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MARINA BIOTECH, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

August 19, 2014

Overview

Statements contained herein that are not historical fact may be 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, that are subject to a variety of risks and uncertainties. There are a number of important factors that could cause actual results to differ materially from those projected or suggested in any forward-looking statement made by us. These factors include, but are not limited to: (i) the ability of our company to obtain additional and substantial funding in the future; (ii) the ability of our company to attract and/or maintain research, development, commercialization and manufacturing partners; (iii) the ability of our company and/or a partner to successfully complete product research and development, including pre-clinical and clinical studies and commercialization; (iv) the ability of our company and/or a partner to obtain required governmental approvals, including product and patent approvals; and (v) the ability of our company and/or a partner to develop and commercialize products that can compete favorably with those of competitors. In addition, significant fluctuations in quarterly results may occur as a result of the timing of milestone payments, the recognition of revenue from milestone payments and other sources, and the timing of costs and expenses related to our research and development programs. Additional factors that could cause actual results to differ materially from those projected or suggested in any forward-looking statements are contained in our filings with the Securities and Exchange Commission, including those factors discussed under the captions "Risk Factors" and "Forward-Looking Statements" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, as may be supplemented or amended from time to time, which we urge investors to consider. We undertake no obligation to publicly release revisions in such forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrences of unanticipated events or circumstances, except as otherwise required by securities and other applicable laws.

Background



We are a biotechnology company focused on the discovery, development and commercialization of nucleic acid-based therapies to treat orphan diseases. Since 2010, we have strategically acquired/in-licensed and further developed nucleic acid chemistry and delivery-related technologies to form an integrated drug discovery platform. We distinguish ourselves from others in the nucleic acid therapeutics area through this unique platform that enables the development of a variety of therapeutics targeting coding and non-coding RNA via multiple mechanisms of action such as RNA interference ("RNAi"), messenger RNA ("mRNA") translational inhibition, exon skipping, miRNA ("miRNA") replacement, miRNA inhibition, and steric blocking in order to modulate gene expression either up or down depending on the specific mechanism of action. Our goal is to dramatically improve the lives of the patients and families affected by orphan diseases through either our own efforts or those of our collaborators and licensees.

We are focusing our efforts and resources on the discovery and development of our own pipeline of nucleic acid-based compounds in order to commercialize drug therapies to treat orphan diseases. In addition, we will seek to establish collaborations and strategic partnerships with pharmaceutical and biotechnology companies to generate revenue through up-front, milestone and royalty payments related to our technology and/or the products that are developed using such technology.

Cash Position and Liquidity



The accompanying condensed consolidated financial statements have been prepared on the basis that we will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business. At March 31, 2014, we had an accumulated deficit of approximately $340 million. To the extent that sufficient funding is available, we will in the future continue to incur losses as we continue our research and development ("R&D") activities. In addition, we have had and will continue to have negative cash flows from operations. We have funded our losses primarily through the sale of common and preferred stock and warrants, revenue provided from our license agreements with other parties, and, to a lesser extent, equipment financing facilities and secured loans. At March 31, 2014, we had a working capital surplus of $3.0 million, which included $5.5 million in cash.

On February 24, 2014, certain debt holders exchanged secured promissory notes in the aggregate principal and interest amount of $1.5 million for 2.0 million shares of our common stock. In addition, on March 7, 2014, we entered into a Securities Purchase Agreement with certain investors pursuant to which we sold 1,200 shares of Series C Stock, and warrants to purchase up to 6.0 million shares of our common stock at an exercise price of $0.75 per

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share, for an aggregate purchase price of $6.0 million. Each share of Series C Stock has a stated value of $5,000 per share and is convertible into shares of common stock at a conversion price of $0.75 per share. The Series C Stock is initially convertible into an aggregate of 8,000,000 shares of our common stock, subject to certain limitations and adjustments, has no stated dividend rate, is not redeemable and has voting rights on an as-converted basis.

We believe that our current cash resources, which include the proceeds of the March 2014 offering of Series C Stock, will enable us to fund our intended operations through May 2015.

Cash flows



Our operating activities used cash of $1.1 million in the three months ended March 31, 2014, compared to $0.5 million in the three months ended March 31, 2013. In the three months ended March 31, 2014, cash used in operating activities related primarily to funding our net loss, adjusted for non-cash gains on the settlement of liabilities of $0.26 million. Adjustments for non-cash expenses totaling $8.8 million included charges related to beneficial conversion and debt extinguishment, interest expense, stock compensation, and the adjustment of warrants and stock to be issued to extinguish liabilities to reflect fair value. Changes in operating assets and liabilities used $0.6 million mostly from changes in accrued liabilities. In the three months ended March 31, 2013, cash used in operating activities related primarily to funding our net loss, adjusted for non-cash gains totaling $2.7 million related to changes in the fair value of the liability for price adjustable warrants, stock reserved to settle liabilities and embedded derivatives. Non-cash expenses totaling $1.0 million included the loss on debt extinguishment, interest expense and stock compensation. Changes in operating assets and liabilities used $0.2 million mostly from changes in the accrued restructuring.

We had no investing activities in the three months ended March 31, 2014; during the three months ended March 31, 2013, $0.4 million was drawn from our letter of credit associated with our lease termination.

Our financing activities provided $5.7 million in the three months ended March 31, 2014, compared to using $0.002 million in the three months ended March 31, 2013. Changes in cash from financing activities are primarily due to the sale of preferred stock and warrants to purchase common shares offset by cash we were required to pay the note-holders prior to conversion of the notes payable into equity.

