Attached files
Exhibit 99.1
Financial Statements
Regulus Therapeutics Inc.
Years Ended December 31, 2009 and 2008 and the Period
from September 6, 2007 (inception) to December 31, 2007
With Report of Independent Auditors
Years Ended December 31, 2009 and 2008 and the Period
from September 6, 2007 (inception) to December 31, 2007
With Report of Independent Auditors
Regulus Therapeutics Inc.
Financial Statements
Years Ended December 31, 2009 and 2008 and the Period from
September 6, 2007 (inception) to December 31, 2007
September 6, 2007 (inception) to December 31, 2007
Contents
Report of Independent Auditors |
1 | |||
Audited Financial Statements |
||||
Balance Sheets |
2 | |||
Statements of Operations |
3 | |||
Statements of Members Equity and Stockholders Equity |
4 | |||
Statements of Cash Flows |
5 | |||
Notes to Financial Statements |
6 |
Report of Independent Auditors
Board of Directors
Regulus Therapeutics Inc.
Regulus Therapeutics Inc.
We have audited the accompanying balance sheets of Regulus Therapeutics Inc. (formerly Regulus
Therapeutics LLC) as of December 31, 2009 and 2008, the related statements of operations,
stockholders equity, and cash flows for the year ended December 31, 2009 and the related
statements of operations, members equity, and cash flows for the year ended December 31, 2008 and
the period from September 6, 2007 (inception) to December 31, 2007. These financial statements are
the responsibility of the Companys management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United
States. Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. We were not engaged to
perform an audit of the Companys internal control over financial reporting. Our audits included
consideration of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of Regulus Therapeutics Inc. (formerly Regulus Therapeutics LLC)
at December 31, 2009 and 2008, and the results of its operations and its cash flows for the years
ended December 31, 2009 and 2008 and the period from September 6, 2007 (inception) to December 31,
2007, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
February 26, 2010
1
Regulus Therapeutics Inc.
Balance Sheets
December 31, | ||||||||
2009 | 2008 | |||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 16,227,883 | $ | 22,410,522 | ||||
Short-term investments |
14,480,421 | | ||||||
Contracts receivable |
| 60,253 | ||||||
Deferred tax asset |
138,449 | | ||||||
Other current assets |
160,207 | 126,070 | ||||||
Total current assets |
31,006,960 | 22,596,845 | ||||||
Fixed assets, net |
1,206,924 | 743,318 | ||||||
Patents, net |
416,840 | 314,954 | ||||||
Licenses, net |
43,542 | 23,125 | ||||||
Deferred tax asset, non-current portion |
255,767 | | ||||||
Total assets |
$ | 32,930,033 | $ | 23,678,242 | ||||
Liabilities and stockholders equity |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 419,916 | $ | 600,734 | ||||
Payables to related parties |
852,438 | 2,060,177 | ||||||
Accrued payroll |
698,408 | 474,726 | ||||||
Income taxes payable |
534,822 | | ||||||
Accrued expenses |
140,919 | 136,623 | ||||||
Current portion of notes payable |
317,013 | | ||||||
Current portion of deferred revenue |
2,928,484 | 2,857,098 | ||||||
Total current liabilities |
5,892,000 | 6,129,358 | ||||||
Non-current liabilities: |
||||||||
Convertible notes payable |
5,341,747 | 5,179,247 | ||||||
Deferred revenue |
8,125,000 | 10,625,000 | ||||||
Notes payable, net of current portion |
631,941 | | ||||||
Total liabilities |
19,990,688 | 21,933,605 | ||||||
Stockholders equity: |
||||||||
Common stock, $0.001 par value; 32,000,000 and zero shares authorized at
December 31, 2009 and 2008, respectively, zero shares issued and outstanding
at December 31, 2009 and 2008, respectively |
| | ||||||
Series A convertible preferred stock, $0.001 par value; 25,000,000 authorized,
24,900,000 and zero shares issued and outstanding at December 31, 2009
and 2008, respectively; liquidation preference of $49,800,000 and $0 at
December 31, 2009 and 2008, respectively |
24,900 | | ||||||
Additional paid-in capital |
32,764,482 | | ||||||
Members equity |
| 12,690,491 | ||||||
Accumulated other comprehensive loss |
(251 | ) | | |||||
Accumulated deficit |
(19,849,786 | ) | (10,945,854 | ) | ||||
Total stockholders equity |
12,939,345 | 1,744,637 | ||||||
Total liabilities and stockholders equity |
$ | 32,930,033 | $ | 23,678,242 | ||||
See accompanying notes.
2
Regulus Therapeutics Inc.
Statements of Operations
Period from | ||||||||||||
September 6, | ||||||||||||
2007 | ||||||||||||
(inception) to | ||||||||||||
Year Ended December 31, | December 31, | |||||||||||
2009 | 2008 | 2007 | ||||||||||
Revenues: |
||||||||||||
Research and development revenue under
collaborative arrangements |
$ | 3,000,000 | $ | 1,875,000 | $ | | ||||||
Grant revenue |
13,247 | 236,290 | 119,562 | |||||||||
Total revenues |
3,013,247 | 2,111,290 | 119,562 | |||||||||
Expenses: |
||||||||||||
Research and development |
9,034,338 | 9,158,945 | 1,314,945 | |||||||||
General and administrative |
2,755,213 | 2,870,157 | 226,041 | |||||||||
Total operating expenses |
11,789,551 | 12,029,102 | 1,540,986 | |||||||||
Loss from operations |
(8,776,304 | ) | (9,917,812 | ) | (1,421,424 | ) | ||||||
Other income (expense): |
||||||||||||
Interest income |
184,894 | 434,924 | 137,705 | |||||||||
Interest expense |
(171,916 | ) | (179,247 | ) | | |||||||
Total other income |
12,978 | 255,677 | 137,705 | |||||||||
Loss before income tax |
(8,763,326 | ) | (9,662,135 | ) | (1,283,719 | ) | ||||||
Income tax expense |
(140,606 | ) | | | ||||||||
Net loss |
$ | (8,903,932 | ) | $ | (9,662,135 | ) | $ | (1,283,719 | ) | |||
See accompanying notes.
