e10vq

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2010


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File number 001-33958

RXi Pharmaceuticals Corporation

(Exact name of registrant as specified in its charter)


Delaware (State of incorporation)		20-8099512 (I.R.S. Employer Identification No.)

60 Prescott Street, Worcester, MA 01605
(Address of principal executive office) (Zip code)

Registrant’s telephone number: (508) 767-3861

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on it corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter time that the registrant was required to submit and post such files).

Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o
(Do not check if a smaller reporting company)

Smaller reporting company þ

Indicate by checkmark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

As of August 9, 2010, RXi Pharmaceuticals Corporation had 18,372,759 shares of common stock, $0.0001 par value, outstanding.

PART I

ITEM 1. FINANCIAL STATEMENTS

RXi PHARMACEUTICALS CORPORATION
(A Development Stage Company)

CONDENSED BALANCE SHEETS
(Amounts in thousands, except share data)
(Unaudited)


	June 30,			December 31,
	2010			2009
ASSETS
Current assets:
Cash and cash equivalents	$	5,093		$	5,684
Short term investments		5,996			—
Prepaid expenses and other current assets		310			120

Total current assets		11,399			5,804

Equipment and furnishings, net		429			432
Deposits		16			16

Total assets	$	11,844		$	6,252

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	329		$	625
Accrued expenses and other current liabilities		1,203			1,077
Current maturities of capital lease obligations		50			52
Fair value of common stock mandatorily redeemable for cash upon the exercise of warrants		785			—
Fair value of common stock warrants potentially settleable in cash		3,006			3,721

Total current liabilities		5,373			5,475
Capital lease obligations, net of current maturities		35			36

Total liabilities		5,408			5,511


Commitments and contingencies (Note 6)

Stockholders’ equity:
Preferred stock, $0.0001 par value; 5,000,000 shares authorized; no shares issued and outstanding		—			—
Common stock, $0.0001 par value; 50,000,000 shares authorized;19,047,759 shares issued and 18,372,759 shares outstanding and 16,207,625 shares issued and outstanding at June 30, 2010 and December 31, 2009, respectively		3			2
Additional paid-in capital		60,059			44,489
Deficit accumulated during the developmental stage		(49,777	)		(43,750	)
Less treasury shares at cost, 675,000 and 0 shares at June 30, 2010 and December 31, 2009, respectively		(3,849	)		—

Total stockholders’ equity		6,436			741

Total liabilities and stockholders’ equity	$	11,844		$	6,252

The accompanying notes are an integral part of these financial statements.

RXi PHARMACEUTICALS CORPORATION
(A Development Stage Company)

CONDENSED STATEMENTS OF EXPENSES
(Amounts in thousands, except per share data)
(Unaudited)


													Period from
													January 1, 2003
	For the Three			For the Three			For the Six			For the Six			(Date of
	Months Ended			Months Ended			Months Ended			Months Ended			Inception) to
	June 30,			June 30,			June 30,			June 30,			June 30,
	2010			2009			2010			2009			2010

Expenses:
Research and development expense	$	1,484		$	1,817		$	2,983		$	3,011		$	23,620
Research and development employee stock based compensation expense		267			212			540			412			1,863
Research and development non-employee stock based compensation expense		513			997			667			1,019			5,987
Fair value of common stock in exchange for licensing rights		—			—			—			—			3,954

Total research and development expenses		2,264			3,026			4,190			4,442			35,424

General and administrative		1,654			1,425			3,102			2,728			18,719
General and administrative employee stock based compensation		646			532			1,418			969			6,262
Common stock warrants issued for general and administrative expenses		190			92			500			826			2,076
Fair value of common stock issued in exchange for general and administrative expenses		—			—			—			281			281


Total general and administrative expenses		2,490			2,049			5,020			4,804			27,338

Operating loss		(4,754	)		(5,075	)		(9,210	)		(9,246	)		(62,762	)
Interest income (expense)		3			(2	)		2			(2	)		625
Other income (expense)		2,610			(4	)		3,181			(4	)		2,319

Net loss	$	(2,141	)	$	(5,081	)	$	(6,027	)	$	(9,252	)	$	(59,818	)


Net loss per common share:
Basic and diluted loss per share	$	(0.12	)	$	(0.37	)	$	(0.35	)	$	(0.67	)		N/A


Weighted average common shares outstanding:
Basic and diluted		18,371,808			13,821,817			17,384,606			13,812,367			N/A

The accompanying notes are an integral part of these financial statements.

RXi PHARMACEUTICALS CORPORATION
(A Development Stage Company)

CONDENSED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)


							Period from
							January 1, 2003
							(Date of
	For the Six			For the Six			Inception)
	Months Ended			Months Ended			through
	June 30,			June 30,			June 30,
	2010			2009			2010
Cash flows from operating activities:
Net loss	$	(6,027	)	$	(9,252	)	$	(59,818	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization expense		85			80			414
Loss on disposal of equipment		—			4			12
Non-cash rent expense		—			—			29
Accretion and receipt of bond discount		—			—			35
Non-cash stock based compensation		2,625			2,400			14,114
Fair value of common stock warrants issued in exchange for services		500			826			2,076
Fair value of common stock issued as a commitment fee in connection with the SEDA		—			281			281
Change in fair value of common stock warrants issued in connection with various equity financings potentially settleable in cash		(3,181	)		—			(2,323	)
Fair value of common stock issued in exchange for licensing rights		—			—			3,954
Changes in assets and liabilities:
Prepaid expenses		(190	)		(260	)		(310	)
Accounts payable		296			186			329
Due to former parent		—			—			(207	)
Accrued expenses and other current liabilities		333			298			1,410

Net cash used in operating activities		(6,151	)		(5,437	)		(40,004	)

Cash flows from investing activities:
Purchase of short-term investments		(5,996	)		—			(37,538	)
Maturities of short-term investments		—			—			31,507
Cash paid for purchase of equipment and furnishings		(54	)		(46	)		(635	)
Disposal of equipment and furnishings		—			(1	)		—
Cash paid for lease deposit		—			—			(45	)


Net cash used in investing activities		(6,050	)		(47	)		(6,711	)

Cash flows from financing activities:
Net proceeds from issuance of common stock		15,235			—			46,367
Cash paid for repurchase of common stock		(3,849	)		—			(3,849	)
Net proceeds from exercise of common stock options		255			—			611
Repayments of capital lease obligations		(31	)		(10	)		(87	)
Cash advances from former parent company, net		—			—			8,766

Net cash provided by (used in) financing activities		11,610			(10	)		51,808

Net increase (decrease) in cash and cash equivalents		(591	)		(5,494	)		5,093
Cash and cash equivalents at the beginning of period		5,684			9,856			—

Cash and cash equivalents at end of period	$	5,093		$	4,362		$	5,093


Supplemental disclosure of cash flow information:
Cash received during the period for interest	$	2		$	—		$	725

Cash paid during the period for interest	$	—		$	2		$	7


Supplemental disclosure of non-cash investing and financing activities:
Settlement of corporate formation expenses in exchange for common stock	$	—		$	—		$	978

Fair value of warrants issued in connection with common stock recorded as a cost of equity	$	2,466		$	—		$	5,329

Fair value of shares mandatorily redeemable for cash upon the exercise of warrants	$	785		$	—		$	785

Allocation of management expenses	$	—		$	—		$	551

Equipment and furnishings exchanged for common stock	$	—		$	—		$	48

Equipment and furnishings acquired through capital lease	$	28		$	—		$	172

Value of restricted stock units issued in lieu of cash bonuses	$	207		$	—		$	207

Value of restricted stock units issued in lieu of bonuses included in accrued expenses	$	47		$	—		$	47

Non-cash lease deposit	$	—		$	—		$	50

The accompanying notes are an integral part of these financial statements.

1. Description of Business and Basis of Presentation

RXi Pharmaceuticals Corporation (“RXi” or the “Company”) began operations in January 2007 as a biopharmaceutical company pursuing the development of proprietary therapeutics based on RNA Interference (“RNAi”) for the treatment of human diseases. By utilizing the Company’s expertise in RNAi and the RNAi therapeutic platform the Company has established, the Company believes it will be able build a pipeline of therapeutics for the treatment of a number of diseases. The Company is currently focusing its internal therapeutic development efforts in two main core areas, dermal anti-scarring and retinal disorders, and is prepared to advance product candidates from these core areas into early development and through clinical proof-of-concept. RXi may explore additional indications and proceed through preclinical development, itself and with potential partners, in areas that are of strategic interest to the company.

To date, RXi’s principal activities have consisted of conducting research and pre-clinical development activities, acquiring key RNAi technologies and patent rights through exclusive, co-exclusive and non-exclusive licenses, recruiting an RNAi-focused management and scientific/clinical advisory team, capital raising activities and conducting business development activities aimed at establishing development partnerships with pharmaceutical and larger biotechnology companies. As the Company has not generated any revenues from inception through June 30, 2010, the Company is considered a development-stage company for financial reporting purposes.

The Company expects to incur significant operating losses for the foreseeable future while it advances its future product candidates from discovery through pre-clinical studies and clinical trials and seeks regulatory approval and potential commercialization, even if the Company is collaborating with pharmaceutical and larger biotechnology companies. The Company also expects general and administrative costs to increase as it recruits additional management and administrative personnel. The Company will need to generate significant revenues to achieve profitability and may never do so.

In the future, the Company will be dependent on obtaining funding from third parties such as proceeds from the sale of equity, funded research and development payments, both government and private grants and payments under partnership and collaborative agreements, to maintain its operations. 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, it would be forced to scale back or terminate its operations, or to seek to merge with or to be acquired by another company.

The accompanying condensed financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with the Company’s financial statements and the notes thereto for the year ended December 31, 2009 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 31, 2010. Certain information and footnote disclosures normally included in financial statements prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. The information presented as of and for the three and six month periods ended June 30, 2010 and 2009, as well as the cumulative financial information for the period from January 1, 2003 (date of inception) through June 30, 2010, is unaudited and has been prepared on the same basis as the audited financial statements and includes all adjustments, consisting of only normal recurring adjustments, necessary for the fair presentation of this information in all material respects. The results of any interim period are not necessarily indicative of the results of operations to be expected for a full fiscal year. There have been no material changes to the Company’s significant accounting policies as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. The Company’s operating results will fluctuate for the foreseeable future. Therefore, period-to-period comparisons should not be relied upon as predictive of the results in future periods.

Uses of estimates in preparation of financial statements

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and

liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Derivative Financial Instruments

During the normal course of business, from time to time, the Company issues warrants and options to vendors as consideration to perform services. It may also issue warrants as part of a debt or equity financing. The Company does not enter into any derivative contracts for speculative purposes.

The Company recognizes all derivatives as assets or liabilities measured at fair value with changes in fair value of derivatives reflected as current period income or loss unless the derivatives qualify for hedge accounting and are accounted for as such. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 815-40, “Derivatives and Hedging — Contracts in Entity’s Own Stock,” the value of these warrants is required to be recorded as a liability, as the holders have an option to put the warrants back to the Company in certain events, as defined.

