10-Q 1 v359151_10q.htm FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2013
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE TRANSITION PERIOD FROM                     TO                     
 
Commission File Number: 001-34058
 
NILE THERAPEUTICS, INC.
(Exact Name Of Registrant As Specified In Its Charter)
  
Delaware
88-0363465
(State of Incorporation)
(I.R.S. Employer Identification No.)
 
63 Bovet Rd., Suite 421, San Mateo, CA 94402
(Address of principal executive offices)(Zip Code)
 
(650) 918-7489
(Registrant’s telephone number, including area code)
 
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   x   No   ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     x   Yes     ¨   No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer   ¨
Accelerated filer ¨
 
 
Non-accelerated filer     ¨ (Do not check if a smaller reporting company)
Smaller reporting company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ¨    No  x
 
As of November 12, 2013, there were 43,520,563 shares of common stock, par value $0.001 per share, of Nile Therapeutics, Inc. issued and outstanding.
 
 
 
 
 
Index
 
 
 
Page
 
 
 
PART I
FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
Condensed Balance Sheets (unaudited)
4
 
 
 
 
Condensed Statements of Operations (unaudited)
5
 
 
 
 
Condensed Statement of Stockholders’ Equity (unaudited)
6
 
 
 
 
Condensed Statements of Cash Flows (unaudited)
7
 
 
 
 
Notes to Condensed Financial Statements (unaudited)
8
 
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
21
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
30
 
 
 
Item 4.
Controls and Procedures
30
 
 
 
PART II
OTHER INFORMATION
 
 
 
 
Item 1.
Legal Proceedings
31
 
 
 
Item 1A.
Risk Factors
31
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
31
 
 
 
Item 3.
Defaults Upon Senior Securities
31
 
 
 
Item 4.
Mine Safety Disclosures
31
 
 
 
Item 5.
Other Information
32
 
 
 
Item 6.
Exhibits
33
 
 
 
 
Signatures
33
 
 
 
 
Exhibit Index
34
 
 
2

 
Forward-Looking Statements
 
This Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Any statements about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. These forward-looking statements include, but are not limited to, statements about:
 
 
our ability to complete our planned merger with Capricor, Inc.;
 
our ability to obtain adequate financing;
 
our ability to find collaborative partners for research, development and commercialization of potential products;
 
the development of our product candidates;
 
the regulatory approval of our product candidates;
 
our use of clinical research centers and other contractors;
 
acceptance of our products by doctors, patients or payors;
 
our ability to market any of our product candidates;
 
our history of operating losses;
 
our ability to compete against other companies and research institutions;
 
our ability to secure adequate protection for our intellectual property;
 
our ability to attract and retain key personnel;
 
availability of reimbursement for our product candidates;
 
the effect of potential strategic transactions on our business; and
 
the volatility of our stock price.
 
These statements are often, but not always, made through the use of words or phrases such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend” and similar words or phrases. For such statements, we claim the protection of the Private Securities Litigation Reform Act of 1995. Readers of this Quarterly Report on Form 10-Q are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the time this Quarterly Report on Form 10-Q was filed with the Securities and Exchange Commission, or SEC. These forward-looking statements are based largely on our expectations and projections about future events and future trends affecting our business, and are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. Discussions containing these forward-looking statements may be found throughout this report, including Part I, the section entitled “Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations.” These forward-looking statements involve risks and uncertainties, including the risks discussed in our Annual Report on Form 10-K for the year ended December 31, 2012 (“Form 10-K”), that could cause our actual results to differ materially from those in the forward-looking statements. Except as required by law, we undertake no obligation to publicly revise our forward-looking statements to reflect events or circumstances that arise after the filing of this report or documents incorporated by reference herein that include forward-looking statements. The risks discussed in our Form 10-K and in this report should be considered in evaluating our prospects and future financial performance.
 
In addition, past financial or operating performance is not necessarily a reliable indicator of future performance and you should not use our historical performance to anticipate results or future period trends. We can give no assurances that any of the events anticipated by the forward-looking statements will occur or, if any of them do, what impact they will have on our results of operations and financial condition.
 
References to the “Company,” “Nile,” the “Registrant,” “we,” “us,” or “our” in this report refer to Nile Therapeutics, Inc., a Delaware corporation, unless the context indicates otherwise.
 
 
3

 
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.
 
NILE THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED BALANCE SHEETS
 
 
 
September 30, 2013
 
December 31, 2012
 
 
 
(unaudited)
 
 
 
 
ASSETS
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
71,028
 
$
46,716
 
Prepaid expenses and other current assets
 
 
37,975
 
 
124,912
 
 
 
 
 
 
 
 
 
Total current assets
 
 
109,003
 
 
171,628
 
 
 
 
 
 
 
 
 
Property and equipment, net
 
 
828
 
 
3,488
 
Other noncurrent assets
 
 
4,535
 
 
51,938
 
 
 
 
 
 
 
 
 
Total assets
 
$
114,366
 
$
227,054
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' DEFICIT
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
Accounts payable
 
$
339,245
 
$
182,916
 
Accrued expenses and other current liabilities
 
 
497,886
 
 
131,928
 
Notes payable, net of unamortized discount of $123,204
 
 
326,796
 
 
-
 
Due to related party
 
 
18,000
 
 
16,139
 
 
 
 
 
 
 
 
 
Total current liabilities
 
 
1,181,927
 
 
330,983
 
 
 
 
 
 
 
 
 
Warrant liability
 
 
499,993
 
 
63,384
 
 
 
 
 
 
 
 
 
Total liabilities
 
 
1,681,920
 
 
394,367
 
 
 
 
 
 
 
 
 
Commitments and contingencies
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stockholders' deficit
 
 
 
 
 
 
 
Preferred stock, $0.001 par value, 10,000,000 shares authorized, none issued and outstanding
 
 
-
 
 
-
 
Common stock, $0.001 par value, 100,000,000 shares authorized, 43,520,563 and 43,062,231 shares issued and outstanding
 
 
43,521
 
 
43,062
 
Additional paid-in capital
 
 
46,525,778
 
 
46,497,642
 
Deficit accumulated during the development stage
 
 
(48,136,853)
 
 
(46,708,017)
 
 
 
 
 
 
 
 
 
Total stockholders' deficit
 
 
(1,567,554)
 
 
(167,313)
 
 
 
 
 
 
 
 
 
Total liabilities and stockholders' deficit
 
$
114,366
 
$
227,054
 
 
See accompanying notes to the unaudited condensed financial statements.
 
 
4

 
NILE THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Period from August
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1, 2005 (incpetion)
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
through September
 
 
 
2013
 
2012
 
2013
 
2012
 
30, 2013
 
Income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Grant income
 
$
-
 
$
-
 
$
-
 
$
-
 
$
482,235
 
Collaboration income
 
 
-
 
 
-
 
 
-
 
 
195,500
 
 
1,550,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total income
 
 
-
 
 
-
 
 
-
 
 
195,500
 
 
2,032,235
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Research and development
 
 
30,882
 
 
179,142
 
 
130,002
 
 
976,945
 
 
31,149,822
 
General and administrative
 
 
261,083
 
 
397,170
 
 
908,178
 
 
1,339,159
 
 
18,846,049
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total operating expenses
 
 
291,965
 
 
576,312
 
 
1,038,180
 
 
2,316,104
 
 
49,995,871
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss from operations
 
 
(291,965)
 
 
(576,312)
 
 
(1,038,180)
 
 
(2,120,604)
 
 
(47,963,636)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
 
 
57
 
 
309
 
 
200
 
 
1,149
 
 
795,392
 
Interest expense
 
 
(68,282)
 
 
-
 
 
(155,345)
 
 
-
 
 
(1,429,079)
 
Other income (expense)
 
 
11,737
 
 
9,771
 
 
(235,511)
 
 
428,410
 
 
460,470
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total other income (expense)
 
 
(56,488)
 
 
10,080
 
 
(390,656)
 
 
429,559
 
 
(173,217)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
 
$
(348,453)
 
$
(566,232)
 
$
(1,428,836)
 
$
(1,691,045)
 
$
(48,136,853)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic and diluted loss per share
 
$
(0.01)
 
$
(0.01)
 
$
(0.03)
 
$
(0.04)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding
 
 
43,366,125
 
 
43,062,231
 
 
43,164,642
 
 
41,912,961
 
 
 
 
 
See accompanying notes to the unaudited condensed financial statements.
 
 
5

 
NILE THERAPEUTICS, INC. 
(A DEVELOPMENT STAGE COMPANY) 
CONDENSED STATEMENT OF STOCKHOLDERS’ (DEFICIT) EQUITY 
PERIOD FROM AUGUST 1, 2005 (INCEPTION) TO SEPTEMBER 30, 2013
(unaudited)
   
 
 
 
 
 
 
 
 
 
 
 
DEFICIT
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ACCUMULATED
 
TOTAL
 
 
 
 
 
 
 
 
 
ADDITIONAL
 
DURING THE
 
STOCKHOLDERS'
 
 
 
COMMON STOCK
 
PAID-IN
 
DEVELOPMENT
 
EQUITY
 
 
 
SHARES
 
AMOUNT
 
CAPITAL
 
STAGE
 
(DEFICIT)
 
Issuance of common shares to founders
 
 
13,794,132
 
$
13,794
 
$
(8,794)
 
$
-
 
$
5,000
 
Founders shares returned to treasury
 
 
(1,379,419)
 
 
-
 
 
-
 
 
-
 
 
-
 
Net loss
 
 
-
 
 
-
 
 
-
 
 
(10,043)
 
 
(10,043)
 
Balance at December 31, 2005
 
 
12,414,713
 
 
13,794
 
 
(8,794)
 
 
(10,043)
 
 
(5,043)
 
Issuance of common shares pursuant to licensing agreement
 
 
1,379,419
 
 
-
 
 
500
 
 
-
 
 
500
 
Issuance of stock options for services
 
 
-
 
 
-
 
 
10,000
 
 
-
 
 
10,000
 
Net loss
 
 
-
 
 
-
 
 
-
 
 
(2,581,972)
 
 
(2,581,972)
 
Balance at December 31, 2006
 
 
13,794,132
 
 
13,794
 
 
1,706
 
 
(2,592,015)
 
