the loss carryforwards and other temporary differences will not be realized in the future. In the year ended December 31, 2009, the valuation allowance increase approximately $1,907,000.

Operating loss carryforward

Through December 31, 2009, Cequent had U.S. federal and state net operating loss carryforwards of approximately $14,871,000 that can be carried forward and offset against taxable income. Federal net operating losses can be carried forward for 20 years and begin to expire in 2024 while Massachusetts net operating losses can be carried forward for five years and began to expire in 2009. Utilization of net operating losses may be subject to substantial annual limitations due to the “change in ownership” provisions of the Internal Revenue Code, and similar state provisions. The annual limitations may result in the expiration of net operating losses before utilization.

9.	STOCKHOLDERS’ EQUITY

Series A and A-1 Redeemable, Convertible Preferred Stock

In October 2006, Cequent entered into a Securities Purchase Agreement (the “Agreement”) authorizing the issuance of up to 8,000,000 shares of Series A Redeemable, Convertible Preferred Stock (“Series A Preferred Stock”). In June and December 2007 and August 2008, Cequent authorized additional closings of Series A Preferred Stock increasing the number of authorized shares of Series A Preferred to 14,850,000 shares as of December 31, 2008.

CEQUENT PHARMACEUTICALS, INC.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS (Continued)

In October 2009, Cequent entered into a Series A-1 Convertible Preferred Stock Purchase Agreement (the “Series A-1 Agreement) authorizing the conversion of up to 14,850,000 of original Series A Preferred Stock to Series A-1 Preferred Stock. In addition, the Series A-1 Agreement also authorized the issuance of up to an additional 12,734,420 of Series A-1 shares for a total of 27,584,420 authorized shares of Series A-1 Preferred Stock.

Under the Series A-1 Agreement, 11,850,000 shares of Series A Preferred Stock converted to an equal number of shares of Series A-1 Preferred Stock and 3,000,000 shares of Series A Preferred Stock converted into an equal number of shares of common stock. In addition, Cequent sold 3,326,263 shares of Series A-1 Preferred Stock for cash proceeds of $3,237,131, net of issuance costs of $89,132.

Significant terms of the Series A-1 Preferred Stock are as follows:

Conversion

Each share of Series A-1 Preferred Stock is initially convertible into four shares of common stock, subject to adjustments as applicable from time to time, at the option of the holder, at any time after the day of issuance of such share or automatically upon the earlier of (i) a qualified initial public offering (“IPO”) in which shares are sold at not less than $4.00 per share and gross proceeds to Cequent are not less than $35 million; or (ii) when the holders of at least a majority of the then outstanding Series A-1 Preferred Stock so agree.

Liquidation preference

Upon any liquidation, dissolution, or winding up of Cequent, either voluntary or involuntary, the holders of Series A-1 Preferred Stock shall be entitled to receive, prior and in preference to holders of Series A Preferred Stock or common stock, an amount per share equal to (i) the Series A-1 Original Issues Price ($1.00, subject to adjustment) per share of Series A-1 Preferred Stock; plus (ii) an amount equal to all accrued but unpaid dividends and all declared but unpaid dividends.

After the payment of all preferential amounts required to be paid to the holders of Series A-1 Preferred Stock, the holders of Series A Preferred Stock shall be entitled to receive, prior and in preference to holders of common stock, an amount per share equal to (i) the Series A Original Issues Price ($1.00, subject to adjustment) per share of Series A-1 Preferred Stock; plus (ii) an amount equal to all accrued but unpaid dividends and all declared but unpaid dividends.

After the payment of all preferential amounts required to be paid to the holders of Series A and A-1 Preferred Stock, the remaining assets of Cequent available for distribution to its stockholders shall be distributed among the holders of shares of Series A and A-1 Preferred Stock, common stock and any other class or series of stock entitled to participate in liquidation distributions with the holders of common stock, pro rata based on the number of shares of common stock held by each (assuming conversion into common stock of all such shares); provided, however, that the holders of Series A and A-1 Preferred Stock are not entitled to receive an amount in excess of four times the Original Issue Price.

Dividends

The holders of Series A-1 Preferred Stock shall be entitled to receive dividends, out of any assets legally available if and when declared by the Board of Directors, at the rate of eight percent (8%) of the Series A-1 Original Issue Price per annum on each outstanding share of Series A-1 Preferred Stock. Such dividends shall begin accruing on the first anniversary of the original Series A-1 Preferred Stock

CEQUENT PHARMACEUTICALS, INC.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS (Continued)

issuance date, and shall be on a cumulative basis, compounding annually. Dividends are payable when declared by the Board of Directors, upon a liquidation event and upon conversion. Dividends with respect to the Series A Preferred Stock exchanged for Series A-1 Preferred Stock that were accrued but unpaid at the time of such exchange shall be deemed to have accrued to the Series A-1 Preferred Stock for which such Series A Preferred Stock was exchanged and such share of Series A-1 Preferred Stock thereafter accrue dividends as though such accrued but unpaid dividends had accrued originally on such Series A-1 Preferred Stock shares.

To date, the Board of Directors has not declared any dividends. At December 31, 2009, Cequent had cumulative accreted dividends on the Series A-1 Preferred Stock of $1,793,805 that represent dividends accrued on Series A Preferred Stock of $1,183,805 and $610,000 for the years ended December 31, 2009 and 2008, respectively.

Voting

The holders of each share of Series A-1 Preferred Stock have the right to one vote for each share of common stock into which such Series A-1 Preferred Stock could then convert. As long as any of the Series A-1 Preferred Stock is outstanding, the holders of a majority of Series A-1 Preferred Stock have the right, exclusively and as a separate class, to elect four members of Cequent’s Board of Directors.

Redemption

On each of the fourth, fifth and sixth anniversaries of the Series A-1 Preferred Stock issuance date, any holder of Series A-1 Preferred Stock may elect to redeem up to a maximum of 33%, 67% and 100%, respectively, of the holder’s shares of Series A-1 Preferred Stock at an amount per share equal to the Series A-1 Original Issue Price per share, plus all accrued but unpaid dividends on such share of Series A-1 Preferred Stock. The amount of the redemption is subject to appropriate adjustments in the event of any stock dividend, stock split, combination or other similar recapitalization affecting Series A-1 Preferred Stock.

Cequent considers the Series A-1 Preferred Stock contingently redeemable as a result of the conversion feature and has therefore classified the Series A-1 Preferred Stock as equity in the balance sheet.

Cequent will accrete the Series A-1 Preferred Stock to its redemption value over the period from issuance to redemption, such that the carrying amounts of the Series A-1 Preferred Stock will equal the redemption amount at the earliest redemption date.

Demand registration and participation rights

At any time two years after the date of issuance, the holders of Series A-1 Preferred Stock, in the aggregate and forming at least a majority of total equity securities outstanding, had the right to request that Cequent file a qualified initial public offering (“IPO”). No such filing has occurred. The holders of Series A-1 Preferred Stock also have certain participation rights in future financings.

