REGENERX BIOPHARMACEUTICALS INC - Quarter Report: 2007 June (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

Quarterly Report Under Section 13 or 15(d)

of the Securities Exchange Act of 1934

REGENERX BIOPHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

3 Bethesda Metro Center

Suite 630

Bethesda, Maryland 20814

(Address of principal executive offices)

Issuer’s telephone number, including area code: (301) 280-1992

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the 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  x    No  ¨

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

Large accelerated filer  ¨    Accelerated filer  ¨    Non-accelerated filer  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

46,553,527 shares of RegeneRx Biopharmaceuticals, Inc. Common Stock, par value $.001 per share, were outstanding as of June 30, 2007.

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RegeneRx Biopharmaceuticals, Inc.

Form 10-Q

Quarterly Period Ended June 30, 2007

INDEX

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PART I – FINANCIAL INFORMATION

RegeneRx Biopharmaceuticals, Inc.

Balance Sheets

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

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RegeneRx Biopharmaceuticals, Inc.

Statements of Operations

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

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RegeneRx Biopharmaceuticals, Inc.

Statements of Cash Flows

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

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RegeneRx Biopharmaceuticals, Inc.

Notes to Financial Statements

For the six-months ended June 30, 2007 and 2006 (Unaudited)

RegeneRx Biopharmaceuticals, Inc. (the “Company”, “We”, “Us”, “Our” or “RegeneRx”), is a biopharmaceutical company focused on the discovery and development of novel molecules to accelerate tissue and organ repair. Currently, we are developing Thymosin beta 4 (“Tß4^”), a 43 amino acid peptide as the basis for our technology platform. Current research suggests that Tß4 may prove efficacious for multiple medical indications; therefore, we are developing several Tß4-based therapeutic drug candidates. We hold nearly sixty world-wide patents and patent applications related to dermal, ophthalmic, and internal wounds and tissue repair, cardiac and neurological injuries, and septic shock. We are currently sponsoring, in parallel, three Phase II dermal wound healing clinical trials. Under our Phase II Investigational New Drug Application (“IND”), Sigma-Tau, one of our major shareholders, is conducting a Phase II clinical trial in the EU and has assumed all associated costs. Additionally, we have recently been cleared by the U.S. Food and Drug Administration (“FDA”) to initiate two additional clinical trials, a Phase II ophthalmic trial and a Phase IA trial utilizing an intravenous route of administration as part of our cardiovascular clinical program.

The accompanying unaudited financial statements reflect, in the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of our financial position, results of operations and cash flows for each period presented. These statements have been prepared in accordance with generally accepted accounting principles in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These interim financial statements should be read in conjunction with the audited financial statements and related notes thereto, which are included in our Annual Report on Form 10-K for the year ended December 31, 2006. Similarly, this entire report should be read in conjunction with our Annual Report on Form 10-K for a broader understanding of our business and inherent risks.

The accompanying December 31, 2006 financial information was derived from audited financial statements. Operating results for the three and six-month periods ended June 30, 2007 are not necessarily indicative of the results to be expected for the year ending December 31, 2007 or any other future period.

Net loss per share is based on the weighted average number of common shares outstanding during the three and six months periods ended June 30, 2007 and June 30, 2006. During these periods, certain securities were not included in the calculation as their effect would be anti-dilutive. Securities that could potentially dilute basic net loss per share in the future, and that were not included in the calculation of diluted net loss per share, are as follows:

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On January 1, 2006 we adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (or “FAS 123R”), which supersedes our previous accounting under APB Opinion No. 25, “Accounting for Stock Issued to Employees” (or “APB 25”). FAS 123R requires the recognition of compensation expense, using a fair-value based method, for cost related to all share-based payments including stock options. FAS 123R requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense on a straight-line basis over the requisite service periods in our Statements of Operations. We adopted FAS 123R using the modified prospective transition method, which requires that compensation expense be recognized in the financial statements for all awards granted after the date of adoption as well as for existing awards for which the requisite service has not been rendered as of the date of adoption. The modified prospective transition method does not require restatement of prior periods to reflect the impact of FAS 123R.

A summary of compensation expense related to stock options follows:

At June 30, 2007 total compensation cost related to non-vested stock options not yet recognized was approximately $2,532,324, which is expected to be recognized over the next 3.0 years, on a weighted average basis.