 
(2,576,515)
 
Issuance of common shares pursuant to licensing agreement
 
 
63,478
 
 
64
 
 
182,172
 
 
-
 
 
182,236
 
Issuance of common shares pursuant to licensing agreement
 
 
350,107
 
 
350
 
 
999,650
 
 
-
 
 
1,000,000
 
Common shares sold in private placement, net of
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
issuance costs of $102,000
 
 
6,957,914
 
 
6,958
 
 
19,865,789
 
 
-
 
 
19,872,747
 
Warrants issued in connection with note conversion
 
 
-
 
 
-
 
 
288,000
 
 
-
 
 
288,000
 
Conversion of notes payable upon event of merger
 
 
1,684,085
 
 
1,684
 
 
4,349,481
 
 
-
 
 
4,351,165
 
Note discount arising from beneficial conversion feature
 
 
-
 
 
-
 
 
483,463
 
 
-
 
 
483,463
 
Reverse merger transaction
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Elimination of accumulated deficit
 
 
-
 
 
-
 
 
(234,218)
 
 
-
 
 
(234,218)
 
Previously issued SMI stock
 
 
1,250,000
 
 
1,250
 
 
232,968
 
 
-
 
 
234,218
 
Employee stock-based compensation
 
 
-
 
 
-
 
 
1,902,298
 
 
-
 
 
1,902,298
 
Non-employee stock-based compensation
 
 
-
 
 
-
 
 
(667)
 
 
-
 
 
(667)
 
Net loss
 
 
-
 
 
-
 
 
-
 
 
(10,302,795)
 
 
(10,302,795)
 
Balance at December 31, 2007
 
 
24,099,716
 
 
24,100
 
 
28,070,642
 
 
(12,894,810)
 
 
15,199,932
 
Warrants issued in satisfaction of accrued liabilities
 
 
-
 
 
-
 
 
334,992
 
 
-
 
 
334,992
 
Employee stock-based compensation
 
 
-
 
 
-
 
 
2,436,603
 
 
-
 
 
2,436,603
 
Non-employee stock-based compensation
 
 
-
 
 
-
 
 
13,687
 
 
-
 
 
13,687
 
Issuance of common shares pursuant to licensing agreement
 
 
49,689
 
 
50
 
 
249,950
 
 
-
 
 
250,000
 
Net loss
 
 
-
 
 
-
 
 
-
 
 
(13,131,596)
 
 
(13,131,596)
 
Balance at December 31, 2008
 
 
24,149,405
 
 
24,150
 
 
31,105,874
 
 
(26,026,406)
 
$
5,103,618
 
Employee stock-based compensation
 
 
-
 
 
-
 
 
1,772,597
 
 
-
 
 
1,772,597
 
Non-employee stock-based compensation
 
 
-
 
 
-
 
 
473,584
 
 
-
 
 
473,584
 
Units sold in private placement, net of issuance costs of $282,773
 
 
2,691,394
 
 
2,691
 
 
3,284,484
 
 
-
 
 
3,287,175
 
Stock option and warrant exercises
 
 
245,025
 
 
245
 
 
217,228
 
 
-
 
 
217,473
 
Net loss
 
 
-
 
 
-
 
 
-
 
 
(7,872,297)
 
 
(7,872,297)
 
Balance at December 31, 2009
 
 
27,085,824
 
 
27,086
 
 
36,853,767
 
 
(33,898,703)
 
 
2,982,150
 
Employee stock-based compensation
 
 
-
 
 
-
 
 
1,142,552
 
 
-
 
 
1,142,552
 
Non-employee stock-based compensation
 
 
-
 
 
-
 
 
(19,249)
 
 
-
 
 
(19,249)
 
Units sold in private placement, net of issuance costs of $715,801
 
 
7,475,000
 
 
7,475
 
 
4,509,224
 
 
-
 
 
4,516,699
 
Stock option and warrant exercises
 
 
68,970
 
 
69
 
 
6,138
 
 
-
 
 
6,207
 
Net loss
 
 
-
 
 
-
 
 
-
 
 
(6,031,491)
 
 
(6,031,491)
 
Balance at December 31, 2010
 
 
34,629,794
 
 
34,630
 
 
42,492,432
 
 
(39,930,194)
 
 
2,596,868
 
Employee stock-based compensation
 
 
-
 
 
-
 
 
785,587
 
 
-
 
 
785,587
 
Non-employee stock-based compensation
 
 
-
 
 
-
 
 
20,740
 
 
-
 
 
20,740
 
Stock option and warrant exercises
 
 
82,437
 
 
82
 
 
13,666
 
 
-
 
 
13,748
 
Units sold in private placement, net of issuance costs of $201,434
 
 
5,000,000
 
 
5,000
 
 
2,293,566
 
 
-
 
 
2,298,566
 
Net loss
 
 
-
 
 
-
 
 
-
 
 
(4,884,786)
 
 
(4,884,786)
 
Balance at December 31, 2011
 
 
39,712,231
 
 
39,712
 
 
45,605,991
 
 
(44,814,980)
 
 
830,723
 
Employee stock-based compensation
 
 
-
 
 
-
 
 
312,690
 
 
-
 
 
312,690
 
Units sold in private placement, net of issuance costs of $145,793
 
 
3,350,000
 
 
3,350
 
 
1,190,857
 
 
-
 
 
1,194,207
 
Warrants issued in connection with offering
 
 
-
 
 
-
 
 
(611,896)
 
 
-
 
 
(611,896)
 
Net loss
 
 
-
 
 
-
 
 
-
 
 
(1,893,037)
 
 
(1,893,037)
 
Balance at December 31, 2012
 
 
43,062,231
 
 
43,062
 
 
46,497,642
 
 
(46,708,017)
 
 
(167,313)
 
Warrants exchanged for common stock
 
 
458,332
 
 
459
 
 
13,291
 
 
-
 
 
13,750
 
Employee stock-based compensation
 
 
-
 
 
-
 
 
14,845
 
 
-
 
 
14,845
 
Net loss
 
 
-
 
 
-
 
 
-
 
 
(1,428,836)
 
 
(1,428,836)
 
Balance at September 30, 2013
 
 
43,520,563
 
$
43,521
 
$
46,525,778
 
$
(48,136,853)
 
$
(1,567,554)
 
 
See accompanying notes to the unaudited condensed financial statements.
 
 
6

 
NILE THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
 
 
 
 
 
 
 
 
 
Period from
 
 
 
Nine months ended September 30,
 
August 1, 2005 (inception)
 
 
 
2013
 
2012
 
through September 30, 2013
 
Cash flows from operating activities
 
 
 
 
 
 
 
 
 
 
Net loss
 
$
(1,428,836)
 
$
(1,691,045)
 
$
(48,136,853)
 
 
 
 
 
 
 
 
 
 
 
 
Adjustment to reconcile net loss to net cash used in
    operating activities
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
 
1,353
 
 
4,806
 
 
328,257
 
Stock-based compensation
 
 
14,845
 
 
305,243
 
 
10,632,995
 
Conversion of warrants to common stock
 
 
13,750
 
 
-
 
 
13,750
 
Warrant liability
 
 
233,209
 
 
(431,046)
 
 
(315,303)
 
Write-off of intangible assets
 
 
-
 
 
-
 
 
106,830
 
Warrants issued in connection with note conversion
 
 
-
 
 
-
 
 
288,000
 
Note discount arising from beneficial conversion feature
 
 
-
 
 
-
 
 
483,463
 
Loss on disposal of assets
 
 
1,307
 
 
-
 
 
38,031
 
Noncash interest expense
 
 
147,696
 
 
-
 
 
498,861
 
 
 
 
 
 
 
 
 
 
 
 
Changes in operating assets and liabilities
 
 
 
 
 
 
 
 
 
 
Prepaid expenses and other current assets
 
 
86,937
 
 
115,456
 
 
(37,975)
 
Other non-current assets
 
 
47,403
 
 
-
 
 
(4,535)
 
Accounts payable
 
 
156,329
 
 
(227,787)
 
 
339,245
 
Accrued expenses and other current liabilities
 
 
365,958
 
 
4,309
 
 
497,886
 
Due to related party
 
 
1,861
 
 
(30,826)
 
 
18,000
 
 
 
 
 
 
 
 
 
 
 
 
Net cash used in operating activities
 
 
(358,188)
 
 
(1,950,890)
 
 
(35,249,348)
 
 
 
 
 
 
 
 
 
 
 
 
Cash flows from investing activities
 
 
 
 
 
 
 
 
 
 
Purchase of property and equipment
 
 
-
 
 
-
 
 
(130,855)
 
Proceeds from sale of assets
 
 
-
 
 
-
 
 
2,500
 
Cash paid for intangible assets
 
 
-
 
 
-
 
 
(345,591)
 
Net cash used in investing activities
 
 
-
 
 
-
 
 
(473,946)
 
 
 
 
 
 
 
 
 
 
 
 
Cash flows from financing activities
 
 
 
 
 
 
 
 
 
 
Proceeds from issuance of notes payable
 
 
382,500
 
 
-
 
 
5,882,500
 
Repayment of notes payable
 
 
-
 
 
-
 
 
(1,500,000)
 
Proceeds from exercise of stock options and warrants
 
 
-
 
 
-
 
 
237,428
 
Proceeds from sale of common stock to founders
 
 
-
 
 
-
 
 
5,000
 
Proceeds from sale of common stock in private placement, net
 
 
-
 
 
1,194,207
 
 
31,169,394
 
 
 
 
 
 
 
 
 
 
 
 
Net cash provided by financing activities
 
 
382,500
 
 
1,194,207
 
 
35,794,322
 
 
 
 
 
 
 
 
 
 
 
 
Net (decrease) increase in cash and cash equivalents
 
 
24,312
 
 
(756,683)
 
 
71,028
 
Cash and cash equivalents at beginning of period
 
 
46,716
 
 
1,039,190
 
 
-
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents at end of period
 
$
71,028
 
$
282,507
 
$
71,028
 
 
 
 
 
 
 
 
 
 
 
 
Supplemental schedule of cash flows information:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash paid for interest
 
$
-
 
$
-
 
$
150,000
 
 
 
 
 
 
 
 
 
 
 
 
Supplemental schedule of non-cash investing and financing activities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Warrants issued in satisfaction of accrued liability
 
$
-
 
$
-
 
$
334,992
 
Warrants issued to placement agent and investors in connection with private placements
 
 
 
 
$
-
 
$
5,721,000
 
Warrants issued to investors in connection with registered direct offering
 
$
-
 
$
611,896
 
$
611,896
 
Conversion of notes payable and interest to common stock
 
$
-
 
$
-
 
$
4,351,165
 
Common shares of SMI issued in reverse merger transaction
 
$
-
 
$
-
 
$
1,250
 
 
See accompanying notes to the unaudited condensed financial statements.
 