Participation rights

CEQUENT PHARMACEUTICALS, INC.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS (Continued)

portion of the securities up to the total of all of the holders of Series A-1 Preferred Stock pro rata portion of the equity securities offered for sale.

Common stock

The common stock confers upon its holders the right to receive dividends out of any assets legally available, when and as declared by the Board of Directors. The holders of the common stock have the right, exclusively and as a separate class, to elect one director. In addition, the holders of the common stock have the right to participate and vote in the general meeting of stockholders and in extraordinary meetings of Cequent in such manner that each share confers upon its holder one vote therein.

Restricted common stock

In March 2004, Cequent sold 918,253 shares of restricted common stock to its two founders for total proceeds of $2,250. Cequent sold 9,182 shares of restricted common stock to a consultant in January 2006 for total proceeds of $400. Following the termination of a founder’s employment, Cequent has the right to repurchase all unvested restricted shares at a price equal to the original purchase price. Cequent’s repurchase rights vary by each restricted stockholders’ respective agreement and also include vesting schedules of between three and four years. At December 31, 2009, there were no shares of restricted common stock subject to repurchase.

If a holder of restricted stock proposes to transfer shares that are no longer subject to repurchase by Cequent, then the holder shall give written notice to Cequent of the proposed transfer. For a specified period of time following the delivery of the request, Cequent shall have the option to purchase all, but not less than all, of the shares proposed for transfer at the price and upon the terms set forth in the transfer notice, as defined.

Other common stock issuances

In 2005, Cequent sold 103,048 shares of its common stock for proceeds of $4,489. In 2006, Cequent sold 1,368,910 shares of its common stock for proceeds of $4,687.

Licensing agreement

On December 30, 2004, Cequent entered into an exclusive licensing agreement with Beth Israel Deaconess Medical Center (“BIDMC”) for patented technology in the field of Bacterial-Mediated Gene Silencing and related methods of use. This agreement was amended on October 20, 2006. The amended agreement obligates Cequent to issue shares of common stock to BIDMC upon a Qualified Financing until BIDMC holds five percent of the issued and outstanding equity securities of Cequent as of the date of the Qualified Financing. Cequent’s obligation to issue additional shares of common stock ceased when the total equity financing reached $7,500,000. As of December 31, 2009, Cequent had Qualified Financing equal to $18,176,000, as a result of the Series A and Series A-1 Preferred Stock issuances. In the years ended December 31, 2007 and 2006, Cequent issued 78,947 and 437,059 shares of common stock to BIDMC with a fair value of $9,474 and $52,447, respectively, and recorded research and development expense in the same amounts upon issuance of the common stock. There was no additional stock issued to BIDMC in 2009 or 2008.

The licensing agreement contains a requirement that Cequent must file an IND application with the FDA by December 31, 2009 or Cequent will forfeit the exclusive use of the licensed technology. In compliance with the licensing agreement, Cequent filed its first IND application in November 2009.

CEQUENT PHARMACEUTICALS, INC.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS (Continued)

Treasury stock

In 2006, as a result of the death of one of Cequent’s founders, Cequent repurchased unvested shares of restricted stock. Cequent repurchased 86,090 shares at their original purchase price of $0.001 or $86. These shares were held in treasury in accordance with Delaware law until May 9, 2007 when Cequent returned the 86,090 shares to the status of authorized but unissued.

Stock option plan

In 2006, Cequent adopted the 2006 Stock Incentive Plan (the “Plan”). Under the Plan, the Board of Directors may grant options and establish the terms of each grant in accordance with provisions of the Plan. Plan options are exercisable for up to 10 years from the date of issuance.

As of December 31, 2009, the aggregate number of common shares which may be issued under the Plan was 15,673,052 shares. A summary of the activity under Cequent’s stock option plan is as follows:


	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Months)		Aggregate Intrinsic Value
Outstanding at December 31, 2008		3,207,106		$	0.118
Granted		435,000		$	0.130
Exercised		—			—
Forfeited		(1,058,334	)		0.126

Outstanding at December 31, 2009		2,583,772		$	0.121		98	$	3,568


Options exercisable at December 31, 2009		1,366,997		$	0.116		114	$	3,568

Reserved for future grants		11,990,834

Cequent recorded $21,247 and $36,262 as compensation expense in 2009 and 2008, respectively, for stock option awards granted to employees and consultants under the Plan. As of December 31, 2009, there was $47,680 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan which will be recognized over a weighted average period of approximately three years.

The weighted-average grant-date fair value of options granted during 2009 and 2008 was $0.07 and $0.04, respectively. As of December 31, 2009 no stock options have been exercised under the Plan.

The exercise prices for options granted in 2009 and 2008 were $0.13 and $0.12 per share, respectively.

Fair value was determined using the Black-Scholes option pricing model and the assumptions described in Note 2.

Included in the 1,368,910 shares of common stock sold in 2006 (see “Other Common Stock Issuances” above) were 1,098,446 shares of common stock issued under the Plan.

10.

DEFERRED REVENUE

CEQUENT PHARMACEUTICALS, INC.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS (Continued)

and License Agreement for selected Cequent Modulators related to the Selected Target, as defined. Novartis BioVentures Ltd. paid a non-refundable fee of $1,250,000 and is obligated to make an additional non-refundable payment of $1,250,000 within thirty days of Cequent’s completion of a designated milestone. The option expires on the fifth anniversary of the agreement, June 13, 2012. On June 15, 2007, Cequent received the first payment and recorded the receipt as deferred revenue. On August 28, 2008, Cequent received the second payment and recorded the receipt as deferred revenue. Cequent is amortizing the payments to revenue over the life of the option. In the years ended December 31, 2009 and 2008, Cequent recognized revenue of $581,087 and $390,872, respectively, in connection with the agreement.

11.

COMMITMENTS

Cequent leases office space in Cambridge, Massachusetts under a lease agreement with a 39 month term commencing on March 1, 2007. This lease was amended in September 2007 to increase the square footage. The lease has escalating monthly payments over its life of between $20,201 and $21,267.

The aggregate future minimum lease payment under this lease is as follows:


Year Ending December 31,
2010	$	106,335

Rent expense for operating leases with escalation provisions is recognized on a straight-line basis over the term of the lease. Total rent expense was $247,324 and $248,382 for the years ended December 31, 2009 and 2008, respectively.

12.

EMPLOYEE BENEFIT PLAN

In January 2007, Cequent adopted a 401(k) plan (the “Plan”) covering all employees. Employees must be 21 years of age in order to participate in the Plan. Under the Plan, Cequent may make matching contributions. In 2009 and 2008 Cequent incurred expenses of $37,892 and $37,157, respectively, in connection with the Plan.

13.

SUBSEQUENT EVENTS

Management has evaluated subsequent events through April 12, 2010, which is the date the financial statements were available to be issued. Other than as discussed below there were no subsequent events that require adjustment to or disclosure in the financial statements.

