Business Context and Reporting Period
This Form 10-Q was filed by Nile Therapeutics, Inc., not Capricor Therapeutics, for the quarter and six months ended June 30, 2013. Nile was a development-stage biopharmaceutical company focused on cardiovascular and renal disease candidates, principally cenderitide and preclinical CU-NP. The financial statements are unaudited.
On July 7, 2013, after quarter-end, Nile entered into a merger agreement with Capricor, Inc. Capricor stockholders were expected to receive shares representing approximately 90% of the combined company on a fully diluted basis, subject to closing conditions.
Financial Results and Key Metrics
| Metric | Three Months Ended June 30, 2013 | Three Months Ended June 30, 2012 | Six Months Ended June 30, 2013 | Six Months Ended June 30, 2012 |
|---|---|---|---|---|
| Total income | $0 | $0 | $0 | $195,500 |
| Research and development expense | $36,513 | $332,450 | $99,119 | $797,803 |
| General and administrative expense | $384,621 | $441,970 | $647,095 | $941,990 |
| Operating loss | $421,134 | $774,420 | $746,214 | $1,544,293 |
| Net loss | $597,621 | $352,934 | $1,080,383 | $1,124,813 |
| Loss per share | $0.01 | $0.01 | $0.03 | $0.03 |
| Cash used in operating activities | Not separately reported | Not separately reported | $200,011 | $1,456,215 |
The company had no product sales and no operating revenue. Gross and operating margins are therefore not meaningful. Cumulative net loss since inception was $47.8 million.
| Balance Sheet Metric | June 30, 2013 | December 31, 2012 |
|---|---|---|
| Cash and cash equivalents | $229,205 | $46,716 |
| Total assets | $294,822 | $227,054 |
| Total liabilities | $1,527,673 | $394,367 |
| Current liabilities | $1,015,586 | $330,983 |
| Notes payable, net | $258,514 | $0 |
| Warrant liability | $512,087 | $63,384 |
| Stockholders’ deficit | $1,232,851 | $167,313 |
Financing activities provided $382,500 during the first six months of 2013, from secured convertible notes issued in March 2013. The notes had $450,000 of principal, a 15% original issue discount, a March 15, 2014 maturity date, and were secured by a blanket lien on company assets.
Material Changes Versus the Prior Comparable Period
- Six-month operating loss decreased to $746,214 from $1.54 million, primarily because clinical development activity was substantially wound down.
- Six-month R&D expense declined to $99,119 from $797,803 as cenderitide development was placed on hold and the company had no R&D employees.
- Six-month G&A expense declined to $647,095 from $941,990 due to lower stock compensation, professional fees, and other operating costs.
- Net loss improved modestly for the six months but worsened for the quarter because of interest expense and changes in warrant-liability fair value.
- Cash increased by $182,489 during the first six months, principally from the March convertible-note financing, while operating cash use declined substantially.
- Liabilities increased materially, including the addition of $258,514 of net notes payable and a $512,087 warrant liability.
- Prior-year collaboration income of $195,500 did not recur; the Medtronic agreement had expired after final reimbursement in February 2012.
Guidance, Outlook, Risks, and Unusual Items
- Management stated that available cash was sufficient only to fund minimal operating expenses until approximately the middle of the third quarter of 2013. Substantial additional capital was required to continue operations and fund development.
- The company disclosed substantial doubt about its ability to continue as a going concern. If the Capricor merger or alternative financing failed, management stated that Nile could be forced to liquidate.
- A Phase 2 cenderitide trial was estimated to cost approximately $15 million to $20 million and take approximately 30 months. No funding had been secured for the trial, and all further development of cenderitide and CU-NP was on hold.
- The Capricor merger was subject to stockholder approval, including approval of a reverse split of up to 1-for-100, amendment of the Mayo license arrangements, and satisfaction or release of most accrued liabilities. The agreement could be terminated if not completed by September 30, 2013.
- Nile was not in compliance with several terms of its Mayo license agreements, including annual maintenance payments and active development obligations. It owed Mayo approximately $154,100 for cenderitide-related fees and $39,300 for CU-NP-related fees. Failure to renegotiate could result in loss of the licensed rights.
- The March 2013 note agreement provided for automatic conversion and warrants upon certain changes of control, or a cash payment equal to 175% of principal for other qualifying changes of control.
- The warrant liability increased from $63,384 at year-end 2012 to $512,087 at June 30, 2013. The increase included a $245,303 unrealized loss and reflected a higher probability of warrant issuance following the Capricor merger announcement.
- Deferred executive compensation accrued at June 30, 2013 totaled approximately $225,712 for the CEO and $114,384 for the CFO. Additional change-of-control compensation provisions could result in equity or cash payments.
- Subsequent to quarter-end, the company exchanged warrants to purchase 2.75 million shares for 458,332 common shares and obtained termination agreements for options covering 1,774,341 shares, contingent on the planned merger.
- Management reported effective disclosure controls and procedures and no material changes to internal control over financial reporting. No material legal proceedings were disclosed.
Important Facts for Investors to Verify
- Confirm the issuer identity and subsequent corporate name or status, because the supplied request identifies Capricor Therapeutics while the filing is for Nile Therapeutics, Inc.
- Verify whether the Capricor merger closed, whether the reverse split occurred, and the resulting ownership and capitalization.
- Assess the company’s post-quarter-end liquidity, financing sources, and ability to satisfy or restructure accrued liabilities and secured notes.
- Review the final disposition of the Mayo license agreements and whether cenderitide and CU-NP rights were retained.
- Reconcile the warrant and option cancellations, new shares issued, and resulting fully diluted share count.
- Evaluate the going-concern disclosure and whether operations continued beyond the company’s stated cash runway in the third quarter of 2013.