REGENERX BIOPHARMACEUTICALS INC - Quarter Report: 2007 March (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

For the quarterly period ended March 31, 2007

Commission file number 0-15070

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 March 31, 2007.

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RegeneRx Biopharmaceuticals, Inc.

Form 10-Q

Quarterly Period Ended March 31, 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 three-months ended March 31, 2007 and 2006 (Unaudited)

A. ORGANIZATION & BASIS OF PRESENTATION

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 that are targeted for full enrollment during 2007. Under our Phase II Investigational New Drug Application (“IND”), Sigma-Tau, one of our major shareholders,) is conducting one of these Phase II clinical trials 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, an ophthalmic (Phase II) and a cardiac (Phase IA).

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 our audited financial statements. Operating results for the three-month periods ended March 31, 2007 are not necessarily indicative of the results to be expected for the year ending December 31, 2007 or any other future period.

B. NET LOSS PER SHARE

Net loss per share is based on the weighted average number of common shares outstanding during the three-month periods ended March 31, 2007 and 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:

C. STOCK BASED COMPENSATION

On January 1, 2006 we adopted Statement of Financial Accounting Standards No. 123 (revised 2004),

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“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 March 31, 2007 total compensation cost related to non-vested stock options not yet recognized was approximately $2,771,000, which is expected to be recognized over the next 1.6 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 first quarter of 2007:

Based on the assumptions in the Black-Scholes valuation model discussed above, the estimated fair value of shares vested during the first quarters of 2007 and 2006 was $113,216 and $10,875, respectively. No options were granted during the first quarter of 2006 and the weighted average estimated fair value of stock options granted during the first quarter of 2007 was $1.79.

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The following table summarizes outstanding and exercisable options at March 31, 2007:

D. OTHER COMPREHENSIVE INCOME

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 three month period ended March 31, 2007 we recognized an unrealized loss of ($4,153), which reduced our accumulated other comprehensive loss from $0 at December 31, 2006 to ($4,153) at March 31, 2007. We recognized other comprehensive income of $1,738 in the corresponding interim period in 2006.

E. EQUITY TRANSACTIONS

Exercise of Warrants

During the three months ended March 31, 2007, we received $45,706 for the exercise of warrants associated with 457,050 shares of our common stock.

F. EFFECT OF NEW ACCOUNTING STANDARDS

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, the Company has adopted the provisions of FIN 48 and there was no material effect on the financial statements. As a result, there was no cumulative effect related to adopting FIN 48.

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. The Company is currently evaluating the effect, if any, the adoption of these standards will have on its financial statements.

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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 that are targeted for full enrollment during 2007. Under our Phase II Investigational New Drug Application (“IND”), Sigma-Tau, one of our major, is conducting one of these Phase II clinical trials 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, an ophthalmic (Phase II) and a cardiac (Phase IA).

We have incurred significant losses since our inception. As of March 31, 2007, our accumulated deficit was $59.2 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.

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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. 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 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 CROs and participating

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

Results of operations for the three months ended March 31, 2007 and 2006

Research and development expenses

Research and development expenses were $2.43 million for the three months ended March 31, 2007, compared to $0.89 million for the corresponding period in 2006. The $1.54 million increase was primarily due to bulk production of Tß4, $0.90 million, $0.44 million in drug formulation expenses primarily related to clinical material processed for our recently commenced ophthalmic and cardiac clinical trails and $0.20 million for additional staff and other miscellaneous costs. Prospectively, we will likely not procure bulk Tß4 again until the fourth quarter. And while drug formulation costs may lessen, clinical trial management may increase due to the commencement of our ophthalmic and cardiac programs. Research and development is comprised of all internal and external costs to progress our clinical programs, including: drug manufacture, formulation, and stability; trial sites; and, other outside services such as clinical program management.

General and administrative expenses

General and administrative expenses were $0.78 million for the three months ended March 31, 2007, compared to $0.53 million for the corresponding period in 2006. The $0.25 million increase was primarily due to additional legal expenses of $0.17 million, about half of which was for maintenance of our expanding intellectual property portfolio, and half for the one-time filing of a registration statement in the first quarter of 2007, related to securities sold in a private placement on December 21, 2006. The remaining $0.08 million was attributable to additional non-cash stock compensation expense of $0.30 million and other cost increases of $0.50 million (approximately 10%). General and Administrative expenses are comprised of the direct and indirect expenses of our Board and executive management team, office facilities, attorneys, outsourced accountants and our registered independent public accounting firm.

Interest income

Interest income was $0.21 million for the three months ended March 31, 2007, compared to $0.10 million for the corresponding period in 2006. The increase in interest income was due to an increase in the average amount invested, which resulted from the December 2006 equity financing, and the overall market improvement in investment returns.

Liquidity and capital resources

Sources of liquidity

Since inception we have financed our operations through the sale of equity securities. At March 31, 2007 we had $14.46 million in cash, cash equivalents and short-term investments.

Cash used in operating activities for the three months ended March 31, 2007 was $2.63 million compared with $1.11 million in 2006, an increase of $1.52 million, in-line with the increased expenses incurred in the first quarter of 2007 as compared to 2006, discussed previously.

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Cash used in investing activities for the three months ended March 31, 2007 was $8.91 million compared with $0.82 million in 2006. Subsequent to our new equity investment in December of 2006 and during the first quarter 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 three months ended March 31, 2007 was $0.05 million compared to $6.85 million provided in the first quarter of 2006. In 2006 we sold approximately 2.6 million shares of common stock. In the first quarter of 2007 we did not sell stock, but 457,050 warrants for shares of our common stock were exercised.

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 through 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 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 March 31, 2007 consist of an office facility lease and obligations to purchase Tß4, as follows:

We also have $1,660,000 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 March 31, 2007, cash, cash equivalents and short-term investments were $14.5 million. Due to the nature of these investments, if market interest rates were to increase immediately and uniformly by 10% from levels as of March 31, 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 the our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) both of chief executive and chief financial officers of the Company have 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

None

On April 12, 2007, the Company entered into a new employment agreement with Neil Lyons, the Company’s Chief Financial Officer. Mr. Lyons’ employment agreement provides for an annual base salary of one hundred and ninety six thousand, six hundred and thirty eight dollars ($196,638) and has an initial term of one year, which is automatically extended for successive one-year terms unless the Company or Mr. Lyons elects not to extend the agreement. Pursuant to this employment agreement, Mr. Lyons is entitled to participate in and receive all standard employee benefits and to participate in all of the Company’s applicable incentive plans, including stock option, stock, bonus, savings and retirement plans. At any time during the term of Mr. Lyons’ employment agreement, the Board may terminate his employment with or without cause. If Mr. Lyons’ employment is terminated without cause (as defined in the employment agreement, attached hereto as Exhibit 10.9), then the Company is obligated to pay him a lump sum payment in an amount equal to 50% of his then annual base salary (less federal and state tax withholding) as severance. If he is terminated “for cause,” then Mr. Lyons is not entitled to receive any payment under his employment agreement beyond the date of his termination.

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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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