Stock option and incentive stock

On February 5, 2010, pursuant to Cequent’s 2006 Incentive Stock Plan, Cequent granted to employees and consultants stock options for the purchase of 5,807,354 shares of Cequent’s common stock at an exercise price of $0.05 per share. Subject to the terms of the Plan and the stock option agreement, such options will become exercisable for 25% of the shares on the first anniversary of the vesting start date and thereafter for 1/48 (rounded up to the next whole number) of the shares on the same day of each month following the vesting start date set forth below until such options are fully exercisable and such options shall expire ten years from the date of grant.

In addition, Cequent reissued as Non-qualified Stock Options (NSO) certain Incentive Stock Options (ISO) for the purchase of 655,000 shares of Cequent’s common stock. The ISO’s were issued by Cequent prior to

CEQUENT PHARMACEUTICALS, INC.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS (Continued)

December 31, 2009 to certain individuals who have since converted in status from employees of Cequent to consultants. The previous vesting schedules of the ISO’s were preserved until their consulting agreements are terminated.

On March 18, 2010, pursuant to Cequent’s 2006 Incentive Stock Plan, Cequent granted to employees and consultants stock options for the purchase of 5,888,000 shares of Cequent’s common stock at an exercise price of $0.13 per share. Subject to the terms of the Plan and the stock option agreement, such options will become exercisable for 25% of the shares on the earlier of a Change of Control or the first anniversary of the vesting start date and thereafter for 1/48 (rounded up to the next whole number) of the shares on the same day of each month following the vesting start date set forth below until such options are fully exercisable and such options shall expire ten years from the date of grant.

Agreement and Plan of Merger

On March 31, 2010, Cequent entered into an Agreement and Plan of Merger (“Merger Agreement”) with MDRNA, Inc. (“MDRNA”), a leading RNAi-based drug discovery and development company, and with Calais Acquisition Corp. (“merger sub”), a wholly-owned subsidiary of MDRNA, pursuant to which merger sub would merge with and into Cequent, with Cequent surviving as a wholly-owned subsidiary of MDRNA. The transaction includes certain loan provisions that will fund MDRNA’s operations through the anticipated closing of the merger in early July 2010. (See below).

Under the terms of the Merger Agreement, each outstanding share of Cequent’s common stock will be exchanged for MDRNA common stock at an exchange ratio that implies a purchase price for Cequent’s common and preferred stockholders of approximately $44 million, plus an additional value of approximately $2 million to warrant and option holders, based on the 10 day Volume-Weighted Average Price (VWAP) of MDRNA shares on March 31, 2010. This represents an approximate 56% equity ownership in the consolidated entity for MDRNA stockholders and a 44% equity ownership for Cequent’s securityholders.

The Merger Agreement anticipates that the combined company will be headquartered in Bothell, Washington with offices in Cambridge, Massachusetts. RNAi drug discovery, research and biology will continue to be conducted at MDRNA’s R&D facility in Bothell while clinical operations will reside in Cambridge.

In connection with the execution of the Merger Agreement described above, MDRNA and Cequent entered into a Loan Agreement (the “Loan Agreement”), pursuant to which, among other things, Cequent shall extend one or more loans to MDRNA in the aggregate principal amount of up to $3,000,000 (the “Term Loans”) to fund MDRNA’s operations prior to the completion or closing of the merger. The Term Loans are evidenced by a secured promissory note issued by MDRNA to Cequent (the “Term Note”), which bears interest absent an event of default, at a rate of ten percent per annum. MDRNA will repay the principal and interest of the Term Loans in three equal consecutive monthly installments, commencing on August 15, 2010 and continuing on the 15th day of each month thereafter through and including October 15, 2010. Notwithstanding the foregoing, if the Merger is consummated prior to August 15, 2010, then, on the closing date of the Merger, MDRNA shall not owe to any third party any obligations with respect to the Term Loans, including, without limitation the then outstanding principal balance of the Term Loans and any interest then accrued but unpaid thereon. MDRNA may prepay any Term Loan in whole or in part without premium or penalty.

CEQUENT PHARMACEUTICALS, INC.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS (Continued)

adjustments as defined in the Merger Agreement. Each warrant is exercisable for a number of shares of MDRNA’s common stock equal to sixty-five percent (65%) of the principal amount of the Term Loan being made on such date divided by $1.1496 (subject to an equitable adjustment in the event of any stock split, stock dividend, stock combination or the like). The warrant cannot be exercised unless the Merger Agreement has been terminated, without the consummation of the transaction contemplated by the Merger Agreement. Upon the completion of the Merger Agreement the warrants will terminate and be invalid.

Preferred stock issuance

On April 8, 2010, pursuant to the Series A-1 Convertible Preferred Stock Purchase Agreement, Cequent issued 2,517,173 Series A-1 Convertible Preferred Stock for gross proceeds of $2,517,173.

EX-99.2 4 dex992.htm UNAUDITED FINANCIAL STATEMENTS OF CEQUENT PHARMACEUTICALS, INC. Unaudited financial statements of Cequent Pharmaceuticals, Inc.

Exhibit 99.2

INDEX TO FINANCIAL STATEMENTS

CEQUENT PHARMACEUTICALS, INC.

(A Development Stage Company)

Three-month Periods ended March 31, 2010 and 2009 and the Period from

November 10, 2003 (Inception) through March 31, 2010

(Unaudited)

CONTENTS


	Page
Balance Sheets		2
Statements of Operations		3
Statements of Cash Flows		4
Notes to Financial Statements		5

CEQUENT PHARMACEUTICALS, INC.

(A Development Stage Company)

BALANCE SHEETS

(Unaudited)


	As of,
	March 31, 2010			December 31, 2009
ASSETS
Current assets:
Cash and cash equivalents	$	2,116,378		$	3,213,748
Prepaid expenses		31,399			37,211

Total current assets		2,147,777			3,250,959
Property and equipment, net		367,067			417,224
Other assets		45,133			45,133

Total assets	$	2,559,977		$	3,713,316

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	45,599		$	131,009
Accrued expenses		216,972			331,938
Capital lease—current portion		15,236			13,656
Deferred revenue—current portion		576,087			576,087

Total current liabilities		853,894			1,052,690
Capital lease, net of current portion		12,089			17,769
Deferred revenue, net of current portion		692,935			836,956

Total liabilities		1,558,918			1,907,415

Commitments
Stockholders’ equity:
Series A redeemable, convertible preferred stock, $0.001 par value; authorized 14,850,000 shares, none issued and outstanding at March 31, 2010 and December 31, 2009		—			—
Series A-1 redeemable, convertible preferred stock, $0.001 par value; authorized 27,584,420 shares, issued and outstanding 15,176,263 at March 31, 2010 and December 31, 2009 (preference in liquidation of $16,970,068 at March 31, 2010)		16,896,705			16,966,615
Common stock , $0.001 par value; authorized 130,000,000 shares, issued and outstanding 5,824,710 and 5,820,127 at March 31, 2010 and December 31, 2009, respectively		5,825			5,820
Additional paid-in capital		1,895,119			1,719,445
Deficit accumulated during the development stage		(17,796,590	)		(16,885,979	)

Total stockholders’ equity		1,001,059			1,805,901

Total liabilities and stockholders’ equity	$	2,559,977		$	3,713,316

The accompanying notes are an integral part of these financial statements.