Summary



We believe that our current cash resources, which include the proceeds of the March 2014 offering of Series C Stock, will enable us to fund our intended operations through May 2015. The market value and the volatility of our stock price, as well as our historical financial situation and general market conditions, could make it difficult for us to complete a financing or collaboration transaction on favorable terms, or at all. Any financing we obtain may further, and substantially, dilute or otherwise impair the ownership interests of our current stockholders. If we fail to obtain significant additional capital in the future, we will be forced to further delay, reduce or eliminate some or all of our planned activities.

Consolidated Results of Operations

Comparison of Results of Operations for the three months ended March 31, 2014 to the three months ended March 31, 2013

Research and Development. R&D expense consists primarily of salaries and other personnel-related expenses, consulting and other outside services, and other costs. R&D expense declined 61% from $0.1 million in the three months ended March 31, 2013 to $0.05 million in the three months ended March 31, 2014, due to the following:

Personnel-related expenses (compensation, benefits, travel related) decreased

by 91% from $0.1 million in the first three months of 2013 to $0.01 million in the first three months of 2014 due to the resignation of our chief scientific officer at the end of 2013.



Consulting fees increased 250% to $0.013 million in the three months ended

March 31, 2014 from an immaterial amount in the first three months of 2013 as we resume development of our FAP product.



The compensation for our scientific advisory board represented $0.02 million in

the first three months of 2014 while there was no scientific advisory board

compensation in the first three months of 2013.

In general, our strengthened financial position at March 31, 2014 has allowed us to subsequently increase R&D spending

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as we resume development of our FAP product. We had yet to resume spending on R&D operations at March 31, 2014, resulting in an overall decline in R&D expenses for the three months ended March 31, 2014 compared to the same period in 2013.

General and administrative. General and administrative ("G&A") expense consists primarily of salaries and other personnel-related expenses to support our R&D activities, stock-based compensation for G&A personnel and non-employee members of our Board, professional fees, such as accounting and legal, and corporate insurance costs. G&A costs increased 146% from $0.2 million in the three months ended March 31, 2013 to $0.5 million in the three months ended March 31, 2014 as a result of the following:

Personnel-related expenses (compensation, benefits, travel related) increased

9% from $0.2 million in the three months ended March 31, 2013 to $0.22 million in the three months ended March 31, 2014 due primarily to the transition of our interim chief financial officer from management to the board of directors.



Costs of legal and accounting fees, consulting, corporate insurance and other

administrative costs decreased by 17% from $0.3 million in the three months ended March 31, 2013 to $0.25 million in the three months ended March 31, 2014 due to reduced expected fees related to audit and tax preparation and reduced legal fees.



Also included in G&A in the first three months of 2013 was a credit of $0.3

million due to the reversal of a financing-related liability the payment of

which was deemed remote.



In general, G&A expenses stayed relatively flat in the first three months of 2014 compared to the first three months of 2013 after adjusting for the one-time credit of $0.3 million in the first three months of 2013.

Interest & other expense. Interest and other expense increased from $0.06 million in the three months ended March 31, 2013 to $1.0 million in the three months ended March 31, 2014. This was mostly due to the 2014 non-cash interest expense related to the conversion of the notes payable into common stock.

Change in fair value liability for price adjustable securities. The fair value liability is revalued each balance sheet date utilizing Black-Scholes-Merton model computations, with the decrease or increase in fair value being reported in the statement of operations as other income or expense, respectively. The gain associated with this mark-to-fair value requirement was $2.0 million during the first three months of 2013, but stock price increases and the issuance terms of the Series C related warrants resulted in a $5.3 million loss during the first three months of 2014. The largest drivers of the change in the value of the liability are the number of price adjustable securities and the change in the stock price. We issued an additional 6 million price adjustable securities and our stock price went from $0.25 to $0.89 at March 31, 2013 and 2014, respectively. An increase in stock price increases the liability and increases our loss on the consolidated statements of operations.

Change in fair value liability for stock to be issued. During the first three months of 2014, we recognized a $2.5 million loss associated with the change in the value of share-based payments contractually obligated, but not yet issued. At March 31, 2013, we had contractually pledged 0.1 million shares to a vendor to partially settle an account payable, 0.5 million shares to Novosom to settle amounts owed under our license agreement, and 1.5 million shares to our landlord as part of our lease termination agreement. The increase in the market value of the shares due to stock price increases between December 31, 2013, and the date of issuance in March 2014, was recorded as a loss in the consolidated statement of operations.

Change in fair value of features embedded in notes payable. We recorded a gain of $0.3 million in the three months ended March 31, 2013 for the change in fair value of separately valued stand-alone features embedded in our notes payable. These features were revalued at each reporting period and the liability adjusted accordingly, with changes in the liability reflected as a gain or loss on the consolidated statements of operations. The change in the value of these features was tied to the stock price, such that price declines within the reporting period reduced the fair value of the liabilities and was recorded as a gain on the consolidated statements of operations. The gain was offset when substantially equivalent losses were incurred on debt extinguishment, as discussed below. The notes and all such features were extinguished in March 2014.

Loss on Debt Extinguishment. Due to the requirements under debt extinguishment accounting, the fair value of existing debt is extinguished on the date of certain note amendments. Any concurrent warrant issuances and the fair value of any embedded features within the notes are fully expensed as a gain or loss on extinguishment, then the note terms and features are revalued and rebooked on the balance sheet. In the three months ended March 31, 2013, a $0.9 million loss was recorded due to extinguishment of the debt related to the February 2013 amendment.

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Gain on settled liabilities. During the three months ended March 31, 2014, we recorded a $0.26 million gain due to the negotiated settlement of liabilities accrued for our executive officers. The remaining liabilities to those officers of $1.0 million were paid through the issuance of 2.8 million common shares with a fair value of $1.0 million.

Off-Balance Sheet Arrangements

As of March 31, 2014, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.


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Source: Edgar Glimpses


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