3
Regulus Therapeutics Inc.
Statements of Members Equity and Stockholders Equity
Accumulated | ||||||||||||||||||||||||||||
Series A Convertible | Additional | Other | ||||||||||||||||||||||||||
Preferred Stock | Paid-in | Comprehensive | Members | Accumulated | ||||||||||||||||||||||||
Shares | Amount | Capital | Income | Equity | Deficit | Total | ||||||||||||||||||||||
Capital investment in limited liability company at September 6, 2007
(inception) by Alnylam Pharmaceuticals, Inc. |
| $ | | $ | | $ | | $ | 10,000,000 | $ | | $ | 10,000,000 | |||||||||||||||
Patents exclusively licensed to Regulus from Isis Pharmaceuticals, Inc.
at September 6, 2007 (inception) |
| | | | 161,629 | | 161,629 | |||||||||||||||||||||
Non-cash compensation expense related to stock options issued by
Isis Pharmaceuticals, Inc. |
| | | | 91,975 | | 91,975 | |||||||||||||||||||||
Non-cash compensation expense related to stock options issued by
Alnylam Pharmaceuticals, Inc. |
| | | | 320,303 | | 320,303 | |||||||||||||||||||||
Net loss and comprehensive loss |
| | | | | (1,283,719 | ) | (1,283,719 | ) | |||||||||||||||||||
Balance at December 31, 2007 |
| | | | 10,573,907 | (1,283,719 | ) | 9,290,188 | ||||||||||||||||||||
Capital contribution by Alnylam Pharmaceuticals, Inc. |
| | | | 100,000 | | 100,000 | |||||||||||||||||||||
Non-cash compensation expense related to stock options issued by
Isis Pharmaceuticals, Inc. |
| | | | 490,442 | | 490,442 | |||||||||||||||||||||
Non-cash compensation expense related to stock options issued by
Alnylam Pharmaceuticals, Inc. |
| | | | 1,526,142 | | 1,526,142 | |||||||||||||||||||||
Net loss and comprehensive loss |
| | | | | (9,662,135 | ) | (9,662,135 | ) | |||||||||||||||||||
Balance at December 31, 2008 |
| | | | 12,690,491 | (10,945,854 | ) | 1,744,637 | ||||||||||||||||||||
Conversion from an LLC to C-corporation |
14,900,000 | 14,900 | 12,675,591 | | (12,690,491 | ) | | | ||||||||||||||||||||
Issuance of Series A convertible preferred stock at $2 per share |
10,000,000 | 10,000 | 19,990,000 | | | | 20,000,000 | |||||||||||||||||||||
Non-cash compensation expense related to stock options issued by |
||||||||||||||||||||||||||||
Regulus Therapeutics Inc. |
| | 626,870 | | | | 626,870 | |||||||||||||||||||||
Non-cash compensation benefit related to stock options issued by
Alnylam Pharmaceuticals, Inc. |
| | (527,979 | ) | | | | (527,979 | ) | |||||||||||||||||||
Changes in unrealized losses |
| | | (251 | ) | | | (251 | ) | |||||||||||||||||||
Net loss |
| | | | | (8,903,932 | ) | (8,903,932 | ) | |||||||||||||||||||
Comprehensive loss |
(8,904,183 | ) | ||||||||||||||||||||||||||
Balance at December 31, 2009 |
24,900,000 | $ | 24,900 | $ | 32,764,482 | $ | (251 | ) | $ | | $ | (19,849,786 | ) | $ | 12,939,345 | |||||||||||||
See accompanying notes.
4
Regulus Therapeutics Inc.
Statements of Cash Flows
Period from | ||||||||||||
September 6, | ||||||||||||
2007 | ||||||||||||
(inception) to | ||||||||||||
Year Ended December 31, | December 31, | |||||||||||
2009 | 2008 | 2007 | ||||||||||
Operating activities |
||||||||||||
Net loss |
$ | (8,903,932 | ) | $ | (9,662,135 | ) | $ | (1,283,719 | ) | |||
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: |
||||||||||||
Depreciation and amortization expense |
218,348 | 15,905 | | |||||||||
Amortization of (discount) premium on investments, net |
66,923 | | | |||||||||
(Gain) loss on investments |
(13,187 | ) | | | ||||||||
Compensation related to stock options |
98,891 | 2,016,584 | 412,278 | |||||||||
Deferred income taxes |
(394,216 | ) | | | ||||||||
Change in operating assets and liabilities: |
||||||||||||
Contracts receivable |
60,253 | 65,602 | (125,855 | ) | ||||||||
Other current assets |
(34,137 | ) | (115,422 | ) | (10,648 | ) | ||||||
Accounts payables |
(180,818 | ) | 600,734 | | ||||||||
Payables to related parties |
(1,207,739 | ) | 893,741 | 1,139,191 | ||||||||
Accrued payroll |
223,682 | 474,726 | | |||||||||
Accrued expenses |
4,296 | 281,596 | 6,294 | |||||||||
Accrued interest |
162,500 | | | |||||||||
Deferred revenue |
(2,428,614 | ) | 13,482,098 | | ||||||||
Income tax payable |
534,822 | | | |||||||||
Net cash (used in) provided by operating activities |
(11,792,928 | ) | 8,053,429 | 137,541 | ||||||||
Investing activities |
||||||||||||
Purchases of fixed assets |
(676,502 | ) | (755,534 | ) | | |||||||
Purchases of investments |
(20,509,438 | ) | | | ||||||||
Proceeds from the sale of short-term investments |
5,975,030 | | | |||||||||
Trademark expenditures |
| | | |||||||||
Acquisition of patents |
(102,755 | ) | (99,914 | ) | | |||||||
Acquisition of licenses |
(25,000 | ) | (25,000 | ) | | |||||||
Net cash used in investing activities |
(15,338,665 | ) | (880,448 | ) | | |||||||
Financing activities |
||||||||||||
Proceeds from issuance of Series A convertible preferred stock |
20,000,000 | | | |||||||||
Capital contribution |
| 100,000 | 10,000,000 | |||||||||
Principal payments on long-term obligations |
(51,046 | ) | | | ||||||||
Proceeds from issuance of long-term obligations |
1,000,000 | | | |||||||||
Proceeds from issuance of convertible notes payable |
| 5,000,000 | | |||||||||
Net cash provided by financing activities |
20,948,954 | 5,100,000 | 10,000,000 | |||||||||
Net (decrease) increase in cash and cash equivalents |
(6,182,639 | ) | 12,272,981 | 10,137,541 | ||||||||
Cash and cash equivalents at beginning of period |
22,410,522 | 10,137,541 | | |||||||||
Cash and cash equivalents at end of period |
$ | 16,227,883 | $ | 22,410,522 | $ | 10,137,541 | ||||||
Supplemental disclosure of cash flow information |
||||||||||||
Interest paid |
$ | 9,872 | $ | | $ | | ||||||
Supplemental disclosures of non-cash investing and financing activities |
||||||||||||
Patents exclusively licensed to Regulus from Isis Pharmaceuticals, Inc. |
$ | | $ | | $ | 161,629 | ||||||
Amounts accrued in payables to related parties for patent expenditures |
$ | | $ | 16,614 | $ | (10,631 | ) | |||||
Amounts accrued in accrued expenses for patent expenditures |
$ | 17,264 | $ | 27,000 | $ | | ||||||
See accompanying notes.
