corresp
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TroyGould
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1801 Century Park East, Suite 1600 |
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Los Angeles, California 90067-2367 |
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Tel (310) 533-4441
Fax (310) 201-4746 |
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www.troygould.com |
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Dale
Short (310) 789-1259 dshort@troygould.com
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File No. 3218-1 |
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February 7, 2012 |
BY EDGAR
James Peklenk
United States Securities and Exchange Commission
Division of Corporation Finance
100 F Street, N.E.
Washington, D.C. 20549
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Re: |
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RXi Pharmaceuticals Corporation
Amendment No. 4 to Form S-1
Filed February 6, 2012
File No. 333-177498 |
Dear Mr. Peklenk:
This letter and attachments respond to the oral comment of the staff (the
Staff) of the Securities and Exchange Commission (SEC) communicated to me
earlier today regarding RXi Pharmaceuticals Corporations ( the Company) amended
Registration Statement on Form S-1/A filed on February 6, 2012. The Staffs comment pertains to
the nature of the derivatives potentially settleable in cash liability (the Derivative
Liability) reflected on the carved out balance sheets of the Company contained in the amended
S-1/A. In this regard, please be advised supplementally that the actual liabilities of the Company
do not, and will not as of the completion of the spin-off of the Company, include the Derivative
Liability.
The Derivative Liability as its description suggests is derived from the corresponding
warrants potentially settleable in cash liability of Galena Biopharma, Inc., the Companys
current parent company (Galena), and management of the Company believe it is properly reflected
in the carved out financial statements of the Company for the reasons stated in the Companys
previous response letters. By their nature, the carved
out financial statements reflect a pro forma
presentation and do not purport to be an actual depiction of the Companys financial condition.
As between Galena and the Company, only Galena is and will be
responsible for payment or other settlement of the Derivative
Liability. This is implicit in the
terms of the Contribution Agreement between Galena and the
Company, which Agreement provides, in Section 2.3 thereof, that the only liabilities of Galena
assumed by the Company are the Assumed Liabilities (as defined), which do not include the
Derivative Liability. Galena and the Company also have represented and warranted that this is the
case in the Securities Purchase Agreement
James Peklenk
February 7, 2012
Page 2
among Galena, the Company and Tang Capital Partners, LP and RTW
Investments, LLC refered to in the S-1/A.
In response to the Staffs comment, the Company hereby undertakes to make the changes shown on
the attached selected pages of the preliminary prospectus in order to clarify the treatment of the
Derivative Liability in connection with the spin-off. If these changes are acceptable, the Company
will file via EDGAR a pre-effective Amendment No.5 to the Form S-1 setting forth these changes, or
will include the changes in the final prospectus to be filed under Rule 424, if appropriate.
* * * * *
Apart from the foregoing response to the Staffs comments, the Company reiterates that it is
responsible for the accuracy and adequacy of the disclosures contained in the Registration
Statement.
When the time comes, the Company will include in its request for acceleration of the
effectiveness of the Registration Statement the additional acknowledgements requested by the Staff.
Please direct questions regarding this response letter to the undersigned at (310) 789-1259.
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Very truly yours,
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/s/ Dale E. Short
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DES: tms
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cc: |
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Mary Mast (SEC)
Jennifer Riegel (SEC)
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We recognize 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. During the period ended September 30, 2011 and the years ended December 31, 2010 and
2009, Galena issued derivatives to purchase 17,950,000, 540,000 and 978,142 shares of its common stock,
respectively, in connection with an equity transaction. In accordance with ASC Topic 815-40, Derivatives and Hedging Contracts in Entitys Own Stock (ASC 815-40), the value of these
derivatives is required to be recorded as a liability, as the holders have an option to put the
derivatives back to Galena in certain events, as defined.
The
liability represents managements best estimate of the Companys allocable share of Galenas warrants
issued as part of equity financings had the Company been a stand-alone
entity at the time. These warrants are
exercisable only for Galena common stock and are not exercisable for
RXi stock.