 
7

 
Nile Therapeutics, Inc
(A Development Stage Company)
Notes to Condensed Financial Statements
 
1. DESCRIPTION OF BUSINESS
 
Nile Therapeutics, Inc. (“Nile” or the “Company”) engages in research and development of innovative products for the treatment of cardiovascular diseases. Nile’s lead compound is cenderitide, a chimeric natriuretic peptide currently in development for the treatment of heart failure patients in the post-acute period. The Company is also developing CU-NP, a pre-clinical rationally designed natriuretic peptide that consists of amino acid chains identical to those produced by the human body, specifically the ring structure of C-type Natriuretic Peptide (“CNP”) and the N- and C-termini of Urodilatin (“URO”).
 
The Company was incorporated in the State of Nevada on June 17, 1996 and reincorporated in Delaware on February 9, 2007, at which time its name was SMI Products, Inc. (“SMI”). On September 17, 2007, the Company completed a merger transaction whereby Nile Merger Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of SMI, merged with and into Nile Therapeutics, Inc., a privately held Delaware corporation (“Old Nile”), with Old Nile becoming a wholly-owned subsidiary of SMI. Immediately following the merger described above, Old Nile was merged with and into the Company, with the Company remaining as the surviving corporation to that merger. In connection with that short-form merger, the Company changed its name to “Nile Therapeutics, Inc.” All costs incurred in connection with the SMI merger transactions have been expensed. Upon completion of these merger transactions, the Company adopted Old Nile’s business plan.
 
On July 7, 2013, the Company entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with Capricor, Inc. (“Capricor”), a privately held company incorporated in Delaware, and Bovet Merger Corp., a Delaware corporation and a wholly-owned subsidiary of the Company (“Merger Sub”), pursuant to which Merger Sub, subject to certain conditions contained in the Merger Agreement, will merge with and into Capricor and Capricor will become a wholly-owned subsidiary of the Company (the “Merger”). The Merger Agreement was amended on September 27, 2013.  Upon completion of the Merger, each outstanding share of Capricor common stock, and each security convertible into Capricor common stock, will automatically convert into the right to receive a number of shares of the Company’s common stock, or, as applicable, securities convertible into the Company’s common stock, such that, after giving effect to the Merger, the holders of Capricor capital stock immediately prior to the Merger will hold, in the aggregate, 90% of the total number of shares of the Company’s common stock on a fully-diluted basis. Capricor is a company whose mission is to improve the treatment of heart disease by commercializing cardiac stem cell therapies for patients.
 
The Merger Agreement contains customary representations and warranties by the Company and Capricor with respect to their businesses and the transactions contemplated by the Merger Agreement. Closing of the Merger is conditioned on, among other things, accuracy of such representations and warranties, approval of the Merger Agreement by the requisite number of Capricor’s stockholders, conversion of each share of Capricor preferred stock into Capricor common stock, and stockholder approval of an amendment to the Company’s Certificate of Incorporation authorizing a reverse split of the Company’s common stock at a ratio not to exceed 1-for-100. In addition, the closing of the Merger is conditioned on the Company amending its technology license agreement with the Mayo Foundation and evidence of payment or other satisfaction in full (including releases) of accrued liabilities and obligations of the Company (with the exception of obligations not to exceed the aggregate amount of $100,000, which may remain outstanding through the effective time of the Merger). The Merger Agreement may be terminated for certain reasons, including by either party if the closing thereof does not occur prior to November 15, 2013. The Merger Agreement also contains other customary terms and provisions as are common in similar agreements.
 
The Company’s executive officers will resign and will be replaced by the current officers of Capricor. Following completion of the planned merger, Capricor will continue its focus on developing its product pipeline and the Company expects that the combined company will also eventually continue the development of cenderitide and CU-NP. See Note 3, below.

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
The Company is a development stage enterprise since it has not yet generated any revenue from the sale of products and, through September 30, 2013, its efforts have been principally devoted to developing its licensed technologies, and raising capital. Accordingly, the accompanying condensed financial statements have been prepared in accordance with the provisions of Accounting Standards Codification (“ASC”) 915, “Development Stage Entities.”
 
The accompanying unaudited Condensed Financial Statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q adopted under the Securities Exchange Act of 1934, as amended. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. In the opinion of Nile’s management, the accompanying Condensed Financial Statements contain all adjustments (consisting of normal recurring accruals and adjustments) necessary to present fairly the financial position, results of operations and cash flows of the Company at the dates and for the periods indicated. The interim results for the period ended September 30, 2013 are not necessarily indicative of results for the full 2013 fiscal year or any other future interim periods. Because the 2007 merger with SMI was accounted for as a reverse acquisition under generally accepted accounting principles, the financial statements for periods prior to September 17, 2007 reflect only the operations of Old Nile.
 
 
8

 
Nile Therapeutics, Inc
(A Development Stage Company)
Notes to Condensed Financial Statements
 
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
These unaudited Condensed Financial Statements have been prepared by management and should be read in conjunction with the Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 filed with the Securities and Exchange Commission.
 
The preparation of financial statements in conformity with GAAP requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting periods. Estimates and assumptions principally relate to services performed by third parties but not yet invoiced, estimates of the fair value and forfeiture rates of stock options issued to employees and consultants, and estimates of the probability and potential magnitude of contingent liabilities. Actual results could differ from those estimates.
 
Collaboration Income
 
In February 2011, the Company entered into a collaboration agreement whereby the Company was reimbursed for work performed on behalf of the collaborator upon the achievement of certain milestones. The Company recorded all of these expenses as research and development expenses and the reimbursements upon the achievement of the milestones as income (Note 5).
 
The Company recognizes milestone payments as income upon achievement of the milestone only if (1) the milestone payment is non-refundable, (2) substantive effort is involved in achieving the milestone, (3) the amount of the milestone is reasonable in relation to the effort expended or the risk associated with achievement of the milestone and (4) the milestone is at risk for both parties. If any of these conditions are not met, the Company defers the milestone payment and recognizes it as income over the remaining estimated period of performance under the contract as the Company completes its performance obligations.
 
Research and Development
 
Research and development costs are charged to expense as incurred. Research and development includes employee costs, fees associated with operational consultants, contract clinical research organizations, contract manufacturing organizations, clinical site fees, contract laboratory research organizations, contract central testing laboratories, licensing activities, and allocated office, insurance, depreciation, and facilities expenses. The Company accrues for costs incurred as the services are being provided by monitoring the status of the trial and the invoices received from its external service providers. The Company adjusts its accruals in the period when actual costs become known. Costs related to the acquisition of technology rights for which development work is still in process are charged to operations as incurred and considered a component of research and development costs.
 
Fair Value of Financial Instruments
 
The Company measures fair value in accordance with generally accepted accounting principles. Fair value measurements are applied under other accounting pronouncements that require or permit fair value measurements. Financial instruments included in the Company’s balance sheets consist of cash and cash equivalents, accounts payable, accrued expenses, due to related parties, and warrant liability. The carrying amounts of these instruments reasonably approximate their fair values due to their short-term maturities.
 
Warrant Liability
 
The Company accounts for the warrants issued in connection with the March 2013 convertible note issuance (Note 6) and the April 2012 financing (Note 8) in accordance with the guidance on Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, which provides that the Company classifies the warrant instrument as a liability at its fair value and adjust the instrument to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized as a component of other income or expense. The fair value of warrants issued by the Company, in connection with the April 2012 financing, have been estimated by management using a binomial options pricing model. The binomial option pricing model is a generally accepted valuation model used to generate a defined number of stock price paths in order to develop a reasonable estimate of the range of the Company’s future expected stock prices, and their resulting probabilistic valuation. In connection with the March 2013 convertible note issuance, the Company estimated the fair value of the embedded derivative warrant liability by using the Black-Scholes option-pricing model.
 
 
9

 
Nile Therapeutics, Inc
(A Development Stage Company)
Notes to Condensed Financial Statements
 
3. LIQUIDITY, CAPITAL RESOURCES AND MANAGEMENT’S PLANS
 
As discussed above under Note 1, on July 7, 2013, the Company entered into a merger agreement with Capricor. Following completion of the planned merger, the Company anticipates that the combined company, under the leadership of Capricor’s management, will eventually continue the development of cenderitide and CU-NP (Note 5), in addition to Capricor’s current research and development programs.
 
The Company does do not have the capital resources available to continue the development of our product development programs or to otherwise remain in business. For more than 12 months, we have sought either additional financing to fund such activities or a collaboration or other strategic agreement with another company that would provide the capital needed to fund further development of the Company’s product candidates. Prior to our entry into the Capricor merger agreement, the Company had been unsuccessful in securing such additional capital. The planned merger with Capricor is subject to several conditions, including the approval of stockholders of a reverse split of the Company’s common stock at a ratio not to exceed 1-for-100. If such conditions are not satisfied, the Company may be unable to complete the planned merger. In that case, the Company would be forced to liquidate.
 
The Company has experienced net losses since its inception and has an accumulated deficit of approximately $48.1 million at September 30, 2013. Cash resources as of September 30, 2013 were approximately $0.1 million, compared to $0.05 million as of December 31, 2012. Based on its currently available cash resources, including the proceeds from the additional Notes (see Note 12), the Company believes that it only has sufficient capital to fund its minimal operating expenses until the middle of the fourth quarter of 2013. The Company will need to raise additional capital to fund any clinical development and to otherwise continue operations beyond the middle of the fourth quarter of 2013. Additionally, the Company will need substantial additional financing in the future until it can achieve profitability, if ever. The Company’s continued operations will depend on its ability to raise additional funds through various potential sources, such as equity and debt financing, or to license its product candidates to another pharmaceutical company. The Company will continue to fund operations from cash on hand and through sources of capital similar to those previously described. The Company cannot assure that it will be able to secure such additional financing, or if available, that it will be sufficient to meet its needs.
 