5
Regulus Therapeutics Inc.
Notes to Financial Statements
December 31, 2009
1. Organization and Basis of Presentation
Regulus Therapeutics Inc. (the Company) was organized and began operations as a Delaware Limited
Liability Company on September 6, 2007 (inception). On January 2, 2009, the Company reorganized as
Regulus Therapeutics Inc., a Delaware C-corporation.
The Company is a jointly owned biopharmaceutical company created to discover, develop and
commercialize microRNA-based therapeutics that Isis Pharmaceuticals, Inc. (Isis), a pioneer in
oligonucleotide drug technologies and a leader in the field of antisense therapeutics, and Alnylam
Pharmaceuticals, Inc. (Alnylam), a leader in the field of RNAi therapeutics, formed. The Company
intends to address therapeutic opportunities that arise from abnormal expression or mutations in
microRNAs. Since microRNAs regulate the expression of broad networks of genes and biological
pathways, microRNA-based therapeutics define a new strategy to target multiple points on disease
pathways.
At inception, Isis and Alnylam granted the Company exclusive licenses to their intellectual
property for microRNA therapeutic applications, as well as certain early fundamental patents in the
microRNA field including the Tuschl III patent. Alnylam made an initial investment of $10,000,000
in cash to balance venture ownership; thereafter, Isis and Alnylam share funding of Regulus.
During 2008, the Company commenced its planned principal operations and as a result exited the
development stage.
2. Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States requires management to make estimates and assumptions regarding certain types
of assets, liabilities, revenues and expenses. Such estimates primarily relate to
unsettled transactions and events as of the date of the financial statements. Accordingly, upon
settlement, actual results may differ from estimated amounts.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit
risk consist primarily of cash, cash equivalents and short-term investments. The Company maintains
deposits in federally insured financial institutions in excess of federally insured limits.
6
Regulus Therapeutics Inc.
Notes to Financial Statements (continued)
2. Significant Accounting Policies (continued)
Management believes the Company is not exposed to significant credit risk due to the financial
position of the depository institutions in which those deposits are held. Additionally, the Company
established guidelines regarding approved investments and maturities of investments, which are
designed to maintain safety and liquidity.
Cash, Cash Equivalents and Short-term Investments
Cash consists of deposits at the Companys bank and there are no restrictions on withdrawal or use
of the funds. The Company considers all liquid investments with maturities of 90 days or less when
purchased to be cash equivalents. As a result, short-term investments have initial maturities of
greater than 90 days from date of purchase. The Company classifies its short-term investments as
available-for-sale and carries them at fair market value based upon prices for identical or
similar items on the last day of the year. The Company records unrealized gains and losses as a
separate component of stockholders equity and includes net realized gains and losses in interest
income. The Company uses the specific identification method to determine the cost of securities
sold. When the Company determines that a decline in the fair value below its cost basis is
other-than-temporary, it recognizes an impairment loss in the year in which the
other-than-temporary decline occurred. The Company determined that there were no
other-than-temporary declines in value of short-term investments in 2009 and 2008 and the period
from September 6, 2007 (inception) to December 31, 2007.
Fixed Assets
Fixed assets included on the Companys balance sheets at December 31, 2009 and 2008, consists of
laboratory equipment at a cost of $1,433,016 and $756,514, less accumulated depreciation of
$226,092 and $13,196, respectively. The Company depreciates lab equipment on a straight-line method
over an estimated five-year useful life. Depreciation expense was $212,896, $13,196 and $0 for the
years ended December 31, 2009 and 2008 and the period from September 6, 2007 (inception) to
December 31, 2007, respectively.
Patents
At inception, the Company recorded patents it received from Isis and Alnylam on a carryover basis,
which represented the contributors carrying amount on their financial statements. Isis contributed
patents with a carryover basis of $161,629.
7
Regulus Therapeutics Inc.
Notes to Financial Statements (continued)
2. Significant Accounting Policies (continued)
The Company capitalizes additional costs which consist principally of outside legal costs and
filing fees related to obtaining patents. The Company reviews its capitalized patent costs
periodically to determine that they include costs for patent applications that have future value.
The Company evaluates costs related to patents that it is not actively pursuing and writes off any
of these costs. The Company amortizes patent costs over their estimated useful lives of ten years,
beginning with the date the patents are issued. Accumulated amortization related to patents was
$1,703 and $834 at December 31, 2009 and 2008, respectively. The weighted-average remaining life of
issued patents was eight years at December 31, 2009. Amortization expense was $869, $834 and $0 for
the years ended December 31, 2009 and 2008 and the period from September 6, 2007 (inception) to
December 31, 2007, respectively. Estimated amortization expense is $878 for each of the years
ending December 31, 2010, 2011, 2012, 2013, and 2014.
Licenses
The Company obtains licenses from third parties and capitalizes the costs related to exclusive
licenses. The Company amortizes licenses over an estimated useful life of ten years. Accumulated
amortization related to licenses was $6,458 and $1,875 at December 31, 2009 and 2008, respectively.