Valuation assumptions

The fair value for each option granted was estimated as the date of grant using the Black-Scholes option-pricing model, assuming no expected dividends. The risk free rate of return was established for each award, based on the date of grant and the expected life of the award. Since our historical data is limited, the expected life was determined in accordance with SAB 107 guidance for “plain vanilla” options. The volatility was determined, based on the historical, closing price of the Company’s publicly-traded stock, as measured for a time period consistent with the expected life of the option. Approximate values of these assumptions follow:

Stock Option Activity

The following is a summary of option activity for the six months ended June 30, 2007:

Based on the assumptions in the Black-Scholes valuation model discussed above, the estimated fair value of shares vested during the first two quarters of 2007 and 2006 was $634,372 and $485,983, respectively. No options were granted during the first two quarters of 2006 and the weighted average estimated fair value of stock options granted during the first two quarter of 2007 was $1.39.

The following table summarizes outstanding and exercisable options at June 30, 2007:

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Our other comprehensive income or loss is comprised solely of unrealized gains and losses on our portfolio of available-for-sale, marketable securities. Annually, we present other comprehensive income or loss in our Statement of Stockholders Equity and in a footnote during interim periods. For the six month period ended June 30, 2007, we recognized an unrealized loss of ($3,608), which reduced our accumulated other comprehensive loss from $0 at December 31, 2006 to ($3,608) at June 30, 2007. We recognized other comprehensive income of $2,663 in the corresponding interim period in 2006.

Exercise of Warrants

During the six months ended June 30, 2007, we received $45,706 for the exercise of warrants associated with 457,050 shares of our common stock.

In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement 109” (“FIN 48”). This statement clarifies the criteria that an individual tax position must satisfy for some or all of the benefits of that position to be recognized in a company’s financial statements. FIN 48 prescribes a recognition threshold of more-likely–than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the financial statements. Effective January 1, 2007, we adopted the provisions of FIN 48, after determining that there was no material effect on our financial statements.

In September 2006, and February 2007 the FASB issued FASB Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“FAS 157”), and Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“FAS 159”), respectively. Both standards prescribe changes to fair value measurements of certain assets and liabilities and are effective for fiscal years beginning after November 15, 2007. We are currently evaluating the effect, if any, the adoption of these standards will have on our financial statements.

In June 2007, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF Issue No. 07-03, “Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities.” EITF 07-03 concludes that non-refundable advance payments for future research and development activities should be deferred and capitalized until the goods have been delivered or the related services have been performed. If and when an entity no longer expects to receive the goods or services contracted, any remaining capitalized, nonrefundable, advance payments should then be charged to expense. This consensus is effective for fiscal years beginning after December 15, 2007. Currently we expense nonrefundable advance payments when paid and are evaluating the impact EITF 07-03 may have on our financial statements. If on the date of adoption, January 1, 2008, we determine that there are qualifying transactions requiring capitalization in accordance with EITF 07-03, we will adopt the provisions of this statement through a cumulative-effect adjustment to retained earnings on that date.

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This report contains forward-looking statements concerning matters that involve risks and uncertainties. Statements made in this Item that are not purely historical, including statements about us, our respective clinical trials, research programs, product pipelines, current and potential corporate partnerships, licenses and intellectual property, the adequacy of capital reserves and anticipated operating results and cash expenditures, are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended and Section 27A of the Securities Act of 1933, as amended. Words such as “believes,” “likely,” “may,” and “plans” are intended to identify forward–looking statements, although not all forward-looking statements contain these words. These forward-looking statements concern matters that involve risks and uncertainties that could cause actual results to differ materially from those projected, including risks associated with the success of research and product development programs, the issuance and validity of patents, the development and protection of proprietary technologies, the ability to raise capital, operating expense levels and the ability to establish and retain corporate partnerships, our history of operating losses and the risks set forth under Part II, Item 1A., “Risk Factors.” We do not undertake any obligation to update forward-looking statements. The following should be read in conjunction with our financial statements included in Item 1, and the financial statements in our Annual Report on Form 10-K for the year ended December 31, 2006 and in other documents filed by us from time to time with the Securities and Exchange Commission.