Upon the closing of the planned spin-off, the liability will
be a liability of Galena only, and will not be an obligation of the
Company.
Results of Operations for the Nine Months Ended September 30, 2011 and 2010
For the nine months
ended September 30, 2011, our net loss was approximately $8,643,000 compared
with a net loss of $10,162,000 for the nine months ended September 30, 2010. Reasons for the variations in
the losses between the two periods are discussed below.
Results of Operations for the Years Ended December 31, 2010 and 2009
For the year ended December 31, 2010, our net loss was approximately $11,993,000, compared
with a net loss of $18,387,000 for the year ended December 31, 2009. Reasons for the variations in
the losses between the years are discussed below.
Revenues
Since we are a development-stage biopharmaceutical company, we have not generated any revenues
since inception.
Research and Development Expense (in thousands)
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For the Nine Months |
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Ended September 30, |
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2011 |
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2010 |
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Research and development expense |
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$ |
4,652 |
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$ |
4,589 |
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Research and development employee stock-based compensation expense |
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471 |
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814 |
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Research and development non-employee stock-based compensation expense |
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(49 |
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723 |
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Total research and development expense |
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$ |
5,074 |
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$ |
6,126 |
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For the Years Ended |
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December 31, |
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2010 |
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2009 |
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Research and development expense |
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$ |
6,046 |
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$ |
6,728 |
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Research and development employee stock-based compensation expense |
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1,084 |
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867 |
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Research and development non-employee stock-based compensation expense |
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743 |
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1,297 |
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Total research and development expense |
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$ |
7,873 |
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$ |
8,892 |
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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 to continue to devote a substantial portion of
our resources to research and development programs. We expect research and development expenses to
increase as we expand our research and development activities.
39
RXi PHARMACEUTICALS CORPORATION
(A Development Stage Company)
NOTES
TO FINANCIAL STATEMENTS
(Information as of September 30, 2011 and for the
nine months ended September 30, 2011 and 2010 is
unaudited)
Derivative Financial Instruments During the normal course of business, from time
to time, Galena 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 FASB ASC Topic 815-40, Derivatives and Hedging Contracts in Entitys
Own Stock, the value of these derivatives is required to be recorded as a liability, as
the holders have an option to put the derivatives back to the Company
for cash upon the occurrence of
certain events set forth in the agreement.
The
liability represents managements best estimate of the Companys allocable share of Galenas warrants
issued as part of equity financings had the Company been a stand-alone
entity at the time. These warrants are
exercisable only for Galena common stock and are not exercisable for
RXi stock. Upon the closing of the planned spin-off, the liability will be
a liability of Galena only and will not be an obligation of the
Company.
Obligations to Repurchase Shares of Galenas Equity Securities In accordance with
FASB ASC Topic 480-10, Distinguishing Liabilities from
Equity, the Company recognizes
all obligations to repurchase shares of Galenas equity securities allocated to the
Company that require or may require settlement of 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.
Deferred Revenue Deferred revenue consists of advance payments received under government
grants. The Company will recognize revenue when the obligations under the grants are fulfilled.
Research and Development Expenses Research and development costs are expensed as
incurred. Included in research and development costs are wages, benefits and other
operating costs, facilities, supplies, external services and overhead directly related to
the Companys research and development departments, as well as costs to acquire technology
licenses.
Income Taxes The Company recognizes liabilities or assets for the deferred
tax consequences of temporary differences between the tax basis of assets or liabilities
and their reported amounts in the financial statements in accordance with FASB ASC 740-10,
Accounting for Income Taxes (ASC 740-10). These temporary differences will result in
taxable or deductible amounts in future years when the reported amounts of the assets or
liabilities are recovered or settled. ASC 740-10 requires that a valuation allowance be
established when management determines that it is more likely than not that all or a
portion of a deferred asset will not be realized. RXi evaluates the realizability of its
net deferred income tax assets and valuation allowances as necessary, at least on an
annual basis. During this evaluation, the Company reviews its forecasts of income in
conjunction with other positive and negative evidence surrounding the realizability of its
deferred income tax assets to determine if a valuation allowance is required. Adjustments
to the valuation allowance will increase or decrease the Companys income tax provision or
benefit. The recognition and measurement of benefits related to the Companys tax
positions requires significant judgment, as uncertainties often exist with respect to new
laws, new interpretations of existing laws, and rulings by taxing authorities. Differences
between actual results and RXis assumptions or changes in the Companys assumptions in
future periods are recorded in the period they become known.