Amortization expense was $4,583, $1,875 and $0 for the years ended December 31, 2009 and 2008 and
the period from September 6, 2007 (inception) to December 31, 2007, respectively. Estimated
amortization expense is $5,278 for each of the years ending December 31, 2010, 2011, 2012, 2013 and
2014.
Long-Lived Assets
The Company assesses the value of its long-lived assets, which include fixed assets, patents and
licenses acquired from third parties, for impairment whenever events or changes in circumstances
indicate that the carrying value of the assets may not be recoverable. The Company has not recorded
any write-downs of its long-lived assets to their estimated net realizable values.
Revenue Recognition
The Company recognizes revenue when it satisfies all of its contractual obligations and reasonably
believes it can collect the outstanding receivable. In 2008, the Company entered into a
collaboration agreement with GlaxoSmithKline (GSK). As part of the GSK collaboration, the Company
received a $15,000,000 non-refundable upfront payment. The Company recognizes
8
Regulus Therapeutics Inc.
Notes to Financial Statements (continued)
2. Significant Accounting Policies (continued)
revenue related to non-refundable upfront payments ratably over its period of performance relating
to the term of the contractual arrangements. The period of performance for the GSK collaboration,
based on the research and development plan included in the agreement, is estimated at six years
ending in March 2014.
The GSK collaboration also includes contractual milestones. When the Company achieves these
milestones, it is entitled to payment, as defined by the underlying agreements. The Company
generally recognizes revenue related to milestone payments upon completion of the milestones
substantive performance requirement, as long as the Company is reasonably assured of collecting the
receivable and it has no future performance obligations related to achievement of the milestone. In
May 2009, the Company earned its first milestone payment under the GSK collaboration, and
recognized $500,000 in revenue associated with the milestone payment.
The Company received a Small Business Innovation Research grant from the National Institute of
Allergy and Infectious Diseases, a part of the National Institutes of Health, which was funding
further research for the miR-122 program. Prior to the end of the grant in January 2009, the
Company recognized revenue as it performed the research and development activities called for in
the grant.
Research and Development
The Company expenses research and development costs as incurred. In certain circumstances, the
Company makes nonrefundable advance payments to purchase goods and services for future use in
research and development activities pursuant to executory contractual arrangements. In those
instances, the Company defers and recognizes an expense in the period that it receives the goods or
services.
Stock-Based Compensation
The Company accounts for stock-based compensation expense related to stock options granted to
employees and members of the Companys Board of Directors by estimating the fair value of each
stock option on the date of grant using the Black-Scholes model. The Company recognizes stock-based
compensation expense using the accelerated multiple-option approach. Under the accelerated
multiple-option approach (also known as the graded-vesting method), an entity recognizes
compensation expense over the requisite service period for each separately vesting tranche of the
award as though the award were in substance multiple awards, resulting in front-loading the expense
over the vesting period.
9
Regulus Therapeutics Inc.
Notes to Financial Statements (continued)
2. Significant Accounting Policies (continued)
Stock options granted to non-employees, which primarily consist of members of the Companys
Scientific Advisory Board, are accounted for using the fair value approach. Stock options granted
to non-employees are subject to periodic revaluation over their vesting terms.
Comprehensive Loss
Comprehensive loss is defined as the change in equity during a period from transactions and other
events and/or circumstances from non-owner sources. The Companys only component of other
comprehensive loss is unrealized gains (losses) on available-for-sale securities.
Income Taxes
The Company follows the accounting guidance on accounting for uncertainty in income taxes. The
guidance prescribes a recognition threshold and measurement attribute criteria for the financial
statement recognition and measurement of tax positions taken or expected to be taken in a tax
return. For those benefits to be recognized, a tax position must be more-likely-than-not to be
sustained upon examination by taxing authorities.
Beginning in 2009, the Company uses the liability method of accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on the difference between the
financial reporting and the tax reporting basis of assets and liabilities and are measured using
the enacted tax rates and laws that are expected to be in effect when the differences are expected
to reverse. The Company provides a valuation allowance against net deferred tax assets unless,
based upon the available evidence, it is more likely than not that the deferred tax assets will be
realized.
For the year ended December 31, 2008 and the period from September 6, 2007 (inception) to December
31, 2007, the statements of operations contains no provision for income taxes since the income or
loss of the Company flows through to Isis and Alnylam, who are responsible for including their
shares of the taxable results of operations in their respective tax returns.
Risks and Uncertainties
The Company is subject to various risks common to companies within the pharmaceutical and
biotechnology industries. These include, but are not limited to, development by competitors of new
technological innovations; dependence on key personnel and outside relationships; risks
10
Regulus Therapeutics Inc.
Notes to Financial Statements (continued)
2. Significant Accounting Policies (continued)
inherent in the research and development of pharmaceutical and biotechnology products; protection
of proprietary technology; estimation by the Company of the size and characteristics of the market
for the Companys products; acceptance of the Companys products by the countrys regulatory
agencies in which the Company may choose to sell its products, as well as acceptance by customers;
health care cost containment initiatives; and product liability and compliance with government
regulations and agencies, including the U.S. Food and Drug Administration (FDA).
3. Investments
The Company invests its excess cash in commercial paper and debt instruments of financial
institutions, corporations, U.S. government sponsored entities, and the U.S. Treasury. As of
December 31, 2009, the Company had $14,480,421 in short-term investments of which 79% had one year
or less to maturity and 21% had more than one year but less than three years to maturity.