Obligations to Repurchase Shares of the Company’s Equity Securities

In accordance with FASB ASC Topic 480-10, “Distinguishing Liabilities from Equity,” the Company recognizes all obligations to repurchase shares of its equity securities that require or may require the Company to settle the obligation by transferring assets, as liabilities or assets in some circumstances measured at fair value with changes in fair value reflected as current period income or loss and are accounted for as such.

2. Fair Value Measurements

In January, 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-06, “Improving Disclosures about Fair Value Measurements”, (“ASU 2010-06”). The standard amends FASB ASC Topic 820 “Fair Value Measurements and Disclosures”, (“ASC 820”) to require additional disclosures related to transfers in and out of Levels 1 and 2 and for activity in Level 3 and clarifies other existing disclosure requirements. The Company adopted ASU 2010-06 beginning January 1, 2010. This update had no impact on the Company’s financial statements.

Effective January 1, 2008, the Company implemented ASC 820 for the Company’s financial assets and liabilities that are re-measured and reported at fair value at each reporting period, and are re-measured and reported at fair value at least annually using a fair value hierarchy that is broken down into three levels. Level inputs are as defined as follows:

Level 1 — quoted prices in active markets for identical assets or liabilities.

Level 2 — other significant observable inputs for the assets or liabilities through corroboration with market data at the measurement date.

Level 3 — significant unobservable inputs that reflect management’s best estimate of what market participants would use to price the assets or liabilities at the measurement date.

The Company categorized its cash equivalents and short term investments as Level 1 hierarchy. The valuation for Level 1 was determined based on a “market approach” using quoted prices in active markets for identical assets. Valuations of these assets do not require a significant degree of judgment. The Company categorized its warrants potentially settleable in cash and its common stock mandatorily redeemable for cash upon the exercise of warrants as Level 2 hierarchies. The warrants potentially settleable in cash are valued using the Black-Scholes method, using assumptions consistent with our application of ASC 718 and are being marked to market each quarter-end until they are completely settled. The common stock mandatorily redeemable for cash upon the exercise of warrants is measured on a recurring basis and is determined by using the fixed monetary amount of each warrant multiplied by assumptions regarding the expected number and timing of warrants to be exercised under the conditions specified in the stock redemption agreement and discounted to present value each quarter until they are completely settled. See footnote 7.

In accordance with the provisions of ASC 820 the Company has elected to defer implementation of ASC 820, as it relates to its non-financial assets and liabilities that are recognized and disclosed at fair value in the financial statements on a nonrecurring basis until the first quarter of 2011. The adoption of ASC 820, as it relates to the Company’s financial assets and liabilities that are re-measured and reported at fair value at least annually did not have an impact on the Company’s financial results.

3. Short Term Investments

The Company purchased zero coupon U.S. Treasury Bills at a discount during the second quarter of 2010. The securities mature in November 2010. The investments were classified as held-to-maturity and are valued at amortized cost, which approximates fair value. The Company did not have any short-term investments as of December 31, 2009.

4. Stock Based Compensation

The Company follows the provisions of the FASB ASC Topic 718, “Compensation — Stock Compensation” (“ASC 718”), which requires the measurement and recognition of compensation expense for all stock based payment awards made to employees, non-employee directors, and consultants, 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.

The Company is currently using the Black-Scholes option-pricing model to determine the fair value of all its option grants. For options grants issued in the three and six month period ended June 30, 2010 and 2009, the following assumptions were used:


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2010			2009			2010			2009
Weighted average risk-free interest rate		3.21	%		3.49	%		3.06	%		2.25	%
Weighted average expected volatility		124.03	%		121.90	%		120.84	%		119.05	%
Weighted average expected lives (years)		9.29			8.98			7.26			7.4
Weighted average expected dividend yield		0.00	%		0.00	%		0.00	%		0.00	%

The weighted average fair value of options granted during the six month period ended June 30, 2010 and 2009 was $4.34 and $4.42 per share, respectively.

The weighted average fair value of options granted during the three month period ended June 30, 2010 and 2009 was $4.87 and $4.42 per share, respectively.

RXi’s expected common stock price volatility assumption is based upon the volatility of a basket of comparable companies. The expected life assumptions for employee grants were based upon the simplified method provided for under ASC 718-10, which averages the contractual term of RXi’s options of ten years with the average vesting term of four years for an average of six years. The expected life assumptions for non-employees were based upon the contractual term of the option. The dividend yield assumption of zero is based upon the fact that RXi has never paid cash dividends and presently has no intention of paying cash dividends. The risk-free interest rate used for each grant was also based upon prevailing short-term interest rates. RXi has estimated an annualized forfeiture rate of 4.0% for options granted to its employees, 2.1% for options granted to senior management and no forfeiture rate for the directors. RXi will record additional expense if the actual forfeitures are lower than estimated and will record a recovery of prior expense if the actual forfeiture rates are higher than estimated.

The following table summarizes stock option activity from January 1, 2010 through June 30, 2010:


	Total Number		Weighted Average		Aggregate
	of Shares		Exercise Price		Intrinsic Value
Outstanding at January 1, 2010		3,582,339	$	5.16	$	143,500
Granted		898,768		4.87		—
Exercised		53,500		4.75		163,889
Cancelled		100,644		4.56		—

Outstanding at June 30, 2010		4,326,963	$	5.12	$	143,500

Options exercisable at June 30, 2010		2,755,201	$	5.21	$	17,938

The weighted average remaining contractual life of options outstanding and exercisable at June 30, 2010 was 7.85 years and 7.45 years, respectively.

The aggregate intrinsic values of outstanding and exercisable options at June 30, 2010 were calculated based on the closing price of the Company’s common stock on June 30, 2010 of $2.60 per share less the exercise price of those shares. The aggregate intrinsic values of options exercised was calculated based on the difference between the exercise price of the underlying awards and the quoted price of the Company’s common stock on the date of exercise.

5. Net Loss per Share

The Company accounts for and discloses net loss per common share in accordance with FASB ASC Topic 260, “Earnings per Share.” Basic net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding. Diluted net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares that would have been outstanding during the period assuming the issuance of common shares for all potential dilutive common shares outstanding. Potential common shares consist of shares issuable upon the exercise of stock options and warrants. Because the inclusion of potential common shares would be anti-dilutive for all periods presented diluted net loss per common share is the same as basic net loss per common share.

The following table sets forth the potential common shares excluded from the calculation of net loss per common share because their inclusion would be anti-dilutive:


	June 30,
	2010		2009

Options to purchase common stock		4,326,963		3,382,342
Warrants to purchase common stock		2,100,642		332,500

Total		6,427,605		3,714,842

6. License Agreements

As part of its business, the Company enters into numerous licensing agreements. These license agreements with third parties often require milestone and royalty payments based on the progress of the asset through development stages. Milestone payments may be required, for example, upon approval of the product for marketing by a regulatory agency. In certain agreements, RXi is required to make royalty payments based upon a percentage of sales.

The expenditures required under these arrangements may be material individually in the event that the Company develops product candidates covered by the intellectual property licensed under any such arrangement, and in the unlikely event that milestones for multiple products covered by these arrangements were reached in the same period, the aggregate charge to expense could be material to the results of operations. In addition, these arrangements often give RXi the discretion to unilaterally terminate development of the product, which would allow RXi to avoid making the contingent payments; however, RXi is unlikely to cease development if the compound successfully achieves clinical testing objectives. The Company’s contractual obligations as they relate to these agreements that

will require future cash payments relating to minimum annual maintenance fees and milestone payments have not changed significantly from December 31, 2009.

7. Capital Transactions

On March 22, 2010, the Company entered into a placement agency agreement relating to a proposed offering by the Company of new securities to potential investors. On March 23, 2010, the Company entered into definitive agreements for the sale and issuance by the Company to certain investors of 2,700,000 units, with each unit consisting of one share of the Company’s common stock and a warrant to purchase 0.20 of a share of the Company’s common stock, at a purchase price of $6.00 per unit (the “2010 Offering”). The 2010 Offering closed on March 26, 2010. The Company issued 540,000 warrants with an exercise price of $6.00 per share and that are exercisable beginning on September 26, 2010 until their expiration on March 26, 2016. The Company raised gross proceeds of approximately $16.2 million in the 2010 Offering and net cash proceeds, after deducting the placement agent fees and other offering expenses payable by the Company, of approximately $15.2 million.

As part of the 2010 Offering, RXi entered in a stock redemption agreement whereby the Company was required to use 25% of the net proceeds from the 2010 Offering to repurchase from CytRx Corporation (“CytRx”) 675,000 shares of the Company’s common stock held by CytRx (“CytRx shares”). The Company repurchased such shares on March 29, 2010. The values of the shares at the date of repurchase totaling $3,849,000 were recorded at cost and have been included in treasury stock in the accompanying balance sheet at June 30, 2010. The Company is also required to use 25% of the proceeds from the exercise of warrants issued in the 2010 Offering to repurchase from CytRx a number of CytRx Shares equal to 25% of shares issued upon the exercise of such warrants. Subject to the satisfaction of certain closing conditions, if any warrant issued in the 2010 Offering is exercised, on the first business day after the exercise of such warrant.

Shares of common stock that are mandatorily redeemable under the stock redemption agreement upon the exercise of warrants issued in the 2010 Offering, were determined to embody an obligation that may require the Company to settle the obligation by transferring assets, and as such, shall be classified as a liability. The fair value of the common stock potentially redeemable under the stock redemption agreement totaling $785,000 was recorded as a liability and a cost of equity and was determined using the fixed monetary amount of each warrant multiplied by assumptions regarding the number and timing of warrants to be exercised. Consistent with the Company’s assumptions upon issuance, we currently believe that the warrant shares will be exercised within the twelve months after they become exercisable in September 2010. Consequently the fair value of the obligation is $810,000 which is the maximum amount of cash that would be received by the Company under the conditions specified in the stock redemption agreement, if all of the shares required to be redeemed were repurchased discounted over one year at a rate of 3.18%.

Certain warrants issued in connection with the 2010 Offering were determined not to be indexed to the Company’s common stock as they are potentially settleable in cash. The fair value of the warrants at the dates of issuance totaling $2,466,000 was recorded as a liability and a cost of equity and was determined by the Black-Scholes option pricing model. Due to the fact that we have limited trading history, our expected stock volatility assumption is based on a combination of implied volatilities of similar entities whose share or option prices are publically traded. The Company used a weighted average expected stock volatility of 119.49%. The expected life assumption is based on the contract term of 6.5 years. The dividend yield of zero is based on the fact that we have no present intention to pay cash dividends. The risk free rate of 3.22% used for the warrant is equal to the zero coupon rate in effect at the time of the grant. The decrease in the fair value of the warrants from the date of issuance to June 30, 2010 is $1,302,000 and has been included in other income and expense in the accompanying condensed statements of expenses for the six months ended June 30, 2010. The fair value of the warrants at June 30, 2010 of $1,164,000 is included as a current liability in the accompanying balance sheets and was determined by the Black-Scholes option pricing model. Due to the fact that we have limited trading history, our expected stock volatility assumption is based on a combination of implied volatilities of similar entities whose share or option prices are publically traded. The Company used a weighted average expected stock volatility of 123.45%. The expected life assumption is based on the contract term of 6.25 years. The dividend yield of zero is based on the fact that we have no present intention to pay cash dividends. The risk free rate of 2.29% used for the warrant is equal to the zero coupon rate in effect on the date of the re-measurement.