These factors raise substantial doubt about the Company's ability to continue as a going concern. The Company’s Condensed Financial Statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The financial statements do not include any adjustments that might result from the inability of the Company to continue as a going concern.

4. BASIC AND DILUTED LOSS PER SHARE
 
Basic loss per share is computed by dividing the loss available to common shareholders by the weighted-average number of common shares outstanding. Diluted loss per share is computed similarly to basic loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive.
 
For all periods presented, potentially dilutive securities are excluded from the computation of fully diluted loss per share as their effect is anti-dilutive. There are no potentially dilutive securities as of September 30, 2013 and 2012.
 
For the three and nine months ended September 30, 2013 and 2012, warrants and options to purchase 9,861,400 and 16,762,331 shares, respectively, have been excluded from the computation of potentially dilutive securities, respectively, as their exercise prices are greater than the average market price per common share for the periods ended September 30, 2013 and September 30, 2012, respectively.

5. INTANGIBLE ASSETS AND INTELLECTUAL PROPERTY
 
License Agreements
 
Cenderitide
 
On January 20, 2006, the Company entered into an exclusive, worldwide, royalty-bearing license agreement, or the Cenderitide License Agreement, with Mayo Foundation for Medical Education and Research (“Mayo”) for the rights to issued patents, patent applications and know-how relating to the use of cenderitide in all therapeutic indications.  The Company was also entitled to rights to improvements to cenderitide that arose out of the laboratory of Dr. John Burnett, the co-inventor of cenderitide, until January 19, 2009.  
 
 
10

 
Nile Therapeutics, Inc
(A Development Stage Company)
Notes to Condensed Financial Statements
 
5. INTANGIBLE ASSETS AND INTELLECTUAL PROPERTY (Continued)
 
Under the terms of the Cenderitide License Agreement, the Company paid Mayo an up-front cash payment, reimbursed it for past patent expenses and issued to Mayo 1,379,419 shares of common stock. Additionally, the Company agreed to make contingent cash payments up to an aggregate of $31.9 million upon successful completion of specified clinical and regulatory milestones relating to cenderitide. This aggregate amount is subject to increase upon the receipt of regulatory approval for each additional indication of cenderitide as well as for additional compounds or analogues contained in the intellectual property. In July 2008, the Company made a milestone payment of $400,000 to Mayo upon the dosing of the first patient in a Phase 2 trial.  Based on the current stage of research the Company does not expect to make any milestone payments for the year ending December 31, 2013. Pursuant to the Cenderitide License Agreement, the Company will pay Mayo an annual maintenance fee and a percentage of net sales of licensed products, as well as $50,000 per year for the consulting services of Dr. Burnett while serving as chairman of the Company’s Scientific Advisory Board.
 
In addition to the potential milestone payments discussed above, the Cenderitide License Agreement requires the Company to issue shares of common stock to Mayo for an equivalent dollar amount of grants received in excess of $300,000, but not to exceed $575,000. For the period from August 1, 2005 (inception) through September 30, 2013, the Company received $482,235 in grant income for which it has issued to Mayo 63,478 shares of common stock. No such grant income has been received or shares issued since the year ended December 31, 2008.
 
The Cenderitide License Agreement, unless earlier terminated, will continue in full force and effect until January 20, 2026. However, to the extent any patent covered by the license is issued with an expiration date beyond January 20, 2026, the term of the agreement will continue until such expiration date. Mayo may terminate the agreement earlier (i) for the Company’s material breach of the agreement that remains uncured after 90 days’ written notice, (ii) the Company’s insolvency or bankruptcy, or (iii) if the Company challenges the validity or enforceability of any of the patents in any manner. The Company may terminate the agreement without cause upon 90 days’ written notice.
 
As of September 30, 2013, the Company was not in compliance with several terms of the Cenderitide License Agreement, including, but not limited to, provisions requiring the Company to pay the Mayo Foundation an annual maintenance fee and actively pursue the development of cenderitide. The Company is in discussions with the Mayo Foundation to amend the agreement, but the Company cannot guarantee that it will be able to reach an agreement with Mayo that allows the Company to maintain its rights to cenderitide. The Company currently owes Mayo approximately $154,100 in fees and expense reimbursements related to the Cenderitide License Agreement, all of which is included in accounts payable. The Company is currently negotiating with Mayo to amend its license agreements relating to cenderitide and CU-NP in order to satisfy and/or modify the Company’s outstanding obligations to Mayo. The Company anticipates that it will conclude such negotiations prior to completing its planned merger with Capricor.
 
CU-NP
 
On June 13, 2008, the Company entered into an exclusive, worldwide, royalty-bearing license agreement, or the CU-NP License Agreement, with Mayo for the rights to intellectual property and to develop commercially CU-NP for all therapeutic indications. The Company was also entitled to rights to improvements to CU-NP that arose out of the laboratory of Dr. John Burnett and Dr. Candace Lee, the inventors of CU-NP, until June 12, 2011.
 
Under the terms of the CU-NP License Agreement, the Company made an up-front cash payment to Mayo and agreed to make future contingent cash payments up to an aggregate of $24.3 million upon achievement of specific clinical and regulatory milestones relating to CU-NP, including a milestone payment due in connection with the initiation of the first Phase 2 clinical trial of the licensed product. This aggregate amount of $24.3 million is subject to increase upon the receipt of regulatory approval for each additional indication of CU-NP, as well as for additional compounds or analogues contained in the intellectual property. Based on the current stage of research the Company does not expect to make any milestone payments for the year ending December 31, 2013. Pursuant to the agreement, the Company must also pay Mayo an annual maintenance fee and a percentage of net sales of licensed products.
 
In addition to these cash payments payable with respect to the CU-NP License Agreement, the Company also agreed to issue shares of its common stock and warrants to Mayo. In June 2008, the Company issued 49,689 shares of common stock to Mayo having a fair market value as of June 13, 2008 equal to $250,000. This amount has been recorded in research and development expenses in the accompanying Condensed Statements of Operations.
 
The CU-NP License Agreement, unless earlier terminated, will continue in full force and effect until June 13, 2028. However, to the extent any patent covered by the license is issued with an expiration date beyond June 13, 2028, the term of the agreement will continue until such expiration date. Mayo may terminate the agreement earlier (i) for the Company’s material breach of the agreement that remains uncured after 90 days written notice, (ii) the Company’s insolvency or bankruptcy, (iii) if the Company challenges the validity or enforceability of any of the patents in any manner, or (iv) upon receipt of notice from the Company that it has terminated all development efforts under the agreement. The Company may terminate the agreement without cause upon 90 days’ written notice.
 
 
11

 
Nile Therapeutics, Inc
(A Development Stage Company)
Notes to Condensed Financial Statements
 
5. INTANGIBLE ASSETS AND INTELLECTUAL PROPERTY (Continued)
 
  As of September 30, 2013, the Company was not in compliance with several terms of the CU-NP License Agreement, including, but not limited to, provisions requiring the Company to pay the Mayo Foundation an annual maintenance fee and actively pursue the development of CU-NP. The Company is in discussions with the Mayo Foundation to amend the agreement, but the Company cannot guarantee that it will be able to reach an agreement with Mayo that allows the Company to maintain its rights to CU-NP. As of September 30, 2013, the Company owed Mayo approximately $39,300 in fees and expense reimbursements related to the CU-NP License Agreement, all of which is included in accounts payable.
 
Collaboration Agreement
 
In February 2011, the Company entered into a Clinical Trial Funding Agreement with Medtronic, Inc. Pursuant to the agreement, Medtronic provided the funding and equipment necessary for the Company to conduct a Phase 1 clinical trial to assess the pharmacokinetics and pharmacodynamics of cenderitide when delivered to heart failure patients through continuous subcutaneous infusion using Medtronic’s diabetes pump technology.
 
Under the agreement, the Company agreed not to enter into an agreement with a third party to develop or commercialize cenderitide or any drug/device combination developed under the agreement until the earlier of: (i) three months following delivery to Medtronic of a final database with respect to the Phase 1 trial; and (ii) 15 months after the date of the agreement. The final database was delivered to Medtronic on November 19, 2011.
 
The agreement also provided that intellectual property conceived in or otherwise resulting from the performance of the Phase 1 clinical trial shall be jointly owned by Nile and Medtronic (the “Joint Intellectual Property”), and that Nile shall pay royalties to Medtronic based on the net sales of any Nile product, the manufacture, use or sale of which is covered or claimed in one or more issued patents constituting Joint Intellectual Property.  The agreement further provided that, if the parties fail to enter into a definitive commercial license agreement with respect to cenderitide, then each party shall have a right of first negotiation to license exclusive rights to any Joint Intellectual Property. As of September 30, 2013, three filed patent applications are considered Joint Intellectual Property.
 
Pursuant to its terms, the agreement expired in February 2012, following the completion of the Phase 1 clinical trial and the delivery of data and reports related to the study. The Company received the final reimbursement of $195,500 in February 2012 and a total of $1,550,000 over the life of the agreement. All amounts are recorded as collaboration income in the Company’s Condensed Statement of Operations.

6. CONVERTIBLE NOTES PAYABLE
 
On March 15, 2013, the Company entered into a convertible note purchase agreement with certain accredited investors pursuant to which the Company agreed to sell an aggregate principal amount of up to $500,000 of secured convertible promissory notes (the “2013 Notes”) for an aggregate original issue price of $425,000, representing a 15% original issue discount. The closing of the private placement also occurred on March 15, 2013, and resulted in the sale of the 2013 Notes in the aggregate principal amount of $450,000 for an aggregate original issue price of $382,500. The original issue discount is $67,500 and is being amortized to interest expense over the term of the 2013 Notes. As of September 30, 2013, the unamortized balance of this original issue discount is $30,699.
 
The 2013 Notes, which have a maturity date of March 15, 2014, do not bear interest and may be prepaid without penalty upon 30 days’ written notice, on the terms set forth in the Notes. The 2013 Notes are secured by a blanket lien on our assets pursuant to a security agreement dated March 15, 2013.
 