The following table summarizes the Companys short-term investments:
Amortized | Unrealized | Estimated | ||||||||||||||
Cost | Gains | Losses | Fair Value | |||||||||||||
December 31, 2009 |
||||||||||||||||
Corporate debt securities |
$ | 3,498,213 | $ | 8,303 | $ | (1,536 | ) | $ | 3,504,980 | |||||||
Debt securities issued by
U.S. government agencies |
6,062,405 | 6,452 | (1,172 | ) | 6,067,685 | |||||||||||
Debt securities issued by
U.S. Treasury |
1,902,869 | 1,628 | (877 | ) | 1,903,620 | |||||||||||
Total securities with a
maturity of one year or
less |
11,463,487 | 16,383 | (3,585 | ) | 11,476,285 | |||||||||||
Corporate debt securities |
1,503,921 | | (9,012 | ) | 1,494,909 | |||||||||||
Debt securities issued by
U.S. government agencies |
508,346 | | (3,197 | ) | 505,149 | |||||||||||
Debt securities issued by
U.S. Treasury |
1,004,918 | | (840 | ) | 1,004,078 | |||||||||||
Total securities with a
maturity of more than one
year |
3,017,185 | | (13,049 | ) | 3,004,136 | |||||||||||
Total short-term investments |
$ | 14,480,672 | $ | 16,383 | $ | (16,634 | ) | $ | 14,480,421 | |||||||
11
Regulus Therapeutics Inc.
Notes to Financial Statements (continued)
3. Investments (continued)
Investments the Company considers to be temporarily impaired at December 31, 2009, are as follows:
Less than 12 months of | ||||||||||||
temporary impairment | ||||||||||||
Number of | Estimated | Unrealized | ||||||||||
Investments | Fair Value | Losses | ||||||||||
Corporate debt securities |
4 | $ | 2,012,083 | $ | (10,548 | ) | ||||||
Debt securities issued by U.S.
government agencies |
2 | 1,538,587 | (4,369 | ) | ||||||||
Debt securities issued by U.S. Treasury |
2 | 2,001,452 | (1,717 | ) | ||||||||
Total temporarily impaired securities |
8 | $ | 5,552,122 | $ | (16,634 | ) | ||||||
Fair Value Measurements
The Company uses a three-tier fair value hierarchy to prioritize the inputs used in its fair value
measurements. These tiers include: Level 1, defined as observable inputs such as quoted prices in
active markets, which includes money market funds and treasury securities classified as
available-for-sale securities; Level 2, defined as inputs other than quoted prices in active
markets that are either directly or indirectly observable, which includes fixed income securities
and commercial paper classified as available-for-sale securities; and Level 3, defined as
unobservable inputs in which little or no market data exists, therefore requiring an entity to
develop its own assumptions.
12
Regulus Therapeutics Inc.
Notes to Financial Statements (continued)
3. Investments (continued)
Below is a table of the Companys assets that it measures at fair value on a recurring basis. For
the following major security types, the Company breaks down the inputs used to measure fair value
at December 31, 2009:
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Cash equivalents |
$ | 2,483,360 | $ | 2,483,360 | $ | | $ | | ||||||||
Corporate debt securities |
4,999,889 | | 4,999,889 | | ||||||||||||
Debt securities issued
by U.S. government
agencies |
6,572,834 | | 6,572,834 | | ||||||||||||
Debt securities issued
by U.S. Treasury |
2,907,698 | 2,907,698 | | | ||||||||||||
Total |
$ | 16,963,781 | $ | 5,391,058 | $ | 11,572,723 | $ | | ||||||||
4. Long-term Obligations
Convertible Note Payable
As part of the strategic alliance with GlaxoSmithKline (GSK) in 2008, the Company sold $5,000,000
of convertible notes to GSK. The principal amount of the GSK note plus interest will convert into
the Companys common stock in the future if it achieves a minimum level of financing with
institutional investors. The rate of interest is a floating rate based on the prime rate as
published by The Wall Street Journal at the beginning of each calendar quarter; at December 31,
2009, the interest rate was 3.25%. In addition, Isis and Alnylam are guarantors of the note, and if
the note does not convert or is not repaid in cash after three years, Isis, Alnylam and the Company
may elect to repay the note plus interest with shares of each companys common stock.
Equipment Financing Arrangement
In September 2009, the Company entered into a $1,000,000 loan agreement to finance its equipment
purchases. Upon completing the transaction, the Company drew down the entire $1,000,000 available
under the loan agreement. The Company is using the equipment purchased under the loan agreement as
collateral. The term of the agreement is three years with principal and interest payable monthly.
The interest rate under this arrangement is a fixed rate of 5.9%. The carrying amount at
December 31, 2009, was $948,954.
13
Regulus Therapeutics Inc.
Notes to Financial Statements (continued)
4. Long-term Obligations (continued)
Annual debt and other obligation maturities at December 31, 2009, are as follows:
2010 |
$ | 317,013 | ||
2011 |
336,231 | |||
2012 |
5,637,457 | |||
Thereafter |
| |||
Total |
$ | 6,290,701 | ||
5. Stock Options
2009 Equity Incentive Plan
In February 2009, the Companys Board of Directors adopted and approved the 2009 Equity Incentive
Plan (the 2009 Plan), which provides for the issuance of non-qualified and incentive stock options
for the purchase of up to 5,100,000 shares of common stock to Regulus employees, members of
Regulus Board of Directors and members of Regulus Scientific Advisory Board. Options expire ten
years from the date of grant and vest over a four-year period, with 25% exercisable at the end of
one year from the date of the grant and the balance vesting ratably thereafter. At December 31,
2009, a total of 4,847,000 options were outstanding, 2,850,000 shares were exercisable, and 253,000
shares were available for future grant under the 2009 Plan.
In December 2009, the Companys Board of Directors increased the total number of shares reserved
for issuance under the 2009 Plan from 5,100,000 shares to 5,900,000 shares effective January 1,
2010.
Stock-Based Compensation Expense
While the Company was an LLC, Isis granted its stock options to: Isis employees seconded to
Regulus; members of Regulus Board of Directors; and members of Regulus Scientific Advisory Board
for their services to the Company. During this time, Alnylam also granted Alnylam stock options to:
three officers of Regulus; members of Regulus Board of Directors; and members of Regulus
Scientific Advisory Board for their services to the Company. The Company recognized stock
compensation expense related to stock options granted by Isis and Alnylam, on its behalf, with a
corresponding increase to stockholders equity in 2009 and members equity in 2008 and 2007.
14
Regulus Therapeutics Inc.