Certain warrants issued in connection with a registered direct stock offering on August 3, 2009 (the “2009 Offering”) were determined not to be indexed to the Company’s common stock as they are potentially settleable in

cash. The fair value of the warrants at the dates of issuance totaling $2,863,000 was recorded as a liability and a cost of equity and was determined by the Black-Scholes option pricing model. Due to the fact that we have limited trading history, our expected stock volatility assumption is based on a combination of implied volatilities of similar entities whose share or option prices are publically traded. The Company used a weighted average expected stock volatility of 122.69%. The expected life assumption is based on the contract term of five years. The dividend yield of zero is based on the fact that we have no present intention to pay cash dividends. The risk free rate of 1.72% used for the warrant is equal to the zero coupon rate in effect at the time of the grant. The decrease in the fair value of the warrants from the date of issuance to June 30, 2010 is $1,021,000 of which $1,879,000 has been included in other income and expense in the accompanying condensed statements of expenses for the six months ended June 30, 2010. The fair value of the warrants at June 30, 2010 of $1,842,000 is included as a current liability in the accompanying balance sheets and was determined by the Black-Scholes option pricing model. Due to the fact that we have limited trading history, our expected stock volatility assumption is based on a combination of implied volatilities of similar entities whose share or option prices are publically traded. The Company used a weighted average expected stock volatility of 123.45%. The expected life assumption is based on the contract term of 4 years. The dividend yield of zero is based on the fact that we have no present intention to pay cash dividends. The risk free rate of 1.11% used for the warrant is equal to the zero coupon rate in effect on the date of the re-measurement. The most significant factor causing the decline in fair value is the decline in the Company’s stock price.

8. Recent Accounting Pronouncements

In April 2010, the FASB issued ASU 2010-17 which provides guidance in applying the milestone method of revenue recognition to research or development arrangements. Under this guidance, management may recognize revenue contingent upon the achievement of a milestone in the period in which the milestone is achieved only if the milestone meets all the criteria within the guidance to be considered substantive. This standard is effective on a prospective basis for research and development milestones achieved in fiscal years beginning on or after June 15, 2010. The adoption of ASU 2010-17 did not have a material impact on the Company’s financial statements.

In June 2009, the FASB issued FASB ASC Topic 810-10, “Consolidations” (“ASC 810-10”), which amends the consolidation guidance applicable to variable interest entities and was effective as of January 1, 2010. The adoption of ASC Topic 810-10 did not have a material impact on the Company’s financial statements.

In June 2009, the FASB issued FASB ASC Topic 860-10, “Transfers and Servicing of Financial Assets” (“ASC 860-10”), which eliminates the concept of a qualifying special-purpose entity, changes the requirements for derecognizing financial assets, and requires additional disclosures in order to enhance information reported to users of financial statements by providing greater transparency about transfers of financial assets, including securitization transactions, and an entity’s continuing involvement in and exposure to the risks related to transferred financial assets. This statement is effective for fiscal years beginning after November 15, 2009. The adoption of ASC Topic 860-10 did not have a material impact on the Company’s financial statements.

9. Subsequent Events

The Company evaluated all events or transactions that occurred after June 30, 2010 up through the date these condensed financial statements were issued. Other than what is disclosed below, during this period, the Company did not have any material recognizable or unrecognizable subsequent events.

In July 2010, the National Institute of Allergy and Infectious Diseases (“NIAID”), part of the National Institutes of Health (“NIH”), awarded the Company an Advanced Technology Small Business Innovation Research (SBIR) grant to fund the pre-clinical development of RNAi therapeutics using the Company’s novel, proprietary therapeutic platform, which includes both novel RNAi compounds and advanced delivery technologies. The NIAID SBIR grants are for advanced technology projects that require a longer award period and greater award amount than those routinely allowed under the SBIR program. “Advanced Technology” is defined by NIAID as a “clearly identified” product or service that requires approval of the Food and Drug Administration and is within the mission of NIAID.

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

In this document, “we,” “our,” “ours” and “us” refer to RXi Pharmaceuticals Corporation

This management’s discussion and analysis of financial condition as of June 30, 2010 and results of operations for three and six months ended June 30, 2010 and 2009 should be read in conjunction with management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2009 which was filed with the SEC on March 31, 2010.

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 our Annual Report on Form 10-K for the year ended December 31, 2009, 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.

Overview

We are a discovery-stage biopharmaceutical company 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. By utilizing our expertise in RNAi and the comprehensive RNAi therapeutic platform that we have established, we believe we will be able to discover and develop lead compounds and progress them into and through clinical development for potential commercialization more efficiently than traditional drug development approaches.

We were formed in 2006 by CytRx Corporation (“CytRx”) and four prominent RNAi researchers, including Dr. Craig Mello, who was awarded the 2006 Nobel Prize in Medicine for his co-discovery of RNAi. From 2003 through 2006, CytRx sponsored therapeutic RNAi research at the University of Massachusetts Medical School (“UMMS”) and Massachusetts General Hospital. We commenced operations in January 2007 after CytRx contributed to us its portfolio of RNAi therapeutic assets in exchange for approximately 7.04 million shares of our common stock. These assets consisted primarily of RNAi licenses and related intellectual property, and a nominal amount of equipment. The cost of the licenses had previously been expensed by CytRx as in-process research and development and was recorded in the predecessor financial statements at cost.

Our proprietary therapeutic platform is comprised of two main components:

	•		Novel RNAi Compounds, referred to as rxRNA™ compounds, that are distinct from, and we believe convey significant advantages over classic siRNA (conventionally-designed “small interfering RNA” compounds), and offer many of the properties that we believe are important to the clinical development of RNAi-based drugs. We have developed a number of unique forms of rxRNA compounds, all of which have been shown to be highly potent both in vitro and in vivo. These RNAi compounds include rxRNAori^TM, rxRNAsolo^TM and sd-rxRNA^TM, or “self delivering” RNA. Based on our research we believe that these different, novel siRNA configurations have various advantages for therapeutic use. These advantages include high potency, increased resistance to nucleases and off-target effects, and, in the case of the sd-rxRNA compounds, access to cells and tissues with no additional formulation required.

	•		Advanced Delivery Technologies, may enable the delivery of our rxRNA compounds to treat a variety of acute and chronic diseases using both local and systemic approaches, potentially providing a competitive advantage in the development of many RNAi therapeutic compounds. Our suite of delivery technologies is comprised of delivery vehicles, which can be combined with various rxRNA compounds, as well as sd-rxRNA compounds, which are chemically modified and have the unique property of entering cells and tissues to effect silencing without the need for any additional delivery vehicle. This suite of delivery technologies has broad applications for multiple therapeutic areas targeting both local and systemic applications.

Therapeutic Programs

Our therapeutic platform has the potential to be broadly applicable to multiple therapeutic areas. We intend to focus our internal therapeutic development efforts in two main core areas, dermal anti-scarring and retinal disorders. By utilizing our expertise in RNAi and the RNAi technology platform we have built, we believe we will be able to discover and develop lead compounds and progress them into clinical development more efficiently than traditional drug discovery approaches. We are prepared to advance product candidates from these core areas into early development and through clinical proof-of-concept. We will may also explore additional indications and proceed through preclinical development, ourselves and with potential partners, in areas that are of strategic interest to us, including in the areas of neurological disorders and oncology as discussed below.

Core Areas

Dermatology — Anti-Scarring

Our sd-rxRNA compounds in preliminary pre-clinical models using local administration to the skin have shown robust delivery and effective target silencing. Anti-scarring is an attractive therapeutic indication with clear development precedent, limited competition for effective therapies, and substantial market potential. We intend to select an anti-scarring development candidate in 2010 and file an IND in 2011. Our success with RNAi therapeutics in anti-scarring may provide additional opportunities in other dermatology applications as well as in anti-fibrotic indications including pulmonary fibrosis, liver fibrosis, acute spinal cord injury, ocular scarring and restenosis.

Ophthalmology — Retinal Disorders

We have shown data demonstrating unprecedented delivery and effective target silencing in the retina with sd-rxRNA compounds. By applying our unique technology with existing and novel targets, and potentially multiple targets, we believe we have the potential to develop next generation treatments for retinal disorders. Further, we believes that there is opportunity to potentially improve on existing therapies, extend the time required between doses and utilize new modes of administration for delivery to the eye. We intend to select a retinal disorder development candidate in 2011.

Strategic Interest

Neurology — Spinal Cord

We are exploring indications accessible by spinal cord delivery of sd-rxRNA. Direct dosing to the spinal cord could be used for severe central nervous system or spinal cord diseases in both orphan and non-orphan indications. We may also be able to `leverage early proof-of-concept studies and collaborations to advance programs in this area. We intend to advance potential candidates through preclinical studies as well as seek potential partners to help support further development.

Oncology — Liver Metastases and Hepatocellular Carcinoma

In the area of oncology, we will be concentrating initially on liver metastases and hepatocellular carcinoma using systemic delivery of sd-rxRNA or other rxRNA compounds in combination with delivery vehicles. Given the emerging emphasis on multi-targeted therapies for cancer, we have the ability to develop RNAi compounds against multiple gene targets to generate effective combination treatments. The unique features of sd-rxRNA may offer a new alternative to treating cancers and could lead to attractive product candidates to further advance in conjunction with partners.

Financial Overview

To date, our principal our activities have consisted of conducting discovery research and pre-clinical development activities utilizing our RNAi therapeutic platform, acquiring RNAi technologies and patent rights through exclusive, co-exclusive and non-exclusive licenses, recruiting an RNAi-focused management and scientific/clinical advisory team, capital raising activities and conducting business development activities aimed at establishing research and development partnerships with pharmaceutical and larger biotechnology companies.

We have not generated revenue to date and may not generate revenue in the foreseeable future, if ever. We expect to incur significant operating losses as we advance our product candidates through the drug development and regulatory process. In addition to increasing research and development expenses, we expect general and

administrative costs to increase as we add personnel. We will need to generate significant revenues to achieve profitability and might never do so. In the absence of product revenues, our potential sources of operational funding are expected to be the proceeds from the sale of equity, funded research and development payments, both government and private grants and payments under partnership and collaborative agreements. As we have not generated any revenues since inception through June 30, 2010, we are considered a development stage company for financial reporting purposes.