The 2013 Notes contain an optional conversion feature that enables the Holder to convert all outstanding shares into shares of the Company's common stock at a conversion price per share equal to the average daily Closing Price over the ten consecutive trading days preceding the date of such prepayment notice. The optional conversion feature goes into effect only if the Company chooses to prepay the Notes in whole or in part without penalty upon 30 days' prior written notice to the Holder (and conversion must occur within this 30 day period). 
 
 
12

 
Nile Therapeutics, Inc
(A Development Stage Company)
Notes to Condensed Financial Statements
 
6. CONVERTIBLE NOTES PAYABLE (Continued)
 
On September 27, 2013, the Company and the holders of the Notes entered into an amendment to the Notes, which provided, among other things, that upon a Change of Control as described above, the conversion price applicable to the Notes and the exercise price applicable to the warrants issuable upon a Change of Control will be equal to the average dollar volume weighted average price ("VWAP") of the Company's common stock for each trading day during the period from July 8, 2013 to September 30, 2013. The average VWAP during such period is approximately $0.045 per share. Additionally, pursuant to the amendment, upon a conversion of the Notes in connection with a Change of Control, the holders confirmed that all obligations under the Notes would be deemed satisfied in full and released the Company from any claims relating to the Notes.  
 
Pursuant to the terms of the 2013 Notes, upon a Change of Control (as defined in the 2013 Notes) in which either (i) the outstanding shares of the Company’s common stock are exchanged for securities of another corporation, or (ii) the Company issues shares of common stock, with no securities or other consideration paid or payable to holders of our common stock (e.g., a merger transaction in which the Company acquires another corporation in exchange for shares of our common stock), then (A) the entire unpaid principal under the applicable 2013 Note shall automatically convert, as of immediately prior to the effective time of the Change of Control, into shares of the Company’s common stock at a conversion price per share equal to approximately $0.045 on the effective date of the Change of Control, and (B) the Company shall also issue to each 2013 Note holder a five-year warrant entitling the holder to purchase, at an exercise price equal to approximately $0.045, that number of shares of our common stock obtained by dividing (a) the sum of the outstanding principal under the applicable Note by (b) approximately $0.045. Upon a Change of Control other than as described in the preceding sentence, the Company shall pay to each 2013 Note holder an amount in cash equal to 175% of the principal amount then outstanding under the applicable Note. Upon payment of such amount to the 2013 Note holders, all of the obligations under the Notes shall be deemed paid and satisfied in full.
 
The warrants issuable upon a Change of Control are considered an embedded derivative and were bifurcated from the notes and accounted for separately at fair value. The fair value of the warrants was $203,400 on March 15, 2013, the date of issuance, and were recorded as additional debt discount (Note 7). The Company will revalue the warrants on a quarterly basis until the warrants are issued or the 2013 Notes are repaid in full. As of September 30, 2013, the fair value of the warrants was $393,200. Following the entry into, and subsequent amendment of the merger agreement with Capricor (Note 1), management have estimated the probability of issuance to be 95% as of September 30, 2013. Management used the following assumptions for the Black-Scholes valuation of the 2013 Notes on March 15, 2013 and September 30, 2013:
 
 
 
March 15, 2013
 
 
September 30, 2013
 
Stock Price :
 
$
0.09
 
 
$
0.05
 
Strike Price :
 
$
0.09
 
 
$
0.05
 
Risk-free Rate:
 
 
0.84
%
 
 
1.39
%
Volatility
 
 
148
%
 
 
153
%
Term
 
 
5 years
 
 
 
5 years
 
Probability of issuance:
 
 
50
%
 
 
95
%
 
The discount is being amortized to interest expense over the one year term of the 2013 Notes. As of September 30, 2013, the unamortized balance of this note discount is $92,505.

7. FAIR VALUE OF FINANCIAL INSTRUMENTS
 
The Company defines fair value as the amount at which an asset (or liability) could be bought (or incurred) or sold (or settled) in a current transaction between willing parties, that is, other than in a forced or liquidation sale. The fair value estimates presented in the table below are based on information available to the Company as of September 30, 2013.
 
The accounting standard regarding fair value measurements 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 standard utilizes 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 that reflect the reporting entity’s own assumptions.
 
 
13

 
Nile Therapeutics, Inc
(A Development Stage Company)
Notes to Condensed Financial Statements
 
7. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
 
The Company has determined the fair value of certain liabilities using the market approach. The following table presents the Company’s fair value hierarchy for these assets measured at fair value on a recurring basis as of September 30, 2013: 
 
 
 
 
 
 
Quoted Market
 
 
 
 
Significant
 
 
 
Fair Value
 
Prices in Active
 
Significant Other
 
Unobservable
 
 
 
September 30,
 
Markets
 
Observable Inputs
 
Inputs
 
 
 
2013
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
Warrant liability - April 2012 issuance
 
$
106,793
 
$
-
 
$
-
 
$
106,793
 
Warrant liability - 2013 Notes
 
 
393,200
 
 
-
 
 
-
 
 
393,200
 
Total
 
$
499,993
 
$
-
 
$
-
 
$
499,993
 
 
The fair value of the warrant liability relating to the 2013 Notes (Note 6) was estimated by management using the Black-Scholes option-pricing model. The changes in the fair value of the warrant liability are recorded in other income (expense) on the Condensed Statements of Operations.
  
The fair value of the warrant liability relating to the warrants issued in conjunction with the April 2012 financing (Note 8b) was estimated by management using a binomial option pricing model. The binomial option pricing model is a generally accepted valuation model used to generate a defined number of stock price paths in order to develop a reasonable estimate of the range of the Company’s future expected stock prices, and their resulting probabilistic valuation. The changes in the fair value of the warrant liability are recorded in other income (expense) on the Condensed Statements of Operations.
 
The following table provides a summary of changes in fair value of the Company’s liabilities, as well as the portion of losses included in income attributable to unrealized appreciation that relate to those liabilities held at September 30, 2013: 
 
 
 
Fair Value
 
 
 
Measurements Using
 
 
 
Significant
 
 
 
Unobservable Inputs
 
 
 
(Level 3)
 
 
 
Warrant Liability
 
 
 
 
 
 
Balance at January 1, 2013
 
$
63,384
 
 
 
 
 
 
Purchases, sales and settlements:
 
 
 
 
Derivatives issued
 
 
203,400
 
 
 
 
 
 
Total gains or losses
 
 
 
 
Unrealized appreciation
 
 
233,209
 
 
 
 
 
 
Balance at September 30, 2013
 
$
499,993
 
 
 
14

 
Nile Therapeutics, Inc
(A Development Stage Company)
Notes to Condensed Financial Statements
 
8. STOCKHOLDERS’ DEFICIT
 
On July 7, 2013, the Company entered into an Agreement and Plan of Merger and Reorganization with Capricor, Inc., a Delaware corporation (“Capricor”), and Bovet Merger Corp., a wholly-owned subsidiary of the Company. Pursuant to this agreement, Bovet Merger Corp. will merge with and into Capricor, with Capricor remaining as the surviving corporation and a wholly-owned subsidiary of the Company. In connection with this merger transaction, the current stockholders of Capricor will receive in exchange for their shares of Capricor stock a number of shares of the Company’s common stock such that, following the merger, the former Capricor stockholders will hold 90% of the outstanding shares of the Company’s common stock on a fully-diluted basis
 
(a) Common Stock
 
On April 4, 2012, the Company closed an offering with certain purchasers pursuant to which it sold an aggregate of 3,350,000 shares of the Company’s common stock to such purchasers for a purchase price of $0.40 per share. In addition, for each share purchased, each purchaser also received three-fourths of a five-year warrant to purchase an additional share of common stock at an exercise price of $0.50 per share, which resulted in the issuance of warrants to purchase an aggregate of 2,512,500 shares of the Company’s common stock. The warrants contain non-standard anti-dilution features (Note 8b) and as result will be classified as a liability on the Company’s Condensed Balance Sheet.
 
The total gross proceeds from the offering were $1.34 million, before deducting selling commissions and other offering expenses of approximately $0.14 million. In connection with the offering, the Company engaged Roth Capital Partners, LLC, or Roth, to serve as placement agent. Pursuant to the terms of the placement agent agreement, the Company paid Roth a cash fee equal to seven percent of the gross proceeds received by the Company, or approximately $0.11 million, plus a non-accountable expense allowance of $35,000. Richard B. Brewer, the Company’s former Executive Chairman, Joshua A. Kazam, the Company’s former President and Chief Executive Officer and a director, Daron Evans, the Company’s Chief Financial Officer, and Hsiao Lieu, M.D., the Company’s former Executive VP of Clinical Development, participated in the offering on the same terms as the unaffiliated purchasers, and collectively purchased 275,000 shares of common stock and warrants to purchase 206,250 shares of common stock for an aggregate purchase price of $110,000.
 
On August 1, 2013, the Company entered into warrant exchange agreements with each holder of the warrants to purchase an aggregate of 2,750,000 shares of common stock that were issued in connection with the Company’s June 2011 private placement. Pursuant to such agreements, each such holder received 0.1667 shares of the Company’s common stock for each warrant share purchasable under the warrants held by such holder. The Company issued total number of 458,332 shares of its common stock pursuant to the warrant exchange agreements with a fair value of $13,750. The Company recorded the fair value of the shares as additional expense in the condensed statements of operations.
 
(b) Warrants
 
In connection with the April 2012 financing, as discussed above, the Company issued a total of 2,512,500 warrants, each of which has a term of five years and represents the right to purchase one share of the Company’s common stock at an exercise price of $0.50 per share. The warrants contain non-standard anti-dilution features, such that, in the event the Company issues common shares at a price below the current exercise price of the warrants, the exercise price of the warrants will be adjusted based on the lower issuance price. Because of this anti-dilution provision and the inherent uncertainty as to the probability of future common share issuances, the Black-Scholes option pricing model the Company uses for valuing stock options could not be used. Management used a binomial option pricing model to determine the warrant liability to be approximately $0.6 million on the date of issuance and $0.1 million at September 30, 2013. The binomial option pricing model (Note 7) is used for the valuation of the warrant liability, which will be revised on a quarterly basis until the warrants are exercised or they expire with the changes in fair value recorded in other income (expense) on the Condensed Statements of Operations.
 