CEQUENT PHARMACEUTICALS, INC.

(A Development Stage Company)

STATEMENTS OF OPERATIONS

(Unaudited)


	Three Months Ended March 31,						Period from November 10, 2003 (Inception) through March 31, 2010
	2010			2009
Revenue	$	144,021		$	140,625		$	1,240,978

Operating expenses:
Research and development		291,153			973,815			11,563,862
General and administrative		763,365			557,658			7,233,267

Total operating expenses		1,054,518			1,531,473			18,797,129

Operating loss		(910,497	)		(1,390,848	)		(17,556,151	)

Other income (expense):
Other income (expense)		—			—			10,287
Interest income		63			7,986			445,947
Interest expense		(177	)		(727	)		(71,908	)

Other income (expense), net		(114	)		7,259			384,326

Net loss	$	(910,611	)	$	(1,383,589	)	$	(17,171,825	)

The accompanying notes are an integral part of these financial statements

CEQUENT PHARMACEUTICALS, INC.

(A Development Stage Company)

STATEMENTS OF CASH FLOWS

Unaudited


	Three Months Ended March 31,						Period from November 10, 2003 (Inception) through March 31, 2010
	2010			2009
Cash flows from operating activities:
Net loss	$	(910,611	)	$	(1,383,589	)	$	(17,171,825	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization expense		48,948			36,000			497,045
Non-cash interest expense		—			—			31,379
Share-based compensation expense		105,173			14,957			176,409
Fair value of common stock issued in conjunction with license agreement		—			—			61,921
Changes in operating assets and liabilities:
Prepaid expenses and other assets		5,812			47,978			(102,378	)
Accounts payable		(85,410	)		52,235			45,599
Accrued expenses		(114,966	)		(263,185	)		221,363
Deferred revenue		(144,021	)		(140,625	)		1,269,022

Net cash used in operating activities		(1,095,075	)		(1,636,229	)		(14,971,465	)

Cash flows from investing activities:
Purchases of property and equipment		—			(8,900	)		(820,280	)
Disposal of property and equipment		1,209			—			1,209

Net cash provided (used) in investing activities		1,209			(8,900	)		(819,071	)

Cash flows from financing activities:
Proceeds from issuance of preferred stock, net of issuance costs		—			—			17,912,694
Repayments of capital lease		(4,100	)		(3,411	)		(17,716	)
Proceeds from issuance of common stock		596			—			12,022
Repurchase of common stock		—			—			(86	)

Net cash (used) provided by financing activities		(3,504	)		(3,411	)		17,906,914

(Decrease) increase in cash and cash equivalents		(1,097,370	)		(1,648,540	)		2,116,378
Cash and cash equivalents at beginning of period		3,213,748			5,580,661			—

Cash and cash equivalents at end of period	$	2,116,378		$	3,932,121		$	2,116,378

Supplemental disclosure of cash flow information and non-cash transactions:
Cash paid for interest	$	177		$	565		$	36,126

Exchange of Series A Preferred stock and dividends for Series A-1 Preferred stock and dividends	$	—		$	—		$	13,643,805

Exchange of Series A Preferred stock for Common Stock	$	—		$	—		$	3,000,000

		—
Accretion of dividend and issuance costs on Series A Preferred stock	$	—		$	180,000		$	2,053,921

Relative fair value of warrants recorded as deferred financing costs	$	—		$	5,533		$	5,533

Property and equipment acquired under capital leases	$	—		$	45,041		$	45,041

The accompanying notes are an integral part of these financial statements.

CEQUENT PHARMACEUTICALS, INC.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

Period Ended March 31, 2010 and 2009, and the Period from

November 10, 2003 (Inception) to March 31, 2010 (Unaudited)

1. NATURE OF OPERATIONS

Business

Cequent Pharmaceuticals, Inc. (“Cequent”) was incorporated on November 10, 2003 under the laws of the State of Delaware.

2. SIGNIFICANT ACCOUNTING POLICIES

A summary of the significant accounting policies followed by Cequent in the preparation of the accompanying consolidated financial statements follows:

Basis of presentation

The accompanying unaudited financial statements of Cequent have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and do not include all the information and notes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, the accompanying unaudited financial statements include all adjustments, consisting of normal recurring adjustments, which are necessary to present fairly our financial position, results of operations and cash flows. Operating results for the three month period ended March 31, 2010, are not necessarily indicative of the results that may be expected for a full fiscal year.

Certain amounts in the 2009 financial statements have been reclassified to conform with the 2010 presentation.

Use of estimates

CEQUENT PHARMACEUTICALS, INC.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS (Continued)

Cash and cash equivalents

Cequent considers all highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents.

Financial instruments

Derivative instruments

At March 31, 2010, Cequent had outstanding warrants to purchase 198,249 shares of its common stock with an exercise price of $0.07 per share. These warrants are considered to be derivative instruments since the agreements contain “down round” provisions whereby the number of shares covered by the warrants is subject to change in the event of certain dilutive stock issuances. The fair value of these derivative instruments at March 31, 2010 and December 31, 2009 was immaterial, as was the change in the fair value during that period. The fair value of these warrants was estimated using the Black-Scholes option pricing model and assumptions consistent with those disclosed in “Share-based payments” below.

The primary underlying risk exposure pertaining to the warrants is the change in fair value of the underlying common stock for each reporting period.

Property and equipment


Classification		Estimated Useful Life
Computer hardware and software		3 years
Office furniture and equipment		5 years
Lab equipment		5 years
Leasehold improvements		Shorter of lease term or useful life

CEQUENT PHARMACEUTICALS, INC.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS (Continued)

Depreciation and amortization expense was $48,948 and $36,000 for the three-month periods ended March 31, 2010 and 2009, respectively.

Maintenance and repairs are charged to expense as incurred, while any additions or improvements are capitalized.

Research and development expenses

Costs incurred for research and development are expensed as incurred.

Income taxes

For federal and state income taxes, deferred tax assets and liabilities are recognized based upon temporary differences between the financial statement and the tax basis of assets and liabilities. Deferred income taxes are based upon prescribed rates and enacted laws applicable to periods in which differences are expected to reverse. A valuation allowance is recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Accordingly, Cequent provides a valuation allowance, if necessary, to reduce deferred tax assets to amounts that are realizable.