We believe that our existing cash and short term investments should be sufficient to fund our operations through at least the first half of fiscal 2011. In addition, we also have funds available to us upon the issuance of shares of our common stock under the Standby Equity Distribution Agreement (the “SEDA”) that we entered into on January 30, 2009 with YA Global Master SPV Ltd. (“YA Global”) which expires on January 30, 2011. In the future, we will be dependent on obtaining funding from third parties such as proceeds from the sale of equity, funded research and development payments, both government and private grants and payments under partnership and collaborative agreements, in order to maintain our operations and meet our obligations to licensors. There is no guarantee that debt, additional equity or other funding will be available to us on acceptable terms, or at all. If we fail to obtain additional funding when needed, we would be forced to scale back, or terminate, our operations or to seek to merge with or to be acquired by another company

Results of Operations

For the Three and Six Months Ended June 30, 2010, and June 30, 2009

Operating Results

We reported a loss from operations of $4,754,000 which includes $1,616,000 of non-cash equity based compensation for the three months ended June 30, 2010 compared with a loss from operations of $5,075,000 which includes $1,833,000 of non-cash equity compensation in 2009. The decrease in loss of $321,000, or 6%, was due primarily to $217,000 decrease in non-cash equity compensation and a $333,000 decrease in research and development expenses offset by an increase of $229,000 in general and administrative expenses, as noted below.

We reported a loss from operations of $9,210,000 which includes $3,125,000 of non-cash equity based compensation for the six months ended June 30, 2010 compared with a loss from operations of $9,246,000 which includes $3,507,000 of non-cash equity based compensation in 2009. The decrease in loss of $36,000, or 0.4%, was due primarily to $382,000 decrease in non-cash equity compensation and a $28,000 decrease in research and development expenses offset by an increase of $374,000 in general and administrative expenses, as noted below.

For the three months ended June 30, 2010, our net loss was approximately $2,141,000 compared with a net loss of $5,081,000 for the three months ended June 30, 2009. The decrease in net loss of $2,940,000, or 58%, includes the decrease in the loss from operations of $321,000 and a decrease of $2,619,000 in non-cash other income related to the change in fair value of common stock warrants issued with several financing transactions. The result is a net loss per share of $0.12 and $0.37, for the three months ended June 30, 2010 and 2009, respectively. Reasons for the variations in the losses between the two periods are discussed below.

For the six months ended June 30, 2010, our net loss was approximately $6,027,000 compared with a net loss of $9,252,000 for the six months ended June 30, 2009. The decrease in net loss of $3,225,000, or 35%, includes the decrease in loss from operations of $36,000 offset by the increase in other income of $3,189,000 in non-cash other income related to the change in fair value of warrants issued with several financing transactions. The result is a net loss per share of $0.35 and $0.67, for the six months ended June 30, 2010 and 2009, respectively. Reasons for the variations in the losses between the two periods are discussed below.

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 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 and development activities for RNAi therapeutics.

Total research and development expenses were approximately $2,264,000 for the three months ended June 30, 2010, compared with $3,026,000 for the three months ended June 30, 2009. The decrease of $762,000 or 25%, was primarily due to an decrease of $484,000 in non-employee non-cash stock based compensation and $333,000 decrease in research and development cash expenses related to the timing of patent application and prosecution on internal discoveries offset by an increase in costs associated with employee non-cash stock based compensation of $55,000 due to an increase in headcount.

Total research and development expenses were approximately $4,190,000 for the six months ended June 30. 2010, compared with $4,442,000 for the six months ended June 30, 2009. The decrease of $252,000 or 6% was primarily due to a decrease of $352,000 in non-employee non-cash stock based compensation and $28,000 decrease in research and development cash expenses related to the timing of patent application and prosecution on internal discoveries offset by an increase of $128,000 in costs associated with employee non-cash stock based compensation.

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 $2,490,000 for the three months ended June 30, 2010, compared with $2,049,000 for the three months ended June 30, 2009. The increase of $441,000, or 22%, was primarily due to a $114,000 increase in non-cash employee stock based compensation and a $98,000 increase due to non-cash stock based compensation expense related to a warrant issued for business advisory services. Excluding these non-cash items general and administration expense were approximately $1,654,000 for the three months ended June 30, 2010, compared with $1,425,000 for the three months ended June 30, 2009, the increase of $229,000 was primarily due to an increase in headcount.

General and administrative expenses were approximately $5,020,000 for the six months ended June 30, 2010, compared with $4,804,000 for the six months ended June 30, 2009. The increase of $216,000, or 4%, was primarily due to a $449,000 increase in non-cash stock based compensation offset by a $607,000 decrease due to non-cash stock based compensation expense related to a warrant issued for business advisory services as well as the fair value of common stock issued as a commitment fee for the SEDA for the six months ended June 30, 2009. Excluding these non-cash items, general and administration expense were approximately $3,102,000 for the six months ended June 30, 2010, compared with $2,728,000 for the six months ended June 30, 2009, the increase of $374,000 was primarily due to an increase in headcount.

Interest Income

Interest income was negligible for the three and six months ended June 30, 2010 and 2009. 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. The interest rates available on lower risk, shorter-term investments in today’s market are lower than rates available in the prior period.

Other Income/Expense

Other income and expense for the three months ended June 30, 2010 includes $2,610,000 in non-cash income related to a gain on the change in the fair value of common stock warrants issued in connection with several financing transactions in 2009 and 2010.

Other income and expense for the six months ended June 30, 2010 includes $3,181,000 in non-cash income related to a gain on the change in the fair value of common stock warrants issued in connection with equity financings in 2009 and 2010. The fair value of the warrants at June 30, 2010 of $3,006,000 is included as a current liability in the accompanying balance sheets and was determined by the Black-Scholes option pricing model.

Liquidity and Capital Resources

During 2009 and to date in 2010, we have entered into the following significant financing transactions:

On January 30, 2009, we entered into the SEDA, pursuant to which we may, at our option over a two-year period, ending on January 30, 2011, periodically sell to YA Global shares of our common stock, for a total purchase price of up to $25.0 million. To date we have not sold any shares under the SEDA.

On August 4, 2009, we closed the 2009 Offering in which we sold 2,385,715 shares of our common stock and warrants to purchase 954,286 shares of our common stock at an exercise price of $4.50 per share resulting in approximately $7.8 million in net proceeds after deducting the placement agent fee and offering expenses.

On March 26, 2010, we closed the 2010 Offering pursuant to which we sold to certain investors 2,700,000 units for $6.00, which consisted of one share of common stock and a warrant to purchase 0.20 shares of common stock with an exercise price of $6.00 per share. The financing provided approximately $15.2 million in net proceeds to us after deducting the placement agent fee and offering expenses. Pursuant to a stock redemption agreement between us and CytRx dated March 22, 2010, we were required to use 25% of the net proceeds from the 2010 Offering to repurchase from CytRx a number of shares of our common stock held by CytRx equal to 25% of the shares sold by us in the 2010 Offering. We are also required to use 25% of the proceeds from the exercise of warrants issued in the 2010 Offering to repurchase from CytRx a number of shares of our common stock held by CytRx equal to 25% of the shares issued upon the exercise of such warrants. As required by the agreement with CytRx, on March 29, 2010, we repurchased 675,000 shares of our common stock from CytRx for an aggregate price of approximately $3.8 million. We estimate that we will repurchase an additional 135,000 shares of our common stock from CytRx for an aggregate price of $0.8 million if all of the warrants issued in the offering are exercised.

We have not generated any revenues since inception nor are any revenues expected for the foreseeable future. We expect to incur significant operating losses for the foreseeable future while we advance our future product candidates from discovery through pre-clinical studies and clinical trials and seek regulatory approval and potential commercialization, even if we are collaborating with pharmaceutical and larger biotechnology companies. In addition to these increasing research and development expenses, we expect general and administrative costs to increase as we recruit additional management and administrative personnel.

We believe that our existing cash and short term investments should be sufficient to fund our operations through at least the first half of 2011. In addition, we also have funds available to us upon the issuance of shares of our common stock under the SEDA which expires on January 30, 2011. In the future, we will be dependent on obtaining funding from third parties such as proceeds from the sale of equity, funded research and development payments, both government and private grants and payments under partnership and collaborative agreements, in order to maintain our operations and meet our obligations to licensors. There is no guarantee that debt, additional equity or other funding will be available to us on acceptable terms, or at all. If we fail to obtain additional funding when needed, we would be forced to scale back, or terminate, our operations or to seek to merge with or to be acquired by another company.

Net Cash Flow from Operating Activities

Cash used in operating activities is adjusted for non-cash items to reconcile net loss to net cash used in or provided by operating activities. These non-cash adjustments consist primarily of stock-based compensation, change in fair value of common stock warrants issued in connection with various equity financings potentially settleable in cash, and depreciation and amortization. Net cash used in operating activities was approximately $6,151,000 for the six months ended June 30, 2010, compared with $5,437,000 for the six months ended June 30, 2009. Cash used in operations in 2010 consisted primarily of a net loss of $6,027,000, less the add back of non-cash items of $29,000, of which $3,181,000 related to the change in fair value of common stock warrants issued in connection with various equity financings, $2,625,000 related to non-cash stock based compensation, $500,000 related to common stock warrant expense in exchange for services, $85,000 related to depreciation and amortization expense and $153,000 related to changes in current assets and liabilities.

We expect that we will require significant amounts of cash to fund our operating activities for the foreseeable future as we continue to develop and advance our research and development initiatives. The actual amount of overall

expenditures will depend on numerous factors, including the timing of expenses, the timing and terms of collaboration agreements or other strategic transactions, if any, and the timing and progress of our research and development efforts.

Net Cash Flow from Investing Activities

Net cash used in investing activities was $6,050,000 for the six months ended June 30, 2010, compared with net cash used in investing activities of $47,000 for the six months ended June 30, 2009. The increase of $6,003,000 in cash used in investing activities was primarily due to the purchase of new equipment in the first quarter of 2010, combined with the purchase of United States Treasury notes in the second quarter of 2010.

Net Cash Flow from Financing Activities

Net cash provided by financing activities was $11,610,000 for the six months ended June 30, 2010, compared with net cash used in financing of $10,000 for the six months ended June 30, 2009. Cash provided in 2010 was primarily due to net proceeds from the issuance of common stock to institutional investors in the first quarter of 2010. There were no such financing activities in the first two quarters of 2009.

Off-Balance Sheet Arrangements

We have not entered into off-balance sheet financing, other than operating leases, license agreements and the SEDA.

Critical Accounting Policies and Estimates

In our Annual Report on Form 10-K for the year ended December 31, 2009, we disclosed our critical accounting policies and estimates upon which our financial statements are derived. There have been no changes to these policies since December 31, 2009. Readers are encouraged to review these disclosures in conjunction with the review of this quarterly report on Form 10-Q.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, our Chief Executive Officer and Principal Accounting Officer (the “Certifying Officers”), evaluated the effectiveness of our disclosure controls and procedures. Disclosure controls and procedures are controls and procedures designed to reasonably assure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 (the “Exchange Act”), such as this Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms. Disclosure controls and procedures are also designed to reasonably assure that such information is accumulated and communicated to our management, including the Certifying Officers, as appropriate to allow timely decisions regarding required disclosure. Based on these evaluations, the Certifying Officers have concluded, that, as of the end of the period covered by this quarterly report on Form 10-Q:

(a)

our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Exchange Act was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and

(b)

our disclosure controls and procedures were effective to provide reasonable assurance that material information required to be disclosed by us in the reports we file or submit under the Exchange Act was accumulated and communicated to our management, including the Certifying Officers, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There has not been any change in our internal control over financial reporting that occurred during the quarterly period ended June 30, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

RXi PHARMACEUTICALS CORPORATION

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None

ITEM 1.A RISK FACTORS

Our business is subject to numerous risks. We caution you that the following important factors, among others, could cause our actual results to differ materially from those expressed in forward- looking statements made by us or on our behalf in filings with the SEC, press releases, communications with investors and oral statements. Any or all of our forward-looking statements in this quarterly report on Form 10-Q and in any other public statements we make may turn out to be wrong. They can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Many factors mentioned in the discussion below will be important in determining future results. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially from those anticipated in forward-looking statements. When used in this Form 10-Q, the words “believe,” “anticipate,” “expect,” “estimate,” “intend,” “plan,” “project,” “will be,” “will continue,” “will result,” “seek,” “could,” “may,” “might” and similar expressions are intended to identify forward-looking statements. We explicitly disclaim any obligation to update any forward-looking statements to reflect events or circumstances that arise after the date hereof. You are advised, however, to consult any further disclosure we make in our reports filed with the SEC.

