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RXII > SEC Filings for RXII > Form 10-Q on 13-Nov-2012All Recent SEC Filings

Show all filings for RXI PHARMACEUTICALS CORP

Form 10-Q for RXI PHARMACEUTICALS CORP


13-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In this document, "we," "our," "ours," "us," "RXi" and the "Company" refer to RXi Pharmaceuticals Corporation. All references to "Galena" refer to Galena Biopharma, Inc. and Apthera, Inc., Galena's wholly owned subsidiary.

This management's discussion and analysis of financial condition as of September 30, 2012 and results of operations for the three and nine months ended September 30, 2012 and 2011 should be read in conjunction with the financial statements included in our Special Financial Report on Form 10-K for the year ended December 31, 2011 which was filed with the SEC on May 7, 2012.

The discussion and analysis below includes certain forward-looking statements related to future operating losses and our potential for profitability, the sufficiency of our cash resources, our ability to obtain additional equity or debt financing, possible partnering or other strategic opportunities for the development of our products, as well as other statements related to the progress and timing of product development, present or future licensing, collaborative or financing arrangements or that otherwise relate to future periods, which are all forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. These statements represent, among other things, the expectations, beliefs, plans and objectives of management and/or assumptions underlying or judgments concerning the future financial performance and other matters discussed in this document. The words "may," "will," "should," "plan," "believe," "estimate," "intend," "anticipate," "project," and "expect" and similar expressions are intended to identify forward-looking statements. All forward-looking statements involve certain risks, uncertainties and other factors described elsewhere in this report and in our Special Financial Report on Form 10-K for the year ended December 31, 2011, that could cause our actual results of operations, performance, financial position and business prospects and opportunities for this quarter and the periods that follow to differ materially from those expressed in, or implied by, those forward-looking statements. We caution investors not to place significant reliance on the forward-looking statements contained in this report. These statements, like all statements in this report, speak only as of the date of this report (unless another date is indicated) and we undertake no obligation to update or revise forward-looking statements.


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Overview

We are a biotechnology company focused on discovering, developing and commercializing innovative therapies addressing major unmet medical needs using RNAi-targeted technologies. We are pursuing proprietary therapeutics based on RNA interference ("RNAi"), a naturally occurring cellular mechanism that has the potential to effectively and selectively interfere with, or "silence," expression of targeted disease-associated genes.

Certain human diseases result from overexpression of one or more genes. We believe that these types of human diseases can potentially be treated by silencing (reducing) the overexpressed genes. While no therapeutic RNAi products have been approved by the Food and Drug Administration ("FDA") to date, there has been significant interest in the field of RNAi therapeutic development. This interest is driven by the potential ability to use RNAi to develop lead compounds that specifically and selectively inhibit single target genes, many of which are thought to be incapable of being inhibited by other modalities. RXI-109, our first RNAi product candidate, is a dermal anti-scarring investigative therapy that targets connective tissue growth factor ("CTGF"). The Company received the FDA's clearance to enter clinical trials with RXI-109, and with this clearance the Company initiated a Phase 1 clinical trial in 2012. Because abnormal overexpression of CTGF is implicated in dermal scarring and fibrotic disease, we believe that RXI-109 or other CTGF-targeting RNAi compounds may be able to treat other indications, including pulmonary fibrosis, liver fibrosis, acute spinal injury, ocular scarring and restenosis. We intend to maintain our core RNAi discovery and development capability and to develop products both on our own and through collaborations.

Research and Development

To date, our research programs have focused on identifying product candidates and optimizing the delivery method and technology necessary to make RNAi compounds available by local, systemic administration, as appropriate for diseases for which we intend to develop an RNAi therapeutic. Since we commenced operations, research and development has comprised a significant proportion of our total operating expenses and is expected to comprise the majority of our spending for the foreseeable future.

