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RGRX > SEC Filings for RGRX > Form 10-K on 16-Apr-2013All Recent SEC Filings

Show all filings for REGENERX BIOPHARMACEUTICALS INC | Request a Trial to NEW EDGAR Online Pro

Form 10-K for REGENERX BIOPHARMACEUTICALS INC


16-Apr-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation.

You should read the following discussion and analysis together with our consolidated financial statements and the related notes included elsewhere in this annual report.

Business Overview

We are a biopharmaceutical company focused on the development of a novel therapeutic peptide, Thymosin beta 4, or T4, for tissue and organ protection, repair, and regeneration. We have formulated T4 into three distinct product candidates in clinical development:

RGN-259, a preservative-free topical eye drop for regeneration of corneal tissues damaged by injury, disease or other pathology;

RGN-352, an injectable formulation to treat cardiovascular diseases, central and peripheral nervous system diseases, and other medical indications that may be treated by systemic administration; and

RGN-137, a topical gel for dermal wounds and reduction of scar tissue.

We are continuing strategic partnership discussions with biotechnology and pharmaceutical companies regarding the further clinical development of all of our product candidates.

In addition to our three pharmaceutical product candidates, we are also pursuing the commercial development of peptide fragments and derivatives of T4 for potential cosmeceutical and other personal care uses. These fragments are select amino acid sequences, and variations thereof, within the T4 molecule that have demonstrated activity in several in vitro preclinical research studies that we have sponsored. We believe the biological activities of these fragments may be useful, for example, in developing novel cosmeceutical products for the anti-aging market. Our strategy is to collaborate with another company to develop cosmeceutical formulations based on these peptides.

Current Financial Circumstances

Due to our current financial condition as described further in this report, beginning in late 2011, we began implementing significant cost-saving measures to conserve capital resources and maintain a minimal level of operations, while seeking to receive additional funding and/or complete a strategic transaction. To that end, we have greatly reduced salaries and work schedules of our employees and have increasingly relied on reimbursements under a grant that we received from the National Institutes of Health (NIH), to fund employee salaries. In the first quarter of 2013 we substantially completed all of the work under the grant and have exhausted the grant as a financing source. In early 2012 we engaged investment bankers to help us explore financing alternatives, including a possible equity financing or licensing transaction, in order to continue the development of our product candidates, as well as the exploration of other strategic alternatives, including a possible asset out-licensing, asset sale, or sale of our company. While this engagement has expired we continue to work with these and other bankers to advance these initiatives. On October 19, 2012, we entered into a series of convertible promissory notes totaling $300,000 with two members of management, an outside director, and an affiliated stockholder and on March 29, 2013 we entered into a second series of convertible promissory notes totaling $225,000 with one member of management, an outside director and two unaffiliated investors. The proceeds from the second set of notes will allow us to maintain current operations and continue work on opportunities related to our ophthalmic and cardiac drug candidates, as well as certain strategic financial opportunities. The loan proceeds are expected to fund operations into the second quarter of 2013. While we expect that these funds will allow us to continue our minimal level of operations, we will need to complete a financing or strategic transaction within the second quarter of 2013 to continue as a going concern, or we may be forced to cease operations, seek protection under the provisions of the U.S. Bankruptcy Code, or liquidate and dissolve our company.

Financial Operations Overview

We have never generated product revenues, and we do not expect to generate product revenues until the FDA approves one of our product candidates, if ever, and we begin marketing and selling it. Subject to the availability of financing, we expect to invest increasingly significant amounts in the furtherance of our current clinical programs and may add additional nonclinical studies and new clinical trials as we explore the potential of our current product candidates in other indications and explore new formulations of T4-based product candidates. As we expand our clinical development initiatives, we expect to incur substantial and increasing losses. Accordingly, we will need to generate significant product revenues in order to ultimately achieve and then maintain profitability. Also, we expect that we will need to raise substantial additional capital in order to meet product development requirements. We cannot assure investors that such capital will be available when needed, on acceptable terms, or at all.