Risks Relating to RXi’s Business and Industry

The approach we are taking to discover and develop novel therapeutics using RNAi is unproven and may never lead to marketable products.

The scientific discoveries that form the basis for our efforts to discover and develop new drugs are relatively new. The RNAi technologies that we have licensed or have created internally and that we intend to develop have not yet been clinically tested by us, nor are we aware of any clinical trials for efficacy having been completed by third parties involving these technologies. To date, neither we nor any other company has received regulatory approval to market therapeutics utilizing RNAi and a number of clinical trials of third parties’ RNAi technology has been unsuccessful. The scientific evidence to support the feasibility of developing drugs based on these discoveries is both preliminary and limited. Successful development of RNAi-based products by us will require solving a number of issues, including providing suitable methods of stabilizing the RNAi material and delivering it into target cells in the human body. We may spend large amounts of money trying to solve these issues and never succeed in doing so. In addition, any compounds that we develop may not demonstrate in patients the chemical and pharmacological properties ascribed to them in laboratory studies, and they may interact with human biological systems in unforeseen, ineffective or even harmful ways.

Further, our exclusive focus on RNAi technology for developing products as opposed to multiple, more proven technologies for drug development increases the risk associated with our business. If we are not successful in developing a product candidate using RNAi technology, we may not be able to identify and successfully implement an alternative product development strategy.

We will be subject to competition and may not be able to compete successfully.

A number of medical institutions and pharmaceutical companies are seeking to develop therapeutic products using RNAi technologies, including for at least some of the disease indications we have been focusing our efforts on to date. Companies working in the RNAi area include: Alnylam Pharmaceuticals, Marina Biotech, Tacere Therapeutics, Benitec, OPKO Health, Silence Therapeutics, Quark Pharmaceuticals, Rosetta Genomics, Lorus Therapeutics, Tekmira Pharmaceuticals Corporation, Calando Pharmaceuticals, Regulus Therapeutics, and Santaris Pharmaceuticals, as well as a number of the large pharmaceutical companies. In addition, a number of companies are developing therapeutics for the same diseases we are targeting using technologies other than RNA interference, and, for some of these diseases, there are existing therapeutics being marketed currently. Most of these competitors

have substantially greater research and development capabilities and financial, scientific, technical, manufacturing, marketing, distribution, and other resources than us, and we may not be able to successfully compete with them. In addition, even if we are successful in developing our product candidates, in order to compete successfully we may need to be first to market or to demonstrate that our RNAi based products are superior to therapies based on different technologies. A number of our competitors have already commenced clinical testing of RNAi product candidates and may be more advanced than are we in the process of developing products. If we are not first to market or are unable to demonstrate such superiority, any products for which we are able to obtain approval may not be successful.

We may not be able to establish or maintain the third party relationships that are necessary to develop or potentially commercialize some or all of our product candidates.

We expect to depend on collaborators, partners, licensees, clinical research organizations and other third parties to support our discovery efforts, to formulate product candidates, to manufacture our product candidates, and to conduct clinical trials for some or all of our product candidates. We cannot guarantee that we will be able to successfully negotiate agreements for or maintain relationships with collaborators, partners, licensees, clinical investigators and other third parties on favorable terms, if at all. Our ability to successfully negotiate such agreements will depend on, among other things, potential partners’ evaluation of the superiority of our technology over competing technologies and the quality of the pre-clinical data that we have generated, the perceived risks in developing RNAi therapeutics as a new form of therapeutic. In addition, we and other companies operating in the RNAi field receive notices from third parties from time to time that our or such other companies’ technology or product candidates infringe or may infringe the intellectual property rights of those third parties. The assertion by third parties that our activities or product candidates infringe upon their intellectual property rights may adversely affect our ability to secure strategic partners or licensees for our technology or product candidates or our ability to secure or maintain manufacturers for our compounds. If we are unable to obtain or maintain these agreements, we may not be able to clinically develop, formulate, manufacture, obtain regulatory approvals for or commercialize our product candidates. Under certain license agreements that we have already entered into, we have minimum dollar amounts per year that we are obligated to spend on the development of the technology we have licensed from our contract partners. If we fail to meet this requirement under any of our licenses that contain such requirements or any other obligations under these licenses, we may be in breach of our obligations under such agreement, which may result in the loss of the technology licensed. We cannot necessarily control the amount or timing of resources that our contract partners will devote to our research and development programs, product candidates or potential product candidates, and we cannot guarantee that these parties will fulfill their obligations to us under these arrangements in a timely fashion. We may not be able to readily terminate any such agreements with contract partners even if such contract partners do not fulfill their obligations to us.

We are dependent on technologies we license, and if we lose the right to license such technologies or we fail to license new technologies in the future, our ability to develop new products would be harmed.

We currently are dependent on licenses from third parties for our key technologies relating to fundamental RNAi technologies. Our current licenses impose, and any future licenses we enter into are likely to impose, various development, funding, royalty, diligence, sublicensing, insurance and other obligations on us. If our license with respect to any of these technologies is terminated for any reason, the development of the products contemplated by the licenses would be delayed, or suspended altogether, while we seek to license similar technology or develop new non-infringing technology. The costs of obtaining new licenses are high, and many patents in the RNAi field have already been exclusively licensed to third parties, including our competitors. If any of our existing licenses are terminated, the development of the products contemplated by the licenses could be delayed or terminated and we may not be able to negotiate additional licenses on acceptable terms, if at all, which would have a material adverse effect on our business.

We will rely upon third parties for the manufacture of our clinical product candidates.

We do not have the facilities or expertise to manufacture supplies of any of our potential product candidates. Accordingly, we will be dependent upon contract manufacturers for these supplies. We currently manufacture limited quantities of our product candidates for our research activities at our facility, and we have no manufacturing supply arrangements for any of our product candidates. There can be no assurance that we will be able to secure needed supply arrangements on attractive terms, or at all. Our failure to secure these arrangements as needed could

have a materially adverse effect on our ability to complete the development of our product candidates or, if we obtain regulatory approval for our product candidates, to commercialize them.

Our current plans call for the manufacture of our rxRNA compounds and, as necessary, any delivery vehicles that may be used to deliver our rxRNA compounds by contract manufacturers offering research grade, Good Laboratory grade and Good Manufacturing Practices grade materials for preclinical studies (e.g. toxicology studies) and for clinical use. We anticipate the chemistry, manufacturing and controls for each RNAi active pharmaceutical ingredient will be addressed by our clinical development team in close collaboration with a contract manufacturer with extensive experience in RNA drug synthesis. RNA is a complex molecule requiring many synthesis steps, which may lead to challenges with purification and scale-up. These challenges could result in increased costs and delays in manufacturing.

Any drug candidates we develop may fail in development or be delayed or may not be commercially viable.

Before obtaining regulatory approval for the sale of any drug candidate, we must conduct, at our own expense, extensive pre-clinical tests and clinical trials to demonstrate the safety and efficacy in humans of our drug candidates. However, we are required to do extensive testing in animal models with our product candidates before we can be approved by the FDA to initiate clinical trials in humans. Furthermore, we cannot be sure that our product candidates will be safely tolerated by humans or be efficacious. All of our products in development must be approved by the FDA or similar foreign governmental agencies before they can be marketed. The process for obtaining FDA approval is both time-consuming and costly, with no certainty of a successful outcome. This process typically includes the conduct of extensive preclinical and clinical testing, which may take longer or cost more than we anticipate, and may prove unsuccessful due to numerous factors. A failure of one or more of our pre-clinical studies or clinical trials can occur at any stage of testing. Product candidates that may appear to be promising at early stages of development may not successfully reach the market for a number of reasons. The results of pre-clinical and initial clinical testing of these products may not necessarily indicate the results that will be obtained from later or more extensive testing. Companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in advanced clinical trials, even after obtaining promising results in earlier trials.

We, the FDA or other applicable regulatory authorities, or an institutional review board (“IRB”), an independent committee under the oversight of the United States Department of Health and Human Services (“HHS”), which has been formally registered with HHS and functions to approve, monitor and review biomedical and behavioral research involving humans, may suspend clinical trials of a drug candidate at any time for various reasons, including if we or they believe the subjects or patients participating in such trials are being exposed to unacceptable health risks. Among other reasons, adverse side effects of a drug candidate on subjects or patients in a clinical trial could result in the FDA or other regulatory authorities suspending or terminating the trial and refusing to approve a particular drug candidate for any or all indications of use.

Clinical trials of a new drug candidate require the enrollment of a sufficient number of patients, including patients who are suffering from the disease the drug candidate is intended to treat and who meet other eligibility criteria. Rates of patient enrollment are affected by many factors, and delays in patient enrollment can result in increased costs and longer development times.

Clinical trials also require the review and oversight of IRBs, which approve and continually review clinical investigations and protect the rights and welfare of human subjects. An inability or delay in obtaining IRB approval could prevent or delay the initiation and completion of clinical trials, and the FDA may decide not to consider any data or information derived from a clinical investigation not subject to initial and continuing IRB review and approval.

Numerous factors could affect the timing, cost or outcome of our drug development efforts, including the following:

	•		Delays in filing initial drug applications,

	•		Difficulty in securing centers to conduct trials,

	•		Conditions imposed on us by the FDA or comparable foreign authorities regarding the scope or design of our clinical trials,

	•		Problems in engaging IRBs to oversee trials or problems in obtaining or maintaining IRB approval of studies,

	•		Difficulty in enrolling patients in conformity with required protocols or projected timelines,

	•		Third party contractors failing to comply with regulatory requirements or meet their contractual obligations to us in a timely manner,

	•		Our drug candidates having very different chemical and pharmacological properties in humans than in laboratory testing and interacting with human biological systems in unforeseen, ineffective or harmful ways,

	•		The need to suspend or terminate our clinical trials if the participants are being exposed to unacceptable health risks,

	•		Insufficient or inadequate supply or quality of our drug candidates or other necessary materials necessary to conduct our clinical trials,

	•		Effects of our drug candidates not being the desired effects or including undesirable side effects or the drug candidates having other unexpected characteristics,

	•		The cost of our clinical trials may be greater than we anticipate,

	•		Negative or inconclusive results from our clinical trials or the clinical trials of others for drug candidates similar to our own or inability to generate statistically significant data confirming the efficacy of the product being tested,

	•		Changes in the FDA’s requirements for our testing during the course of that testing,

	•		Modification of the drug during testing,

	•		Reallocation of our limited financial and other resources to other clinical programs, and

	•		Adverse results obtained by other companies developing RNAi drugs.