Significant assumptions used at September 30, 2013 for the warrants included a weighted average term of 3.50 years, volatility of 153%, and a risk-free interest rate of 1.39%.
 
The 2012 warrants provide that, upon certain fundamental corporate transactions, such as a merger transaction involving the Company, the warrant holders can elect to receive a cash amount equal to the Black-Scholes value of the warrant, as described in such warrants.  As of September 30, 2013, the aggregate Black-Scholes value of such warrants was approximately $110,550.  Following the completion of the quarter ended September 30, 2013, the Company and holders of 2012 warrants to purchase 2,503,125 shares entered into agreements pursuant to which such holders agreed to receive, upon the completion of the Merger with Capricor, an equal number of shares of common stock in exchange for the surrender and cancellation of their warrants, including cancellation of their right to receive the cash payment of the Black-Scholes value of the warrants upon completion of the Merger.
 
In connection with the 2011 Offering, the Company issued a total of 2,500,000 Warrants, each of which has a term of five years and represents the right to purchase one share of the Company’s common stock at an exercise price of $0.60 per share. In addition, the Company issued the Placement Agents a five-year warrant to purchase 250,000 shares of the Company’s common stock at an exercise price of $0.60 per share. As discussed above, as a result of the exchange agreement, all of the warrants issued in connection with the 2011 offering have been cancelled.
 
 
15

 
Nile Therapeutics, Inc
(A Development Stage Company)
Notes to Condensed Financial Statements
 
8. STOCKHOLDERS’ EQUITY (Continued)
 
At September 30, 2013, the Company had outstanding warrants to purchase an aggregate of 2,904,695 shares of its common stock that were originally issued on July 15, 2009 in connection with the Company’s private placement of common stock and warrants (the “2009 Warrants”).  The 2009 Warrants have exercise prices ranging from $1.25 to $2.28 per share. On November 13, 2013, the Company entered into warrant exchange agreements with holders of 2009 Warrants to purchase 1,484,695 shares.  Under the terms of these agreements, the Company issued to such holders approximately 0.01102 shares of common stock for each share of common stock underlying their 2009 Warrants for a total issuance of 16,360 shares of common stock. Upon such issuance, all rights of such holders under their 2009 Warrants terminated.
 
Below is a table that summarizes all outstanding warrants to purchase shares of the Company’s common stock as of September 30, 2013.
 
 
 
 
 
 
 
 
 
Weighted
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Exercise
 
Average
 
 
 
 
 
 
 
 
 
Grant
 
Warrants
 
Price
 
Exercise
 
Expiration
 
 
 
 
Warrants
 
Date
 
Issued
 
Range
 
Price
 
Date
 
Exercised
 
Outstanding
 
7/15/2009
 
 
2,909,695
 
$
1.25-2.28
 
$
1.64
 
7/14/2014
 
 
5,000
 
 
2,904,695
 
4/21/2010
 
 
2,632,500
 
$
0.94
 
$
0.94
 
4/20/2015
 
 
-
 
 
2,632,500
 
4/4/2012
 
 
2,512,500
 
$
0.50
 
$
0.50
 
4/3/2017
 
 
-
 
 
2,512,500
 
 
 
 
8,054,695
 
 
 
 
$
1.13
 
 
 
 
5,000
 
 
8,049,695
 

9. STOCK OPTION PLAN
 
The Company’s Amended and Restated 2005 Stock Option Plan (the “Plan”) was initially adopted by the Board of Directors on August 10, 2005. The Plan authorized a total of 2,000,000 shares of common stock for issuance. On September 17, 2007, pursuant to the merger with SMI, the Plan was amended and each share of common stock then subject to the Plan was substituted with 2.758838 shares of common stock, resulting in an aggregate of 5,517,676 shares available under the Plan. On July 26, 2010, the Company’s stockholders approved an amendment to the Plan increasing the total number of shares authorized for issuance thereunder to 9,500,000. Under the Plan, incentives may be granted to officers, employees, directors, consultants, and advisors. Incentives under the Plan may be granted in any one or a combination of the following forms: (a) incentive stock options and non-statutory stock options, (b) stock appreciation rights, (c) stock awards, (d) restricted stock and (e) performance shares. The Plan is administered by the Board of Directors, or a committee appointed by the Board, which determines the recipients and types of awards to be granted, as well as the number of shares subject to the awards, the exercise price and the vesting schedule. The term of stock options granted under the Plan cannot exceed ten years. Currently, stock options are granted with an exercise price equal to the closing price of the Company’s common stock on the date of grant, and generally vest over a period of one to four years.
 
For the three and nine months ended September 30, 2013 and September 30, 2012, the Company did not issue any employee stock options.
 
 
16

 
Nile Therapeutics, Inc
(A Development Stage Company)
Notes to Condensed Financial Statements
 
9. STOCK OPTION PLAN (Continued)
 
A summary of the status of the options issued under the Plan at September 30, 2013, and information with respect to the changes in options outstanding is as follows:
 
 
 
Shares
 
Outstanding
 
Weighted-
 
Aggregate
 
 
 
Available for
 
Stock
 
Average
 
Intrinsic
 
 
 
Grant
 
Options
 
Exercise Price
 
Value
 
Balance at January 1, 2013
 
 
4,537,522
 
 
4,571,046
 
$
1.24
 
 
 
 
Options granted under the Plan
 
 
-
 
 
-
 
$
-
 
 
 
 
Options exercised
 
 
-
 
 
-
 
$
-
 
 
 
 
Options forfeited
 
 
2,759,341
 
 
(2,759,341)
 
$
1.38
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at September 30, 2013
 
 
7,296,863
 
 
1,811,705
 
$
1.02
 
$
-
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Exercisable at September 30, 2013
 
 
 
 
 
1,811,705
 
$
1.02
 
$
-
 
 
The following table summarizes information about stock options outstanding at September 30, 2013:
 
 
 
 
Outstanding
 
Exercisable
 
 
 
 
 
 
 
Weighted-
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average
 
 
 
 
 
 
 
Weighted-
 
Range of
 
 
 
 
Remaining
 
Weighted-Average
 
 
 
 
Average
 
Exercise Prices
 
Shares
 
Contractual Life
 
Exercise Price
 
Total Shares
 
Exercise Price
 
$
0.09 to $0.57
 
 
696,533
 
 
3.38
 
$
0.45
 
 
696,533
 
$
0.45
 
$
0.68 to $0.93
 
 
835,172
 
 
2.67
 
$
0.85
 
 
835,172
 
$
0.85
 
$
1.77 to $4.50
 
 
280,000
 
 
5.17
 
$
2.94
 
 
280,000
 
$
2.94
 
 
Total
 
 
1,811,705
 
 
3.33
 
$
1.02
 
 
1,811,705
 
$
1.02
 
 
 Share-based compensation is recognized only for those awards that are ultimately expected to vest; therefore, the Company has applied an estimated forfeiture rate to unvested awards for the purpose of calculating compensation cost. These estimates will be revised, if necessary, in future periods if actual forfeitures differ from estimates. Changes in forfeiture estimates impact compensation cost in the period in which the change in estimate occurs.
 
Employee stock-based compensation costs for the three and nine months ended September 30, 2013 and 2012 and for the cumulative period from August 1, 2005 (inception) through September 30, 2013 are as follows:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Period from
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
August 1, 2005
 
 
 
Three months ended
 
Nine months ended
 
(inception)
 
 
 
September 30,
 
September 30,
 
through September 30,
 
 
 
2013
 
2012
 
2013
 
2012
 
2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
General and administrative
 
$
-
 
$
51,210
 
 
14,845
 
$
237,957
 
$
6,822,795
 
Research and development
 
 
-
 
 
-
 
 
-
 
 
67,286
 
 
1,551,203
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
-
 
$
51,210
 
 
14,845
 
$
305,243
 
$
8,373,998
 
 
The fair value of shares vested under the Plan for the three and nine months ended September 30, 2013 and 2012 and for the period from August 1, 2005 (inception) through September 30, 2013 were $0, $14,862, $217,101, $625,961 and $7,620,918 respectively.
 
 
17

 
Nile Therapeutics, Inc
(A Development Stage Company)
Notes to Condensed Financial Statements 
 
9. STOCK OPTION PLAN (Continued)
 
At September 30, 2013, there were no unrecognized estimated employee (including directors) compensation costs related to stock options. All employee options outstanding were fully vested as of September 30, 2013.
 
Common stock, stock options or other equity instruments issued to non-employees (including consultants and all members of the Company’s Scientific Advisory Board) as consideration for goods or services received by the Company are accounted for based on the fair value of the equity instruments issued (unless the fair value of the consideration received can be more reliably measured). The fair value of any options issued to non-employees is recorded as expense over the applicable service periods.
 
The Company did not incur stock-based compensation costs for services by non-employees for the three and nine months ended September 30, 2013 and 2012, and has expensed a total of $498,095 for the cumulative period from August 1, 2005 (inception) through September 30, 2013. These amounts were included in research and development and general and administrative expenses in the accompanying Condensed Statements of Operations. As of September 30, 2013 all non-employee based options outstanding were fully vested.
 
On August 9, 2013, holders of options to purchase, at exercise prices ranging from $0.301 to $4.50 per share, an aggregate of 1,774,341 shares of the Company’s common stock pursuant to the Plan agreed to terminate all of their rights in such stock options effective immediately prior to the effective time of the Company’s planned merger with Capricor. Such holders, all of whom are directors or officers of the Company, did not receive any consideration for such agreements.

