3. RXi Pharmaceuticals Corporation
Contribution Agreement
On September 24, 2011, we entered into a contribution agreement with RXi pursuant to which we
assigned and contributed to RXi substantially all of our RNAi-related technologies and assets. The
contributed assets consist primarily of our novel RNAi compounds and licenses relating to our RNAi
technologies, as well as the lease of our Worcester, Massachusetts laboratory facility, fixed
assets and other equipment located at the facility and our employment arrangements with certain
scientific, corporate and administrative personnel who have become employees of RXi. We also
have contributed $1.5 million of cash to the capital of RXi.
Pursuant to the contribution agreement, RXi has agreed to assume certain recent accrued
expenses of our RXi-109 development program and all future obligations under the contributed
licenses, employment arrangements and other agreements. RXi has also agreed to make future
milestone payments to us of up to $45 million, consisting of two one-time payments of $15 million
and $30 million, respectively, if RXi achieves annual net sales equal to or greater than $500
million and $1 billion, respectively, of any covered products that may be developed with the
contributed RNAi technologies.
In the contribution agreement, we have made customary representations and warranties to RXi
regarding the contributed assets and other matters, and the parties have agreed to customary
covenants regarding the conduct of RXi’s business pending the spin-off of RXi. The parties
also have agreed to indemnify each other against losses arising from a breach of their respective
representations, warranties and covenants set forth in the contribution agreement.
Securities Purchase Agreement
On September 24, 2011, we also entered into a securities purchase agreement with RXi and two
institutional investors (the “investors”), pursuant to which the investors agreed to purchase a
total of $9,500,000 of Series A Preferred Stock of RXi (“RXi Preferred Stock”) at the closing of
the spin-off of RXi, and to lend up to $1,500,000 to RXi to fund its operations between signing and
closing (the “Bridge Loan”). The outstanding principal and accrued interest from the Bridge Loan
will, except under certain circumstances described below, be converted into RXi Preferred Stock at
the closing of the spin-off of RXi and will represent a portion of the $9,500,000 total investment,
which is referred to herein as the “RXi financing.” The RXi financing and the spin-off of
RXi are subject to customary closing conditions, including the registration under the Securities
Act of 1933, as amended (the “Securities Act”), of the distribution by us of the spin-off shares.
There is no assurance that the RXi financing and the spin-off of RXi will be completed.
The RXi Preferred Stock will be convertible by a holder at any time into shares of RXi common
stock, except to the extent that the holder would own more than 9.999% of the shares of RXi common
stock outstanding immediately after giving effect to such conversion. Without regard to this
conversion limitation, the shares of the Preferred Stock to be held by the investors upon
completion of the RXi financing and the spin-off of RXi will be convertible into shares of RXi
common stock representing approximately 83% of the shares of RXi common stock that would be
outstanding, assuming the conversion in full of the Preferred Stock, which we refer to as the
“as-converted common stock.” We will own approximately 12% of the as-converted common stock
immediately prior to the
spin-off of RXi, and Advirna, LLC, a key licensor of RXi, will be issued the remaining 5% of
the as-converted common stock pursuant to the agreement with Advirna, LLC as described below.
Spin-Off
We have agreed in the securities purchase agreement to undertake to distribute to our
stockholders on a share-for-share basis approximately 8% of the
as-converted common stock of RXi, subject
to the registration of the distribution of such shares under the
Securities Act of 1933, as amended (the “Securities Act”) and other
conditions. Assuming the spin-off of RXi is completed, we will initially retain 4% of the
as-converted common stock, and we have agreed, in the securities purchase agreement, not to sell or
dispose of our shares of RXi common stock for a one-year period following completion of the
spin-off of RXi. The securities purchase agreement provides that the spin-off will be on a
share-for-share basis, so that one share of RXi will be distributed as a dividend on each share of
Galena that is issued and outstanding as of a record date to be determined prior to the spin-off.
Accordingly, the capitalization of RXi has not yet been established and the actual number of
spin-off shares, as well as the actual shares of common stock of RXi to be outstanding upon
completion of the spin-off of RXi, are not yet known and will be determined at a subsequent
time closer to the completion of the spin-off.