Notes to Financial Statements (continued)
5. Stock Options (continued)
As part of the Companys conversion from a LLC to a C-corporation, both Isis and Alnylam modified
the stock options that each company had previously granted to Regulus employees, members of
Regulus Board of Directors and Scientific Advisory Board to stop vesting in these stock awards
before the awards were fully vested. In conjunction with these modifications, in February 2009,
Regulus issued options to purchase its own common stock to Regulus employees, members of Regulus
Board of Directors and members of Regulus Scientific Advisory Board. As a result of the
modifications made to the Isis stock options, the fair value of the Regulus stock options issued in
February 2009 was equal to the unamortized expense of the Isis options. Regulus is amortizing the
fair value of those options into expense over the four-year vesting period. For the modifications
made to the Alnylam options, Regulus recorded a benefit to reverse the stock compensation that the
Company had previously recognized for the unvested portion of the forfeited options.
A summary of the Regulus stock options issued during 2009 is as follows:
Weighted- | Average | |||||||||||||||
Average | Remaining | Aggregate | ||||||||||||||
Number of | Exercise | Contractual | Intrinsic | |||||||||||||
Options | Price | Term | Value | |||||||||||||
(In Years) | ||||||||||||||||
Outstanding at December 31, 2008 |
| $ | | |||||||||||||
Granted |
4,866,000 | $ | 0.19 | |||||||||||||
Exercised |
| $ | | |||||||||||||
Cancelled/forfeited/expired |
19,000 | $ | 0.19 | |||||||||||||
Outstanding at December 31, 2009 |
4,847,000 | $ | 0.19 | 9.08 | $ | | ||||||||||
Exercisable at December 31, 2009 |
2,850,000 | $ | 0.19 | 9.00 | $ | | ||||||||||
15
Regulus Therapeutics Inc.
Notes to Financial Statements (continued)
5. Stock Options (continued)
For the year ended December 31, 2009, the Company used the following weighted-average assumptions
in its Black-Scholes calculations, excluding the options that were issued as part of the
modification mentioned above:
Year Ended | ||||
December 31, | ||||
2009 | ||||
Employee Stock Options: |
||||
Risk-free interest rate |
2.9 | % | ||
Dividend yield |
0.0 | % | ||
Volatility |
80.0 | % | ||
Expected Life |
6.1 years |
Year Ended | ||||
December 31, | ||||
2009 | ||||
Board of Director Stock Options: |
||||
Risk-free interest rate |
2.6 | % | ||
Dividend yield |
0.0 | % | ||
Volatility |
80.4 | % | ||
Expected Life |
6.1 years |
Risk-Free Interest Rate. The risk-free interest rate assumption is based upon observed interest
rates appropriate for the term of the stock option grants.
Dividend Yield. The dividend yield assumption is based on the Companys history and expectation of
dividend payouts. The Company has not paid dividends in the past and does not expect to in the
future.
Volatility. The volatility rate used to value stock option grants is based on volatilities of a
peer group of similar companies whose share prices are publicly available. The peer group was
developed based on companies in the pharmaceutical and biotechnology industry in a similar stage of
development.
Expected Life. The expected life of employee stock options represents the average of the life of
the options and the average vesting period, and is a derived output of the simplified method.
16
Regulus Therapeutics Inc.
Notes to Financial Statements (continued)
5. Stock Options (continued)
Forfeitures. As stock-based compensation expense recognized in the statement of operations is based
on awards ultimately expected to vest, it has been reduced for estimated forfeitures. The estimate
of forfeitures is based on forfeiture rates of a peer group of similar companies whose share prices
are publicly available. The peer group was developed based on companies in the pharmaceutical and
biotechnology industry in a similar stage of development.
During the year ended December 31, 2009, the Company granted 315,000 options to members of the
Scientific Advisory Board to purchase shares of common stock. In connection with the Scientific
Advisory Board options, the Company recognized expense of $20,156 during the year ended
December 31, 2009.
The Company records stock compensation expense incurred by Isis and Alnylam on its behalf and
Regulus stock options with a corresponding increase to stockholders equity in 2009 and members
equity in 2008 and before. The following table summarizes stock compensation expense:
Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007(1) | ||||||||||
Stock compensation associated with: |
||||||||||||
Isis stock options |
$ | | $ | 490,442 | $ | 91,975 | ||||||
Alnylam stock options |
(527,979 | ) | 1,526,142 | 320,303 | ||||||||
Regulus stock options |
626,870 | | | |||||||||
Non-cash stock compensation
included in operating expenses |
$ | 98,891 | $ | 2,016,584 | $ | 412,278 | ||||||
(1) | The Period from September 6, 2007 (inception) to December 31, 2007 |
17
Regulus Therapeutics Inc.
Notes to Financial Statements (continued)
5. Stock Options (continued)
The following table summarizes the allocation of stock compensation expense:
Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007(1) | ||||||||||
Research and development |
$ | (166,012 | ) | $ | 1,059,506 | $ | 237,238 | |||||
General and administrative |
264,903 | 957,078 | 175,040 | |||||||||
Non-cash stock
compensation included in
operating expenses |
$ | 98,891 | $ | 2,016,584 | $ | 412,278 | ||||||
(1) | The Period from September 6, 2007 (inception) to December 31, 2007 |
As of December 31, 2009, total unrecognized compensation cost related to non-vested
stock-based compensation plans was $804,216. The Company will adjust total unrecognized
compensation cost for future changes in estimated forfeitures. The Company expects to recognize
this cost over a weighted-average period of 2.92 years.
6. Stockholders Equity
Series A Convertible Preferred Stock
The Companys Amended and Restated Certificate of Incorporation authorizes the Company to issue
25,000,000 shares of Series A convertible preferred stock. In January 2009, the Company issued a
total of 14,900,000 shares of Series A convertible preferred stock to Isis and Alnylam as part of
its legal reorganization from an LLC to a C-corporation. At the time of conversion, the number of
shares issued to, and subsequent ownership by, Isis and Alnylam reflected their respective
ownership percentages in the LLC.
In March 2009, the Company issued 10,000,000 shares of Series A convertible preferred stock at
$2.00 per share for total proceeds of $20,000,000. Isis and Alnylam were the sole and equal
investors in this financing.