The substances we are intending to develop may represent a new class of drug, and the FDA has not yet established any definitive policies, practices or guidelines in relation to these drugs. While we expect any product candidates that we develop will be regulated as a new drug under the Federal Food, Drug, and Cosmetic Act, the FDA could decide to regulate them or other products we may develop as biologics under the Public Health Service Act. The lack of policies, practices or guidelines may hinder or slow review by the FDA of any regulatory filings that we may submit. Moreover, the FDA may respond to these submissions by defining requirements that we may not have anticipated.

It is possible that none of the product candidates that we develop will obtain the appropriate regulatory approvals necessary for us to begin selling them or that any regulatory approval to market a product may be subject to limitations on the indicated uses for which we may market the product. The time required to obtain FDA and other approvals is unpredictable but often can take years following the commencement of clinical trials, depending upon the complexity of the drug candidate. Any analysis we perform of data from clinical activities is subject to confirmation and interpretation by regulatory authorities, which could delay, limit or prevent regulatory approval. Any delay or failure in obtaining required approvals could have a material adverse effect on our ability to generate revenue from the particular drug candidate.

We are also subject to numerous foreign regulatory requirements governing the conduct of clinical trials, manufacturing and marketing authorization, pricing and third-party reimbursement. The foreign regulatory approval process includes all of the risks associated with FDA approval described above as well as risks attributable to the satisfaction of local regulations in foreign jurisdictions. Approval by the FDA does not assure approval by regulatory authorities outside of the United States.

The FDA approval process may be delayed for any drugs we develop that require the use of specialized drug delivery devices or vehicles.

Some drug candidates that we develop may need to be administered using specialized vehicles that deliver RNAi therapeutics directly to diseased parts of the body. For example, we may use an implantable pump to deliver certain potential drug candidates to the nervous system. The drug delivery vehicles that we expect to deliver our drug candidates have not been approved by the FDA or other regulatory agencies. In addition, the FDA may regulate the product as a combination product of a drug and a device or require additional approvals or clearances for the modified delivery.

Further, to the extent the specialized delivery vehicle is owned by another company, we would need that company’s cooperation to implement the necessary changes to the vehicle, or its labeling, and to obtain any additional approvals or clearances. Any delays in finding suitable drug delivery vehicles to administer RNAi therapeutics directly to diseased parts of the body could negatively affect our ability to successfully develop our RNAi therapeutics.

If we are not successful in developing pre-clinical product candidates, we will not be able to commence clinical trials in humans or obtain approval for our product candidates.

We are in the new drug discovery phase and we have not yet identified any lead compounds for therapeutic development. RNA interference is a relatively new scientific field, and the technologies are still in the early stage of development. We have no compounds in pre-clinical toxicology studies, and we may not be able to advance any product candidate through the pre-clinical stage into clinical trials. Additionally, our development efforts may never result in the identification of a pre-clinical candidate which we are able to successfully develop into a drug. Even if we are able to designate a lead candidate, we may not be able to identify data that would support entering such a candidate into clinical trials. Furthermore, even if we successfully enter into clinical studies, the results from pre- clinical testing of a drug candidate may not predict the results that will be obtained on human clinical trials.

Even if we obtain regulatory approvals, our marketed drugs will be subject to ongoing regulatory review. If we fail to comply with continuing U.S. and foreign regulations, we could lose our approvals to market drugs and our business would be materially adversely affected.

Following any initial regulatory approval of any drugs we may develop, we will also be subject to continuing regulatory review, including the review of adverse drug experiences and clinical results that are reported after our drug products are made available to patients. This would include results from any post marketing tests or vigilance required as a condition of approval. The manufacturer and manufacturing facilities we use to make any of our drug candidates will also be subject to periodic review and inspection by the FDA. The discovery of any new or previously unknown problems with the product, manufacturer or facility may result in restrictions on the drug or manufacturer or facility, including withdrawal of the drug from the market. Our product promotion and advertising also will be subject to regulatory requirements and continuing regulatory review. If we fail to comply with applicable continuing regulatory requirements, we may be subject to fines, suspension or withdrawal of regulatory approval, product recalls and seizures, operating restrictions and other adverse consequences.

Even if we receive regulatory approval to market our product candidates, our product candidates may not be accepted commercially, which may prevent us from becoming profitable.

The product candidates that we are developing are based on new technologies and therapeutic approaches. RNAi products may be more expensive to manufacture than traditional small molecule drugs, which may make them more costly than competing small molecule drugs. Additionally, for various applications, RNAi products are likely to require injection or implantation, and do not readily cross the so-called blood brain barrier, which will make them

less convenient to administer than drugs administered orally. Key participants in the pharmaceutical marketplace, such as physicians, medical professionals working in large reference laboratories, public health laboratories and hospitals, third- party payors and consumers, may not accept products intended to improve therapeutic results based on RNAi technology. As a result, it may be more difficult for us to convince the medical community and third-party payors to accept and use our product, or to provide favorable reimbursement. And if medical professionals working with large reference laboratories, public health laboratories and hospitals choose not to adopt and use our RNAi technology, our products may not achieve broader market acceptance.

Other factors that we believe will materially affect market acceptance of our product candidates include:

	•		The timing of our receipt of any marketing approvals, the terms of any approvals and the countries in which approvals are obtained,

	•		The safety, efficacy and ease of administration of our product candidates,

	•		The advantages of our product candidates over those of our competitors,

	•		The willingness of patients to accept relatively new therapies,

	•		The success of our physician education programs,

	•		The availability of government and third-party payor reimbursement,

	•		The pricing of our products, particularly as compared to alternative treatments, and

	•		The availability of effective alternative treatments and the relative risks and/or benefits of the treatments.

We may be unable to protect our intellectual property rights licensed from others parties, our intellectual property rights may be inadequate to prevent third parties from using our technologies or developing competing products, and we may need to license additional intellectual property from others.

We have a non-exclusive license to the Fire-Mello patent owned by UMMS and the Carnegie Institution of Washington, which claims various aspects of RNAi or genetic inhibition by double stranded RNA. This license continues to be available to third parties, and as such it does not provide us with the ability to exclude others from its use or protect us from competition. Therapeutic applications of gene silencing technologies, delivery methods, and other technologies that we license from third parties are claimed in a number of pending patent applications, but there can be no assurance that these applications will result in any issued patents or that those patents would withstand possible legal challenges or protect our technologies from competition. United States Patent and Trademark Office and patent granting authorities in other countries have upheld stringent standards for the RNAi patents that have been prosecuted so far. Consequently, pending patents that we have licensed and those that we own may continue to experience long and difficult prosecution challenges and may ultimately issue with much narrower claims than those in the pending applications. We are aware of a number of issued patents covering various particular forms and compositions of RNAi-mediating molecules and therapeutic methods. Third parties may hold or seek to obtain additional patents that could make it more difficult or impossible for us to develop products based on RNAi technology without obtaining a license to such patents, which licenses may not be available on attractive terms or at all.

In addition, others may challenge the patents or patent applications that we currently license or may license in the future or that we own and, as a result, these patents could be narrowed, invalidated or rendered unenforceable, which would negatively affect our ability to exclude others from use of RNAi technologies described in these patents. There can be no assurance that these patent or other pending applications or issued patents we license or that we own will withstand possible legal challenges. Moreover, the laws of some foreign countries may not protect our proprietary rights to the same extent as do the laws of the United States. Any patents issued to us or our licensors may not provide us with any competitive advantages, and there can be no assurance that the patents of others will not have an adverse effect on our ability to do business or to continue to use our technologies freely. Our efforts to enforce and maintain our intellectual property rights may not be successful and may result in substantial costs and

diversion of management time. Even if our rights are valid, enforceable and broad in scope, competitors may develop products based on technology that is not covered by our licenses or patents or patent application that we own.

We may need to license additional intellectual property rights from this third party or other third parties in order to be able to complete the development or enhance the efficacy of our product candidates or avoid possible infringement of the rights of others. Additionally, many of our UMMS licenses are limited to ALS, obesity, diabetes and cancer, and in order to pursue other diseases against proprietary gene targets, we may need licenses from other third parties that may be unavailable. There is no assurance that we will be able to acquire any additional intellectual property rights on satisfactory terms, or at all. To the extent that we are required and are able to obtain multiple licenses from third parties to develop or commercialize a product candidate, the aggregate licensing fees and milestones and royalty payments made to these parties may materially reduce our economic returns or even cause us to abandon development or commercialization of a product candidate.

In addition to our licenses, we also rely on copyright and trademark protection, trade secrets, know-how, continuing technological innovation and licensing opportunities. In an effort to maintain the confidentiality and ownership of our trade secrets and proprietary information, we require our employees, consultants, advisors and others to whom we disclose confidential information to execute confidentiality and proprietary information agreements. However, it is possible that these agreements may be breached, invalidated or rendered unenforceable, and if so, there may not be an adequate corrective remedy available. Furthermore, like many companies in our industry, we may from time to time hire scientific personnel formerly employed by other companies involved in one or more areas similar to the activities we conduct. In some situations, our confidentiality and proprietary information agreements may conflict with, or be subject to, the rights of third parties with whom our employees, consultants or advisors have prior employment or consulting relationships. Although we require our employees and consultants to maintain the confidentiality of all confidential information of previous employers, we or these individuals may be subject to allegations of trade secret misappropriation or other similar claims as a result of their prior affiliations. Finally, others may independently develop substantially equivalent proprietary information and techniques, or otherwise gain access to our trade secrets. Our failure to protect our proprietary information and techniques may inhibit or limit our ability to exclude certain competitors from the market and execute our business strategies.

Our success depends upon our ability to obtain and maintain intellectual property protection for our products and technologies.

Our success will depend on our ability to obtain and maintain adequate protection of our intellectual property covering our product candidates and technologies. The ultimate degree of patent protection that will be afforded to biotechnology products and processes, including ours, in the United States and in other important markets remains uncertain and is dependent upon the scope of protection decided upon by the patent offices, courts and lawmakers in these countries. There is no certainty that our existing patents, or patent applications if obtained, will afford us substantial protection or commercial benefit. Similarly, there is no assurance that our pending patent applications or patent applications licensed from third parties will ultimately be granted as patents or that those patents that have been issued or are issued in the future will stand if they are challenged in court. These applications claim many different methods, compositions and processes relating to the discovery, development, delivery and commercialization of RNAi therapeutics. Because the field is so new, very few of these patent applications have been fully processed by government patent offices around the world, and there is a great deal of uncertainty about which patents will issue, when, to whom, and with what claims. It is likely that there will be significant litigation and other proceedings, such as interference and opposition proceedings in various patent offices, relating to patent rights in the RNAi field and that we may be a party to such proceedings.