Purchase Agreement Terms and Conditions
In the securities purchase agreement, the parties have made customary representations and
warranties to the other parties and have agreed to customary covenants regarding the parties’
actions in connection with the spin-off of RXi and other matters, including
the filing of a
resale registration statement registering a portion of the common stock underlying the conversion
of the Preferred Stock. The parties also have agreed to indemnify each other against losses arising
from a breach of their respective representations, warranties and covenants set forth in the
securities purchase agreement. RXi has agreed, upon completion of the spin-off of RXi, to
reimburse Galena and the investors for up to a total of $250,000 and $100,000, respectively, of
transaction costs relating to the contribution agreement, the securities purchase agreement and the
transactions contemplated by the agreements.
The securities purchase agreement may be terminated in certain circumstances, including by the
investors or us if the spin-off of RXi has not occurred by February 22, 2012. If the
securities purchase agreement is terminated without cause due to the fact that the spin-off has not
occurred by such date, then a portion of the Bridge Loan will be converted into common stock of
RXi, as described below.
Bridge Loan
Pursuant to the securities purchase agreement, the investors have agreed to provide the Bridge
Loan by purchasing $500,000 of secured convertible promissory notes of RXi (“RXi convertible
notes”) and agreeing to purchase up to an additional $1 million of RXi convertible notes prior to
the closing of the spin-off or RXi. The RXi convertible notes will, except as described below, be
convertible into shares of RXi Preferred Stock at a conversion price of $1,000 per share. The
proceeds from the Bridge Loan will be used by RXi in accordance with an operating budget approved
by the investors to fund RXi’s business and operations pending completion of the spin-off of RXi.
The RXi convertible notes accrue interest at a rate of 7% per annum (or 18% per annum in the
case of an event of default) and mature on February 22, 2012, or earlier in the case of an event of
default. The obligations due under the RXi convertible notes are secured by a first-priority
blanket lien on the assets of RXi and are guaranteed by Galena. Additionally, Galena has pledged
all of the shares of RXi common stock that it holds to further guaranty the timely repayment of the
amounts due under the RXi convertible notes, if not converted into RXi Preferred Stock at the closing under the
securities purchase agreement.
The RXi convertible notes will be issued, and the Bridge Loan will be funded, in three
tranches of $500,000 each, with the initial tranche issued and funded on September 24, 2011 and the second and
third tranches to be issued and funded following the approval by the investors, in their discretion, of
operating budgets for RXi during the period between September 24, 2011 and closing under the
securities purchase agreement.
If the closing under the securities purchase agreement has not occurred by
the February 22, 2012 maturity date of the RXi convertible notes, then 50% of the outstanding
Bridge Loan balance will be converted into a number of shares of RXi common stock equal to 51% of
the post-conversion shares outstanding. RXi will remain obligated to repay the remaining balance of
the principal and accrued interest under the Bridge Loan, and Galena has agreed to guarantee RXi’s
repayment of the RXi convertible notes to the extent they are not converted. In this event, Galena
and Advirna, LLC will beneficially own 44% and 5%, respectively, of the
outstanding shares of RXi common stock, and RXi will carry on as a stand-alone private company
under the investors’ control. Neither the investors nor Galena will be obliged to provide any
funding to RXi in this event.
At
September 30, 2011, the first tranche of $500,000 was received and
recorded to convertible notes payable as a current liability. There
are additional features of the Series A Convertible Preferred Stock
which represent contingent beneficial conversion features, to be
reevaluated in the future. In the event that the facts and
circumstances indicate that a contingency is removed, at that point
the beneficial conversion feature, if any, will be recorded.
Advirna Agreement
As part of the transactions contemplated by the contribution and securities purchase
agreements, RXi has entered into an agreement with Advirna, LLC, which we refer to as “Advirna,” a
company affiliated with Anastasia Khvorova, Ph.D., RXi’s Senior Vice President and Chief Scientific
Officer. In the agreement, Advirna has agreed to amend its existing patent and technology
assignment agreement with RXi to eliminate all clinical milestone and royalty payments to Advirna
under the amended agreement; obligations remain to make an annual $100,000 maintenance fee and a
one-time milestone payment of $350,000 to Advirna upon the issuance of a patent with valid claims
covering the assigned technology. Additionally, RXi will be required to pay a 1% royalty to Advirna
for any licensing revenue received by RXi on the license of the assigned Advirna technology. In
exchange, RXi has agreed to issue to Advirna upon the earlier of the closing under the securities
purchase agreement or the partial conversion of the RXi convertible notes, a number of shares of
RXi common stock equal to 5% of the as-converted common stock of RXi.