The holders of the Series A convertible preferred stock have the right to convert their Series A
convertible preferred stock, at any time, into shares of common stock. The initial conversion rate
is one-to-one into common stock. Any accrued but unpaid dividends convert into shares of
18
Regulus Therapeutics Inc.
Notes to Financial Statements (continued)
6. Stockholders Equity (continued)
common stock at the then applicable conversion price. The Series A convertible preferred stock,
including any accrued but unpaid dividends, will automatically convert into common stock, at the
then applicable conversion price, upon the earlier of: (1) holders of at least 662/3% majority of the
outstanding Series A convertible preferred stock consent to such a conversion, or (2) upon the
closing of an underwritten public offering of common stock if the per share public offering price
is not less than two times the original purchase price (as adjusted for stock splits, dividends,
recapitalizations and the like) and a total offering of not less than $50,000,000 (before deduction
of underwriters commissions and expenses).
The preferred stockholders have voting rights equal to the number of common shares they would own
upon conversion, which is currently on a one-for-one basis into common stock. In addition,
preferred stockholders participate on an as converted basis in any dividends declared or paid to
common stockholders.
In the event of any liquidation, dissolution or winding up of the Company, the holders of the
Series A Convertible Preferred stock have a per share liquidation preference equal to their
original purchase price plus any declared but unpaid dividends.
Common Stock
The Company is authorized to issue up to 32,000,000 shares of common stock. As of December 31, 2009
and 2008, there were no shares of Regulus common stock outstanding.
7. Related-Party Transactions
The Company entered into several agreements with related parties in the ordinary course of business
to license intellectual property and to procure administrative and research and development support
services.
(a) License and Collaboration Agreement
On September 6, 2007, the Company entered into a License and Collaboration agreement with Isis and Alnylam. Under the License and Collaboration agreement, both Isis and Alnylam granted the Company the exclusive right to use technology, know-how, patents and other intellectual property rights related to the design, development, and manufacture of microRNA therapeutic applications. The licenses granted to the Company are royalty bearing |
19
Regulus Therapeutics Inc.
Notes to Financial Statements (continued)
7. Related-Party Transactions (continued)
and sub licensable. Alnylam and Isis retain rights to develop and commercialize on pre-negotiated terms microRNA therapeutic products that the Company decides not to develop either itself or with a partner. In January 2009, the parties amended the License and Collaboration agreement to reflect the Companys conversion into a C-corporation. |
(b) Limited Liability Company Agreement of Regulus Therapeutics LLC
On September 6, 2007, the Company entered into a Limited Liability Company Agreement (the LLC Agreement) with Isis and Alnylam. The LLC Agreement established the Companys main business focus as the discovery, development, manufacture and commercialization of microRNA therapeutics. |
The LLC Agreement also established the Companys Managing Board of Directors, which consists of up to seven directors. Alnylam and Isis each have the right to designate up to three directors. At least two of the seven directors need to be independent directors and the seventh director is the Companys President. The independent directors received cash compensation and Isis and Alnylam stock options for service on the Managing Board of Directors. |
Additionally, the LLC Agreement established the Companys Scientific Advisory Board. The Scientific Advisory Board advises the Company as to research goals and plans, and to review and interpret research data. As compensation for serving on the Scientific Advisory Board, members receive cash and annual grants of Isis and Alnylam stock. In January 2009, the LLC Agreement expired in connection with the Companys conversion to a C-corporation. Beginning in January 2009, members of the Scientific Advisory Board receive cash and annual stock option grants to purchase shares of the Companys stock. |
(c) Services Agreement
On September 6, 2007, the Company entered into a Services Agreement with Isis and Alnylam. Under the Services Agreement, Isis and Alnylam will provide the Company certain research and development services and/or other services, including, without limitation, general and administrative support services, business development services, and intellectual property prosecution and enforcement services, as specifically contemplated by the Operating Plan. As compensation for the services provided during 2007 and 2008, the Company paid Isis and Alnylam an annual rate of $350,000 for each full-time equivalent (the |
20
Regulus Therapeutics Inc.
Notes to Financial Statements (continued)
7. Related-Party Transactions (continued)
FTE rate) plus out-of-pocket expenses. The Company did not reimburse Isis or Alnylam for internal general and administrative costs supporting the employees performing the services, as the FTE rate already included these costs. |
As part of the Companys conversion to a C-corporation, in January 2009 the Company, Isis and Alnylam amended and restated the Services Agreement. If requested by the Company, Alnylam will provide services to the Company at the annual FTE rate. In addition, Isis will continue to provide specific research and development services and/or other services, including, without limitation, general and administrative support services, occupancy costs, and intellectual property prosecution and enforcement services, in accordance with an operating plan agreed upon by the Company, Isis and Alnylam. Isis will charge the Company its prorated share of Isis costs to provide such services. |
The following table summarizes the amounts included in the Companys balance sheets, which resulted from the Services Agreement among Isis, Alnylam and the Company: |
December 31, | ||||||||
2009 | 2008 | |||||||
Payable to Isis |
$ | 823,422 | $ | 1,953,914 | ||||
Payable to Alnylam |
29,016 | 106,263 | ||||||
$ | 852,438 | $ | 2,060,177 | |||||
The following table summarizes the amounts included in the Companys operating expenses, which resulted from the Companys activities with Isis: |
Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007(1) | ||||||||||
Services performed by Isis |
$ | 2,260,791 | $ | 5,260,736 | $ | 665,770 | ||||||
Out-of-pocket expenses paid by Isis |
698,749 | 830,630 | 341,178 | |||||||||
Non-cash stock compensation for
Isis stock options |
| 490,442 | 91,975 | |||||||||
$ | 2,959,540 | $ | 6,581,808 | $ | 1,098,923 | |||||||
(1) | The Period from September 6, 2007 (inception) to December 31, 2007 |
21
Regulus Therapeutics Inc.