There may be patent or other intellectual property rights belonging to others that require us to alter our products, pay licensing fees or cease certain activities.. If our products infringe patent or other intellectual property rights of others, the owners of those rights could bring legal actions against us claiming damages and seeking to enjoin manufacturing and marketing of the affected products. If these legal actions are successful, in addition to any potential liability for damages, we could be required to obtain a license in order to continue to manufacture or market the affected products. We may not prevail in any action brought against us, and any license required under any rights that we infringe may not be available on acceptable terms or at all. Others may attempt to invalidate our intellectual property rights or those of our licensors. Even if our rights, or those of our licensors, are not directly challenged, disputes among third parties could lead to the weakening or invalidation of our intellectual property

rights. Any attempt by third parties to circumvent or invalidate our intellectual property rights could be costly to defend, require significant time and attention of our management and have a material adverse effect on our business.

We are subject to potential liabilities from clinical testing and future product liability claims.

If any of our future products are alleged to be defective, they may expose us to claims for personal injury by patients in clinical trials of our products or by patients using our commercially marketed products. Even if the marketing of one or more of our products is approved by the FDA, users may claim that such products caused unintended adverse effects. We will seek to obtain clinical trial insurance for clinical trials that we conduct, as well as liability insurance for any products that we market. There can be no assurance that we will be able to obtain insurance in the amounts we seek, or at all. We anticipate that licensees who develop our products will carry liability insurance covering the clinical testing and marketing of those products. There is no assurance, however, that any insurance maintained by us or our licensees will prove adequate in the event of a claim against us. Even if claims asserted against us are unsuccessful, they may divert management’s attention from our operations and we may have to incur substantial costs to defend such claims.

Any drugs we develop may become subject to unfavorable pricing regulations, third-party reimbursement practices or healthcare reform initiatives, which could have a material adverse effect on our business.

We intend to sell our products primarily to hospitals which receive reimbursement for the health care services they provide to their patients from third-party payors, such as Medicare, Medicaid and other domestic and international government programs, private insurance plans and managed care programs. Most third-party payors may deny reimbursement if they determine that a medical product was not used in accordance with cost-effective treatment methods, as determined by the third-party payor, or was used for an unapproved indication. Third-party payors also may refuse to reimburse for experimental procedures and devices. Furthermore, because our programs are in the early stages of development, we are unable at this time to determine their cost-effectiveness and the level or method of reimbursement for them. Increasingly, the third-party payors who reimburse patients are requiring that drug companies provide them with predetermined discounts from list prices, and are challenging the prices charged for medical products. If the price we are able to charge for any products we develop is inadequate in light of our development and other costs, our profitability could be adversely effected.

We currently expect that any drugs we develop may need to be administered under the supervision of a physician. Under currently applicable law, drugs that are not usually self-administered may be eligible for coverage by the Medicare program if:

	•		They are “incidental” to a physician’s services,

	•		They are “reasonable and necessary” for the diagnosis or treatment of the illness or injury for which they are administered according to accepted standard of medical practice,

	•		They are not excluded as immunizations, and

	•		They have been approved by the FDA.

There may be significant delays in obtaining insurance coverage for newly-approved drugs, and insurance coverage may be more limited than the purpose for which the drug is approved by the FDA. Moreover, eligibility for insurance coverage does not imply that any drug will be reimbursed in all cases or at a rate that covers our costs, including research, development, manufacture, sale and distribution. Interim payments for new drugs, if applicable, may also not be sufficient to cover our costs and may not be made permanent. Reimbursement may be based on payments for other services and may reflect budgetary constraints or imperfections in Medicare data. Net prices for drugs may be reduced by mandatory discounts or rebates required by government health care programs or private payors and by any future relaxation of laws that presently restrict imports of drugs from countries where they may be sold at lower prices than in the United States. Third-party payors often rely upon Medicare coverage policy and payment limitations in setting their own reimbursement rates. Our inability to promptly obtain coverage and profitable reimbursement rates from both government- funded and private payors for new drugs that we develop

could have a material adverse effect on our operating results, our ability to raise capital needed to develop products, and our overall financial condition.

Additionally, third-party payors are increasingly attempting to contain health care costs by limiting both coverage and the level of reimbursement for medical products and services. Levels of reimbursement may decrease in the future, and future legislation, regulation or reimbursement policies of third-party payors may adversely affect the demand for and price levels of our products. If our customers are not reimbursed for our products, they may reduce or discontinue purchases of our products, which could have a material adverse effect on our business, financial condition and results of operations.

Comprehensive health care reform legislation, which was recently adopted by Congress and was subsequently signed into law, could adversely affect our business and financial condition. Among other provisions, the legislation provides that a “biosimilar” product may be approved by the FDA on the basis of analytical tests and certain clinical studies demonstrating that such product is highly similar to an existing, approved product and that switching between an existing product and the biosimilar product will not result in diminished safety or efficacy. This abbreviated regulatory approval process may result in increased competition if we are able to bring a product to market. The legislation also includes more stringent compliance programs for companies in various sectors of the life sciences industry with which we may need to comply and enhanced penalties for non-compliance with the new health care regulations. Complying with new regulations may divert management resources, and inadvertent failure to comply with new regulations may result in penalties being imposed on us.

Some states and localities have established drug importation programs for their citizens, and federal drug import legislation has been introduced in Congress. The Medicare Prescription Drug Plan legislation, which became law in December 2003, required the Secretary of Health and Human Services to promulgate regulations for drug reimportation from Canada into the United States under some circumstances, including when the drugs are sold at a lower price than in the United States. The Secretary, however, retained the discretion not to implement a drug reimportation plan if he finds that the benefits do not outweigh the costs, and has so far declined to approve a reimportation plan. Proponents of drug reimportation may attempt to pass legislation that would directly allow reimportation under certain circumstances. Legislation or regulations allowing the reimportation of drugs, if enacted, could decrease the price we receive for any products that we may develop and adversely affect our future revenues and prospects for profitability.

If we fail to attract, hire and retain qualified personnel, we may not be able to design, develop, market or sell our products or successfully manage our business.

We are highly dependent on our named executive officers and Scientific Advisory Board (“SAB”) members. The continued service of our named executive officers and SAB members is critical to our success. We have entered into employment agreements with our named executive officers, all of which can be terminated by such persons on short notice. The loss of any of our named executive officers or SAB members, or our inability to identify, attract, retain and integrate additional qualified key personnel, could make it difficult for us to manage our business successfully and achieve our business objectives.

Competition for skilled research, product development, regulatory and technical personnel also is intense, and we may not be able to recruit and retain the personnel we need. The loss of the services of any key research, product development, regulatory, and technical personnel, or our inability to hire new personnel with the requisite skills, could restrict our ability to develop our product candidates.

We use biological and hazardous materials and if we do not comply with laws regulating the protection of the environment and health and human safety, our business could be adversely affected.

Our research and development activities involve the controlled use of potentially harmful biological materials as well as hazardous materials, chemicals and various radioactive compounds. We cannot completely eliminate the risk of accidental contamination or injury; we could be held liable for any damages that result, and any liability could exceed our resources. We are subject to federal, state and local laws and regulations governing the use, storage, handling and disposal of these materials and specific waste products. We are also subject to numerous environmental, health and workplace safety laws and regulations, including those governing laboratory procedures,

exposure to blood-borne pathogens and the handling of biohazardous materials. The cost of compliance with these laws and regulations could be significant and may adversely affect capital expenditures to the extent we are required to procure expensive capital equipment to meet regulatory requirements.

We are also subject to numerous environmental, health and workplace safety laws and regulations, including those governing laboratory procedures, exposure to blood-borne pathogens and the handling of biohazardous materials. We maintain workers’ compensation insurance to cover us for costs and expenses we may incur due to injuries to our employees resulting from the use of these materials. The limits of our workers’ compensation insurance are mandated by state law, and our workers’ compensation liability is capped at these state-mandated limits. We do not maintain insurance for environmental liability or toxic tort claims that may be asserted against us in connection with our storage or disposal of biological, hazardous or radioactive materials. Additional federal, state and local laws and regulations affecting our operations may be adopted in the future. We may incur substantial costs to comply with, and substantial fines or penalties if we violate any of these laws or regulations.

Risks Relating Our Financial Position and Capital Requirements

We may not be able to obtain sufficient financing, and may not be able to develop our product candidates.

We believe that our existing cash and cash equivalent should be sufficient to fund our operations through at least the first half of 2011. In the future, we will be dependent on obtaining further financing from third parties in order to maintain our operations and to meet our financial obligations. In addition, until its expiration on January 30, 2011, we also have available to us the SEDA that we entered into on January 30, 2009. However, before we are able to access additional capital from the SEDA, we must satisfy certain conditions, including the requirement that shares of our stock to be sold to YA Global be registered with the U.S. Securities and Exchange Commission (“SEC”), and there is risk of delays in our satisfying these conditions. We cannot assure that additional debt or equity or other funding to maintain our operations and to meet our obligations to our licensors will be available to us in the future on acceptable terms, or at all. If we fail to obtain additional funding when needed, we would be forced to scale back, or terminate, our operations, or to seek to merge with or to be acquired by another company.

We anticipate that we will need to raise substantial amounts of money to fund a variety of future activities integral to the development of our business, which may include but are not limited to the following:

	•		To conduct research and development to successfully develop our RNAi technologies,

	•		To obtain regulatory approval for our product candidates,

	•		To file and prosecute patent applications and to defend and assess patents to protect our technologies,

	•		To retain qualified employees, particularly in light of intense competition for qualified scientists,

	•		To manufacture products ourselves or through third parties,

	•		To market our products, either through building our own sales and distribution capabilities or relying on third parties, and

	•		To acquire new technologies, licenses, products or companies.

We cannot assure you that any financing needed for the development of our business will be available to us on acceptable terms or at all. If we cannot obtain additional financing in the future, our operations may be restricted and we may ultimately be unable to continue to develop and potentially commercialize our product candidates.

We expect to continue to incur significant research and development expenses, which may make it difficult for us to attain profitability, and may lead to uncertainty about or as to our ability to continue as a going concern.

Substantial funds were expended to develop our RNAi technologies, and additional substantial funds will be required for further research and development, including pre-clinical testing and clinical trials of any product

candidates, and to manufacture and market any products that are approved for commercial sale. Because the successful development of our products is uncertain, we are unable to precisely estimate the actual funds we will require to develop and potentially commercialize them. In addition, we may not be able to generate enough revenue, even if we are able to commercialize any of our product candidates, to become profitable.

In the event that we are unable to achieve or sustain profitability or to secure additional financing, we may not be able to meet our obligations as they come due, raising substantial doubts as to our ability to continue as a going concern. Any such inability to continue as a going concern may result in our common stock holders losing their entire investment. There is no guaranty that we will become profitable or secure additional financing. Our financial statements contemplate that we will continue as a going concern and do not contain any adjustments that might result if we were unable to continue as a going concern. Changes in our operating plans, our existing and anticipated working capital needs, the acceleration or modification of our expansion plans, increased expenses, potential acquisitions or other events will all affect our ability to continue as a going concern.

Future financing may be obtained through, and future development efforts may be paid for by, the issuance of debt or equity, which may have an adverse effect on our stockholders or may otherwise adversely affect our business.