Overview

RegeneRx Biopharmaceuticals, Inc. (the “Company”, “We”, “Us”, “Our” or “RegeneRx”), is a biopharmaceutical company focused on the discovery and development of novel molecules to accelerate tissue and organ repair. Currently, we are developing Thymosin beta 4 (“Tß4^”), a 43 amino acid peptide as the basis for our technology platform. Current research suggests that Tß4 may prove efficacious for multiple medical indications; therefore, we are developing several Tß4-based therapeutic drug candidates. We hold nearly sixty world-wide patents and patent applications related to dermal, ophthalmic, and internal wounds and tissue repair, cardiac and neurological injuries, and septic shock. We are currently sponsoring, in parallel, three Phase II dermal wound healing clinical trials. Under our Phase II Investigational New Drug Application (“IND”), Sigma-Tau, one of our major shareholders, is conducting a Phase II clinical trial in the EU and has assumed all associated costs. Additionally, we have recently been cleared by the U.S. Food and Drug Administration (“FDA”) to initiate two additional clinical trials, a Phase II ophthalmic trial and a Phase IA trial utilizing an intravenous (“i.v.”) route of administration as part of our cardiovascular clinical program.

The following are our targeted enrollment timelines for our various clinical trials:

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In the pressure ulcer and venous stasis ulcer trials, patients are treated up to 84 days, or shorter if their ulcers heal; and up to 56 days in the EB trial, or shorter if their lesions heal. In the ophthalmic trial, patients are treated up to 14 days; and in the Phase 1A trial healthy volunteers are given an i.v. dose and evaluated for 24 hours. In all five trials statistical analyses and final reports follow shortly thereafter.

We have incurred significant losses since our inception. As of June 30, 2007, our accumulated deficit was $61.8 million. We have incurred net losses due to expenditures for research and development, clinical trials, contract manufacturing, and general and administrative services in support of our operations. We anticipate incurring net losses over at least the next several years as we continue our clinical trials, apply for regulatory approvals, develop our technology, and expand our operations to support the commercialization or out-licensing of our drug candidates.

We also anticipate incurring additional losses for several years as we expand our drug discovery and development programs. We expect that losses will fluctuate from quarter to quarter and that such fluctuations may be substantial. We do not expect to generate revenues from our drug discovery and development efforts for several years, if at all. If we are unable to successfully develop and market pharmaceutical products over the next several years, our business, financial condition and results of operations would be adversely impacted.

In July 2005, the first European patent related to Tß4 wound healing technology, licensed from the National Institutes of Health in Bethesda, Maryland, was granted. The original patent application, filed in 1999, claims numerous compositions, uses and processes related to Tß4. The grant of the European Patent is being opposed by a third party in a proceeding at the European Patent Office, and we cannot guarantee that any or all of the granted claims will prevail. Similar patent applications have been submitted in other territories throughout the world, including the U.S. and Asia. We have independently filed over sixty world-wide patent applications related to our technology platform.

We utilize an out-sourcing business strategy that we believe is cost effective and allows us the flexibility to implement or modify projects as needed. This strategy employs contract research and development organizations (“CROs”), which have established workforces and facilities to manufacture and formulate our products, as well as conduct clinical trials and perform other product development activities. It also allows us to spend significantly less capital for infrastructure and other fixed costs, all of which we believe maximize shareholder value. We will, therefore, continue to operate our out-sourcing strategy in the near term.

Critical Accounting Policies

Share-based payment – Effective January 1, 2006, we adopted the fair value recognition provisions of FASB Statement No. 123R, using the modified prospective transition method, and therefore have not restated results for prior periods. Under this method we recognize compensation expense for all share-based payments granted to employees after January 1, 2006 and prior to but not yet vested as of January 1, 2006, in accordance with Statement No. 123R. Under the fair value recognition provisions of Statement No. 123R, we recognize stock-based compensation net of an estimated forfeiture rate and only recognize compensation cost for those shares expected to vest on a straight-line basis over the requisite service period of the award.