Notes to Financial Statements (continued)
7. Related-Party Transactions (continued)
The following table summarizes the amounts included in the Companys operating expenses, which resulted from the Companys activities with Alnylam: |
Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007(1) | ||||||||||
Services performed by Alnylam |
$ | 43,794 | $ | 396,958 | $ | 113,596 | ||||||
Out-of-pocket expenses paid by Alnylam |
135,347 | 81,222 | 8,000 | |||||||||
Non-cash stock compensation for
Alnylam stock options |
(527,979 | ) | 1,526,142 | 320,303 | ||||||||
$ | (348,838 | ) | $ | 2,004,322 | $ | 441,899 | ||||||
(1) | The Period from September 6, 2007 (inception) to December 31, 2007 |
(d) Investor Rights Agreement; Certificate of Incorporation
As part of the conversion to a C-corporation, in January 2009 the Company, Isis and Alnylam amended the Corporate Services Agreement and entered into an Investor Rights Agreement. The amended Corporate Services Agreement specifies services that Isis and Alnylam will provide to the Company. |
The terms of the Investor Rights Agreement and Certificate of Incorporation provide Isis and Alnylam specific rights and privileges, including the right to: separately approve transactions that materially affect the Company; each appoint up to two members of the board of directors; preferential distribution in the event of a sale or liquidation of the Company; and approve the Companys operating plan. |
8. Collaborative Arrangement
In April 2008, the Company entered into a strategic alliance with GSK to discover, develop and
market novel microRNA-targeted therapeutics to treat inflammatory diseases such as rheumatoid
arthritis and inflammatory bowel disease. The alliance utilizes the Companys expertise and
intellectual property position in the discovery and development of microRNA-targeted therapeutics
and provides GSK with an option to license drug candidates directed at four different microRNA
targets with relevance in inflammatory disease. The Company will be responsible for the discovery
and development of the microRNA antagonists through completion of clinical proof of concept, unless
GSK chooses to exercise its option earlier. After exercise of
22
Regulus Therapeutics Inc.
Notes to Financial Statements (continued)
8. Collaborative Arrangement (continued)
the option, GSK will have an exclusive license to develop the relevant microRNA target on a
worldwide basis. The Company will have the right to further develop and commercialize any microRNA
therapeutics, which GSK chooses not to develop or commercialize.
The Company received $20,000,000 in upfront payments from GSK, including a $15,000,000 option fee
and a $5,000,000 convertible note. The Company is amortizing the $15,000,000 option fee into
revenue over the Companys six year period of performance.
9. Income Taxes
Until January 1, 2009, the Company was a limited liability company, which resulted in profit or
loss in its operations being passed through to Isis and Alnylam in accordance to provisions set
forth in the Limited Liability Company Agreement dated September 6, 2007. Due to the conversion to
a C-corporation in 2009, the Company no longer shifted its tax burden or benefit to Isis and
Alnylam. As a result, the 2009 tax year is the first year the Company is responsible for its tax
liability or benefit. Although the Company had a book loss in 2009, for tax purposes, the Company
had to include a significant portion of the GSK upfront payment in its taxable revenue resulting in
taxable income.
Significant components of the Companys deferred tax assets are shown below. The Company uses a
valuation allowance to offset the deferred tax assets as realization of such assets has not met the
more-likely-than-not threshold.
Year Ended | ||||
December 31, | ||||
2009 | ||||
Deferred tax assets: |
||||
Research and development tax credits |
$ | 283,935 | ||
Deferred revenue |
4,403,089 | |||
Other |
80,916 | |||
Total deferred tax assets |
4,767,940 | |||
Deferred tax liability |
(271,148 | ) | ||
Valuation allowance |
(4,102,576 | ) | ||
Net deferred tax asset |
$ | 394,216 | ||
23
Regulus Therapeutics Inc.
Notes to Financial Statements (continued)
9. Income Taxes (continued)
The provision for income taxes reported a total tax expense of $140,606. Significant components of
the income tax provision are as follows:
Year Ended | ||||
December 31, | ||||
2009 | ||||
Current: |
||||
Federal |
$ | 438,018 | ||
State |
96,802 | |||
534,820 | ||||
Deferred: |
||||
Federal |
(394,214 | ) | ||
State |
| |||
(394,214 | ) | |||
Income tax expense |
$ | 140,606 | ||
A reconciliation of the federal statutory tax rate of 34% to the Companys effective income tax
rate follows:
Year Ended | ||||
December 31, | ||||
2009 | ||||
Statutory tax rate |
34.0 | % | ||
State taxes, net of federal benefit |
5.8 | % | ||
Tax credits |
7.5 | % | ||
Change in valuation allowance |
(46.9 | %) | ||
Other |
(2.0 | %) | ||
Effective tax rate |
(1.6 | %) | ||
The Company had federal and California research and development tax credit carryforwards of
approximately $80,000 and $310,000, respectively, as of December 31, 2009. The federal research and
development tax credit carryforwards will begin to expire in 2029 unless previously utilized. The
California research and development tax credit carryforwards are available indefinitely.
24
Regulus Therapeutics Inc.
Notes to Financial Statements (continued)
9. Income Taxes (continued)
The future utilization of the Companys research and development credit carryforwards to offset
future taxable income may be subject to an annual limitation as a result of ownership changes that
may have occurred previously or may occur in the future. The Tax Reform Act of 1986 (the Act)
limits a companys ability to utilize certain tax credit carryforwards in the event of a cumulative
change in ownerships in excess of 50% as defined in the Act.
It is the Companys practice to recognize interest and/or penalties related to income tax matters
in income tax expense. The Company recognized no interest or penalties upon adoption or as of
December 31, 2009. The Company does not expect any significant increases or decreases to its
unrecognized tax benefits within the next 12 months. The Company is subject to taxation in the
United States and California. The Companys tax years for 2007 and forward are subject to
examination by the tax authorities in those jurisdictions.
10. Subsequent Events
The Company evaluated subsequent events occurring through February 26, 2010, the date the financial
statements were made available to stockholders, for potential recognition or disclosure in its
financial statements.
In February 2010, the Company announced completion of a new worldwide strategic alliance with GSK
to develop and commercialize microRNA therapeutics targeting miR-122 for the treatment of hepatitis
C virus (HCV) infection. The HCV alliance includes upfront and milestone cash payments, in addition
to royalties, and expands the ongoing GSK-Regulus Immuno-Inflammatory Disease alliance formed in
2008.
25