Concentrations of credit risk

Impairment of long-lived assets

Revenue recognition

Through March 31, 2010, Cequent’s revenue primarily relates to a single option agreement (see Note 7). Revenue is recognized when persuasive evidence of an arrangement exists, the price is fixed or determinable, delivery has occurred and collectibility is reasonably assured. Non-refundable, upfront payments received in connection with license option agreements are recognized over the option term on a straight-line basis.

CEQUENT PHARMACEUTICALS, INC.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS (Continued)

Share-based payments

The following assumptions were used to estimate the fair value of stock options granted using the Black-Scholes option pricing model:


	March 31, 2010	March 31, 2009
Risk-free interest rate	3.00 – 3.68%	1.87%
Expected life	5 – 10 years	5 years
Volatility	69%	69%
Dividend rate	0%	0%

Recent accounting pronouncements

3. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:


	March 31, 2010			December 31, 2009
Computer software and hardware	$	141,949		$	143,158
Office furniture and equipment		101,642			101,642
Lab equipment		523,127			523,127
Leasehold improvements		76,354			76,354

		843,072			844,281
Less accumulated depreciation and amortization		(476,005	)		(427,057	)

	$	367,067		$	417,224

CEQUENT PHARMACEUTICALS, INC.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS (Continued)

4. ACCRUED EXPENSES

Accrued expenses consisted of the following:


	March 31, 2010		December 31, 2009
Accrued bonus	$	—	$	195,800
Accrued expenses		55,353		40,042
Accrued severance		—		46,375
Accrued legal		94,037		35,000
Accrued vacation		67,582		9,788
Accrued other		—		4,933

	$	216,972	$	331,938

5. CAPITAL LEASE

In March 31, 20010, Cequent leased certain equipment under a capital lease agreement that is included in property and equipment and accumulated depreciation on the balance sheet at March 31, 2010:


Leased equipment	$	45,041
Less accumulated depreciation		(12,011	)

	$	33,030

The term of the lease calls for monthly payments in the amount of $1,380 until December 2011. The minimum lease payments under the capital lease are as follows:


Year Ending December 31,
2010	$	12,416
2011		16,555

Total		28,971
Less: amount representing interest		(1,646	)

	$	27,325

6. STOCKHOLDERS’ EQUITY

Series A and A-1 Redeemable, Convertible Preferred Stock

CEQUENT PHARMACEUTICALS, INC.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS (Continued)

Series A-1 Preferred Stock. In addition, the Series A-1 Agreement also authorized the issuance of up to an additional 12,734,420 of Series A-1 shares for a total of 27,584,420 authorized shares of Series A-1 Preferred Stock.

Significant terms of the Series A-1 Preferred Stock are as follows:

Conversion

Liquidation preference

After the payment of all preferential amounts required to be paid to the holders of Series A-1 Preferred Stock, the holders of Series A Preferred Stock shall be entitled to receive, prior and in preference to holders of common stock, an amount per share equal to (i) the Series A Original Issue Price ($1.00, subject to adjustment) per share of Series A-1 Preferred Stock; plus (ii) an amount equal to all accrued but unpaid dividends and all declared but unpaid dividends.

Dividends

CEQUENT PHARMACEUTICALS, INC.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS (Continued)

of Directors, upon a liquidation event and upon conversion. Dividends with respect to the Series A Preferred Stock exchanged for Series A-1 Preferred Stock that were accrued but unpaid at the time of such exchange shall be deemed to have accrued to the Series A-1 Preferred Stock for which such Series A Preferred Stock was exchanged and such share of Series A-1 Preferred Stock thereafter accrue dividends as though such accrued but unpaid dividends had accrued originally on such Series A-1 Preferred Stock shares.

To date, the Board of Directors has not declared any dividends. At March 31, 2010, Cequent had cumulative accreted dividends on the Series A-1 Preferred Stock of $1,793,805. There was no accretion of dividends for the three-month periods ended March 31, 2010 and 2009.

Voting

Redemption

Demand registration and participation rights

Participation rights

The holders of Series A-1 Preferred Stock have the right, for a period of thirty days following the delivery of an equity offering by Cequent, to purchase or acquire at a price and upon the other terms specified in the offer, up to said holder’s pro rata portion of the equity securities plus such additional portion of the securities up to the total of all of the holders of Series A-1 Preferred Stock pro rata portion of the equity securities offered for sale.

CEQUENT PHARMACEUTICALS, INC.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS (Continued)

Common stock

Stock option plan

As of March 31, 2010, the aggregate number of common shares which may be issued under the Plan was 15,673,052 shares. A summary of the activity under Cequent’s stock option plan for the quarter ended March 31, 2010 is as follows:


	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Months)		Aggregate Intrinsic Value
Outstanding at December 31, 2009		2,583,772		$	0.121
Granted		12,350,355		$	0.088
Exercised		(4,583	)	$	0.130
Forfeited		(444,583	)		0.123

Outstanding at March 31, 2010		14,484,961		$	0.093		115	$	547,125

Options exercisable at March 31, 2010		4,130,720		$	0.069		110	$	259,760

Reserved for future grants		85,062

Cequent recorded $105,173 and $14,957 as compensation expense in three-month period ended March 31, 2010 and 2009, respectively, for stock option awards granted to employees and consultants under the Plan. As of March 31, 2010, there was $606,305 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan which will be recognized over a weighted average period of approximately three years.

The weighted-average grant-date fair value of options granted during the three month period ended March 31, 2010 was $0.07. The exercise prices for options granted in the three-month period ended March 31, 2010 were $0.05 and $0.13 per share. Fair value was determined using the Black-Scholes option pricing model and the assumptions described in Note 2.

On March 18, 2010, Cequent granted options to purchase a total of 5,888,000 shares of common stock at $0.13 per share. These options vest as to 25% of the original number of shares on the earlier of (1) the first anniversary of the grant date or (2) immediately upon a change of control, as defined. Cequent has made an initial best estimate of the requisite service period for these options which may be changed in subsequent periods.

CEQUENT PHARMACEUTICALS, INC.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS (Continued)

Option Modification

In the three months ended March 31, 2010, in conjunction with the change in status from employees to consultants, Cequent effectively modified and re-priced options with three individuals for the purchase of a total of 655,000 shares of common stock. The re-issued options retained the vesting terms of the original options, have an exercise price of $0.05 per share and a ten-year term. The total expense related to these options will equal the portion of the grant-date fair value of the original award for which the requisite service is expected to be or has already been rendered ($4,631) plus the incremental cost resulting from the modification ($20,671). Incremental cost was measured as the excess of the fair value of the modified award over the fair value of the original award immediately before its terms were modified. The portion of the newly measured cost attributable to the remaining portion of the requisite service period will be recognized as expense over the service period. As the modified options were granted to non-employees, the fair value will be recomputed throughout the remaining vesting period as measurement dates occur.

