Business, Liquidity and Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2015

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Business, Liquidity and Summary of Significant Accounting Policies

Note 1 — Business, Liquidity and Summary of Significant Accounting Policies

Business

We are a biotechnology company focused on the discovery, development and commercialization of nucleic acid-based therapies to treat orphan diseases. Our pipeline includes CEQ508, a product in clinical development for the treatment of Familial Adenomatous Polyposis (“FAP”), for which we have received Orphan Drug Designation (“ODD”) and Fast Track Designation (“FTD”) from the U.S. Food and Drug Administration (“FDA”), and preclinical programs for the treatment of type 1 myotonic dystrophy (“DM1”) and Duchenne muscular dystrophy (“DMD”).

Since 2010, we have strategically acquired/in-licensed and further developed nucleic acid chemistry and delivery-related technologies in order to establish a novel and differentiated drug discovery platform. This platform allows us to distinguish ourselves from others in the nucleic acid therapeutics area in that we are the only company capable of creating a wide variety of therapeutics targeting coding and non-coding RNA via multiple mechanisms of action such as RNA interference (“RNAi”), messenger RNA translational inhibition, exon skipping, microRNA (“miRNA”) replacement, miRNA inhibition, and steric blocking in order to modulate gene expression either up or down depending on the specific mechanism of action. Our goal is to dramatically improve the lives of the patients and families affected by orphan diseases through either our own efforts or those of our collaborators and licensees.

Liquidity

The accompanying condensed consolidated financial statements have been prepared on the basis that we will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business. At September 30, 2015, we had an accumulated deficit of approximately $335.0 million, $108.9 million of which has been accumulated since we focused on RNA therapeutics in June 2008. To the extent that sufficient funding is available, we will continue to incur losses as we continue our research and development (“R&D”) activities. In addition, we have had and will continue to have negative cash flows from operations. We have funded our losses primarily through the sale of common and preferred stock and warrants, revenue provided from our license agreements and, to a lesser extent, equipment financing facilities and secured loans. In 2014 and 2015, we funded operations with a combination of the issuance of preferred stock and license-related revenues. At September 30, 2015, we had negative working capital of $1.1 million and $1.3 million in cash. Our resumed limited operating activities consume the majority of our cash resources.

We believe that our current cash resources will enable us to fund our intended operations through March 2016. Our ability to execute our operating plan beyond March 2016 depends on our ability to obtain additional funding. The volatility in our stock price, as well as market conditions in general, could make it difficult for us to raise capital on favorable terms, or at all. If we fail to obtain additional capital when required, we may have to modify, delay or abandon some or all of our planned activities, or terminate our operations. We are currently pursuing both non-dilutive means of obtaining additional capital, primarily from existing and potential future licenses and partnerships, and dilutive means of obtaining additional capital, primarily through the offering of our equity and debt securities. However, there can be no assurance that we will be successful in such endeavors. The accompanying condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis of Preparation and Summary of Significant Accounting Policies

Basis of Preparation — The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and note disclosures required by U.S. generally accepted accounting

principles (“U.S. GAAP”) for complete financial statements. The accompanying unaudited financial information should be read in conjunction with the audited consolidated financial statements, including the notes thereto, as of and for the year ended December 31, 2014, included in our 2014 Annual Report on Form 10-K filed with the SEC. The information furnished in this report reflects all adjustments (consisting of normal recurring adjustments), which are, in the opinion of management, necessary for a fair presentation of our financial position, results of operations and cash flows for each period presented. The results of operations for the three and nine months ended September 30, 2015 are not necessarily indicative of the results for the year ending December 31, 2015 or for any future period.

Use of Estimates — The preparation of financial statements in conformity with U.S. GAAP requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting periods. Estimates having relatively higher significance include revenue recognition, stock-based compensation, valuation of warrants, valuation and estimated lives of identifiable intangible assets, impairment of long-lived assets, valuation of features embedded within note agreements and amendments, and income taxes. Actual results could differ from those estimates.

Fair Value of Financial Instruments —We consider the fair value of cash, accounts receivable, accounts payable and accrued liabilities to not be materially different from their carrying value. These financial instruments have short-term maturities.