Most of our expenditures to date have been for research and development, or R&D, activities and general and administrative, or G&A, activities. R&D costs include all of the wholly-allocable costs associated with our various clinical programs passed through to us by our outsourced vendors. Those costs include manufacturing T4 and peptide fragments, formulation of T4 into our product candidates, stability studies for both T4, and the various formulations, preclinical toxicology, safety and pharmacokinetic studies, clinical trial management, medical oversight, laboratory evaluations, statistical data analysis, regulatory compliance, quality assurance and other related activities. R&D includes cash and non-cash compensation, travel and other miscellaneous costs of our internal R&D personnel, three persons in total, who are wholly dedicated on a part-time basis to R&D efforts. R&D also includes a proration of our common infrastructure costs for office space and communications. We expense our R&D costs as they are incurred.

R&D expenditures are subject to the risks and uncertainties associated with clinical trials and the FDA review and approval process. As a result, these expenses could exceed our expectations, possibly materially. We are uncertain as to what we will incur in future research and development costs for our clinical studies, as these amounts are subject to the outcome of current studies, management's continuing assessment of the economics of each individual research and development project and the internal competition for project funding. As described below under "Sources of Liquidity," in May 2010 we were awarded a grant from the NIH to support the development of RGN-352. Subject to our compliance with the terms and conditions of the grant, we are eligible to receive up to $3.0 million over a three-year period in cost reimbursements related to the purposes set forth in the grant. We have used proceeds from the grant for the payment of research and development staff in connection with our grant related research and development activities and, as described above, we have relied on this grant for purposes of funding our R&D employees' reduced salaries. In the first quarter of 2013 we substantially completed all of the work under the grant and have exhausted the grant as a financing source. Proceeds from the grant have been used for animal studies supporting our clinical work to develop RGN-352 for myocardial infarction, as well as to manufacture additional quantities of T?4.

G&A costs include outside professional fees for legal, business development, audit and accounting services. G&A also includes cash and non-cash compensation, travel and other miscellaneous costs of our internal G&A personnel, two in total, who are wholly dedicated to G&A efforts. G&A also includes a proration of our common infrastructure costs for office space, and communications. Our G&A expenses also include costs to maintain our intellectual property portfolio. Historically we have expanded our patent prosecution activities and in some cases, we have filed patent applications for non-critical strategic purposes intended to prevent others from filing similar patent claims. We continue to closely monitor our patent applications in the United States, Europe and other countries with the advice of outside legal counsel to determine if they will continue to provide strategic benefits. In cases where we believe the benefit has been realized or it becomes unnecessary due to the issuance of other patents, or for other reasons that will not affect the strength of our intellectual property portfolio, we have and will continue to abandon these patent applications in order to reduce our costs of continued prosecution or maintenance.

Critical Accounting Policies

We prepare our financial statements in conformity with accounting principles generally accepted in the United States. Such accounting principles require that our management make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Our actual results could differ materially from those estimates. The items in our financial statements that have required us to make significant estimates and judgments are as follows:

Revenue Recognition. We recognize revenue in accordance with the authoritative guidance for revenue recognition. We recognize revenue when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery (or passage of title) has occurred or services have been rendered,
(iii) the seller's price to the buyer is fixed or determinable, and (iv) collectability is reasonably assured. We also comply with the authoritative guidance for revenue recognition regarding arrangements with multiple deliverables. Multiple-element arrangements are analyzed to determine whether the deliverables, which may include a license together with performance obligations such as providing a clinical supply of product and steering committee services, can be separated or whether they must be accounted for as a single unit of accounting. Revenue associated with licensing agreements consists of non-refundable upfront license fees and milestone payments. Non-refundable upfront license fees received under license agreements, whereby continued performance or future obligations are considered inconsequential to the relevant license technology, are recognized as revenue upon delivery of the technology.

Whenever we determine that an arrangement should be accounted for as a single unit of accounting, we must determine the period over which the performance obligations will be performed and revenue will be recognized. Revenue will be recognized using either a relative performance or straight-line method. We recognize revenue using the relative performance method provided that the we can reasonably estimate the level of effort required to complete our performance obligations under an arrangement and such performance obligations are provided on a best-efforts basis. Revenue recognized is limited to the lesser of the cumulative amount of payments received or the cumulative amount of revenue earned, as determined using the relative performance method, as of each reporting period.