If we raise funds through the issuance of debt or equity, any debt securities or preferred stock issued will have rights, preferences and privileges senior to those of holders of our common stock in the event of a liquidation. In such event, there is a possibility that once all senior claims are settled, there may be no assets remaining to pay out to the holders of common stock. In addition, if we raise funds through the issuance of additional equity, whether through private placements or additional public offerings, such an issuance would dilute your ownership in us.

The terms of debt securities may also impose restrictions on our operations, which may include limiting our ability to incur additional indebtedness, to pay dividends on or repurchase our capital stock, or to make certain acquisitions or investments. In addition, we may be subject to covenants requiring us to satisfy certain financial tests and ratios, and our ability to satisfy such covenants may be affected by events outside of our control.

You may have difficulty evaluating our business, because we have limited history and our historical financial information may not be representative of our future results.

The historical financial information included in our annual report on Form 10-K for the year ended December 31, 2009 does not necessarily reflect the financial condition, results of operations or cash flows that we would have achieved as a separate company during the periods presented or those that we will achieve in the future. Prior to the contribution of our RNAi assets from CytRx, our RNAi research and development activities were conducted by CytRx as part of its broader operations, rather than as an independent division or subsidiary, and were primarily conducted through sponsored research arrangements rather than through internal activities. CytRx also performed various corporate functions relating to our business, as discussed above. Our historical financial information reflects allocations of indirect expenses from CytRx for these and similar functions. We believe that these allocations are comparable to the expenses we would have incurred had we operated as a separate company, although we may incur higher expenses as a separate company.

We have limited operating experience and may not be able to effectively operate.

We are a discovery-stage company with limited operating history. We will focus solely on developing and, if we obtain regulatory approval for our product candidates, commercializing therapeutic products based upon RNAi technologies, and there is no assurance that we will be able to successfully implement our business plan. While our management collectively possesses substantial business experience, there is no assurance that we will be able to manage our business effectively, or that we will be able to identify, hire and retain any needed additional management or scientific personnel to develop and implement our product development plans, obtain third-party contracts or any needed financing, or achieve the other components of our business plan.

The obligations associated with being an independent public company require significant resources and management attention.

As a publicly traded company, we are subject to the reporting requirements of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Sarbanes-Oxley Act of 2002. In addition, the Exchange Act requires that we file annual, quarterly and current reports. Our failure to prepare and disclose this information in a timely manner could subject us to penalties under federal securities laws, expose us to lawsuits and restrict our ability to access financing. The Sarbanes-Oxley Act requires that we, among other things, establish and maintain effective internal controls and procedures for financial reporting. From time to time we evaluate our existing internal controls in light of the standards adopted by the Public Company Accounting Oversight Board. It is possible that we or our independent registered public accounting firm may identify significant deficiencies or material weaknesses in our internal control over financial reporting in the future. Any failure or difficulties in implementing and maintaining these controls could cause us to fail to meet the periodic reporting obligations or result in material misstatements in our financial statements.

Section 404 of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness of our internal control over financial reporting. Our failure to satisfy the requirements of Section 404 on a timely basis could result in the loss of investor confidence in the reliability of our financial statements, which in turn could have a material adverse effect on our business and our common stock.

Risks Related to Ownership of Our Common Stock

The market price and trading volume of our common stock may be volatile

The market price of our common stock could fluctuate significantly for many reasons, including the following factors:

	•		Announcements of regulatory developments or technological innovations by us or our competitors,

	•		Changes in our relationship with our licensors and other strategic partners,

	•		Changes in our ownership or other relationships with CytRx,

	•		Our quarterly operating results,

	•		Developments in patent or other technology ownership rights,

	•		Public concern regarding the safety of our products,

	•		Additional funds may not be available on terms that are favorable to us and, in the case of equity financings, may result in dilution to our stock holders,

	•		Government regulation of drug pricing, and

	•		General changes in the economy, the financial markets or the pharmaceutical or biotechnology industries.

In addition, factors beyond our control may also have an impact on the price of our stock. For example, to the extent that other large companies within our industry experience declines in their stock price, our stock price may decline as well. In addition, when the market price of a company’s common stock drops significantly, stockholders often institute securities class action lawsuits against the company. A lawsuit against us could cause us to incur substantial costs and could divert the time and attention of our management and other resources.

Sales of our shares by CytRx could adversely affect our stock price.

As of August 9, 2010, CytRx owned 3,093,881 shares of our common stock, or approximately 16.8% of our outstanding shares. The availability of our shares held by CytRx for public resale on the open market, as well as any actual sales of these shares, could adversely affect the market price of our shares.

We have granted CytRx preemptive rights to acquire shares that we may sell in the future, which may impair our ability to raise funds.

Under an agreement between us, CytRx and our founding stockholders, with some exceptions, CytRx has preemptive rights to acquire a portion of any new securities sold or issued by us so as to maintain its percentage ownership of us at the time of any such sale and issuance, which is currently approximately 16.8% of our outstanding shares. The exercise by CytRx of its preemptive rights may impair our ability to raise funds, or adversely affect the terms on which we are able to raise funds, as we may not be able to offer to new investors the quantity of our stock that they may desire to purchase.

CytRx’s ownership of our common stock could delay or prevent a change in corporate control.

CytRx owns approximately 16.8% of our common stock, and has preemptive rights, as described above, to maintain its percentage ownership. CytRx has agreed with UMMS, us and our other founding stockholders to vote its shares of our common stock so that a majority of the members of our board of directors are not affiliated with CytRx. However, by virtue of its stock ownership, CytRx may be able to significantly influence the outcome of matters required to be submitted to a vote of our stockholders, including any proposed amendments to our certificate of incorporation and approval of mergers and other significant corporate transactions. This concentration of ownership may adversely affect the market price of our common stock by:

	•		Delaying, deferring or preventing a change in control of our company,

	•		Impeding a merger, consolidation, takeover or other business combination involving our company, or

	•		Discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of our company.

CytRx could unilaterally effect a change of control of our company by selling or disposing of our shares owned by it.

If CytRx were to sell or otherwise dispose of all or a significant portion of our shares owned by it to a single buyer or group of affiliated buyers, it could effect a potential change of control of our company without the advice or participation by our board of directors or other stockholders, since transferees of the shares owned by CytRx will not be bound by CytRx’s agreements with UMMS, us and our other founding stockholders with respect to voting such shares.

Anti-takeover provisions of our certificate of incorporation and by-laws and provisions of Delaware law could delay or prevent a change of control that you may favor.

Anti-takeover provisions of our certificate of incorporation and by-laws and provisions of Delaware law may discourage, delay or prevent a merger or other change of control that stockholders may consider favorable, or may impede the ability of the holders of our common stock to change our management. These provisions of our certificate of incorporation and by-laws, among other things:

	•		Divide our board of directors into three classes, with members of each class to be elected for staggered three-year terms,

	•		Limit the right of stockholders to remove directors,

	•		Regulate how stockholders may present proposals or nominate directors for election at annual meetings of stockholders, and

	•		Authorize our board of directors to issue preferred stock in one or more series, without stockholder approval.

In addition, Section 203 of the Delaware General Corporation Law provides that, subject to limited exceptions, persons that acquire, or are affiliated with a person that acquires, more than 15% of the outstanding voting stock of a Delaware corporation such as our company shall not engage in any business combination with that corporation, including by merger, consolidation or acquisitions of additional shares for a three-year period following the date on which that person or its affiliate crosses the 15% stock ownership threshold. Section 203 could operate to delay or prevent a change of control of our company.

We may acquire other businesses or form joint ventures that may be unsuccessful and could adversely dilute your ownership of our company.

As part of our business strategy, we may pursue future acquisitions of other complementary businesses and technology licensing arrangements. We also may pursue strategic alliances. We have no experience with respect to acquiring other companies and limited experience with respect to the formation of collaborations, strategic alliances and joint ventures. If we were to make any acquisitions, we may not be able to integrate these acquisitions successfully into our existing business and we could assume unknown or contingent liabilities. We also could experience adverse effects on our reported results of operations from acquisition related charges, amortization of acquired technology and other intangibles and impairment charges relating to write-offs of goodwill and other intangible assets from time to time following the acquisition. Integration of an acquired company also may require management resources that otherwise would be available for ongoing development of our existing business. We may not identify or complete these transactions in a timely manner, on a cost-effective basis, or at all, and we may not realize the anticipated benefits of any acquisition, technology license or strategic alliance.

To finance acquisitions, we may choose to issue shares of our common stock as consideration, which would dilute your ownership interest in us. Alternatively, it may be necessary for us to raise additional funds through public or private financings. Additional funds may not be available on terms that are favorable to us and, in the case of equity financings, may result in dilution to our stockholders. Any future acquisitions by us also could result in large and immediate write-offs, the incurrence of contingent liabilities or amortization of expenses related to acquired intangible assets, any of which could harm our operating results.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. RESERVED

ITEM 5. OTHER INFORMATION

None


Part No.	Item No.	Description	Page No.
I		FINANCIAL INFORMATION

	1	Financial Statements		3

		Condensed Balance Sheets as of June 30, 2010 and December 31, 2009		3

		Condensed Statements of Expenses for the three months ended June 30, 2010 and 2009, the six months ended June 30, 2010 and 2009 and the cumulative amounts for the period from January 1, 2003 (date of inception) to June 30, 2010		4

		Condensed Statements of Cash Flows for the six months ended June 30, 2010 and 2009 and the cumulative amounts for the period from January 1, 2003 (date of inception) to June 30, 2010		5

		Notes to Condensed Financial Statements		6

	2	Management’s Discussion and Analysis of Financial Condition and Results of Operations		13

	4	Controls and Procedures		19

II		OTHER INFORMATION		20

	1	Legal Proceedings		20
	1A	Risk Factors		20
	2	Unregistered Sales of Equity Securities and Use of Proceeds		33
	3	Defaults Upon Senior Securities		33
	4	Reserved		33
	5	Other Information		33
	6	Exhibits		34

Index to Exhibits				34

Signatures				35
EX-31.1
EX-31.2
EX-32.1


Exhibit
Number		Description

3.1		Form of Amended and Restated Certificate of Incorporation of RXi Pharmaceuticals Corporation(1)

3.2		Form of Amended and Restated By-laws of RXi Pharmaceuticals Corporation(1)

31.1		Sarbanes-Oxley Act Section 302 Certification of Noah D. Beerman

31.2		Sarbanes-Oxley Act Section 302 Certification of Amy B. Tata

32.1		Sarbanes-Oxley Act Section 906 Certification of Noah D. Beerman and Amy B. Tata


	RXi PHARMACEUTICALS CORPORATION (Registrant)
	By:	/s/ Noah D. Beerman
		Noah D. Beerman
		President and Chief Executive Officer (Principal Executive Officer)


	By:	/s/ Amy B. Tata
		Amy B. Tata
		Principal Accounting Officer and Controller (Principal Accounting Officer) Date: August 16, 2010

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(1)		Previously filed as an Exhibit to the Company’s Registration Statement on Form S-1 filed on October 30, 2007 (File No. 333-147009) and incorporated by reference herein