We follow authoritative guidance with respect to fair value reporting issued by the Financial Accounting Standards Board (“FASB”) for financial assets and liabilities, which defines fair value, provides guidance for measuring fair value and requires certain disclosures. The guidance does not apply to measurements related to share-based payments. The guidance discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

Level 3: Unobservable inputs in which little or no market data exists, therefore developed using estimates and assumptions developed by us, which reflect those that a market participant would use.

Our cash is subject to fair value measurement and value is determined by Level 1 inputs. We measure the liability for committed stock issuances with a fixed share number using Level 1 inputs. We measure the liability for price adjustable warrants and certain features embedded in notes using the Black-Scholes option pricing model (“Black-Scholes Model”) under various probability weighted scenarios, using Level 3 inputs. The following tables summarize our liabilities measured at fair value on a recurring basis as of December 31, 2014 and September 30, 2015:

			Level 1				Level 3
	Balance at		Quoted prices in		Level 2		Significant
	December 31,		active markets for		Significant other		unobservable
(In thousands)	2014		identical assets		observable inputs		inputs
Liabilities:
Fair value liability for price adjustable warrants	$	9,225	$	-	$	-	$	9,225
Fair value liability for shares to be issued		75		75		-		-
Total liabilities at fair value	$	9,300	$	75	$	-	$	9,225

			Level 1				Level 3
	Balance at		Quoted prices in		Level 2		Significant
	September 30,		active markets for		Significant other		unobservable
(In thousands)	2015		identical assets		observable inputs		inputs
Liabilities:
Fair value liability for price adjustable warrants	$	3,672	$	-	$	-	$	3,672
Fair value liability for shares to be issued		12		12		-		-
Total liabilities at fair value	$	3,684	$	12	$	-	$	3,672

The following presents activity of the fair value liability of price adjustable warrants determined by Level 3 inputs for the nine months ended September 30, 2015:

				Weighted average as of each measurement date
	Fair value liability for price adjustable warrants (in thousands)			Exercise Price		Stock Price		Volatility			Contractual life (in years)		Risk free rate
Balance at December 31, 2014	$	9,225		$	0.42	$	0.95		121	%		3.51		0.90	%
Warrant issuance in connection with Series D convertible preferred stock		575			0.40		0.44		97	%		1.19		0.73	%
Change in fair value included in statement of operations		(6,128	)		-		-		-			-		-
Balance at September 30, 2015	$	3,672		$	0.42	$	0.53		102	%		2.07		0.57	%

Net Income (Loss) per Common Share — Basic net income (loss) per common share is computed by dividing the net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share includes the effect of common stock equivalents (stock options, unvested restricted stock, warrants) when, under either the treasury or if-converted method, such inclusion in the computation would be dilutive. Net income (loss) is adjusted for the dilutive effect of the change in fair value liability for price adjustable warrants, if applicable. The following number of shares have been excluded from diluted net income (loss) since such inclusion would be anti-dilutive:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2015		2014		2015
Stock options outstanding		1,303,504		1,316,106		1,303,504		1,316,106
Warrants		21,210,695		1,236,946		21,210,695		1,236,946
Convertible preferred stock		8,000,000		10,150,000		8,000,000		10,150,000
Total		30,514,199		12,703,052		30,514,199		12,703,052

The following is a reconciliation of basic and diluted net income (loss) per share:

	Three Months Ended September 30						Nine Months Ended September 30
	2014			2015			2014			2015
Net income (loss) – numerator basic	$	(7,123	)	$	769		$	(18,280	)	$	2,087
Change in fair value liability for price adjustable warrants		-			(2,485	)		-			(6,128	)
Net loss excluding change in fair value liability for price adjustable warrants	$	(7,123	)	$	(1,716	)	$	(18,280	)	$	(4,041	)
Weighted average common shares outstanding – denominator basic		25,668			26,462			24,248			26,047
Effect of price adjustable warrants		-			4,477			-			7,437
Weighted average dilutive common shares outstanding		25,668			30,939			24,248			33,484
Net income (loss) per common share – basic	$	(0.28	)	$	0.03		$	(0.75	)	$	0.08
Net loss per common share – diluted	$	(0.28	)	$	(0.06	)	$	(0.75	)	$	(0.12	)