10. RELATED PARTIES
 
On June 24, 2009, the Company entered into a services agreement with Two River Consulting, LLC (“TRC”) to provide various clinical development, operational and administrative services to the Company, including the part-time services of Joshua A. Kazam as the Company’s President and Chief Executive Officer, for a period of one year.  Mr. Kazam and Arie S. Belldegrun are each directors of the Company and partners of TRC.  David M. Tanen, who served as the Company’s Secretary and director until his resignation from both positions on September 24, 2009, is also a partner of TRC. The terms of the services agreement were reviewed and approved by a special committee of the Company’s Board of Directors consisting of independent directors (the “Special Committee”).  None of the members of the Special Committee had any interest in TRC or the services agreement.  As compensation for the services contemplated by the services agreement, the Company agreed to pay to TRC a monthly cash fee of $65,000 and issued stock options to purchase up to an aggregate of 750,000 shares of the Company’s common stock at a price per share equal to $0.89, the closing sale price of the Company’s common stock on June 24, 2009. Twenty-five percent of the stock options vested immediately and the remaining 75% were scheduled to vest pursuant to the achievement of certain milestones relating to the clinical development of cenderitide. On January 5, 2011, the final block of stock options vested. Of the 750,000 original stock options issued, 535,172 stock options vested with a total fair value of $353,976. In August 2010, the Company and TRC amended the services agreement to extend its term on a month-to-month basis and to provide for the issuance of fully-vested and immediately-exercisable stock options to purchase 250,000 shares of the Company’s common stock at an exercise price of $0.38 per share, which had an estimated fair value of $82,200 that was expensed on the date of grant. In March 2011, the Company and TRC further amended the services agreement to reduce the level of services to be provided by TRC and to reduce the monthly cash fee payable to TRC to $31,702, which monthly fee was then reduced to $30,082 in July 2011 and to $28,600 in April 2012 when certain services were eliminated. On August 1, 2012, the Company and TRC agreed that, upon the appointment of a full-time President and Chief Executive Officer during August 2012, the monthly fee payable under the services agreement would be reduced to $6,000 to reflect the termination of Mr. Kazam’s services as President and Chief Executive Officer. Additional operational and clinical development services may be provided by TRC, and billed to the Company, on an hourly basis. The Special Committee reviewed and approved the August 2010, March 2011, and August 2012 amendments to the services agreement.
 
On occasion, some of the Company’s expenses are paid by TRC. No interest is charged by TRC on any outstanding balance owed by the Company. For the three and nine months ended September 30, 2013 and 2012 and for the period from August 1, 2005 (inception) through September 30, 2013, total cash services and reimbursed expenses totaled $18,000, $57,600, $46,407, $238,346, and $2,164,776, respectively. As of September 30, 2013 the Company had a payable to TRC of $18,000 which was still outstanding as of the date of this report.
 
 
18

 
Nile Therapeutics, Inc
(A Development Stage Company)
Notes to Condensed Financial Statements
 
11. COMMITMENTS AND CONTINGENCIES
 
Compensation of President and CEO.
 
On November 5, 2012, the Company entered into a letter agreement with Darlene Horton, M.D., its President and Chief Executive Officer, pursuant to which Dr. Horton agreed to reduce her monthly salary to $100 effective November 1, 2012, and defer the balance of her $28,314 monthly base salary (the “Deferred Salary”) until such time as the Company completes an Interim Financing Event (defined below). The term “Interim Financing Event” means the consummation on or before December 31, 2013, of one or more transactions pursuant to which the Company shall have received, whether by a financing, strategic transaction or another means (or any combination thereof), an aggregate of at least $1,000,000 in gross proceeds. As of September 30, 2013, the Company has an accrual of $253,926, representing approximately 11 months of Deferred Salary.
 
 On March 21, 2013, the Company entered into a letter agreement with Dr. Horton, which letter agreement amends certain compensation terms under her existing letter agreement dated August 3, 2012, as previously amended on November 5, 2012.
 
Dr. Horton’s existing letter agreement provided that if, prior to the date of a “compensation adjustment event,” the Company completed a Change of Control Transaction (as defined in the agreement) and Dr. Horton’s employment was terminated by the Company (or any successor entity) without cause during the period beginning on the effective date of the Change of Control Transaction and ending on the six-month anniversary of such effective date, then she would have been entitled to receive a cash payment equal to 5% of the applicable Change of Control Proceeds (as defined in the agreement). For purposes of the agreement, the term “compensation adjustment event” means the date on which the Company secures sufficient capital, whether by a financing or strategic transaction (or any combination thereof) or another means, in order to enable the Company to initiate and fund to completion a Phase 2 clinical trial of the Company’s cenderitide product candidate.
 
The March 21, 2013 letter agreement amends the payment terms described in the preceding paragraph and provides that if, prior to December 31, 2013, the Company completes a Change of Control Transaction in which either (i) the outstanding shares of the Company’s common stock are exchanged for securities of another corporation, or (ii) the Company issues shares of its common stock, with no securities or other consideration paid or payable to holders of the Company’s common stock (e.g., a merger transaction in which the Company acquires another corporation in exchange for shares of the Company’s common stock), then Dr. Horton will be entitled to receive, immediately prior to the effective time of the Change of Control Transaction, a number of shares of the Company’s common stock equal to 5% of the shares of the Company’s common stock then outstanding on a fully-diluted basis.
 
The agreement further provides that if, prior to December 31, 2013, the Company completes a Change of Control Transaction other than as described in the preceding paragraph, then Dr. Horton will be entitled to receive a cash payment, on the date of such Change of Control Transaction, equal to 5% of the applicable Change of Control Proceeds (as defined in the agreement).
 
Compensation of Chief Financial Officer.
 
On March 21, 2013, the Company entered into a letter agreement with Daron Evans, its Chief Financial Officer, pursuant to which Mr. Evans agreed to reduce his monthly salary to $100 effective February 1, 2013, and defer the balance of his $22,917 monthly base salary until such time as the Company completes an Interim Financing Event. The term “Interim Financing Event” means the consummation on or before December 31, 2013, of one or more transactions pursuant to which the Company shall have received, whether by a financing, strategic transaction or another means (or any combination thereof), an aggregate of at least $1,000,000 in gross cash proceeds. As of September 30, 2013, the Company has an accrual of $182,533, representing approximately 8 months of deferred salary for Mr. Evans.
 
In addition, the agreement provides that if, prior to December 31, 2013, the Company completes a Change of Control Transaction (as defined in the agreement) in which either (i) the outstanding shares of the Company’s common stock are exchanged for securities of another corporation, or (ii) the Company issues shares of its common stock, with no securities or other consideration paid or payable to holders of the Company’s common stock (e.g., a merger transaction in which the Company acquires another corporation in exchange for shares of the Company’s common stock), then Mr. Evans will be entitled to receive, immediately prior to the effective time of the Change of Control Transaction, a number of shares of the Company’s common stock equal to 4.5% of the shares of the Company’s common stock then outstanding on a fully-diluted basis.
 
 
19

 
Nile Therapeutics, Inc
(A Development Stage Company)
Notes to Condensed Financial Statements
 
11. COMMITMENTS AND CONTINGENCIES (Continued)
 
The agreement further provides that if, prior to December 31, 2013, the Company completes a Change of Control Transaction other than as described in the preceding paragraph, then Mr. Evans will be entitled to receive a cash payment, on the date of such Change of Control Transaction, equal to 4.5% of the applicable Change of Control Proceeds (as defined in the agreement).
 
In consideration of the foregoing, the agreement provides that the Company shall have no further obligations pursuant to the Severance Benefits Agreement between the Company and Mr. Evans, dated July 24, 2010.
 
Termination of Lease Agreement.
 
On February 28, 2013, the Company terminated its office lease at 4 West 4th, Suite 400, San Mateo, CA. There were no penalties or early termination fees incurred as a result of the lease termination.

12. SUBSEQUENT EVENTS
 
On October 21, 2013, the Company and the holders of the Notes entered into an amendment to the Purchase Agreement pursuant to which the Company sold to such holders additional Notes having an aggregate principal amount of $120,510. The additional Notes have identical terms and conditions as the Notes previously issued under the Purchase Agreement (see Note 6) and were allocated among the holders on a pro rata basis based on their initial purchase of Notes. In exchange for the issuance of the Notes, the Company received aggregate gross proceeds of $102,433.
 
 
20

 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
Overview
 
We are a development stage, biopharmaceutical company developing innovative products for the treatment of cardiovascular and renal diseases, with an initial focus on heart failure. We currently have exclusive rights to develop two drug candidates:
 
 
Cenderitide (formerly CD-NP), our lead product candidate, is a chimeric natriuretic peptide that we are developing for the treatment of heart failure.  To date, we have developed cenderitide for the treatment of patients for up to 90 days following admission for acutely decompensated heart failure, or ADHF. We refer to this setting as the “post-acute” period. In 2011, we completed a 58-patient Phase 1 clinical trial of cenderitide in the post-acute setting. We conducted this clinical trial in collaboration with Medtronic, Inc., delivering cenderitide through continuous intravenous infusion using Medtronic’s pump technology. Following that Phase 1 clinical trial, we had planned to initiate a Phase 2 clinical trial of cenderitide, pending availability of capital resources. However, to date we have been unable to raise the capital necessary to conduct the next phase of development of cenderitide. Any further development of cenderitide is subject to our ability to either raise additional capital or enter into a strategic transaction in which an acquirer or strategic partner provides the capital necessary to continue development activities. In addition to treating heart failure, we believe cenderitide may be useful in several other cardiovascular and renal indications.
 
 
CU-NP , is a pre-clinical rationally designed natriuretic peptide that consists of amino acid chains identical to those produced by the human body, specifically the ring structure of C-type natriuretic peptide, or CNP, and the N- and C-termini of Urodilatin, or URO. All development of CU-NP is on hold pending the results of our efforts to pursue strategic alternatives.
 
We have no product sales to date and we will not generate any product revenue until we receive approval from the U.S. Food and Drug Administration, or the FDA, or equivalent foreign regulatory bodies to begin selling our pharmaceutical product candidates. Developing pharmaceutical products is a lengthy and very expensive process. Even if we obtain the capital necessary for us to continue the development of our product candidates, whether through a strategic transaction or otherwise, we do not expect to complete the development of a product candidate for several years, if ever. To date, most of our development expenses have related to our lead product candidate, cenderitide. As we proceed with the clinical development of cenderitide and as we further develop CU-NP, our second product candidate, our research and development expenses will further increase. To the extent we are successful in acquiring additional product candidates for our development pipeline, our need to finance further research and development activities will continue increasing. Accordingly, our success depends not only on the safety and efficacy of our product candidates, but also on our ability to finance the development of the products. Our major sources of working capital have been proceeds from private and public sales of our common stock, and debt financings.
 