For the periods presented, RXi was not a separate taxable entity for federal, state,
and local income tax purposes and its operating results were included in Galenas tax
returns. RXi calculated its income taxes under the separate return method and accounted
for deferred tax assets and liabilities under the asset and liability method described
above.
F - 11
RXi PHARMACEUTICALS CORPORATION
(A Development Stage Company)
NOTES
TO FINANCIAL STATEMENTS
(Information as of September 30, 2011 and for the
nine months ended September 30, 2011 and 2010 is
unaudited)
All options granted pursuant to the SAB
Agreements are fully vested on the date of grant and have a term of ten years. The fair
value of stock options granted during 2010 and 2009 under the SAB Agreement for each
founder is approximately $142,000 and $245,000 which was estimated using the Black-Scholes
option-pricing model as more fully discussed above under significant accounting policies
and the stock based compensation footnote. Included in the Companys financial statements
for the years ended December 31, 2010 and 2009 is approximately $566,000 and $978,000,
respectively, of expense related to the granting of these stock options. Included in the Companys
financial statements for
the nine months ended September 30, 2010 is approximately $566,000, of expense related to the granting of these stock options.
No options under the SAB agreements were issued during the nine months
ended September 30, 2011.
Additionally, pursuant to a letter agreement between Galena and each founder dated as
of April 30, 2007, the SAB Letters, in further consideration of the services to be
rendered by the founders under the SAB Agreements, Galena granted additional stock options
on May 23, 2007 under the 2007 Plan to each of the founders to purchase 26,416 shares of
its common stock. Unless a founder terminates a SAB Agreement without good reason (as
defined) or the Company terminates a SAB Agreement with cause (as defined therein), the
options granted pursuant to the SAB Letters will fully vest from and after April 29, 2012
and will have a term of ten years from the date of grant. At September 30, 2011 and December
31, 2010, the fair market value
of stock options under the SAB Agreement for each founder is
approximately $52,400
and $20,500, respectively, which was estimated using the Black-Scholes option-pricing
model as more fully discussed above under the summary of significant accounting policies
and the stock based compensation footnote. Included in the Companys financial statements
for the nine months ended September 30, 2011 and the years ended December 31, 2010 and 2009 is
approximately $125,000 and $38,000 of income and $73,000, of expense, respectively,
related to these stock options.
12. Subsequent Events
In accordance with ASC 855-10, Subsequent Events, management has evaluated subsequent
events through to the date these financial statements are filed. The Company did not have any material recognizable or unrecognizable
subsequent events, except the following:
On December 6, 2011, Galena entered into separate exchange agreements with several institutional
holders of outstanding warrants to purchase shares of Galena common stock at an exercise price of $0.65 per share.
The warrants were originally issued by Galena in its underwritten offering completed in April 2011. In the exchange agreements,
the warrant holders collectively have agreed to surrender to Galena for cancellation, warrants to purchase an aggregate of 5,930,00
shares of Galena common stock in exchange for an aggregate of 4,151,000 shares of Galena common stock. The closing of the exchange occurred on December 6, 2011. The exchange is expected to result in the elimination of approximately $2.5 million of fair value of derivatives potentially settleable in
cash reflected on our balance sheet as of September 30, 2011.
All of the remaining outstanding warrants are exercisable
only for Galena common stock, and are not exercisable for
the Company common stock. Upon the
closing of the planned spin-off, the liability will be a liability of
Galena only and will not be an obligation of
the Company.
F - 30