7. DEFERRED REVENUE

Cequent entered into an exclusive option agreement with Novartis BioVentures Ltd., a related party, for an exclusive license. The option gives Novartis BioVentures Ltd. the right to enter into a Definitive Research and License Agreement for selected Cequent Modulators related to the Selected Target, as defined. Novartis BioVentures Ltd. paid a non-refundable fee of $1,250,000 and is obligated to make an additional non-refundable payment of $1,250,000 within thirty days of Cequent’s completion of a designated milestone. The option expires on the fifth anniversary of the agreement, June 13, 2012. On June 15, 2007, Cequent received the first payment and recorded the receipt as deferred revenue. On August 28, 2008, Cequent received the second payment and recorded the receipt as deferred revenue. Cequent is amortizing the payments to revenue over the life of the option. In the three-month period ended March 31, 2010 and 2009, Cequent recognized revenue of $144,021 and $140,625, respectively, in connection with the agreement.

8. SUBSEQUENT EVENTS

Management has evaluated subsequent events through June 4, 2010, which is the date the financial statements were available to be issued. Other than as discussed below there were no subsequent events that require adjustment to or disclosure in the financial statements.

Agreement and Plan of Merger

CEQUENT PHARMACEUTICALS, INC.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS (Continued)

As consideration for the Loan Agreement, MDRNA agrees to issue to Cequent on the date of each Term Loan a five-year warrant to purchase shares of MDRNA’s capital stock with an exercise price subject to adjustments as defined in the Merger Agreement. Each warrant is exercisable for a number of shares of MDRNA’s common stock equal to sixty-five percent (65%) of the principal amount of the Term Loan being made on such date divided by $1.1496 (subject to an equitable adjustment in the event of any stock split, stock dividend, stock combination or the like). The loan warrants are only exercisable, for a five year term, if the merger is not consummated, other than by reason of Cequent’s material breach of the Merger Agreement, and MDRNA engages in a transaction with another party that is similar to the proposed merger, prior to the one year anniversary of the termination of the Merger Agreement. Upon the completion of the Merger Agreement the warrants will terminate and be invalid.

Preferred stock issuance

On April 8, 2010, pursuant to the Series A-1 Convertible Preferred Stock Purchase Agreement, Cequent issued 2,517,173 Series A-1 Convertible Preferred Stock for gross proceeds of $2,517,173.

Loan Agreement

On April 30, 2010, Cequent extended MDRNA a Term Loan in the amount of $1,000,000 and on May 31, 2010, Cequent extended MDRNA an additional Term Loan in the amount of $1,000,000 under the Loan Agreement.

EX-99.3 5 dex993.htm UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED FINANCIAL INFORMATION Unaudited pro forma condensed combined consolidated financial information

Exhibit 99.3

UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS

The following unaudited pro forma condensed combined consolidated financial statements give effect to the transaction between our company and Cequent using the purchase method of accounting for the business combination.

We cannot assure you that we and Cequent will not incur charges in excess of those included in the pro forma total consideration related to the transaction or that management will be successful in its efforts to integrate the operations of the companies.

In addition to the impact of ongoing integration activities, the timing of completion of the transaction and other changes in net tangible and intangible assets that occur prior to completion of the transaction could cause material differences in the information presented.

The merger has not been consummated as of the date of the preparation of this unaudited pro forma condensed combined consolidated financial information and there can be no assurances that the merger transaction will be consummated.

The unaudited pro forma condensed combined consolidated financial information does not include any adjustments related to restructuring or one-time charges, potential profit improvements, potential cost savings or other costs which may result from the merger, or the result of final valuations of intangible assets and liabilities, which will not be determined until after the consummation of the merger, or the result of amounts which may be borrowed by our company from Cequent pursuant to terms of the loan agreement, which was entered into concurrent and in connection with the execution of the merger agreement.

UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED

BALANCE SHEET

As of March 31, 2010

(in thousands)


	Historical						Pro Forma Adjustments				Pro Forma Combined
	MDRNA			Cequent			Pro Forma Adjustments				Pro Forma Combined
	(Unaudited)			(Unaudited)			(Unaudited)				(Unaudited)
Current assets:
Cash and cash equivalents	$	2,630		$	2,116		$	5,984		B	$	10,730
Restricted cash		1,156			—			—				1,156
Prepaid expenses and other current assets		553			32			—				585

Total current assets		4,339			2,148			5,984				12,471
Property and equipment, net		4,258			367			—		C		4,625
Intangible assets		—			—			41,700		D		41,700
Goodwill		—			—			8,278		E		8,278
Other assets		—			45			—				45

Total assets	$	8,597		$	2,560		$	55,962			$	67,119

Current liabilities:
Accounts payable	$	2,139		$	46			1,549		F	$	3,734
Other accrued liabilities		3,044			232			—				3,276
Deferred revenue — current portion		126			576			(576	)	G		126

Total current liabilities		5,309			854			973				7,136
Deferred revenue, net of current portion		—			693			(693	)	G		—
Deferred rent and other liabilities		1,597			12			—				1,609
Fair value liability for price adjustable warrants		11,214			—			—				11,214
Deferred taxes		—			—			14,595		D		14,595

Total liabilities		18,120			1,559			14,875				34,554

Commitments and contingencies
Stockholders’ equity (deficit):
Preferred stock		—			16,897			(16,897	)	H		—
Common stock and additional paid in capital		262,984			1,901			43,637		A		306,621
								(1,901	)	H
Accumulated deficit		(272,507	)		(17,797	)		(1,549	)	F		(274,056	)
								17,797		H

Total stockholders’ equity (deficit)		(9,523	)		1,001			41,087				32,565

Total liabilities and stockholders’ equity (deficit)	$	8,597		$	2,560		$	55,962			$	67,119

See accompanying notes to unaudited pro forma condensed combined consolidated financial statements.

UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED

STATEMENT OF OPERATIONS

For the quarter ended March 31, 2010

(in thousands, except per share data)


	Historical						Pro Forma Adjustments			Pro Forma Combined
	MDRNA			Cequent			Pro Forma Adjustments			Pro Forma Combined
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
License and other revenue	$	184		$	144			—		$	328

Operating expenses:
Research and development		3,599			291			—			3,890
Selling, general and administrative		2,559			764			—			3,323
Restructuring		26			—			—			26

Total operating expenses		6,184			1,055			—			7,239

Loss from operations		(6,000	)		(911	)		—			(6,911	)

Other income (expense):
Interest and other expense		(780	)		—			—			(780	)
Change in fair value liability for price adjustable warrants		(2,710	)		—			—			(2,710	)

Total other expense, net		(3,490	)		—			—			(3,490	)

Net loss	$	(9,490	)	$	(911	)		—			(10,401	)

Net loss per common share — basic and diluted	$	(0.20	)					—		$	(0.12	)

Shares used in computing net loss per share — basic and diluted		47,328						38,351	I		85,679

See accompanying notes to unaudited pro forma condensed combined consolidated financial statements.

UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED

STATEMENT OF OPERATIONS

For the year ended December 31, 2009

(in thousands, except per share data)


	Historical						Pro Forma Adjustments			Pro Forma Combined
	MDRNA			Cequent			Pro Forma Adjustments			Pro Forma Combined
							(Unaudited)			(Unaudited)
License and other revenue	$	14,732		$	581			—		$	15,313

Operating expenses:
Research and development		14,882			3,498			—			18,380
Selling, general and administrative		10,088			2,314			—			12,402
Restructuring		455			—			—			455

Total operating expenses		25,425			5,812			—			31,237

Loss from operations		(10,693	)		(5,231	)		—			(15,924	)

Other income (expense):
Interest income		5			11			—			16
Interest and other expense		(538	)		(36	)		—			(574	)
Change in fair value liability for price adjustable warrants		2,526			—			—			2,526
Gain on settlement of liabilities, net		654			—			—			654

Total other income (expense), net		2,647			(25	)		—			2,622

Net loss	$	(8,046	)	$	(5,256	)		—			(13,302	)

Net loss per common share — basic and diluted	$	(0.21	)					—		$	(0.18	)

Shares used in computing net loss per share — basic and diluted		37,457						38,351	I		75,808

See accompanying notes to unaudited pro forma condensed combined consolidated financial statements.

NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED

FINANCIAL STATEMENTS

1. Description of Transaction

We and Cequent have entered into an Agreement and Plan of Merger, dated as of March 31, 2010, which is referred to as the merger agreement. The merger agreement contains the terms and conditions of the proposed business combination of our company and Cequent. Under the merger agreement, Calais Acquisition Corp., a wholly-owned subsidiary of our company, which is referred to as the merger sub, will merge with and into Cequent. This transaction is referred to as the merger. Cequent will then continue as a wholly-owned subsidiary of our company.

At the effective time of the merger, each share of Cequent Series A-1 convertible preferred stock and common stock outstanding immediately prior to the effective time of the merger will be exchanged for shares of our common stock at an exchange ratio that implies a purchase price for Cequent common and preferred stockholders of approximately $44 million, plus an additional value of approximately $2 million to Cequent warrant and option holders, based on the 10-day volume-weighted average price of our common stock on The NASDAQ Global Market ending on March 31, 2010.

Based upon the outstanding shares of our common stock and assuming the exercise or conversion of all of our outstanding exercisable and non-exercisable warrants and stock options, and assuming the exercise or conversion of all of Cequent’s exercisable and non-exercisable warrants, stock options and preferred stock, immediately following the completion of the merger, Cequent securityholders would own approximately 37% of the combined company’s common stock and our securityholders would own approximately 63% of the combined company’s common stock. In addition to considering these relative securityholdings, MDRNA and Cequent management also considered the proposed composition of the Board of Directors, the proposed structure and members of the executive management team, the size of the combining entities and the terms of the exchange of equity interests in determining the accounting acquirer. Based on the weight of these factors, it was concluded that MDRNA is the accounting acquirer.

2. Basis of Presentation

The unaudited pro forma condensed combined consolidated financial statements, which have been prepared by MDRNA have been derived from historical consolidated financial statements of MDRNA and historical financial statements of Cequent.

The unaudited pro forma condensed combined consolidated financial statements were prepared in accordance with Securities and Exchange Commission Regulation S-X Article 11, using the purchase method of accounting based on Accounting Standards Codification (ASC) 805, Business Combinations, and are based on the historical consolidated financial statements of MDRNA and the acquired business lines after giving effect to the stock to be issued by MDRNA to consummate the acquisition, as well as pro forma adjustments.

ASC 805 requires, among other things, that most assets acquired and liabilities assumed be recognized at their fair values, as determined in accordance with ASC 820, Fair Value Measurements, as of the acquisition date and that the fair value of acquired in-process research and development be recorded on the balance sheet regardless of the likelihood of success as of the acquisition date. In addition, ASC 805 establishes that the consideration transferred be measured at the closing date of the asset acquisition at the then-current market price, which may be different than the amount of consideration assumed in these unaudited pro forma condensed combined consolidated financial statements.

ASC 820, as amended, defines the term “fair value” and sets forth the valuation requirements for any asset or liability measured at fair value, expands related disclosure requirements and specifies a hierarchy of valuation techniques based on the nature of the inputs used to develop the fair value measures. Fair value is defined in

ASC 820, as amended, as “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.” This is an exit price concept for the valuation of the asset or liability. In addition, market participants are assumed to be buyers and sellers in the principal (or the most advantageous) market for the asset or liability. Fair value measurements for an asset assume the highest and best use by these market participants. As a result of these standards, MDRNA may be required to record assets which are not intended to be used or sold and/or to value assets at fair value measures that do not reflect MDRNA’s intended use of those assets. Many of these fair value measurements can be highly subjective and it is also possible that other professionals, applying reasonable judgment to the same facts and circumstances, could develop and support a range of alternative estimated amounts.

Under the purchase method of accounting, the assets acquired and liabilities assumed will be recorded as of the completion of the asset acquisition, primarily at their respective fair values and added to those of MDRNA. Financial statements and reported results of operations of MDRNA issued after completion of the asset acquisition will reflect these values, but will not be retroactively restated to reflect the historical financial position or results of operations of Cequent.

Under ASC 805, acquisition-related transaction costs (i.e., advisory, legal, valuation, other professional fees) and certain acquisition-related restructuring charges impacting the target company are expensed in the period in which the costs are incurred. Total advisory, legal, regulatory and valuation costs expected to be incurred by MDRNA are estimated to be approximately $1.5 million. As of March 31, 2010, MDRNA has incurred approximately $0.6 million in acquisition related transaction costs.

3. Accounting Policies

Upon consummation of the merger, MDRNA will perform a detailed review of Cequent’s accounting policies. As a result of that review, it may become necessary to conform the combined company’s financial statements to be consistent with those accounting policies that are determined to be more appropriate for the combined company. The unaudited pro forma condensed combined consolidated financial statements do not assume any differences in accounting policies.