Determining the appropriate fair value model and calculating the fair value of share-based payment awards require the input of highly subjective assumptions, including the expected life of the share-based payment awards and stock price volatility. Since our historical data is limited, the expected life was determined in

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accordance with SAB 107 guidance for “plain vanilla” options. Since our historical trading volume is relatively low, we estimated the expected volatility based on monthly closing prices for a period consistent with the expected life of the option. The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. If our actual forfeiture rate is materially different from our estimate, the stock-based compensation expense could be significantly different from what we have recorded in the current period. See Note C to the Financial Statements for a further discussion on stock-based compensation.

Clinical trial costs – We accrue estimated costs for clinical studies conducted by contract research organizations and participating hospitals. These costs are a significant component of research and development expenses. We accrue/defer costs for clinical studies performed by contract research organizations based on estimates of work performed under the contracts. Costs of setting up hospital sites for participation in trials are accrued immediately. Hospital costs related to patient enrollment are accrued as patients are entered in the trial. Refundable, contractual deposits for clinical development services are deferred and recognized when the contracted services are performed.

Results of operations for the three and six months ended June 30, 2007 and 2006

Research and development expenses

For the six months ended June 30, 2007 compared to the corresponding period in 2006, research and development (“R&D”) expenses increased approximately $614,000 or 16% to $4.36 million. While in general this increase is due to our expanding clinical research efforts there are some significant differences on a quarterly basis. For the three month period ended June 30, 2007 compared to the corresponding period in 2006, research and development expenses decreased by approximately $0.93 million or 33%. The main reason for these quarterly variances is the timing of our purchases of Tß4. While on a year-to-date basis we purchased approximately $650,000 less Tß4 in 2007 compared to 2006, we purchased approximately $1.55 million of Tß4 in the second quarter of 2006 and approximately $0.90 million in the first quarter of 2007. At present we estimate another purchase of Tß4 of approximately $0.90 million during the fourth quarter of 2007. While the underlying clinical research activities vary from quarter to quarter, bulk purchases of Tß4 is by far the most significant variable that causes fluctuations in our average spending pattern. Off setting these reduced expenditures for Tß4 are increased costs for personnel and our expanding clinical research as previously noted. During the first quarter of 2007 we hired two additional employees who are wholly dedicated to clinical research bringing our clinical development employees to a total of eight. The associated increase in base salaries and incentives, annual merit increases for our other clinical employees, along with additional stock option grants has increased our personnel costs by approximately $0.19 million (6.7% of total R&D expenses) and $0.34 million (9.0% of total R&D expenses) for the three and six-month period ended June 30, 2007 compared to the same period in 2006, respectively. For the three and six-month periods ended June 30, 2007, compared to the same periods in 2006 our costs for our expanding clinical research have increased by approximately $0.42 million (15% of total R&D expenses) and $0.90 million (24% of total R&D expenses), respectively. In May of 2007 the Federal Food and Drug Administration cleared us to open a Phase II ophthalmic trial and a Phase IA myocardial trial. The preparation for and the opening of these trials, along with the continued patient enrollment, and expanding breadth of our operable clinical sites for our two US-based Phase II dermal studies are the reasons we have experienced additional costs for our expanding clinical research program as compared to prior periods. Research and development is comprised of all internal and external costs to

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support our clinical programs, including: drug manufacture, formulation, and stability; fees to clinical trial sites; and, other outside services such as clinical program management.

General and administrative expenses

General and administrative expenses increased by $0.32 million (25%) for a total $1. 59 million for the six months ended June 30, 2007, as compared to the corresponding period in 2006. Approximately $0.20 million of this increase was due to an increase in legal and patent filing costs. Approximately $0.06 million (4%) was due to an increase in non-cash stock compensation expenses as a result of additional stock option grants. For the three months ended June 30, 2007 as compared to the corresponding period in 2006, general and administrative expenses increased $0.07 million (9%), most of which was also due to the increase in non-cash stock compensation expenses and other personnel costs. General and Administrative expenses are comprised of the direct and indirect expenses of our Board and executive management team, office facilities, attorneys, outsourced service providers such as accountants, attorneys, investor relations, information systems support, and our registered independent public accounting firm.

Interest income

Interest income was $0.17 million and $0.39 million for the three and six-month periods ended June 30, 2007 respectively, compared to $0.15 million and $0.25 million for the respective corresponding periods in 2006. These increases in interest income are due to an increase in the average amount invested in each period and a year-over-year improvement in average investment returns.

