Phio Pharmaceuticals Corp. quarterly report, Q2 FY2013

Business context and reporting period

This is RXi Pharmaceuticals Corporation’s unaudited Form 10-Q for the quarter and six months ended June 30, 2013. The filing identifies RXi—not Phio Pharmaceuticals Corp.—as the registrant; confirm that this is the intended filing. RXi was a development-stage biotechnology company focused on RNAi therapeutics. Its lead candidate, RXI-109, was in Phase 1 development for reducing dermal scarring, with Phase 2 trials planned for the second half of 2013.

Unless otherwise noted, financial figures below are in millions of dollars. Share amounts reflect the 1-for-30 reverse split effected July 23, 2013.

Financial results and liquidity

• At June 30, cash and cash equivalents were $8.587 million and short-term investments were $9.000 million; restricted cash was $0.053 million. Total current assets were $17.849 million.
• Operating cash use was $3.184 million in the first half, versus $2.655 million a year earlier. Investing cash use was $9.002 million, largely the purchase of short-term investments; financing provided $15.646 million, principally from the March common-stock offering.
• Total liabilities were $1.510 million, including $1.271 million of accounts payable and accrued expenses and $0.239 million of deferred revenue. No material borrowings are shown; capital lease obligations were nil at quarter-end.
• There is no meaningful operating margin given minimal grant revenue and the company’s development-stage losses. Six-month basic and diluted loss per share was $2.52 in 2013 versus $5.20 in 2012.

Material changes versus the prior comparable period

• Q2 R&D expense fell 83% year over year, mainly because Q2 2012 included $6.173 million of stock issued for patent and technology rights. In the first half of 2013, R&D rose 85%, largely reflecting the $12.250 million noncash expense for acquired OPKO RNAi assets, along with higher clinical-trial and employee compensation costs.
• The OPKO asset acquisition closed in March 2013. The shares issued were valued at $12.250 million and expensed as in-process R&D; the agreement also provides for potential development and commercialization milestones of up to $50 million per product and royalties.
• In March 2013, RXi raised approximately $16.4 million gross, or $15.6 million net, through a common-stock offering. Common shares issued and outstanding were 11.440 million at June 30, up from 5.289 million at December 31, 2012.
• Loss applicable to common stockholders includes Series A preferred accretion and dividends: $2.399 million in Q2 and $5.946 million for the first half of 2013. The preferred stock carries cumulative mandatory dividends at 7% annually, payable in additional preferred shares. The prior-year comparison included a one-time $9.5 million beneficial-conversion-feature charge.

Outlook, commentary, and risks

Management said existing cash and cash equivalents were expected to fund operations, including the planned RXI-109 Phase 2 program, into fiscal 2015. RXi expected continued significant operating losses, no near-term product revenue, and dependence on grants, partnerships, or additional financing. Management cautioned that funding may not be available on acceptable terms or at all; a shortfall could force the company to reduce or terminate operations or seek a merger or acquisition.

Key risks include clinical-trial safety, efficacy and timing; regulatory uncertainty; the ability to fund research and development; intellectual-property costs; competition; and whether a proposed Nasdaq listing would be approved and achieve its intended benefits. The filing reported no legal proceedings and stated disclosure controls were effective, with no material change in internal control over financial reporting during the quarter.

Subsequent events: the company effected a 1-for-30 reverse stock split in July and applied to move its listing from OTCQX to Nasdaq. In August, Tang Capital exchanged 2,000 Series A preferred shares for Series A-1 shares, eliminating specified potential cash penalties; the company said the $2 million face value would be reclassified to stockholders’ equity in the September quarter.

Important facts for investors to verify

• Whether this RXi 2013 filing is the intended document for the requested Phio Pharmaceuticals Corp. summary.
• Cash runway assumptions and actual spending relative to management’s fiscal 2015 funding estimate.
• RXI-109 Phase 2 launch, trial progress, safety and efficacy results.
• Series A preferred-stock dividend, conversion and dilution terms, including the effects of the Series A-1 exchange.
• Potential OPKO milestones and royalties, and the development status and value of the acquired assets.