4. Preliminary Purchase Price Determination

The following is a preliminary estimate of consideration expected to be transferred to effect the acquisition of Cequent:

The total preliminary purchase price is estimated at $43.7 million based on the closing price of our common stock on March 31, 2010 of $1.10 per share and is comprised of (in millions):


Equity Component	$	44.7
Exercise price of vested Cequent options and warrants		(1.0	)

Total purchase consideration	$	43.7

5. Preliminary Allocation of Consideration Transferred

The estimated total purchase price of $43.7 million was allocated to the net tangible and intangible assets acquired and liabilities assumed based on their fair values as follows (in millions):


Cash (a)	$	8.1
Identifiable Intangible Assets (b)		41.7
Fixed Assets		0.4
Other Assets		0.1
Deferred Tax Liability (c)		(14.6	)
Other Liabilities		(0.3	)
Goodwill (d)		8.3

Total purchase consideration	$	43.7

(a)

The merger agreement contains a condition that as of the closing date, Cequent must have a cash balance of at least (i) $5,100,000, minus the amount of Cequent’s ordinary course operating expenses from June 2, 2010 through the Closing Date; plus (iii) the difference of $3,000,000 and the aggregate principal amount loaned to MDRNA by Cequent under the Loan Agreement. The merger agreement permits Cequent to sell additional shares of Cequent capital stock, or debt or warrants convertible into capital stock of Cequent, to new and existing investors of Cequent, including but not limited to the sale of up to $7,520,000 of Series A-1 Convertible Preferred Stock. In April 2010, Cequent raised proceeds of approximately $2.5 million through the sale of 2,517,173 shares of Series A-1 Convertible Preferred Stock. Cequent is seeking to raise additional proceeds through additional sales of Series A-1 Convertible Preferred Stock.

(b)	As of the completion of the merger, identifiable intangible assets are required to be measured at fair value consistent with ASC Subtopic 820-10. The fair value measurements were performed after considering the highest and best use of the acquired intangible assets by market participants.

The fair value of the identifiable intangible assets was determined using either the income or cost approach.

For purposes of these unaudited pro forma condensed combined consolidated financial statements and using certain high-level assumptions, the fair value of the identifiable intangible assets and their weighted-average useful lives have been estimated as follows:


In-Process Technology — Program #1		$33.5 million (Indefinite Life)
In-Process Technology — Program #2		6.2 million (Indefinite Life)
In-Process Technology — Program #3		2.0 million (Indefinite Life)

		$41.7 million

The income approach, which relies on future estimates of cash flows, was used to estimate the fair value of the Program #1.

MDRNA believes that the information gathered during the due diligence process and from discussions with Cequent were adequate to perform preliminary fair value measurements of the primary intangible assets.

MDRNA valued the in-process technology of Program #1 and #2 utilizing a discounted cash flow model, which uses forecasts of future revenues and expenses related to the intangible assets. Program #3 was valued using the cost approach due to the early stage of development.

In-process technology will be accounted for as indefinite-lived intangible assets until the projects are completed or abandoned. Once the projects are completed or abandoned, MDRNA will determine the useful lives of these intangible assets, if any, and the intangible assets will be amortized over the useful lives.

Intangible assets with indefinite useful lives and goodwill will not be amortized but will be tested for impairment at least annually. All intangible assets and goodwill are also tested for impairment when certain indicators are present. In the future, if it were determined that intangible assets or goodwill are impaired, an impairment charge would be recorded at that time.

(c)	As of the completion of the merger, MDRNA will provide deferred taxes and other tax adjustments as part of the accounting for the acquisition, primarily related to the estimated fair value adjustments for net acquired intangibles (see Note 6. Pro Forma Adjustments).

(d)	Goodwill is calculated as the difference between the acquisition date fair value of the consideration expected to be transferred and the values assigned to the assets acquired and liabilities assumed. Goodwill is not amortized, but is evaluated annually for impairment.

6. Pro Forma Adjustments

Pro forma adjustments reflect those matters that are a direct result of the merger, which are factually supportable and, for pro forma adjustments to the pro forma condensed combined consolidated statement of operations, are expected to have continuing impact. The pro forma adjustments are based on preliminary estimates which may change as additional information is obtained.

Adjustments included in the column under the heading “Pro Forma Adjustments” represent the following:

(A)

The value of our shares to be issued is based on a per share value of $1.10, which is equal to the closing price per share of our common stock as reported on The Nasdaq Global Market on March 31, 2010. The equity component of the purchase price has been estimated at approximately $43.7 million consisting of the following shares to be issued, offset by the exercise price of vested stock options and warrants:

•

Approximately 38,350,620 shares of our common stock to be issued to holders of shares of Cequent preferred and common stock.

•

Approximately 2,274,832 shares of our common stock to be reserved for Cequent warrant holders, and Cequent option holders, for options vested or expected to vest as of the date of the merger which will be replaced by warrants and vested options to purchase shares of our common stock. The total exercise price for these options and warrants is estimated at $1.0 million.

The pro forma adjustment for shares and replacement warrants and vested options expected to be issued upon the merger includes the estimated value for the holders of the common stock, preferred stock, warrants and vested options, which represents an estimated 40,625,452 shares valued at approximately $44.7 million based on the March 31, 2010 closing price per share of our common stock, less proceeds from the exercise of vested stock options and warrants estimated at $1.0 million.

Approximately 579,267 shares of our common stock will be reserved for holders of unvested Cequent options as of the date of the merger which will be replaced by unvested options to purchase shares of our common stock. The stock-based compensation expense for the replacement options will be reflected in our statement of operations after the merger is consummated.

(B)

(C)	Management believes based upon its preliminary assessment that the estimated fair value of Cequent property and equipment, which is comprised primarily of lab and office equipment, reasonably approximates the Cequent net book value of the assets.

(D)

Portions of the purchase price are expected to be allocated to indefinite-lived intangible assets which were identified by management and have been valued on a number of factors in a preliminary appraisal. The pro forma adjustment amounts reflect management’s preliminary estimates of the fair values of assets to be acquired and liabilities to be assumed at the date of the merger. These estimates are preliminary because the merger has not yet occurred and management has not yet obtained all of the information that it has arranged to obtain and that is known to be available.

We have estimated a deferred tax liability of approximately $14.6 million relating to certain indefinite-lived intangible assets using a 35% tax rate.

(E)

Goodwill represents the excess of purchase price over the fair value of Cequent’s net assets, including identifiable intangible assets, acquired in the merger. Goodwill to be recorded in connection with the merger will differ from the amount presented here as management obtains all information that it has arranged to obtain and that is known to be available, and adjusts the allocation of purchase price accordingly and because the purchase price accounting will be based on MDRNA’s stock price at closing.

(F)

Expenses related to the merger including legal fees, investment banking fees, accounting fees, printing, filing and other costs and fees will be expensed as incurred. A pro forma adjustment estimated in the amount of $1,549,000 has been included on the unaudited pro forma condensed combined consolidated balance sheet as an increase in accounts payable, and as an increase to accumulated deficit.

(G)

Deferred revenue previously recorded by Cequent of approximately $1.3 million at March 31, 2010 has been eliminated as there are no future performance obligations in connection with the Definitive Research and License Agreement for selected Cequent Modulators, the right of which to enter into until June 13, 2012 has been granted to Novartis BioVentures Ltd. (or its affiliate).

(H)	The pro forma adjustments represent the elimination of Cequent’s stockholders equity accounts.

(I)

The weighted average number of shares is based on our historical weighted average shares outstanding and increased to give effect to the issuance of approximately 38,350,620 shares in connection with the merger. This excludes the effect of 2,854,099 common stock equivalents (stock options and warrants) to be issued in connection with the merger since such inclusion in the computation would be anti-dilutive.

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