If we cannot reasonably estimate the level of effort required to complete our performance obligations under an arrangement, the performance obligations are provided on a best-efforts basis and we can reasonably estimate when the performance obligation ceases or the remaining obligations become inconsequential and perfunctory, then the total payments under the arrangement, excluding royalties and payments contingent upon achievement of substantive milestones, would be recognized as revenue on a straight-line basis over the period we expect to complete our performance obligations. Revenue is limited to the lesser of the cumulative amount of payments received or the cumulative amount of revenue earned, as determined using the straight-line basis, as of the period ending date.

If we cannot reasonably estimate when our performance obligation either ceases or becomes inconsequential and perfunctory, then revenue is deferred until we can reasonably estimate when the performance obligation ceases or becomes inconsequential. Revenue is then recognized over the remaining estimated period of performance.

Significant management judgment is required in determining the level of effort required under these arrangements and the period over which we are expected to complete our performance obligations under an arrangement.

We recognize consideration that is contingent upon the achievement of a milestone in its entirety as revenue in the period in which the milestone is achieved only if the milestone is substantive in its entirety. A milestone is considered substantive when it meets all of the following criteria:

The consideration is commensurate with either the entity's performance to achieve the milestone or the enhancement of the value of the delivered item(s) as a result of a specific outcome resulting from the entity's performance to achieve the milestone;

The consideration relates solely to past performance; and

The consideration is reasonable relative to all of the deliverables and payment terms within the arrangement.

A milestone is defined as an event (i) that can only be achieved based in whole or in part on either the entity's performance or on the occurrence of a specific outcome resulting from the entity's performance, (ii) for which there is substantive uncertainty at the date the arrangement is entered into that the event will be achieved and (iii) that would result in additional payments being due to us.

Determination as to whether a payment meets the aforementioned conditions involves management's judgment. If any of these conditions are not met, the resulting payment would not be considered a substantive milestone, and therefore the resulting payment would be considered part of the consideration for the single unit of accounting and would be recognized as revenue as such performance obligations are performed under either the relative performance or straight-line methods, as applicable, and in accordance with these policies as described above.

We account for non-refundable grants as "Sponsored research revenues" in the accompanying statements of operations. Revenue from non-refundable grants is recognized when the following criteria are met; persuasive evidence of an arrangement exists, services have been rendered and the underlying costs incurred, the contract price is fixed or determinable, and collectability is reasonably assured. For the years ended December 31, 2012 and 2011, all of our revenues were received from one NIH grant.

Amounts received prior to satisfying the above revenue recognition criteria are recorded as deferred revenue in our accompanying balance sheets.

Share-based payment

We account for share-based compensation based on the estimated grant date fair value of the award using the Black-Scholes option-pricing model. The estimated grant date fair value is recognized over the requisite service period.

Determining the appropriate fair value model and calculating the fair value of share-based payment awards require the input of highly subjective assumptions, including the expected life of the share-based payment awards and stock price volatility. Since our historical data is limited, the expected life was determined in accordance with SEC Staff Accounting Bulletin No. 107 guidance for "plain vanilla" options. Since our historical trading volume is relatively low, we estimated the expected volatility based on monthly closing prices for a period consistent with the expected life of the option.

The assumptions used in calculating the fair value of share-based payment awards represent management's best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. If our actual forfeiture rate is materially different from our estimate, the stock-based compensation expense could be significantly different from what we have recorded in the current period. See Notes 2 and 8 to the Financial Statements for a further discussion on stock-based compensation and the relative ranges of our historical, underlying assumptions.

Costs of pre-clinical studies and clinical trials

We accrue estimated costs for pre-clinical studies and clinical trials conducted by contract research organizations and participating hospitals. These costs are a significant component of research and development expenses. We accrue costs for pre-clinical studies and clinical trials performed by contract research organizations based on estimates of work performed under the contracts. Costs of setting up hospital sites for participation in trials are accrued immediately. Hospital costs related to patient enrollment are accrued as patients are entered in the trial.

Results of Operations

Comparison of years ended December 31, 2012 and 2011

Revenues. For the year ended December 31, 2012, grant revenue was $1.3 million compared to $1.5 million for the year ended December 31, 2011. This grant was for $1 million per annual grant period for three years. Due to the timing of our research and development activities under the grant all of the revenue recognized in 2012 and 2011 was from the NIH grant to offset costs incurred.