Liquidity and capital resources

Sources of liquidity

Since inception we have financed our operations through the sale of equity securities. At June 30, 2007, we had $11.97 million in cash, cash equivalents and short-term investments.

Cash used in operating activities for the six months ended June 30, 2007 was $5.11 million as compared with $3.28 million in 2006, an increase of $1.83 million. This increased use of cash is greater than the corresponding increase in the net operating loss reported due to differences in accrued liabilities and other balance sheet items between periods.

Cash used in investing activities for the six months ended June 30, 2007 was $4.45 million compared with $2.34 million in 2006. Subsequent to our new equity investment in December of 2006 and during the first half of 2007, we invested a substantial portion of those net proceeds in securities with maturities greater than 90 days from the date of purchase, or qualifying short-term investments.

Cash provided by financing activities for the six months ended June 30, 2007 was $0.05 million compared to $6.95 million provided in the first half of 2006. In 2006 we sold approximately 2.6 million shares of common stock. In the first half of 2007 we only exercised warrants as described in Note E to the Financial Statements.

Although no assurance can be given, we believe that our current cash and investment balances will be sufficient to meet our operating needs for the activities we currently have underway into the second quarter of 2008. However, those activities will not be sufficient to bring our drug candidates to market and we therefore believe new capital resources will be required, in the coming months, to continue our independent

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development efforts. Accordingly, we may entertain the possibility of raising additional capital to preserve our liquidity, depending on a number of conditions, including conditions in the capital markets. We regularly consider the conditions of capital markets, dilution, stockholder value and tax consequences of each type of financing on stockholders. Certain of the financing options available to us may have negative consequences to stockholders such as dilution. Given the volatile nature of the capital markets, decisions to raise capital may require actions that would impose a negative consequence in order to reduce or minimize a more significant negative consequence to stockholders.

Contractual obligations

Our contractual obligations as of June 30, 2007 consist of an office facility lease and obligations to purchase Tß4, as follows:

We also have $4,709,000 in other contractual obligations due within one year and related to our research and development efforts. These obligations, however, are contingent on future events, e.g. the rate of patient accrual in our clinical trials. This amount represents the remaining contractual amounts due under various contracts, although all of these contracts could be cancelled by us, in which case we would only be liable to the vendors for work performed to the date of cancellation.

Off Balance Sheet Arrangements

We have no material off-balance sheet arrangements other than those that are discussed above.

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Our investments in marketable securities, which are composed primarily of investment-grade corporate bonds, U.S. government agency debt securities and mortgage and asset-backed securities, are subject to default, changes in credit rating and changes in market value. These investments are also subject to interest rate risk and will decrease in value if market interest rates increase. As of June 30, 2007, cash, cash equivalents and short-term investments were $11.97 million. Due to the nature of these investments, if market interest rates were to increase immediately and uniformly by 10% from levels as of June 30, 2007, the decline in fair value would not be material.

As of the end of the period covered by this report, based on an evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) each of the chief executive and chief financial officers of the Company has concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in its Exchange Act reports is recorded, processed, summarized and reported within the applicable time periods specified by the SEC’s rules and forms.

There were no significant changes in our internal controls or in any other factors that could significantly affect those controls subsequent to the date of the most recent evaluation of our internal controls, including any corrective actions with regard to any significant deficiencies or material weaknesses.

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PART II – OTHER INFORMATION

None

There were no material changes to the Risk Factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

None

None

(a) The Company’s annual meeting of stockholders was held on June 7, 2007.

(b) At the annual meeting of stockholders, all of the Company’s directors were elected at said meeting as follows:

As all of the directors of the Company were elected at the annual meeting of stockholders, there are no directors whose term of office as a director continued after the meeting.

(c) The following other matters were voted upon at the meeting, and the following number of affirmative votes and negative votes were cast with respect to each such matter:

The reappointment by the Company’s Board of Directors of the firm of Reznick Group, P.C. as independent certified public accountants to examine the financial statements and perform the annual audit of the Company for the year ending December 31, 2007 was ratified. This matter received 43,520,969 affirmative votes, 17,585 negative votes, 54,058 votes abstained and 0 non-vote.

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None.

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SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

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