There are risks in any new field of drug discovery that preclude certainty regarding the successful development of a product. We cannot reasonably estimate or know the nature, timing and costs of the efforts necessary to complete the development of, or the period in which material net cash inflows are expected to commence from, any product candidate. Our inability to make these estimates results from the uncertainty of numerous factors, including but not limited to:

Our ability to advance product candidates into preclinical research and clinical trials;

The scope and rate of progress of our preclinical program and other research and development activities;

The scope, rate of progress and cost of any clinical trials we commence;

The cost of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights;

Clinical trial results;

The terms and timing of any collaborative, licensing and other arrangements that we may establish;

The cost and timing of regulatory approvals;

The cost of establishing clinical and commercial supplies of our product candidates and any products that we may develop;

The cost and timing of establishing sales, marketing and distribution capabilities;

The effect of competing technological and market developments; and

The effect of government regulation and insurance industry efforts to control healthcare costs through reimbursement policy and other cost management strategies.

Failure to complete any stage of the development of our product candidates in a timely manner could have a material adverse effect on our operations, financial position and liquidity.

Critical Accounting Policies and Estimates

Our significant accounting policies are described in Note 2 of the notes to the financial statements of our Annual Report on Form 10-K for the year ended December 31, 2011, which we filed with the SEC on May 8, 2012. Not all of these significant policies, however, fit the definition of critical accounting policies and estimates. The Company believes that the accounting policies relating to the predecessor financial statements and carve-out financial statements, research and development expenses, stock-based compensation and the accounting for convertible preferred stock fit the description of critical accounting policies and estimates.

Predecessor's Financial Statements and Carve-Out Financial Statements

Prior to April 13, 2011, Galena was engaged primarily in conducting discovery research and preclinical development activities based on RNAi, and Galena's financial statements for periods prior to April 13, 2011 reflected solely the assets, liabilities and results of operations attributable to Galena's RNAi-based assets, liabilities and results of operations. On April 13, 2011, Galena broadened its strategic direction by


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adding the development and commercialization of cancer therapies that utilize peptide-based immunotherapy products, including a main product candidate, NeuVax, for the treatment of various cancers. On September 24, 2011, Galena contributed to RXi, a newly formed subsidiary of Galena, substantially all of Galena's RNAi-related technologies and assets. The newly formed RXi was incorporated on September 8, 2011 with the issuance of 100 initial shares at a price of $0.01 per share for total consideration of $1.00. RXi was not engaged in any activities other than its initial incorporation from September 8, 2011 to September 23, 2011.

As a result of these transactions, the historical financial information for the three and nine months ended September 30, 2011, as well as the cumulative period from inception (January 1, 2003) through September 30, 2012, has been "carved out" of the financial statements of Galena, as our "Predecessor". Such financial information is limited to Galena's RNAi-related activities, assets and liabilities only, and excludes activities, assets and liabilities that are attributable to Galena's cancer therapy activities. The financial information for the cumulative period from inception through September 30, 2012 includes Galena's RNAi-related activities through September 23, 2011 and also includes the results of RXi for the period from September 24, 2011 to September 30, 2012.

The carved-out financial information includes both direct and indirect expenses. The historical direct expenses consist primarily of the various costs for technology license agreements, sponsored research agreements, fees paid to scientific advisors and employee expenses of employees directly involved in RNAi-related activities. Indirect expenses represent expenses incurred by Galena that were allocable to the RNAi business. The indirect expenses are based upon
(1) estimates of the percentage of time spent by Galena employees working on RNAi business matters and (2) allocations of various expenses associated with the employees, including salary, benefits, rent associated with the employees' office space, accounting and other general and administrative expenses. The percentage of time spent by Galena employees was multiplied by these allocable expenses to arrive at the total employee expenses allocable to the RNAi business and reflected in the carved out financial statements. Management believes the assumptions underlying the carve-out financial information are reasonable; however, the financial position, expenses and cash flows may have been materially different if the RNAi business had operated as a stand-alone entity during the periods presented.

Research and Development Expenses

Research and development costs are expensed as incurred. Included in research and development costs are wages, benefits, facilities, supplies, external services, and other operating costs and overhead directly related to the Company's research and development departments, as well as costs to acquire technology licenses.

Stock-based Compensation

The Company follows the provisions of ASC 718, which requires the measurement and recognition of compensation expense for all stock based payment awards made to employees and non-employee directors, including employee stock options. Stock compensation expense based on the grant date fair value estimated in accordance with the provisions of ASC 718 is recognized as an expense over the requisite service period.

For stock options granted as consideration for services rendered by non-employees, the Company recognizes compensation expense in accordance with the requirements of FASB ASC Topic 505-50, "Equity Based Payments to Non- Employees ". Non-employee option grants that do not vest immediately upon grant are recorded as an expense over the vesting period of the underlying stock options. At the end of each financial reporting period prior to vesting, the value of these options, as calculated using the Black-Scholes option-pricing model, will be re-measured using the fair value of the Company's common stock and the non-cash compensation recognized during the period will be adjusted accordingly. Since the fair market value of options granted to non-employees is subject to change in the future, the amount of the future compensation expense will include fair value re-measurements until the stock options are fully vested.

Convertible Preferred Stock

On April 27, 2012, the Company received net proceeds of $8.1 million from the issuance of the convertible preferred stock ("Series A Preferred Stock"). The Company first assessed the preferred stock under ASC 480, "Distinguishing Liabilities from Equity", and it was determined it was not within the scope of ASC 480. The preferred stock was then assessed under ASC 815, "Derivatives and Hedging".

The preferred stock is convertible into common stock at the holders' option, subject to the terms of the Certificate of Designations. This embedded feature meets the definition of a derivative. The Company believes that the Series A Preferred Stock is an equity host for the purposes of assessing the embedded conversion option for potential bifurcation. The Company concluded that the conversion option feature is clearly and closely related to the preferred stock host. As such, the conversion feature did not require bifurcation under ASC 815.

The preferred stock was then assessed under ASC 470, "Debt with Conversion Features and Other Options", to determine if there was a beneficial conversion feature (BCF). The BCF compares the carrying value of the preferred stock after the value of any derivatives has been allocated from the proceeds to the transaction date value of number of shares that the holder would receive upon conversion. The calculation resulted in a BCF of $9,500,000 and was recorded in additional paid-in capital.

The Company has recorded the Series A Preferred Stock in temporary equity as, the Company may not be able to control the actions necessary to issue the maximum number of common shares needed to provide for a conversion in full of the then outstanding Series A Preferred Stock, at which time a holder of the Series A Preferred Stock may elect to redeem their preferred shares outstanding in the amount equal to the face value per share, plus unpaid accrued dividends. The initial carrying value of the preferred stock was $9,500,000. Upon completion of the spin-off, the conversion option of the Series A Preferred Stock was immediately exercisable, therefore the $9,500,000 discount related to the BCF was immediately accreted to preferred dividends, resulting in an increase in the carrying value of the Series A Preferred Stock to $9,500,000.


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Holders of Series A Preferred Stock are entitled to receive cumulative mandatory dividends at the rate per share of seven percent (7%) of the face amount ($1,000 per share) per annum, payable quarterly on each March 31, June 30, September 30 and December 31. Dividends are payable in additional shares of Series A Preferred Stock valued for this purpose at the face amount. In the event there are not sufficient authorized preferred shares available to pay such a dividend, the dividend shall instead accrete to and increase the value of the outstanding Series A Preferred Stock. The fair value of the Series A preferred dividend, which is included in the Company's net loss applicable to common shareholders, is calculated by multiplying the number of common shares that a preferred holder would receive upon conversion by the closing price of the Company's common stock on the dividend payable date. The fair value of the Series A preferred dividend, which is included in the Company's net loss applicable to common shareholders, is calculated by multiplying the number of common shares that a preferred holder would receive upon conversion by the closing price of the Company's common stock on the dividend payable date.

Results of Operations

We have generated no significant revenues since our inception, and anticipate that no significant revenues will be generated for the foreseeable future. Accordingly, for accounting purposes we are considered a development stage company. The Company expects to incur significant operating losses for the foreseeable future while the Company advances its future product candidates from discovery through pre-clinical studies and clinical trials and seek regulatory approval and potential commercialization, even if the Company is collaborating with pharmaceutical and larger biotechnology companies. In addition to these increasing research and development expenses, the Company expects general and administrative costs to increase as the Company recruits additional management and administrative personnel. The Company will need to generate significant revenues to achieve profitability and may never do so.

For the Three and Nine Months Ended September 30, 2012 and 2011

For the three months ended September 30, 2012, our net loss was approximately $1,644,000 compared with a net loss of $2,043,000 for the three months ended September 30, 2011. The loss decreased by $399,000 or approximately 20%. Variations in the losses between the two periods are discussed below.

For the nine months ended September 30, 2012, our net loss was approximately $11,168,000 compared with a net loss of $7,766,000 for the nine months ended September 30, 2011. The loss increased by $3,402,000, or approximately 44%. Variations in the losses between the two periods are discussed below.

Revenue

Total revenues were approximately $57,000 for the three months ended September 30, 2012, compared with no revenues for the three months ended September 30, 2011. The increase of $57,000, or 100%, was due to the recognition of work completed on the Company's government grants during the quarter. During the same period in 2011, the Company was assigned the grants from Galena as per the contribution agreement. The assignment of the grants was subject to the approval from the granting institutions, which was not received until 2012.

Total revenues were approximately $57,000 for the nine months ended September 30, 2012, compared with no revenues for the nine months ended September 30, 2011. The increase of $57,000, or 100%, was due to the recognition of work completed on the Company's government grants during the year. During the same period in 2011, the Company was assigned the grants from Galena as per the contribution agreement. The assignment of the grants was subject to the approval from the granting institutions, which was not received until 2012.

Research and Development Expense

Research and development expense consists primarily of compensation-related costs for our employees dedicated to research and development activities and for our Scientific Advisory Board ("SAB") members, as well as clinical trial costs, licensing fees, patent prosecution costs, and the cost of lab supplies used in our research and development programs. We expect research and development expenses to increase as we expand our discovery, development and clinical activities.

Total research and development expenses were approximately $1,214,000 for the three months ended September 30, 2012, compared with $1,126,000 for the three months ended September 30, 2011. The increase of $88,000, or 8%, was primarily due to an increase of $48,000 related to expenses to run the clinical trial for the Company's RXI-109 program as compared to the prior year period and an increase of $59,000 in employee stock based compensation expense offset by a decrease of $19,000 related to changes in fair value of stock options granted to non-employees.

Total research and development expenses were approximately $9,314,000 for the nine months ended September 30, 2012, compared with $5,074,000 for the nine months ended September 30, 2011. The increase of $4,240,000, or 84%, was primarily due to the fair value of common stock issued in exchange for patent and technology rights of $6,173,000 and an increase of $156,000 related to changes in fair value of stock options granted to non-employees offset by a decrease of $189,000 in employee stock based compensation expense and a decrease of $1,900,000 in research and development expenses due to lower personnel and lab supply costs.

General and Administrative Expense

General and administrative expenses include compensation-related costs for our employees dedicated to general and administrative activities, legal fees, audit and tax fees, consultants and professional services, and general corporate expenses.

General and administrative expenses were approximately $539,000 for the three months ended September 30, 2012, compared with $1,041,000 for the three months ended September 30, 2011. The decrease of $502,000, or 48%, was primarily due to a decrease of $343,000 in general and administrative expenses due to lower personnel related costs, board fees and expenses, and professional outside services, a decrease of $149,000 in employee stock based compensation, and a decrease of $10,000 related to the fair value of common stock warrants issued in exchange for services.


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General and administrative expenses were approximately $2,006,000 for the nine months ended September 30, 2012, compared with $5,206,000 for the nine months ended September 30, 2011. The decrease of $3,200,000, or 61%, was primarily due to a decrease of $1,816,000 in general and administrative expenses due to lower personnel related costs, board fees and expenses, and professional outside services, a decrease of $1,283,000 in employee stock based compensation, a decrease of $23,000 related to the fair value of our Parent Company's common stock issued for services, and a decrease of $78,000 related to the fair value of common stock warrants issued in exchange for services.

Interest Income (Expense)

The key objectives of our investment policy are to preserve principal and ensure sufficient liquidity, so our invested cash may not earn as high a level of income as longer-term or higher risk securities, which generally have less liquidity and more volatility.

Interest expenses were approximately $1,000 for the three months ended September 30, 2012, compared with interest income of $1,000 for the three months ended September 30, 2011. The decrease of $2,000 or 200% was primarily due to interest expense from the Company's financing leases.

Interest expenses were approximately $29,000 for the nine months ended September 30, 2012, compared with interest income of approximately $1,000 for the nine months ended September 30, 2011. The decrease of $30,000 was primarily due to the interest expense from the bridge notes funded by TCP and RTW.

Other Income/Expense

Other income was $53,000 for the three months ended September 30, 2012, compared with $123,000 for the three months ended September 30, 2011. The decrease of $70,000 or 57% was primarily related to a decrease of $123,000 in the change in the fair value of Galena's derivatives potentially settleable in cash issued in connection with several financing transactions offset by $39,000 related to the reimbursement for prior period expenses on the Company's government grants.

Other income was $124,000 for the nine months ended September 30, 2012, compared with $2,513,000 for the nine months ended September 30, 2011. The decrease of $2,389,000 or 95% primarily related to a decrease of $2,513,000 in the change in the fair value of Galena's derivatives potentially settleable in cash issued in connection with several financing transactions offset by $110,000 related to the reimbursement for prior period expenses on the Company's government grants.

Series A Preferred Stock Accretion and Dividends

As of April 27, 2012, the date of completion of RXi's spin-off from Galena, the Company issued 9,500 of Series A Preferred Stock to TCP and RTW, as provided for in the securities purchase agreement. The rights and preferences of the Series A Preferred Stock, as well as the beneficial conversion feature as a result of the issuance of preferred stock and the calculation of dividend payable is described further in Note 4 to the notes of the condensed financial statements.

The accretion of the Series A convertible preferred stock and dividends was approximately $1,277,000 for the three months ended September 30, 2012 compared with no accretion of Series A convertible preferred stock and dividends for the three months ended September 30, 2011. The balance relates to the fair value of the Series A Preferred Stock dividends paid to preferred shareholders for the three months ended September 30, 2012.

Accretion of Series A convertible preferred stock and dividends was approximately $11,897,000 for the nine months ended September 30, 2012 compared with no Series A convertible preferred stock accretion and dividends for the nine months ended September 30, 2011. Of the total balance, $9,500,000 relates to the beneficial conversion feature of the Series A Preferred Stock and $2, 397,000 relates to the fair value of the dividends payable to preferred shareholders for the nine months ended September 30, 2012.

Liquidity and Capital Resources

We had cash and cash equivalents of approximately $6.3 million as of September 30, 2012, compared with $0.5 million as of December 31, 2011. As of April 27, 2012, the Company completed the spin-off from Galena and issued 9,500 of Series A Preferred Stock to TCP and RTW upon the conversion of the $1,026,736 principal and accrued interest under the bridge notes outstanding at this date and the receipt of the remaining $8,473,624 from TCP and RTW, as provided for in the securities purchase agreement. At the closing of the spin-off transaction, RXi reimbursed Galena and TCP $300,000 and $100,000, respectively, for transaction related expenses. The Company believes that the cash available at September 30, 2012 should be sufficient to fund RXi's operations into the third quarter of 2013. We expect to incur significant operating losses as we advance our product candidates through the drug development and regulatory process. We have generated minimal to no revenue to date and may not generate product revenue in the foreseeable future, if ever. In the future, RXi will be dependent on obtaining funding from third parties, such as proceeds from the sale of equity, funded research and development programs and payments under partnership and collaborative agreements, in order to maintain RXi's operations and meet RXi's obligations to licensors. There is no guarantee that debt, additional equity or other funding will be available to the Company on acceptable terms, or at all. If the Company fails to obtain additional funding when needed, RXi would be forced to scale back, or terminate the Company operations or to seek to merge with or to be acquired by another company.


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Net Cash Flow from Operating Activities

Net cash used in operating activities was approximately $3,912,000 for the nine months ended September 30, 2012, compared with $7,179,000 for the nine months ended September 30, 2011. The decrease of approximately $3,267,000 related primarily to the Company's net loss of $11,168,000 for the nine months ended September 30, 2012 as compared to $7,766,000, as described above, and the adjustments to net loss for non-cash items to arrive at the net cash used in operating activities. The non-cash items adjusted for the nine months ended September 30, 2012 was approximately $6,960,000, compared with ($288,000) for the nine months ended September 30, 2011. The increase from the same period in the prior year is primarily related to the fair value of common stock issued in exchange for patent and technology rights of $6,173,000.

Net Cash Flow from Investing Activities

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