Expenses - Research and development. For the year ended December 31, 2012, our R&D expenditures decreased by $3.9 million, or 77%, to $1.2 million, from $5.1 million in 2011.

Our outsourced R&D costs, which are costs paid directly to contract research organizations and outside consultants, decreased by $2.9 million, or 80%, to $775,000, from $3.7 million. This decrease was related to our shift in primary R&D focus to preclinical animal work under our NIH grant. During 2011, the primary R&D expenses were the cost of a Phase 2 dry eye trial for RGN-259, pre-dosing clinical trial costs for the then-anticipated AMI trial for RGN-352 and additional costs resulting from the acquisition of unformulated T4.

During 2011, we engaged a contract research organization to execute a preclinical dry eye study and to conduct a Phase 2 trial in dry eye patients and incurred $1.48 million in CRO costs associated with this trial. We also commissioned a manufacturing run of additional T4 for $840,000 and incurred costs of $715,000 associated with our Phase 2 trial of RGN-352 that was subsequently placed on clinical hold. In contrast, during 2012, we incurred approximately $840,000 in outsourced R&D costs related directly to a series of pre-clinical toxicology studies conducted under the NIH grant. Our internal R&D costs decreased by $1 million to $388,000 from the 2011 amount of $1.4 million. The decrease reflects the significant cost-saving measures implemented in late 2011 to conserve capital resources and maintain a minimal level of operations. Beginning in January 2012, all employees became part-time hourly employees with reduced work schedules.

During 2012, we reversed approximately $168,000 of R&D expense related to a change in estimate in our clinical trial accrual regarding final close-out activities with our CROs.

Expenses - General and administrative. For the year ended December 31, 2012, our G&A expenses decreased by approximately $1.5 million, or 58%, to $1.0 million, from $2.5 million in 2011. The decrease reflects the significant cost-saving measures implemented in late 2011 to conserve capital resources and maintain a minimal level of operations. The cost-saving measures resulted in cost reductions in legal fees incurred for the prosecution of our patent portfolio (decrease of $445,000), corporate legal expenses (decrease of $167,000), investor relations (decrease of $200,000), consulting (decrease of $59,000), outside director fees for board service (decrease of $144,000) and a $450,000 decrease in personnel-related expenses, including non-cash stock-based compensation. These reductions were partially offset by increased costs of $106,000 in 2012 associated with engaging investment bankers to evaluate our strategic options, including advisory and valuation services.

Liquidity and Capital Resources

We have not commercialized any of our product candidates to date and have incurred significant losses since inception. We have primarily financed our operations through the issuance of common stock and common stock warrants in private and public financings, although as discussed below we have been awarded government grants and will continue to pursue other governmental funding sources. The report of our independent registered public accounting firm regarding our financial statements for the year ended December 31, 2012 contains an explanatory paragraph regarding our ability to continue as a going concern based upon our history of net losses and dependence on future financing in order to meet our planned operating activities.

We incurred a net loss of $847,000 for the year ended December 31, 2012. We had cash and cash equivalents of $142,000 at December 31, 2012. Based on our current operations, we believe our existing cash resources will only be adequate to fund our operations into the second quarter of 2013, without considering any potential other sources of capital. In any event, we will continue to have a need for financing, which we may not be able to complete either on favorable terms or at all.

Net Cash Used in Operating Activities. Net cash used in operating activities was $274,000 and $5.4 million for the years ended December 31, 2012 and 2011, respectively. Our reported net loss for the year ended December 31, 2012 was $847,000, which included $168,000 in non-cash share-based compensation, and we experienced a net decrease in accounts payable and accrued expenses of $51,000, a decrease of $37,000 in grants receivable and an increase in unearned revenue of $400,000 resulting from the Lee's license agreement payments. During 2011, we reported a net loss of $6.0 million, which included $222,000 in non-cash share-based compensation, and we experienced a $356,000 increase in working capital, resulting in net cash used in operating activities of approximately $600,000 less than the net loss reported for the year.

Net Cash Used in Investing Activities. Net cash used in investing activities for 2012 was $0 compared to $1,000 for 2011.

Net Cash Provided by Financing Activities. Net cash provided by financing activities totaled $300,000 and $1.7 million for the years ended December 31, 2012 and 2011, respectively. In 2012, the cash provided by financing activities consisted of the proceeds of the October 2012 convertible debt offering (as disclosed in Note 7 to our financial statements included in this report). In 2011, the majority of the cash provided by financing activities consisted of the net proceeds of the issuance of common stock and warrants to purchase common stock as more fully described in Note 8 to our financial statements included in this report.

Future Funding Requirements

The expenditures that will be necessary to execute our business plan are subject to numerous uncertainties that may adversely affect our liquidity and capital resources. We are not currently enrolling patients in any clinical trials. We had intended to commence patient enrollment in a Phase 2 clinical trial of RGN-352 for AMI patients near the end of the first quarter of 2011, but this trial was placed on clinical hold by the FDA pending resolution of certain manufacturing compliance issues at our original contract manufacturer, which was responsible for formulating, filling and finishing RGN-352. We have put the AMI trial on hold pending access to sufficient capital resources to enable us to retain a cGMP-compliant drug product manufacturer and are focusing our current efforts on the development of RGN-259 for ophthalmic indications.

Even with this change in our clinical development priorities, we currently do not have sufficient capital resources to continue product development beyond the second quarter of 2013 without additional capital. While we received $300,000 from a convertible debt offering in October 2012 and $225,000 from a second offering in March 2013, we expect that these funds will only allow us to continue our minimal level of operations into the second quarter of 2013, and we will continue to have insufficient resources to initiate any additional trials that we have planned. As described below, we have established a committed equity facility with LPC, but we are currently unable to draw on the facility and our ability to draw on the facility in the future is subject to a number of limitations, including our stock price, as described in "Risk Factors-Risks Related to Our Liquidity and Need for Financing-We are not currently able to access the LPC committed equity facility and, if we are able to do so in the future, we may not be able to access the full amounts available under the LPC committed equity facility." Therefore, even if we were able to sell shares of our common stock under the LPC facility, based on our recent stock price, the amount of proceeds we would be able to raise would likely not extend our capital resources significantly beyond the second quarter of 2013.

In addition, the length of time required for clinical trials varies substantially according to the type, complexity, novelty and intended use of a product candidate. Some of the factors that could impact our liquidity and capital needs include, but are not limited to:

the progress of our clinical trials;

the progress of our research activities;

the number and scope of our research programs;

the progress of our preclinical development activities;

the costs involved in preparing, filing, prosecuting, maintaining, enforcing and defending patent and other intellectual property claims;

the costs related to development and manufacture of preclinical, clinical and validation lots for regulatory purposes and commercialization of drug supply associated with our product candidates;

our ability to enter into corporate collaborations and the terms and success of these collaborations;

the costs and timing of regulatory approvals; and

the costs of establishing manufacturing, sales and distribution capabilities.

In addition, the duration and the cost of clinical trials may vary significantly over the life of a project as a result of differences arising during the clinical trial protocol, including, among others, the following:

the number of patients that ultimately participate in the trial;

the duration of patient follow-up that seems appropriate in view of the results;

the number of clinical sites included in the trials; and

the length of time required to enroll suitable patient subjects.

Also, we test our product candidates in numerous preclinical studies to identify indications for which they may be efficacious. We may conduct multiple clinical trials to cover a variety of indications for each product candidate. As we obtain results from trials, we may elect to discontinue clinical trials for certain product candidates or for certain indications in order to focus our resources on more promising product candidates or indications.

Our proprietary product candidates also have not yet achieved FDA regulatory approval, which is required before we can market them as therapeutic products. In order to proceed to subsequent clinical trial stages and to ultimately achieve regulatory approval, the FDA must conclude that our clinical data establish safety and efficacy. Historically, the results from preclinical studies and early clinical trials have often not been predictive of results obtained in later clinical trials. A number of new drugs and biologics have shown promising results in clinical trials, but subsequently failed to establish sufficient safety and efficacy data to obtain necessary regulatory approvals.

In addition to our obligations under clinical trials, we were previously committed under an office space lease through January 2013. We are currently utilizing this space on a month to month basis that requires base rental payments of approximately $8,300 per month.

Sources of Liquidity

We have not commercialized any of our product candidates to date and have . . .

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