On July 7, 2013, we entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with Capricor, Inc. (“Capricor”), a privately held company based in Los Angeles, CA, and Bovet Merger Corp., a Delaware corporation and our wholly-owned subsidiary (“Merger Sub”), pursuant to which Merger Sub, subject to certain conditions contained in the Merger Agreement, will merge with and into Capricor and Capricor will become a wholly-owned subsidiary of the Company (the “Merger”). The Merger Agreement was amended on September 27, 2013.  Upon completion of the Merger, each outstanding share of Capricor common stock, and each security convertible into Capricor common stock, will automatically convert into the right to receive a number of shares of our common stock, or, as applicable, securities convertible into our common stock, such that, after giving effect to the Merger, the holders of Capricor capital stock immediately prior to the Merger will hold, in the aggregate, 90% of the total number of shares of our common stock on a fully-diluted basis. Capricor is a company whose mission is to improve the treatment of heart disease by commercializing cardiac stem cell therapies for patients.
 
The Merger Agreement contains customary representations and warranties by us and Capricor with respect to each company’s business and the transactions contemplated by the Merger Agreement.  Closing of the Merger is conditioned on, among other things, accuracy of such representations and warranties, approval of the Merger Agreement by the requisite number of Capricor’s stockholders, conversion of each share of Capricor preferred stock into Capricor common stock, and stockholder approval of an amendment to our Certificate of Incorporation authorizing a reverse split of our common stock at a ratio not to exceed 1-for-100.  In addition, the closing of the Merger is conditioned on us entering into an amendment to our technology license agreement with the Mayo Foundation and evidence of payment or other satisfaction in full (including releases) of our accrued liabilities and obligations (with the exception of obligations not to exceed the aggregate amount of $100,000, which may remain outstanding through the effective time of the Merger). The Merger Agreement may be terminated for certain reasons, including by either party if the closing thereof does not occur prior to November 15, 2013.  The Merger Agreement also contains other customary terms and provisions as are common in similar agreements.
 
We do not have the capital resources available to continue the development of our product development programs or to otherwise remain in business. For more than 12 months, we have sought either additional financing to fund such activities or a collaboration or other strategic agreement with another company that would provide the capital needed to fund further development of our product candidates. Prior to our entry into the Capricor merger agreement, we had have been unsuccessful in securing such additional capital. The planned merger with Capricor is subject to several conditions, including the approval of our stockholders of a reverse split of our common stock at a ratio not to exceed 1-for-100. If such conditions are not satisfied, we may be unable to complete the planned merger. In that case, we would be forced to liquidate the Company.
 
 
21

 
Research and development, or R&D, expenses consist primarily of salaries and related personnel costs, fees paid to consultants and outside service providers for pre-clinical, clinical, and manufacturing development, legal expenses resulting from intellectual property prosecution, contractual review, and other expenses relating to the design, development, testing, and enhancement of our product candidates. We expense our R&D costs as they are incurred.
 
General and administrative, or G&A, expenses consist primarily of salaries and related expenses for executive, finance and other administrative personnel, personnel recruiting fees, accounting, legal and other professional fees, business development expenses, rent, business insurance and other corporate expenses.
 
Our results include non-cash compensation expense as a result of the issuance of stock, stock options, and warrants. We expense the fair value of stock options and warrants over the vesting period. When more precise pricing data is unavailable, we determine the fair value of stock options using the Black-Scholes option-pricing model. The terms and vesting schedules for share-based awards vary by type of grant and the employment status of the grantee. Generally, the awards vest based upon time-based or performance-based conditions. Performance-based conditions generally include the attainment of goals related to our financial performance and product development. Stock-based compensation expense is included in the respective categories of expense in the statements of operations. We expect to record additional non-cash compensation expense in the future, which may be significant.
 
Results of Operations
 
General and Administrative Expenses. G&A expenses for the three months ended September 30, 2013 and 2012 were approximately $0.3 million and $0.4 million, respectively. This decrease of approximately $0.1 million for the three months ended September 30, 2013 as compared to the three months ended September 30, 2012 was primarily driven by reduced professional service fees due to the Company’s minimal operating activities during 2013.
 
G&A expenses for the nine months ended September 30, 2013 and 2012 were approximately $0.9 million and $1.3 million, respectively. The decrease in G&A expenses compared to the same period in 2012 is primarily due to a decrease of approximately $0.1 million in stock compensation costs and a decrease of approximately $0.1 million in reduced professional fees due the reduced use outside management consultants during the first quarter of 2013 compared to the same period of 2012. Additionally, there was a decrease of approximately $0.1 million in general operating expenses during the nine months ended September 30, 2013 as compared to the same period in 2012. This was primarily due to reduced operating activities in 2013 as we cut as many costs as possible to preserve remaining funds.
 
Research and Development Expenses. R&D expenses for the three months ended September 30, 2013 and 2012 were approximately $0.03 million and $0.2 million, respectively. This decrease of approximately $0.1 million over the same period of 2012 is primarily due to the fact that during the third quarter of 2012, we still had some development activities of cenderitide ongoing, while during the third quarter of 2013, we had almost no development activities as we have wound down development of our products.
 
R&D expenses for the nine months ended September 30, 2013 and 2012 were approximately $0.1 million and $1.0 million, respectively. This decrease of approximately $0.9 million over the same period of 2012 is primarily due to the fact that during the nine months ended September 30, 2012, we were still conducting some clinical development activities of cenderitide while during 2013, we had almost no development activities as we have wound down development of our products. This resulted in a decrease of approximately $0.7 million in development costs. Additionally, we had a reduction of approximately $0.2 million in compensation costs, including stock compensation, due to having no R&D employees during the nine months ended September 30, 2013, compared to one employee during the same period in 2012.
 
Cenderitide . Since acquiring our rights to cenderitide in 2006, we have incurred approximately $19.9 million in expenses directly relating to the program through September 30, 2013. All development of cenderitide is on hold pending the results of our efforts to pursue strategic alternatives, including our planned merger with Capricor. Subject to our planned merger with Capricor, we expect that development of cenderitide will eventually continue by the combined company.
 
CU-NP . Since acquiring our rights to CU-NP in September 2008, we have incurred a total of approximately $0.7 million through September 30, 2013. All development of CU-NP is on hold pending the results of our efforts to pursue strategic alternatives, including our planned merger with Capricor. Subject to our planned merger with Capricor, we expect that development of CU-NP will eventually continue by the combined company.
 
 
22

 
Our expenditures on current and future clinical development programs, particularly our cenderitide program, are expected to be substantial, and to increase particularly in relation to our available capital resources. In addition, assuming we complete our planned merger with Capricor, the research and development expenditures of the resulting company will increase substantially with the addition of Capricor’s R&D programs. However, these planned expenditures are subject to many uncertainties, including the results of clinical trials and whether we develop any of our drug candidates with a partner or independently. As a result of such uncertainties, we cannot predict with any significant degree of certainty the duration and completion costs of our research and development projects or whether, when and to what extent we will generate revenues from the commercialization and sale of any of our product candidates. The duration and cost of clinical trials may vary significantly over the life of a project as a result of unanticipated events arising during clinical development and a variety of factors, including:
 
 
the number of trials and studies in a clinical program;
 
the number of patients who participate in the trials;
 
the number of sites included in the trials;
 
the rates of patient recruitment and enrollment;
 
the duration of patient treatment and follow-up;
 
the costs of manufacturing our drug candidates; and
 
the costs, requirements, timing of, and the ability to secure regulatory approvals.
 
Interest Income . Interest income for the three and nine months ended September 30, 2013 and 2012 was approximately $57, $309, $200 and $1,149, respectively. This decrease in interest income in 2013 over the same periods in 2012 is primarily due to lower average cash balances in 2013 than 2012 levels.
 
Collaboration Income.  As a result of our February 2011 collaboration agreement with Medtronic pursuant to which Medtronic reimbursed us for R&D expenditures that we made in connection with our Phase 1 trial of cenderitide, we recognized income of $0, $0, $0 and $0.2 million for the three and nine months ended September 30, 2013 and 2012, respectively. All amounts due under the agreement were paid as of February 2012 at which time the agreement expired. 
 
Interest Expense. Interest expense for the three and nine months ended September 30, 2013 and 2012 were approximately $0.1 million, $0.2 million, $0 and $0, respectively. This increase in interest expense is due to the convertible notes issued in March 2013. During 2012, there were no interest bearing notes outstanding.
 
 Other Income (Expense). Other expense for the three months ended September 30, 2013 was approximately $0.01 million due primarily to an approximately $0.01 million increase in the warrant liability in connection with the 2013 convertible notes during the three months ended September 30, 2013.
 
Other expense for the nine months ended September 30, 2013 was approximately $0.2 million due primarily to an approximately $0.2 million increase in the warrant liability in connection with the 2013 convertible notes issued in March 2013. This increase in the warrant liability valuation was driven primarily by the increased probability of issuance as a result of the announced merger with Capricor, Inc. There was no such warrant liability in connection with the convertible notes during the nine months ended September 30, 2012 as the notes were not issued until 2013. During the nine months ended September 30, 2012, there was other income of approximately $0.4 million as a result of a decrease in the warrant liability relating to the April 2012 warrants. This decrease in the warrant liability during the nine months ended September 30, 2012 was primarily driven by a decrease in the Company’s stock price.
 
 
23

 
Liquidity and Capital Resources
 
The following table summarizes our liquidity and capital resources as of September 30, 2013 and December 31, 2012 and our net decrease in cash and cash equivalents for the nine months ended September 30, 2013 and 2012 (the amounts stated are expressed in thousands):
 
Liquidity and capital resources
 
September 30, 2013
 
December 31,2012
 
Cash and cash equivalents
 
$
71
 
$
47
 
Working capital deficiency
 
$
(1,073)
 
$
(159)
 
Stockholders' equity (deficit)
 
$
(1,568)
 
$
(167)
 
 
 
 
Nine Months Ended September 30,
 
Cash flow data
 
2013
 
2012
 
Cash used in:
 
 
 
 
 
 
 
Operating activities
 
$
(372 )
 
$
(1,951)
 
Investing activities
 
 
-
 
 
-
 
Cash provided by: